Electronic copy available at: http://ssrn.com/abstract=1804871

Organizational Change and Performance 1

Running Head: ORGANIZATIONAL CHANGE AND PERFORMANCE

Organizational Change and Performance: The Moderating Role of Human Resource

Management Centrality*

Manuela Faia Correia

Lusiada University

Lisbon, Portugal

Rita Campos e Cunha

Nova School of Business and Economics

Lisbon, Portugal

Marc Scholten

ISPA University Institute

Lisbon, Portugal

*The authors thank Chris Brewster and Ricardo Rodrigues for their comments on earlier versions of this paper.

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Electronic copy available at: http://ssrn.com/abstract=1804871

Organizational Change and Performance 2

Abstract

In this study, we examine how the effects of mergers and acquisitions on organizational

performance depend on human resource management (HRM) centrality. HRM centrality is the

status of HRM in the organization. In an analysis of the data from the 2005 Cranet survey,

overall results showed that i) organizational change stemming from mergers and acquisitions

increased HRM centrality, ii) organizational change and HRM centrality increased

organizational performance and, most importantly, iii) the positive effect of organizational

change on organizational performance increased with HRM centrality. More detailed analyses

revealed that the moderating role of HRM centrality itself depended on the type of

organizational change, the type of responsibility for HRM practices and HRM strategic

involvement, and the type of organizational performance indicators. The study offers new

insights about the critical role of HRM centrality, and suggests that mergers and acquisitions

should be studied as differentiated change processes.

Key words: Mergers, Acquisitions, Takeovers, Human Resource Management Centrality,

Organizational Performance.

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Organizational Change and Performance 3

Organizational Change and Performance: The Moderating Role of Human Resource

Management Centrality

Introduction

Mergers and acquisitions are popular forms of organizational change. Despite their popularity,

however, they appear to yield mixed results (Agrawal & Jaffe, 2003; Cartwright &

Schoenberg, 2006; King et al., 2004). This has been attributed to a variety of factors,

including culture gaps and clashes, and incompatibility between, and loss of, key people

(Bianco, 2000; Fairlamb, 2000). Executives who have been through a process of change now

recognize that, in today’s economy, the management of the human side of change is the real

key to maximizing the value of a deal (Gunther, 2001; Kay & Shelton, 2000) and expect a

proactive management of the human integration process to lead to a situation where both

organizations win (Cartwright & Cooper, 1996; Kanter, 1994).

Although it is believed that HRM can contribute to the success of mergers and acquisitions,

there is a surprising lack of evidence to corroborate this view. Some evidence comes from

Cunha (1997), who studied privatizations, a particular case of acquisitions. Her results show

that, in privatized companies, major changes in HRM are made, not only to promote strategic

and cultural alignment, but also to increase employees’ job satisfaction and commitment, thus

emphasizing the role of HRM.

In this study, we examine how HRM centrality affects the relation between organizational

change and performance. HRM centrality is the status of HR in the organization, i.e., the

perceived power of the HR department as an agent of change, through the existence of

formalized, or written, strategies, strategic involvement in the change process, and the

responsibility for HR practices.

The components of our analysis are organizational change, i.e., ownership change, HRM

centrality, and organizational performance. With this work, we contribute to the field of HRM

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Organizational Change and Performance 4

by examining the role of HRM centrality in moderating the relation between organizational

change and organizational performance, and by exploring how the moderating effect itself

depends on the type of organizational change involved.

The paper is structured as follows: First, the literature on the relationships between HRM,

organizational change and organizational performance is discussed. The research model and

hypotheses are presented. Next, the research method is described, followed by the

presentation of the statistical analyses and results. Finally, the findings and implications are

discussed.

Theoretical Background and Hypotheses

Organizational change and performance

In this article we distinguish three types of change: Acquisitions, i.e., buying another

organization, being taken over, i.e., being bought by another organization (henceforth,

‘takeover’), and mergers, i.e., fusing two organizations (Schuler & Jackson, 2001). While in a

merger two companies come together and create a new entity, in an acquisition, one company

buys another and manages the acquired company in a way consistent with their strategic aims.

Although acquisitions and takeovers are two sides of the same coin, i.e., an organization

gaining control or ownership of another organization, we distinguish in our study between the

organizations that acquired another organization (acquisition) and the organizations that had

been acquired by another organization (takeover).

One common pattern in processes of mergers and acquisitions is the organizational change

arising from the ownership change, and the goal of achieving substantial improvements in

business performance, either to achieve economies of scale, to expand their market and

internationalize, to spread their risk, and to improve efficiency and flexibility (Kumar, 2009;

Schuler & Jackson, 2001).

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Organizational Change and Performance 5

Hence, our first hypothesis:

H1-Organizational change stemming from mergers, acquisitions, or takeovers increases

organizational performance.

