WHAT DETERMINES THE SIZE OF THE HR FUNCTION?

A CROSSNATIONAL ANALYSIS

CHRIS BREWSTER, GEOFF WOOD, MICHAEL B R O O K E S , A N D J O S VA N O M M E R E N

What determines the resources allocated to an HR department? The antecedents of the size of HR departments within firms and the relationship between HR department size and the role that HR departments perform are issues of theoretical and practical importance. Using large-scale survey data from organizations in Europe and Japan, this article explores the influence of nationality, size, and sector on the comparative ratio of HR specialists in organizations, and on the likely scope and brief of such departments. It also examines the internal organizational characteristics associated with HR department size. In contrast to previous literature on administrative components, we demonstrate that the human resources staff component is affected not only by organizational size but also by sector and national location. 2006 Wiley Periodicals, Inc.

Introduction

his article examines the determinants of the size and role of HR departments within firms, according particular attention to the effects of objective factors, including organizational size, sector, and the national context. At the heart of this study is a desire to understand the relationship between the

relative resources and importance assigned to the HR function and its social context. In other words, the study explores the relative size of the HR department and the manner in which strategic HRM policy and practice is constrained or enabled by setting. Are some settings more likely to engender a proactive strategic HR role? And, in others, is the HR role likely to be reactive, predominantly administrative, and

Correspondence to: Chris Brewster, Henley Management College, Greenlands, Henley-on-Thames, RG9 3AU, UK, phone: +44 (0)1491 414 529 fax: +44 (0)1491 571 635 chris.brewster@henleymc.ac.uk
Human Resource Management, Spring 2006, Vol. 45, No. 1, Pp. 321 2006 Wiley Periodicals, Inc. Published online in Wiley InterScience (www.interscience.wiley.com). DOI: 10.1002/hrm.20093

HUMAN RESOURCE MANAGEMENT, Spring 2006

relatively inefficient in terms of resources allocated? Previous descriptive studies of the size of HR staff have focused on the HR staff ratio, defined as the number of HR staff divided by total headcount. Since studies report either the mean or the median of HR staff ratio, comparison of the studies is not straightforward (the mean is larger than the median, since the distribution of the HR staff ratio is skewed to the right). However, the following examples illustrate the findings of these prior studies. In the United Kingdom, estimates of the mean HR staff ratio vary between 0.010 and 0.013 (Analysis of Personnel Activities Central to the issue and Costs [APAC], 1997; Mayo, 1995); in West Germany, the of HR department mean was estimated to be around size is the question 0.011 (Brewster & Mayne, 1995); and in the United States, the meof the purpose of dian ratio was around 0.011 (Schuler & Huber, 1993, p. 26). such departments. Two important messages emerge from this existing literature on the HR staff ratio. First, despite differences in definitions of HR staff (and the difficulty of obtaining representative samples), the variation in mean/median HR ratios among studies over time is rather low (e.g., Brewster, 1999; Cully, Woodland, OReilly, & Dix, 1999). This low variation may indicate that in larger samples, measurement errors and idiosyncratic differences in interpretation of the term HR staff cancel out in the mean. Or, this result may indicate that there is little change in the proportion of staff devoted to these issues (Mayrhofer & Brewster, 2005). Second, variation in HR ratios between organizations is extremely large. For example, in a study of 256 organizations in the United States, ratios of HR employees to total employees range from 1 per 18 to 1 per 2000 (Walker, 1988). Although such extreme variation may be due to measurement errors and to differences in interpretation of the term HR staff, it seems plausible that differences in the size of the HR staff are caused by differences in organizational and environmental characteristics. This article analyzes the

