Human Resources in the Restaurant and Hospitality Industry

8/13/2015

In the restaurant and hospitality industry, the manner in which human resources (HR) management is handled is largely dependent on the size of the company. This can present problems for smaller organizations that may not place a large emphasis on HR management until it’s too late. Many companies are corporate-owned and HR management processes are established at higher levels than just the specific locations where a majority of employees work. In smaller organizations, however, these policies are typically not established beyond the most basic, simplistic measures. These problems can largely be mitigated by placing a forward-thinking approach to HR management, and making adjustments to compensate for the business’ current organizational structure, or lack thereof. There are a number of difficulties in the nature of HR decision-making that make implementation difficult. Human assets have features that differ from most other resources in the company, such as its final product and financial capital. Human performance is not easy to predict; it is very challenging to make a definitive case that a particular investment clearly leads to improvements in employees' performance, which then has a direct effect on the financial results of a company. At the same time, costs associated with people are much clearer. While the link from employee pay to employee attitudes to employee behaviors to customer perceptions to customer behaviors to organizational results is murky at best, the cost of that employee's pay is absolute, as is the direct cost of raising capital and providing training. Traditional accounting systems add to this contradiction. Because employees represent a high cost, it is tempting to treat them as expenses to be minimized. HR decision makers are confronted with the temptation of managing things that are easily comprehended, especially when the results are instantly apparent.
Nowhere are these ideas more apparent than in the hospitality industry. HR remains one of the key challenges decision makers face. Industry leaders in both the hotel and restaurant industries report human capital challenges as the problems that "keep them awake at night" (Enz, 2001,2004). Hospitality leaders are concerned because in service firms, the success of products depends on their delivery by employees. Thus, service organizations rely on their employees to create memorable experiences that develop a loyal customer base and ultimately carry out the firm's strategic initiatives (Liao & Chuang, 2004; Skaggs & Youndt, 2004). Yet, most hospitality organizations operate with extremely tight margins. Many of these companies face incredibly turnover and find it challenging to attract, retain, and develop a talented labor pool capable of creating relationships with customers that result in repeat business. At the same time, most organizations also are required to offer immediate, oftentimes significant returns to their investors. When salaries and wages represent the number one expense item on the profit and loss (P and L) statement, decision makers find it difficult to justify increased investments in HR, as any additional pay or training budget cuts into immediate profits.
The challenge decision makers face is twofold: How can organizations recognize the value associated with their human capital, and how can they make better decisions to manage the associated investments? While employee behaviors are difficult to predict, observe, and measure, investments in employees still need to be managed. While a great deal of research in professional service firms, such as law and medical practices, focuses on the value employees bring to their organizations as assets (i.e., Hitt, Bierman, Shimizu, & Kochhar, 2001; Kannan & Akhilesh, 2002), very little research has considered the value of employees performing low-skilled service work, such as those hired for hotels, restaurants, and other hospitality service organizations. With annual turnover often climbing over 100%, the common practice has been to minimize investments in employees, as they will likely soon leave the business. What is known from research is that employees as a form of human capital have knowledge, skills, and abilities that can be applied to their work to generate tangible value for the organization (Crossan & Hullard, 2002). When they are performing their jobs well, employees are able to work in an unspoken manner, meaning they are able to complete a task at a level that is almost instinctive and does not require a great deal of planning or thought. When a group of employees act this way, they create an organizational system or routine that is so efficient it becomes a source of advantage for the business that other companies cannot replicate (Argote & Ingram, 2000). At the highest level, this application of human capital has been termed "knowledge value added" and refers to organizational knowledge embedded within its routines. In addition to creating efficient routines, employees can create advantages by acting as links that form crucial relationships with key stakeholders, such as customers and suppliers (Coff, 1997; Skaggs & Youndt, 2004). These sorts of links act as valuable sources of information that businesses can use to shape their product and innovate. For example, wait staff can connect with customers in such a way that they can collect and pass along suggestions to the chef on how to create new, and ultimately customer-pleasing items on the menu. HR decision makers have long tried to argue that employees bring value to the organization and actually represent an investment that provides a substantial return. What is the potential risk if employees leave the firm and bring their capital over to the competition (Coff, 1997)? Recent research has suggested intangible assets add approximately 50% to a firm's market value (Ulrich & Smallwood, 2005).