This change is large in scale and involves all stakeholders, especially managers and

employees, by affecting corporate strategy, operations, and human resource policies. A few of

the negative consequences of organizational change include the fear of job cuts with the

corresponding ‘survivor syndrome’, cultural clash, and poor alignment of structures, systems,

and incentives, resulting in stress reactions and crisis management, which has been named

“merger syndrome” (Marks & Mirvis, 1998). Given the impact on the human factor, it is only

natural that HRM has a central role in improving the integration process in each of the three

types of change.

Organizational change and performance: The moderating role of human resource

management centrality

Strategic human resources management (SHRM) literature focuses on how HRM practices

affect organization-wide outcomes (Ferris et al., 1999). The increasing emphasis on the

contribution of SHRM has been accompanied by a growing interest in relating HRM activities

to competitive performance (see Lengnick-Hall et al., 2009, for an extensive review).

Overall, the link between HRM and organizational performance is well-documented, in terms

of market value (Huselid & Becker, 2000) and return on assets (Combs et al., 2006), or even

directly (Khatri, 2000) or indirectly (Harris & Ogbonna, 2001). However, as Guest (2011)

argues, studies to date do not reveal how this association works, nor the direction of the

relationship.

In the specific case of mergers and acquisitions (M&As), there is a considerable body of

evidence that organizational performance fails to live up to expectations, suggesting that

HRM and employment issues are poorly handled (Buono & Bowditch, 1989; Cartwright &

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Organizational Change and Performance 6

Cooper, 1996; Reeves & Edwards, 2009) and a potential factor in failures of mergers and

acquisitions (e.g., DeNisi & Shin, 2004; Stahl, Mendenhall, & Weber, 2005; Weber & Drori,

2008). Not many studies focus on how the consequences of mergers and acquisitions are

related to HR roles and practices, but Cunha (1997) studied privatizations, and analyzed the

internal change process in terms of corporate culture and HRM practices. The results of her

study showed that following privatizations, companies implemented different HRM practices,

namely in terms of downsizing and selective recruitment, appraisal and incentives,

communication with employees and unions, as well as training and development practices.

These changes were aimed not only at promoting the strategic and cultural organizational

alignment, but also at reducing individual employee stress levels and increasing their job

satisfaction and organizational commitment (Cunha & Cooper, 2002).

Takeovers, mergers, and acquisitions are major organizational events that require HRM

departments to play a more strategic role in their organizations (Björkman & Söderberg,

2003), when different management styles and reward and evaluation systems need to be

reconciled (Datta, 1991). In addition, HRM needs to assure a vertical fit between corporate

strategy and HRM policies and practices as well as a horizontal fit among HRM practices

(Wright & Snell, 1998). Vertical and horizontal fit are needed to provide the link between

strategy and skills and the link between strategy and behaviors. Furthermore, what roles are

played by HRM specialists and Line Managers (LMs) and what their influence is must be

defined (Kirkpatrick et al., 1992; Mesner & Sterbe, 2005), since line managers implement

some of the HRM policies and practices on a daily basis.

A senior HRM officer as member of the board of directors raises awareness of the human

factor at the strategic top management team level. Companies with explicit mission

statements, business strategies, and HRM strategies can be expected to develop adequate

HRM strategies that address the issues essential to strategic implementation (Schuler &

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Jackson, 2001) and enhance organizational performance (Lyles et al., 1993; Nikandrou &

Papalexandris, 2007; Pearce et al., 1987).

This literature leads us to propose that HRM centrality will increase as a result of mergers and

acquisitions. Hence our second hypothesis:

H2-Organizational change stemming from mergers, acquisitions, or takeovers increases HRM

centrality.

According to Danya, Guedrib, and Hatta (2008), integration of strategic decision making with

HRM strengthens the link between HRM and organizational performance. They go further by

suggesting that performance is better when influence over HRM issues is shared by HRM

specialists and LMs, except when there are major organizational changes, in which case the

HRM specialists’ role should predominate (Danya et al., 2008) in order to overcome the

potential lack of interest, time and competences of LMs in HRM issues, themselves

overloaded by the extra responsibilities demanded by the change process. Once again research

revealed mixed results. Using the Cranet data, Nikandrou and Papalexandris (2007) found that

companies with successful mergers and acquisitions had increased HRM involvement in

strategic decisions, formalized HRM practices, built organizational capability through training

and development activities, devolved HR activities to LMs, and emphasized internal labor

market opportunities. However, Björkman and Söderberg’s (2003) study of Nordea bank’s

merger revealed typical problems in organizing and managing HRM issues and illustrated

how HRM specialists are easily given non-strategic roles in these processes.

The impact of HRM on the relationship between organizational change and organizational

performance can thus be expected to depend on the specific areas in which the HRM

department is active: training and development, recruitment and selection, and performance

appraisal and compensation (Delery & Doty, 1996).

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Organizational Change and Performance 8

Based on the SHRM literature, however, HRM must be strategically coordinated in order to

play its positive role (Combs et al., 2006; Delery, 1998; MacDuffie, 1995) and emphasis

needs to be placed on the implementation process, so that firms create strong HRM Systems

(Bowen & Ostroff, 2004). This, in turn, requires that strategy should be formalized, and that

the primary responsibility for various HRM areas remains with HRM specialists, who should

be visibly involved in the design and implementation of HRM policies and practices from the

outset, i.e., HRM centrality should be high.