extra- and interorganizational determinants of HR staff size at the organizational level in other words, the amount of resources allocated to the internal HR function. Thereafter, we assess the likely relationship between HR department size and role. A comparison of HR staff between organizations requires a definition of HR staff. In this study, we opt for a broad definition of HR staff that matches our interests and our empirical investigation. It includes not only staff members who deal with recruiting, retaining, firing, motivating, and developing the organizations employees, but also staff members that deal with personnel functions such as wage administration and training. For extensive discussions of the roles of HR staff, see Jackson and Schuler (2000), Storey (2001), and Ulrich (1995). The debate about the size of the HR department reflects widespread managerial interest in benchmarking as well as several current strands in the HRM debate. These debates include the focus on the role of the HR function in the strategic HRM literature, the effects of outsourcing, and the implications of information technology for the HRM function. Each might, a priori, lead to a reduction in the size of HR departments as the transactional work that they have done hitherto is replaced by value-added work. Hence, central to the issue of HR department size is the question of the purpose of such departments. On the one hand, it could be argued that the proliferation of outsourcing and the development of new electronically based HR to replace low value-added organizational functions may free HR departments to concentrate on strategic issues and the implementation of innovative new systems for enhancing involvement and productivity (Greer, Youngblood, & Gray, 1999; Ulrich, 2000). In other words, overly large HR departments are likely to be replaced with small, strategically focused, Web-enabled departments. Note, however, that a cooler look at the topic of outsourcing of HRM, carried out by academics rather than consultants selling outsourcing, found that, broadly speaking, outsourcing had increased very little over a
Human Resource Management DOI: 10.1002/hrm

What Determines the Size of the HR Function?

decade (Vernon, Phillips, Brewster, & van Ommeren, 2000). The implication is clear, however, that as HR functions are outsourced, there is less need for people in the HR function. There also is clear evidence that the e-enablement of HR is being engineered on a global basis (Harris, Brewster, & Sparrow, 2003). Part of the assumption in these studies is that line managers, or even individual employees, will be encouraged to develop the ethos of self-service, without the need for an HR intermediary. Experience elsewhere shows that introducing information technology does not always correlate with savings on employee numbers (Tremblay, 2001), but in theory at least more e-enabled HRM also should be linked to smaller HR departments. On the other hand, it could be argued that the development of new forms of work organization are likely to necessitate an upskilling and empowerment of workforces, innovative new reward systems, and a greater attention being accorded to planning (Schumann, 2001; Storey & Quintas, 2001). This prediction, along with the resultant flattening of organizational hierarchies, is likely to recast the role of the HR department into facilitators, problem solvers, and co-operating partner(s) for product and process innovation, in addition to the established servicing role (Schumann, 2001, p. 271). Moreover, HR departments need to keep abreast of external innovations in the field (Storey & Quintas, 2001). Hence, it can be argued that, in innovative sectors and industries, the brief of HR departments is likely to be expanded, necessitating a wider range of specialists. A trend in high value-added industries may be toward HR departments that are both bigger and more innovative. In summary, smaller HR departments may be more innovative as a result of outsourcing. Alternatively, new forms of work organization may necessitate bigger HR departments with a wider brief. Examinations of the determinants of structural features of organizations require, ideally, a large sample of organizations randomly drawn from a population of independent organizations, whereas earlier studies relied on small samples (Scott, 1992). The
Human Resource Management DOI: 10.1002/hrm

absence of internationally comparative data in the existing studies is striking, even though there are a number of reasons to believe that the administrative size depends on the organizations external environment (Appelbaum, Bailey, Berg, & Kalleberg, 2000; Blau & Schoenherr, 1971; Scott, 1992). In contrast, this study is based on a large sample and is international; we provide details in the methodology section of this article. This study explores the traditional antecedents of organizational structures (size, sector, and country location) and develops hypotheses for each one. The large-scale survey data and the methodology are explained and Smaller HR the findings presented and discussed. Finally, we attempt to departments may be draw conclusions for theory and more innovative as practice.
a result of

Antecedents of the Size of HR Departments

outsourcing. Alternatively, new forms of work

Organizational Size and the Size of the HR Function

Smaller firms may be leaner and organization may more dynamic, but they lack the necessitate bigger ability to reap the bureaucratic economies of scale that come HR departments with greater organizational size. Hence, it seems likely that firm with a wider brief. size could have an inverse effect on relative HR department size. A large component of the existing literature on the determinants of the relative size of administrative functions within the organization has focused on the effects of overall organizational size (Cullen, Anderson, & Baker, 1986; Cullen & Baker, 1984; Freeman & Hannan, 1975). The professionalization of HR management has been pointed out as one of the key factors in the process by which bureaucratic forms of governance are institutionalized (Baron, Dobbins, & Jennings, 1986). In his classic writings on the subject, Weber believed that the development of rational bureaucracies was inevitable in modern societies. While it might be resisted by the