Research would suggest that employees, such as hospitality employees, have strategic value to the firm but they are not necessarily unique; their skills are widely transferable. Developmentally, long-term HR initiatives, including using above-market compensation plans as well as goal-oriented evaluation systems, should be applied to employee groups whose skills aree unique and specific, such as knowledge-based workers, including perhaps the management staff of a hospitality organization (Lepak & Snell, 2002). However, the more a restaurant or hospitality organization competes by trying to differentiate its level of service, and the more that employees are expected to utilize company-specific knowledge, then the more that these companies should invest in these employees and strive for retention. Utility analysis estimates the value of a HR intervention by first considering the effects of an HR program on employee performance and then by determining the value of the program through an estimate of the value associated with improved employee performance. The primary concept is that it is possible to quantify the additional benefits employees bring to their organizations through HR interventions. The way that improved performance is converted to a monetary value, though, has long been viewed as one of controversial aspect of this research (Boudreau et al., 1994). While having a better understanding of how HR programs affect employees may be a more useful and accurate way of examining the inputs associated with HR programs, the difficulty of measuring the outputs associated with the better performance has made the utility analysis tool less than successful in practice. Some researchers argue that all HR initiatives should be focused on meeting not employees' needs but rather, customers' needs. This concept maps well onto the service-oriented nature of the hospitality industry. Because service quality is key, a company’s customer base and its customer management programs, HR initiatives can add value when they help improve ways employees connect with customers and meet their needs (Kundo & Vora, 2004; McGovern & Panaro, 2004). HR programs, such as staffing and training, should be viewed from the customer's perspective (Ulrich & Brockbank, 2005).
From an applied perspective, the first key piece of information needed before HR investment decisions can be made is to understand the value associated with employee performance. In an industry focused on the delivery of customer service, there are few examples of where employee performance does not matter. The more employee performance matters, the more decision makers should examine their HR investments. Investments may be needed to choose the right employees, develop the employees that make the biggest difference, and retain these employees, as well as collect information on these employees. The greater the value of employee performance, the more that interventions designed to improve performance can produce value. The more value there is associated with employee performance, the more a company may want to invest in this human capital.
What is not known is how to measure the ways employees contribute to the long-term potential of an established customer base, as well as help attract a new one. Human capital represents intangible assets that have remarkable potential to enhance both current and future firm value. While short-term recruiting and turnover issues may change with economic conditions, the general problem of acquiring, developing, and retaining a high-quality workforce is a problem that does not go away in any financial environment. Industry leaders recognize the serious challenge of understanding the investment return from what is typically viewed in the short term, as a very significant P & L expense. Coupled with this contradiction is the fact that critical strategic decisions must be based on practical financial analysis; even of organizations crucial intangible assets, such as investments in its employees. Yet, at the same time, it is not hard to realize in a service-oriented business, how crucial employees, especially frontline employees, are to an company's success. When determining the return on investing in and developing a hospitality firm's human capital, both research and practice should begin with the crucial customer/employee interaction. More specifically, hotel or restaurant guests have many "touch points" or encounters with employees, as throughout their visit, they consume the product for sale. Through guest comments systems and client feedback programs, most organizations already know which aspects of their service delivery system are working and which are candidates for improvement. This data represents points for future investigation from not a service quality perspective but also from an HR one. For example, what are specific employees specifically doing to manage the service encounter in ways that the most valuable, repeat customers appreciate? Or, how do these employees create efficiencies around the work they do that are reflected in high-volume exchanges with satisfied customers and clients? How are efforts such as these reflected in additional revenues or cost savings to the hotel or restaurant? Questions such as these help identify what employees are doing right—all the critical and significant things they do to help build and sustain a successful business. With an understanding of data such as these in hand, HR decision makers can then assess not only what outstanding performance "looks like" in terms of bottom-line impact, but they can also determine the routines that outstanding employees enact, that can be embedded in the organization's processes. At a broader level, decision makers can conduct similar analyses examining the impact of past and current investments in various employee groups (reflected in the wages and benefits required to obtain them) on the hotel's current revenue stream and profitability. Ideas such as these are aimed at applying financial modeling to understand the impact of human capital at both the individual and group level.
The same type of analyses would be useful to analyze the actual impact of different HR investments. For example, with information from return guests in hand, decision makers could examine ways criteria provided by these guests are embedded into performance appraisal systems, are used to identify training standards, and/or are shaped into hiring guidelines for evaluating job candidates. In this way, HR policies and practices become aligned to not only support and develop these high-performing employees but also to encourage others to adopt similar behaviors. Practices such as these would help create and sustain a high-performing work culture. In addition, the success of HR initiatives could be calibrated against how well employees are succeeding in managing those crucial customer linkages that help generate repeat business.
The link between customer and employees represents one leverage point from which these ideas could be directly applied to hospitality research and practice. Connecting employee performance to what matters most to a hotel or restaurant, along with the ability to accurately measure this connection through HR processes, metrics, and analytics pose opportunities for decision makers. The impact of human capital and HR initiatives is obviously critical to a service-oriented business. Understanding the depth of this impact represents an occasion for hotel and restaurant organizations to differentiate themselves in significant ways from their competition.