In sum, we propose that HRM centrality is an important determinant not only of

organizational performance but also of whether organizational change improves

organizational performance. These relationships are reflected in our final two hypotheses:

H3-A greater HRM centrality increases organizational performance.

H4-A greater HRM centrality increases the positive effect of organizational change on

organizational performance.

Research Model

Most studies that have examined the role of HRM in organizational change have used case

studies or domestic surveys (e.g., Antila, 2006; Björkman & Söderberg, 2003; Clement &

Greenspan, 2000), treated mergers and acquisitions indiscriminately, used few indicators of

organizational performance, or did not explore the areas in which HRM should play a

strategic role in order to increase the success of mergers and acquisitions (for exceptions, see

Danya et al., 2008; Nikandrou & Papalexandris, 2007). We overcome those limitations with

our research model, presented in Figure 1.

<Insert Figure 1 about here>

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Organizational Change and Performance 9

Methodology

Survey and sample

This study draws on the 2005 Cranet survey containing data on HR policies and practices in

private and public sector organizations in 32 countries, mostly European. The survey asks the

most senior HRM professional a range of questions on company policies and practices in

human resource management, covering the personnel function, staffing, employee

development, compensation and benefits, employee’s relations and communication, and

organizational details (Brewster et al., 2004). The sample comprises a total of 7914 usable

questionnaires, gathered over a period of 18 months, from late 2003 to mid-2005. Tables 1

and 2 present a description of the sample. Table 1 presents the distribution of the sample by

their reported histories of change and Table 2 provides the distribution of the companies that

experienced change by number of employees and by industrial sector.

<Insert Tables 1 and 2 about here>

Measures

HRM centrality

The concept of HRM centrality has three interrelated, but distinct, variables: (1)

Formalization, (2) HRM strategic involvement in business strategy, and (3) Responsibility for

several HRM practices.

We distinguished written formalization (2), unwritten formalization (1), and no formalization

(0) in four areas (mission statement, business strategy, personnel/HRM strategy, and corporate

values statement), yielding a variable ranging from 0 (no formalization whatsoever) to 8

(written formalization in all four areas).

Concerning HRM strategic involvement, we distinguished four levels: HRM strategic

involvement from the outset (3), HRM strategic involvement through consultation (2), HRM

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Organizational Change and Performance 10

strategic involvement on implementation (1), and HRM not consulted (0). HRM strategic

involvement was treated as an ordinal variable.

When it served as independent variable, HRM strategic involvement was decomposed into

three orthogonal, and hierarchical, contrasts. One contrast, HRM strategic involvement from

the outset, compared ‘from the outset’ (3) with ‘through consultation,’ ‘on implementation,’

and ‘not consulted’ (-1). The second contrast, HRM strategic involvement through

consultation, ignored ‘from the outset’ (0), and compared ‘through consultation’ (2) with ‘on

implementation’ and ‘not consulted’ (-1). The third contrast, HRM strategic involvement on

implementation, ignored ‘from the outset’ and ‘through consultation’ (0), and compared ‘on

implementation’ (1) with ‘not consulted’ (-1).

Responsibility for HRM practices distinguishes five areas: Pay and benefits, recruitment and

selection, training and development, industrial relations, and workforce expansion/reduction.

We considered whether the HRM Department - HRMD (1) or Line Manager - LM (0) is

ultimately responsible for a given area.

Organizational performance.

Both objective and subjective indicators of organizational performance have been used in past

empirical research (Paauwe, 2004, 2009), and there is a correlation between the two types of

indicators (Pearce et al., 1987). Our study used multiple indicators of organizational

performance: Service quality performance, level of productivity, profitability, and rate of

innovation. We used subjective indicators for the same reasons as Nikandrou and

Papalexandris (2007), i.e., difficulty in finding common indicators of performance across

sectors, the validity of subjective perceptions of performance as a basis of managerial action

(Guest et al., 2003) and the potential biases of objective indicators in cross-national studies,

because of differences in long-term and short-term orientations, and differences in fiscal

policies and tax systems.

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Organizational Change and Performance 11

These four indicators were measured on a three-point benchmarking scale: In the top 10% (3),

in the upper half (2), or in the lower half (1). All indicators were treated as ordinal variables.

Control variable

We controlled for the extraneous variance introduced by industry sector, by dividing the

companies into three sector groups: Primary, secondary, and tertiary (Table 2). Primary sector

includes agriculture, forestry, hunting and fishing, secondary sector includes energy and

water, chemical products, metal manufacturing, other manufacturing and building. The

tertiary sector includes retail and distribution, transport and communication, financial

services, personal, social and health services, education, public administration and other

services.