HUMAN RESOURCE MANAGEMENT, Spring 2006

entrepreneurial instincts of capitalists, bureaucratization was irresistible on account of efficiency gains as knowledge becomes centralized and administration formalized (Fletcher, 1971). More specifically, in terms of monitoring and control, it is inherently more resource-efficient than small, less bureaucratic organizations that must depend on the frequent, and often arbitrary, displacement of power. Larger firms should require proportionately fewer staff to be directly engaged in monitoring, control, and reward, either on the shop floor or through specialized arms of management, as a greater amount of activity is . . . either as a result contingent on procedure. This viewpoint has been vigorously disputed by a number of of addressing the popular writers. It is commonly myth of wasteful held that specialized bureaucratic functions make for waste and inbureaucracy or efficiency (see Adams & Brock, 1985). For example, Parkinsons else simply reaping Law claims that large organizathe benefits of tions devote more resources to administration than small organeconomies of scale, izations (Parkinson, 1957). Despite empirical investigations of larger firms tend to the relationship between organihave relatively zation size and bureaucratization reporting contradictory results1 smaller HR (for reviews, see Blau & Schoenherr, 1971; Scott, 1992; Starbuck, departments. 1965), the wasteful bureaucracy viewpoint came into vogue particularly in the 1980s and 1990s. An increasingly strong emphasis on maximizing shareholder value, particularly in the short term, led to pressures toward downsizing, outsourcing, and the shedding of noncore operations, and surplus layers of management and support staff, such as HR specialists (Lazonick & OSullivan, 2000). Overall, these viewpoints suggest that, either as a result of addressing the myth of wasteful bureaucracy or else simply reaping the benefits of economies of scale, larger firms tend to have relatively smaller HR departments. Therefore, we will, following Blau and Schoenherr (1971), posit that a negative relationship is likely to occur. Furthermore,

larger organizations will tend to resemble each other, being commonly characterized not only by a greater formalization of certain behavioral patterns, but also by access to greater resources, enabling a specialization of functions, making for greater efficiency (Haveman, 1993). Hence: H1: Larger organizations will have a smaller proportion of staff in the HR function.

Industry and HR Department Size

As noted earlier, there are potential variations in the HR role according to sector. There are common trends. Information technology is becoming widely used in both the public and private sector, due to the transformation of industrial economies to knowledge- and information-based service economies. New work environments such as telecommuting, new technologies, working conditions, and competencies are becoming increasingly available (Lachance, 1999). All these changes require new approaches for the management of organizations in both the public and private sector and especially for the management of human resources. However, industries where the predominant production paradigm remains centered on low-cost mass production are likely to have HR departments oriented primarily toward administration and the implementation of predetermined systems of control (Taylor & Bain, 2003; Wright & Dwyer, 2003). These HR departments may be relatively small and have a limited brief. By contrast, public organizations are managed through rigid bureaucratic structures and culture; the majority of their members have narrowly defined and highly specialized jobs; and decision making is based on rules established by laws (McHugh, OBrien, & Ramondt, 1999). Traditionally, the role of the human resource manager in a public organization has been more technical, including recordkeeping and dealing with functional personnel issues, placing less emphasis on policy making (Klingner & Lynn, 1997). Working practices in public organizations are often subjected to criticism, because they are
Human Resource Management DOI: 10.1002/hrm

What Determines the Size of the HR Function?

not flexible, due to their dependence on rigid rules (Brookfield, 2000). Recent changes within public-sector organizations are imposing new roles and requirements for public human resource management (Brown, Ryan, & Parker, 2000; Ewing & Caruana, 1999; Klingner & Lynn, 1997; Oswick & Grant, 1996). However, at present, political pressures reducing radical outsourcing, and a strong emphasis on formal procedures and rule-policing, are likely to make for relatively large HR departments. Finally, there are specific industries dominated by specialized and flexible small and medium-sized firms backed up by regionally specific skilled labor forces. A good example would be Silicon Valley (Leborgne & Lipietz, 2001). The competitiveness of such firms is likely to be contingent on innovative HR policies, and such industries are particularly likely to make use of outsourcing, leading to smaller HR departments. Where, as in central government and perhaps financial services, a particular sector lends itself to a long-term employee/employer relationship with a recognized career path and a large commitment to staff development, the size of the HR department will tend to be larger. Hypothesis 2: Sector is likely to impact HR department size, with sectors having traditional, standardized forms of work, such as central government, having more people in the HR function.