Results

Overall analysis: Organizational change, HRM centrality, and organizational performance

To permit a single test of our hypotheses, we aggregated all dependent variables in Figure 1

into the two main ones. HRM centrality was coded in two stages. The four areas of

formalization were combined into one variable of formalization, and the five areas of HRM

responsibility were combined into one variable of HRM responsibility. A factor analysis was

then performed on the three variables constituting HRM centrality: Formalization, HRM

strategic involvement, and HRM responsibility. The first factor, on which all three variables

loaded positively, accounted for 45.6% of the variance, and this factor was used as our overall

measure of HRM centrality. Finally, a factor analysis was performed on the four variables

constituting organizational performance. The first factor, on which all four variables loaded

positively, accounted for 58.7% of the variance, and this factor was used as our overall

measure of organizational performance.

Organizational change, the independent variable, was coded 1 when the organization had gone

through at least one change and 0 otherwise. Industrial sector, the control variable, was

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Organizational Change and Performance 12

decomposed into two orthogonal contrasts, one contrasting the primary sector with the

secondary and tertiary ones, and the other contrasting the secondary sector with the tertiary

one.

All of the above variables, except for organizational change, had a mean equal to 0. Variables

that are centered around their means are convenient for investigating moderating effects in

multiple regression, because they reduce multicollinearity between the independent variables.

We therefore centered organizational change as well.

We conducted four regression analyses. In the first analysis, we regressed HRM centrality on

both organizational change and industrial sector. Thus, the effect of one variable is evaluated

while controlling for the other variable. In support of hypothesis 2, organizational change

increased HRM centrality, t(5368) = 2.88, p = .00. HRM centrality was greater in the

secondary and tertiary sector than in the primary sector, t(5368) = 3.03, p = .00, and greater in

the tertiary sector than in the secondary sector, t(5368) = 5.28, p = .00.

In the second regression analysis, we entered the interaction terms between organizational

change and industrial sector into the equation. The positive impact of organizational change

on HRM centrality was less pronounced in the tertiary sector than in the secondary sector,

t(5366) = 3.85, p = .00. This may indicate a ceiling effect: In the tertiary sector, where HRM

centrality was already greater, there was less room for an even greater HRM centrality.

In the third analysis, we regressed organizational performance on organizational change,

HRM centrality, and industrial sector. In support of hypothesis 1, organizational change

increased organizational performance, t(3706) = 2.09, p = .04, and, in support of hypothesis 3,

so did HRM centrality t(3706) = 2.77, p = .01. Organizational performance was better in the

secondary sector than in the tertiary sector, t(3706) = 2.68, p = .01.

In the fourth and final analysis, we entered the interaction terms between organizational

change, HRM centrality, and industrial sector into the equation. In support of hypothesis 4,

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Organizational Change and Performance 13

the positive impact of organizational change on organizational performance was more

pronounced with greater HRM centrality, t(3699) = 2.59, p = .01. In addition, the positive

impact of organizational change on organizational performance was more pronounced in the

primary sector than in the secondary and tertiary sector, t(3699) = 2.01, p = .04, where

economies of scale and scope are more likely to be created.

In sum, the analysis on the three main variables supported the hypotheses of our study. We

next report a more detailed analysis of the individual variables involved.

Detailed analysis: Organizational change and HRM centrality

We conducted a series of regression analyses to examine the impact of organizational change

on HRM centrality. In each analysis, the occurrence of mergers, acquisitions, and takeovers

served as independent variables.

Formalization. This was the dependent variable in a linear regression. Formalization

increased with acquisitions, t(6756) = 4.80, p = .00, and mergers, t(6756) = 4.32, p = .00. It

also increased with takeovers, but this effect was not reliable, t(6756) = 1.30, p = .19. Overall,

formalization increased with organizational change

HR strategic involvement. This was the dependent variable in an ordinal multinomial LOGIT

regression. HRM strategic involvement increased with acquisitions and decreased with

takeovers, but these effects were not significant, χ2(1) = 2.51, p = .11, and χ2(1) = 2.65, p =

.10, respectively. HRM strategic involvement was not affected by mergers, χ2(1) = 0.15, p =

.69.

Responsibility for HRM practices. This was the dependent variable in five binomial LOGIT

regressions, corresponding to the five areas of responsibility. Responsibility for pay and

benefits shifted from LM to HRMD in the presence of acquisitions, χ2(1) = 4.79, p = .03.

Responsibility for recruitment and selection shifted from LM to HRMD in the presence of

acquisitions, χ2(1) = 3.81, p = .05, and takeovers, χ2(1) = 3.86, p = .05. Responsibility for

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Organizational Change and Performance 14

training and development shifted from LM to HRMD in the presence of acquisitions, χ2(1) =

13.36, p = .00. Responsibility for industrial relations shifted from LM to HRMD in the

presence of acquisitions, χ2(1) = 37.42, p = .00. The same shift of responsibility occurred in

the presence of mergers and takeovers, but these effects were not as reliable, χ2(1) = 3.27, p =

.07, and χ2(1) = 3.25, p = .07, respectively. HRMD responsibility for workforce

expansion/reduction was not affected by organizational change, χ2(3) = 0.25, p = .97. Overall,

responsibilities shifted from LM to HRMD in the presence of acquisitions.

Detailed analysis: Organizational change, HRM centrality, and organizational performance

For each indicator of organizational performance, several ordinal multinomial LOGIT

regressions were conducted: One excluding the interactions between HRM centrality and

organizational change, which yielded the main effects on the independent variables, and

others including the interactions between HRM centrality and organizational change, which

yielded the simple main effects of the independent variables (in addition to the interactions

between them).

Service quality. Acquisitions had a positive effect on service quality performance, χ2(1) =

33.10, p = .00, and so did formalization, χ2(1) = 30.48, p = .00. However, HRM strategic

involvement through consultation had a negative effect on service quality performance, χ2(1)

= 22.45, p = .00. Also, service quality performance was better when HRMD was responsible

for recruitment and selection, χ2(1) = 10.98, p = .00, and workforce expansion/ reduction,

χ2(1) = 4.41, p = .04, and when LM was responsible for pay and benefits, χ2(1) = 8.17, p =

.00, and industrial relations, χ2(1) = 4.30, p = .04.

The positive effect of acquisitions on service quality performance was greater when LM was

responsible for pay and benefits than when HRMD was responsible for it, χ2(1) = 4.12, p =

.04 (see the top left panel of Figure 3). Also, the positive effect of acquisitions on service

quality performance was greater when HRMD was responsible for workforce expansion/

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Organizational Change and Performance 15

reduction than when LM was responsible for it, χ2(1) = 4.55, p = .03 (see the top right panel

of Figure 2).

<Insert Figure 2 about here>

Mergers and takeovers had no overall effect on service quality. In fact, sometimes the effect

was beneficial and sometimes detrimental, depending on HRM centrality. Mergers had a

positive effect on service quality when HRMD was responsible for training and development,

but a (less pronounced) negative effect when LM was responsible for it, χ2(1) = 4.68, p = .03

(see the bottom left panel of Figure 3). Also, takeovers had a positive effect on service quality

when HRM was strategically involved through consultation, but a (slightly more pronounced)

negative effect when it was involved on implementation or not at all, χ2(1) = 4.10, p = .04 (see

the bottom right panel of Figure 3).

Level of productivity. Acquisitions had a positive effect on productivity, χ2(1) = 10.36, p =

.00, and so did formalization, χ2(1) = 37.90, p = .00. HRM strategic involvement from the

outset also had a positive effect on productivity, χ2(1) = 5.21, p = .02. Productivity was higher

when HRM was strategically involved from the outset than when it was involved only through

consultation, on implementation, or not at all. However, HRM strategic involvement through

consultation had a negative effect on productivity, χ2(1) = 25.56, p = .00. Productivity was

lower when HRM was strategically involved through consultation than when it was involved

only on implementation or not at all. Also, productivity was higher when HRMD was

responsible for workforce expansion/reduction, χ2(1) = 3.72, p = .05, and when LM was

responsible for pay and benefits, χ2(1) = 7.08, p = .01, and industrial relations, χ2(1) = 6.30, p

= .01.

The positive effect of acquisitions on productivity was greater when HRMD was responsible

for workforce expansion/reduction than when LM was responsible for it, χ2(1) = 4.20, p = .04

(see the left panel of Figure 4). Mergers had opposite effects on productivity, depending on

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Organizational Change and Performance 16

HRM strategic involvement through consultation, χ2(1) = 5.89, p = .02. They had a positive

effect when HRM was strategically involved on implementation or not at all, but a (less

pronounced) negative effect when HRM was involved through consultation (see the right

panel of Figure 3).

<Insert Figure 3 about here>

Profitability. Acquisitions had a positive effect on profitability, χ2(1) = 32.81, p = .00, and so

did formalization, χ2(1) = 34.21, p = .00. However, HR strategic involvement through

consultation had a negative effect on profitability, χ2(1) = 6.03, p = .01. Profitability was

lower when HR was strategically involved through consultation than when it was involved

only on implementation or not at all. HR strategic involvement through consultation also

impaired any positive effect that mergers had on profitability, χ2(1) = 4.36, p = .04.

Rate of innovation. Acquisitions had a positive effect on rate of innovation, χ2(1) = 6.33, p =

.01, and so did formalization, χ2(1) = 18.96, p = .00. However, takeovers had a negative effect

on rate of innovation, χ2(1) = 10.31, p = .00, and so did HRM strategic involvement through

consultation, χ2(1) = 6.16, p = .01. Rate of innovation was lower when HRM was strategically

involved through consultation than when it was involved only on implementation or not at all.

Also, rate of innovation was higher when HRMD was responsible for recruitment and

selection, χ2(1) = 3.46, p = .06, and workforce expansion/reduction, χ2(1) = 3.97, p = .05, and

when LM was responsible for pay and benefits, χ2(1) = 10.39, p = .00. HRMD responsibility

for industrial relations boosted the positive effect of acquisitions on rate of innovation, χ2(1) =

5.89, p = .02.

Summary

The results obtained in our study are summarized in Tables 3 and 4.