National Context and HR Size

Organizations face different legal and regulatory systems. These systems vary immensely between countries (Aguilera & Jackson, 2003). Rational choice perspectives hold that practices that promote the maximization of returns will gradually diffuse, with remaining variances in behavior reflecting imperfect information or nonrational residual structural impediments (Gooderham, Nordhaug, & Ringdal, 1999). In contrast, institutionalist accounts hold that complex interpersonal transactions require formal structuring to impart predictability and minimize transaction costs (Anderson & Parker, 1964). Patterns of
Human Resource Management DOI: 10.1002/hrm

practice emerge and are reconstituted (Durkheim, 1933; Guler, Guillen, & Macpherson, 2002). A central concern of contemporary institutionalist literature is the nature and extent of the isomorphism process at the national level, reflecting the persistent centrality of state power (Burnell, 2003; Cole, 1985). For example, significant national differences exist in the legal requirements that apply when organizations lay off employees or employ temporary employees. Similarly, different legal regimes cover the recognition of trade unions and the requirement to have consultative committees. These differences may explain why the country factor, in Europe at least, Organizations face is usually the most significant explanatory variable of HR practices different legal and (Brewster, Mayrhofer, & Morley, regulatory systems. 2004). Clearly, the relationship beThese systems vary tween the national context and HR department size is likely to be immensely between a complex one. However, several countries. schools of thought shed light upon the nature of the relationship. For example, institutionalist accounts hold that a number of relatively functional models of national development may coexist (Leborgne & Lipietz, 2001). A dichotomy often is drawn between the shareholder-driven, supply-side-oriented, Anglo-American model of capitalism and the alternative stakeholder model characterized by one or another form of social compromise (Dore, 2000; Hall & Soskice, 2001; Leborgne & Lipietz, 2001; Lincoln & Kalleberg, 1990). Rather more ambitious recent accounts, such as business systems theory, and developments of the regulationist social systems of production theory, seek to develop a greater range of systemic archetypes (Boyer & Hollingsworth, 1997; Whitley, 1999). Whitley (1999) identifies several types of institutional frameworks. The first is the industrial districts model of regions, such as northern Italy. The second is the large firms model, characteristic of much of Germany and Japan (although it should be emphasized that important differences remain be-

HUMAN RESOURCE MANAGEMENT, Spring 2006

tween these two national contexts). What these cases have in common are institutional barriers to numerical flexibility (the right to hire and fire). These barriers make it relatively difficult for firms readily to increase or downsize staff numbers, leading to a greater emphasis on specialization and skills development (Hollingsworth, 1997). Key characteristics of the German and Japanese models are shared with a number of traditionally corporatist countries (often termed the Rhineland states), including much of Benelux and Scandinaviacountries that include a strong emphasis on training, active state interventionism in the labor market, and high levIncreased els of job security. All these factors would make for relatively bureaucracy is a large HR departments engaged response to having not only in basic administrative functions, but also in compliance to understand and and specialized developmental manage complexity. tasks. In contrast to these two types of business systems, three other distinctive variations of capitalism are identifiable.2 A third form, semiperipheral Fordism, is common to Greece, Spain, and Portugal. Here, a long period of relative isolation from the global economy has been followed by directed modernization and austerity (Holman, 2001). This change has resulted in a somewhat painful period of adjustment. The emergence and/or increased penetration of competitive corporations, displacing former parastatals, was followed by the development of a professional managerial class. For HR departments, the dominant logic would be one of expansion, but more constrained than their counterparts in the first two forms of economies. The fourth model is epitomized by the United States and Great Britain. It has been marked by the evolution of firms along rather different lines, reflecting a wider institutional context characterized by individualized fragmentation. The characteristics of this model are adversarial competition and short-term contracting with suppliers, customers, and employees through efficient