<Insert Table 3 about here>

<Insert Table 4 about here>

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Organizational Change and Performance 17

How organizational change affected HRM centrality

Organizational change led to more formalization, and to a shift of responsibilities from LM to

HRMD in all areas, particularly in the case of acquisitions.

How organizational change and HRM centrality affected organizational performance

There were three systematic results. First, acquisitions and formalization led to a better

organizational performance. Second, organizational performance was better when HRMD was

responsible for (1) recruitment and selection and (2) workforce expansion/reduction, and

when LM was responsible for (1) pay and benefits and (2) industrial relations. Third,

productivity was higher when HRM was strategically involved from the outset than when it

was involved only through consultation, on implementation, or not at all.

How the effects of change on performance depended on HRM centrality

The most salient result was that HRM centrality moderated the effects of organizational

change on service quality. HRMD responsibility for workforce expansion/reduction and LM

responsibility for pay and benefits, which by themselves were beneficial to service quality

performance, boosted the positive effect of acquisitions on service quality. Additionally,

HRMD responsibility for training and development changed an otherwise negative effect of

mergers on service quality into a positive one. HRMD responsibility for workforce

expansion/reduction positively moderated the effect of acquisitions on productivity as did

HRMD responsibility for industrial relations on rate of innovation.

Third, HRM strategic involvement through consultation, which by itself was detrimental to

service quality, changed an otherwise negative effect of takeovers on service quality into a

positive one. HRM strategic involvement through consultation continued to have other

detrimental effects, though. It impaired any positive effect that mergers had on profitability

and it changed an otherwise positive effect of mergers on productivity into a negative one.

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Organizational Change and Performance 18

Overall, HRM strategic involvement appears to be a bad idea unless HRM is strategically

involved from the outset.

Discussion

The aim of this paper was to examine how HRM centrality affected organizational

performance and moderated the relationship between organizational change and

organizational performance. In doing so, we distinguished three different types of

organizational change, and included a far greater range of indicators of organizational

performance than have earlier studies. Also, we decomposed HRM centrality into

formalization, strategic involvement, and the responsibility that either the HRM department or

the Line Manager has for specific HRM areas, unlike most studies reported in the literature.

This study therefore considers process variables in addition to content aspects of HRM, which

follows Bowen and Ostroff’s (2004) proposal for studies of the HRM-organizational

performance relationships.

Generally, our findings suggest that HRM centrality moderates the relationship between

organizational change and organizational performance, particularly when organizational

performance was assessed in terms of service quality. However, whether a greater HRM

centrality was good or bad for organizational performance depended on the type of

organizational change and on the indicator of organizational performance.

Acquisitions generally improved organizational performance, whereas mixed results were

obtained for mergers and takeovers, suggesting that takeovers have a stronger negative impact

on rate of innovation, possibly because organizational actors must adjust to the policies and

practices of the acquiring company, frequently suffering downsizing and diminished career

opportunities. However, the robustness of these isolated results must be established by future

research.

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Organizational Change and Performance 19

In our more detailed analyses, organizational change resulted in more formalization, with a

positive effect on all performance indicators, corroborating the findings from earlier studies

(Apospori et al.., 2008; Combs et al.., 2006; Cunha et al.., 2003;; Lyles et al.., 1993), but did

not moderate the relationship between organizational change and organizational performance.

Albeit the need for further empirical analysis, in the case of mergers where both partners share

power and decision making, very formalized/rigid procedures and policies may jeopardize

HRM integration. These very sensitive ‘people decisions’ should be shared in a diplomatic

fashion (namely downsizing) and not through rigid procedures.

Centralization of responsibility for HRM practices occurs in all areas with organizational

change, and this was beneficial when it was responsibility for recruitment and selection and

workforce expansion/reduction, but detrimental in the case of responsibility for pay and

benefits and industrial relations. The fact that LMs are closer to the competitive compensation

packages (external equity) whereas HRM managers seek to achieve internal equity may

explain this finding. The negative impact of HRMD responsibility for labor relations on rate

of innovation is more difficult to explain, since the moderating effects clearly show that, in

acquisitions, rate of innovation is boosted when the responsibility for labor relations lies with

the HR Department. This result is intuitively plausible when we consider the major challenges

that are demanded from management in order to restore and/or regain trust from the unions

and their representatives in this major organizational turbulence.

Unlike Nikandrou and Papalexandris (2007), our study reveals that the positive effect of

acquisitions was sometimes enhanced but other times hindered by LMs’ responsibility for

certain areas. In processes of ownership change, management of workforce

expansion/reduction and industrial relations must be very cautious, because, in order to

achieve synergies, the HRM manager may need to negotiate the terms and conditions of

layoffs and compensation (Antilla, 2006; Delaney & Huselid, 1996), as well as nourish a

19

Organizational Change and Performance 20

perception of labor opportunities and security, raise expectations, support change and increase

individual effort..

Additionally, giving too much HRM responsibilities to LMs can challenge their capacity to

take on new roles parallel to their current workload, as Danya et al. (2008), Kirkpatrick et al.,

(1992) and McGovern et al. (1997) argue. However, contrary to our arguments, none of these

authors questioned that responsibilities for various HRM practices should be differentially

allocated. Our results support the concerns of Brewster and Söderström (1994) with the

devolvement of the area of pay and benefits to the Line Managers.

Our study also suggests that when the HRM department was responsible for training and

development, an otherwise negative effect of mergers on service quality was averted, and

even changed it into a positive one, possibly because it takes into consideration the different

employee segments, thus efficiently creating positive employee attitudes and increasing trust

in the future (Pfeffer, 1998).

HRM strategic involvement appears to only be a good idea when it starts from the outset,

which improves the likelihood that vertical and horizontal fit exist and increases the status of

the HR function in the organization. When HRM is involved from the outset, a strategic

vision on people issues is shared in a very clear way, whereas through consultation, this vision

remains ambiguous, therefore losing credibility, power and focus.

All used HRM centrality measures contributed to service quality, the indicator that is most

intimately linked to HRM-related outcomes (Dyer & Reeves, 1995) or operational

performance.

Limitations

Interpretation of the results must take the limitations of our study into account. First, we used

survey data with single respondents, providing no estimate of the magnitude of error due to

rater sampling (Gerhart et al., 2000). Questionnaires were completed by the senior HRM

20

Organizational Change and Performance 21

manager in each company and we do not have employees’ perspectives on HRM practices at

different levels of the organization. Some of the conclusions may be biased, particularly in

what concerns our concept of HRM Centrality. Future research should incorporate a

multilevel analysis, to reduce the impact of any bias from a specific category. We

acknowledge, however, some of the practical difficulties in doing so, considering that, during

processes of mergers and acquisitions, all human factor issues are politically sensitive and

companies may be reluctant to participate (Cunha, 1997).

Second, because the data are cross-sectional, there may be issues in the determination of

causality. Longitudinal studies could help to determine the robustness of our results, and

clarify some results that remained inconclusive.

A third limitation is that we did not use any ‘accounting/financial’ performance indicator, but

rather intermediate perceived indicators of performance. This is a reasonable practice,

considering the Cranet data include a large number of companies in 32 countries, which make

it impossible to compare financial indicators from companies in different sectors and across

national boundaries, i.e., with different baseline values and varying applicable fiscal and tax

policies. However, future studies, with a smaller number of companies, may capture more

precise measures of firm performance.

Finally, there may be a statistical reason why acquisitions showed such pervasive effects on

organizational performance while mergers and takeovers did not. In the Cranet data we

observed a moderate rate of acquisitions, but low rates of mergers and takeovers (see Table 1).

It may well be that the effects of mergers and takeovers could not be estimated as reliably as

the effects of acquisitions. Thus, conclusions about the differential impact of acquisitions and

other organizational changes should be drawn with caution.

21

Organizational Change and Performance 22

Managing M&As - Implications for practice

The findings in our study suggest different ways to manage the integration process in the three

types of major organizational change associated with ownership.

In the case of acquisitions, our results imply a greater centrality of HRM, i.e. strategic

involvement from the outset and a shift of responsibility from LMs to HRM Managers in most

HRM practices, except for pay and benefits. When one company acquires another one, and

therefore is expected to integrate the acquired one into its policies, strategy, and culture, the

human resources function has an important role as change agent, to promote and reinforce

organizational transformation. Yet, looking at the company that is being taken over, it is

natural that the turbulence and instability associated with the ambiguity of what is about to

come, will negatively affect employee motivation, hence performance and rate of innovation

in particular. HRM should therefore try to minimize this ambiguity, through communication

and development of realistic expectations, acting as much as possible as internal consultants

to top management teams.

Mergers, on the other hand, have a more delicate negotiation process in all issues affecting

employees. Flexibility is needed to adjust to different situations as the integration process

evolves. Our results suggest that low strategic involvement of HRM and low formalization are

positive. On the other hand, centralizing training and development activities in the HRM

manager is important, to promote cultural integration and to develop new skills, aligned with

the strategic intent of the new emerging organization.

Conclusion

In sum, two main conclusions are highlighted in this study. First, that HRM centrality

moderates the relationship between organization change and organizational performance, with

different effects depending on type of organizational change, on type of responsibility for

22

Organizational Change and Performance 23

HRM practices and HRM strategic involvement, and on type of performance indicators.

Future research should systematically analyze these effects.

Second, results suggest that mergers and acquisitions should be considered as two different

cases. Whereas acquisitions seem to require more formalized and centralized HRM practices

with a strategic involvement of the HRM function from the outset, in the case of mergers,

flexibility and low formalization of HRM practices seem to produce better organizational

results. This line of inquiry may help to better understand the puzzle of why organizational

changes sometimes succeed and other times fail.

23

Organizational Change and Performance 24

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Table 1. Distribution of sample by reported histories of change (percentages).