external labor markets (Whitley, 1999). With a strong emphasis on the short term, comparatively little attention is devoted to internal training, development, and consultation. Again, this model should result in relatively small HR departments focusing primarily on basic administrative functions. A fifth form is the transitional model, found in central and eastern Europe since the collapse of Communist Party rule in 1989. Strategic thinking in this model focuses on the need to cut costs. In many cases, cost reduction has been achieved by cutting back on production and administrative expenses (Voskamp & Wittke, 2001). The latter reflects an emphasis on short-term organizational survival and a rigorous culling of surplus staff. Invariably, these cuts will exact a heavy toll on soft, backroom functions such as HR. It is well established that organizations elaborate their internal structures to manage demands from the environment (Buckley, 1967; Thompson, 1967). One of the effects of direct employment regulation is increased complexity of the external environment, because of the numerous situations that are covered in the regulatory framework. Increased bureaucracy is a response to having to understand and manage complexity (Lawrence & Lorsch, 1967; Standing, 1999).3 From this perspective, the size of personnel departments is likely to be heavily influenced by the specific national employment regulation. Employment regulation, therefore, probably increases bureaucracy in the form of additional HR staff required in order to comply with the law, although stronger job protection and better national training systems are also likely to encourage firms to make the most effective use of existing staff (cf., Gooderham, Nordhaug, & Ringdal, 1999; Meyer & Rowan, 1977). The differences between these systems are summarized in Table I. At the environmental level, the existence of national differences in HR ratios has been observed by numerous other studies (e.g., APAC, 1997; Brewster & Mayne, 1995; Marginson, Armstrong, Edwards, Purcell, & Hubbard, 1993; Purcell, 1995). We accept the imHuman Resource Management DOI: 10.1002/hrm

What Determines the Size of the HR Function?

TABLE
SSP/ Variety of Capitalism Characteristic

Relationship Between SSP Type and HR Department Size

Large Firms Model (Germany) Large Firms Model (Japan) Japan Industrial Districts Corporatist (Scand., etc) Peripheral Transitional Compartmentalized

Examples

Germany

N. Italy

Sweden, Denmark, Netherlands

Spain, Portugal

Poland, Czech, Hungary Tendency to shareholderdriven Low Low Low Low Low Low

United Kingdom, United States Shareholder -driven Low Low Uneven Low Low Low

Orientation

Stakeholderdriven High High High Low High High

Stakeholderdriven High High High Low Moderate to low High

Stakeholder- Stakeholderdriven driven Moderate to high Moderate Moderate to high Low to moderate High High High High Moderate to high Low High High

Mixed

Systemic trust Emphasis on training Innovation Numerical flex. Relative strength of unions Employee participation and involvement Functional flex. Degree of state regulation of labor markets Relative HR dept. size

Moderate Low to moderate Low to moderate Moderate to high Moderate to high Moderate

High High

High High

High High

High High

Moderate Moderate to high Moderate

Low Low

Low Low

Large

Large

Large

Large

Small

Small

(abstracted from: Boyer & Hollingsworth, 1997; Whitley, 1999)

plication of these studies and formulate our third hypothesis: country is an important determinant of HR size. However, we also expect that the institutional framework influences these cross-country differences and allows us to predict that countries more closely aligned with the large firms model will tend to have more HR staff and those identifiable as compartmentalized or transitional will be likely to have fewer HR staff. H3: Country will be a key explanatory variable of HR policies and practices, and, hence, differences in the relative size of HR departHuman Resource Management DOI: 10.1002/hrm

ments. The Rhineland economies and Japan will have larger HR functions.