No mergers Mergers

No takeovers Takeovers No takeovers Takeovers

No acquisitions 4966 (62.75) 417 (5.27) 515 (6.51) 54 (0.68)

Acquisitions 1494 (18.88) 142 (1.79) 245 (3.10) 81 (1.02)

N = 7914.

30

Organizational Change and Performance 31

Table 2. Distribution of companies experiencing mergers, acquisitions, or takeovers, by

industrial sector.

Acquisition Takeover Merger

Industrial sector

Primary 2.3% 1.1% 2.8%

Secondary 47.6% 57.3% 37.9%

Tertiary 50.1% 41.7% 59.3%

31

Organizational Change and Performance 32

Table 3. Summary of main effects.

Centrality of HRM

Formalization with acquisitions and mergers

HRM responsibility

Pay and benefits with acquisitions

Recruitment and selection with acquisitions and takeovers

Training and development with acquisitions

Industrial relations with acquisitions

Organizational Performance

Service Quality with acquisitions

with formalization

HRM strategic involvement through consultation

HRM Manager’s responsibility for recruitment and selection

HRM Manager’s responsibility for workforce expansion or reduction

Line Manager’s responsibility for pay and benefits

Line Manager’s responsibility for industrial relations

Productivity with acquisitions

with formalization

HRM strategic involvement from the outset

HRM strategic involvement through consultation

HRM Manager’s responsibility for workforce expansion or reduction

Line Manager’s responsibility for pay and benefits

Line Manager’s responsibility for industrial relations

Profitability with acquisitions

with formalization

HRM strategic involvement through consultation

Rate of Innovation with acquisitions

with formalization

with takeovers

HRM strategic involvement through consultation

HR Manager’s responsibility for recruitment and selection

HR Manager’s responsibility for workforce expansion or reduction

Line Manager’s responsibility for pay and benefits

32

Organizational Change and Performance 33

Table 4. Summary of moderating effects.

On Service Quality Acquisitions Line Manager’s responsibility for pay

and benefits

HRMD’s responsibility for workforce

expansion or reduction

Mergers HRMD’s responsibility for training &

development

Takeovers HR strategic involvement through

consultation

On Productivity Acquisitions HRMD’s responsibility for workforce

expansion or reduction

Mergers HR strategic involvement on

implementation or none

On Profitability Mergers HR strategic involvement through

consultation

On Rate of Innovation Acquisitions HRMD’s responsibility for industrial

relations

33

Organizational Change and Performance 34

Figure 1. The relationship between organizational change, the centrality of HR, and

organizational performance.

Organizationalchange

• Acquisition• Merger• Takeover

Centrality of HR

Formalization• Mission statement• Business strategy• Personnel/HRM strategy• Corporate values statement

HR strategic involvement• From the outset• Through consultation• On implementation• Not consulted

HRM responsibility• Pay and benefits• Recruitment and selection• Training and development• Industrial relations• Workforce expansion/reduction

Organizationalperformance

• Service quality performance• Level of productivity• Profitability• Rate of innovation

Organizationalchange

• Acquisition• Merger• Takeover

Centrality of HR

Formalization• Mission statement• Business strategy• Personnel/HRM strategy• Corporate values statement

HR strategic involvement• From the outset• Through consultation• On implementation• Not consulted

HRM responsibility• Pay and benefits• Recruitment and selection• Training and development• Industrial relations• Workforce expansion/reduction

Organizationalperformance

• Service quality performance• Level of productivity• Profitability• Rate of innovation

34

Organizational Change and Performance 35

Figure 2. The effect of acquisitions on service quality performance, moderated by HRM

responsibility for pay and benefits (top left panel) and HRM responsibility for workforce

expansion/reduction (top right panel), the effect of mergers on service quality performance,

moderated by HRM responsibility for training and development (bottom left panel), and the

effect of takeovers on service quality performance, moderated by HR strategic involvement

through consultation (bottom right panel).

Responsibilityfor pay andbenefits

LM HRM

No Yes

Acquisitions

1

2

3

4

Ser

vice

qua

lity

perfo

rman

ce

Responsibilityfor workforceexpansion/reduction

LM HRM

No Yes

Acquisitions

1

2

3

4

Ser

vice

qua

lity

perfo

rman

ce

Responsibilityfor training &development

LM HRM

No Yes

Mergers

1

2

3

4

Ser

vice

qua

lity

perfo

rman

ce

HR strategicinvolvement

No Through

consultation

No Yes

Takeovers

1

2

3

4

Ser

vice

qua

lity

perfo

rman

ce

35

Organizational Change and Performance 36

Figure 3. The effect of acquisitions on level of productivity, moderated by HRM

responsibility for workforce expansion/reduction (left panel), and the effect of mergers on

level of productivity, moderated by HR strategic involvement through consultation (right

panel).

Responsibilityfor workforceexpansion/reduction

LM HRM

No Yes

Acquisitions

-1

0

1

2

Leve

l of p

rodu

ctiv

ity

HR strategicinvolvement

No Through

consultation

No Yes

Mergers

-1

0

1

2

Leve

l of p

rodu

ctiv

ity

36