Internal Factors and the Size of the HR Function

If the HR department ratio varies with size, sector, and country, how does this relate to the activities of the function? What, in other words, are the internal correlates of a (comparatively) smaller or larger HR department? There has been growing emphasis on understanding the impact of firm-level factors in molding the degree to which the HR func-

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HUMAN RESOURCE MANAGEMENT, Spring 2006

tion may be outsourced, and, hence, the size of the remaining HR department within the organization (Greer et al., 1999; Klaas, McClendon, & Thomas, 2001). For example, the use of new Web-based technologies, particularly for more routinized and administrative functions, may facilitate or replace this outsourcing process (Sparrow, Brewster, & Harris, 2004; Ulrich, 2000). This emphasis on firm-level factors has placed renewed emphasis on the duality of the HRM roleadministrative and strategic. HR departments may be primarily engaged in monitoring, and in the implementation of routinized procedures, or engaged in developing and operaFirms with a strong tionalizing new techniques for effective resourcing, development, and active trade planning, and enhancing emunion will have a ployee commitment (Ulrich, 1995). This perspective has made smaller HR it increasingly difficult to view the size of HR departments independdepartment, since ently of their functions. Hence, in an effective trade a second step, we analyzed the following links between HR departunion can support ment size and internal factors (drawn from Whitley, 1999): the or replace some of status of the HR department as the HR functions. represented by whether the most senior person has a seat on the board of directors, investment in training and development, and the presence or otherwise of the countervailing pressure of a union. The analysis suggests that firms where HR is afforded a high level of status, revealed through having HR represented on the board and/or investing heavily in training, will tend to have larger HR departments. Firms with a strong and active trade union will have a smaller HR department, since an effective trade union can support or replace some of the HR functions. In other words, we explore the possibility that large HR departments may be large simply because of a large administrative workload, or smaller because they play a less transactional, more strategic, developmental and integrative role. H4: Internal factors will be a key determinant of the size of the HR department, with organi-

zations having the senior HR person on the board of directors or equivalent and spending more on training having HR departments of above-average size. Those firms with a higher proportion of employees in membership of trade unions will have smaller HR departments.

METHODOLOGY
This section outlines the data and the construction of the dependent variable and independent variables.

Sample
The data employed in this article are from the repeating Cranet survey,4 which now contains evidence on human resource management issues of private and public organizations in 22 European countries, as well as some dozen others (Brewster, Mayrhofer, & Morley, 2004). The data set used in this article contains results from the 1999/2000 survey in the 17 European countries that fit easily into the country categories outlined earlier, plus Japan. The data are broadly representative with respect to the industrial sector (using the European Unions NACE categorization) in every country. The data set was constructed from a comparative survey administered by research partners in each of the countries to the senior HR person in the organization, with these partners also being used to guard against any cultural bias within the questionnaires. Information was collected from a postal survey using comprehensive and representative address lists compiled by the research partners. We limited our analysis to countries with 200 or more employees, since Semlinger and Mendius (1989) suggest that formal HRM functions are more likely in organizations of this size. The questionnaire was constructed to achieve international comparability, while at the same time retaining local sensitivity. As a result, the questionnaire consisted almost entirely of the same questions for all countries, but a few of the questions or categories were altered where national conditions demanded.
Human Resource Management DOI: 10.1002/hrm

What Determines the Size of the HR Function?

11

The questionnaire was carried out in the language of the participating country. To ensure comparability and equivalence, each questionnaire was translated from (and, as a check, translated back) into English using native speakers with knowledge and experience within the field of HRM (Brislin, 1976; Brislin, Lonner, & Thorndike, 1973). Over 40,000 questionnaires were sent out across all of the countries included in the project. Our response rate of around 17% meant that a database in excess of 7,000 firms could be used for international comparisons of HRM practices. Further details can be found in Brewster, Mayrhofer, and Morley (2004). Approximately 40% (2,953) of these organizations were from countries named in the business systems literature (Whitley, 1999). Measures We used the data to construct an empirical model. The size of the HR department was estimated as a function of firm size, industrial sector, internal environment, and the country in which the firm was located. HR Size The dependent variable, HR size, is based on the ratio of HR staff to total employees. This distribution was skewed, so the natural log of the ratio was taken to create a normally distributed continuous variable that could be used as the dependent variable. However it led to problems with collinearity since total employees also appears as an explanatory variable. Therefore, to minimize the impact of the collinearity, a limited dependent variable model was used with a coded variable extracted from the log of the HR staff ratio as the dependent variable. The distribution of the log HR staff ratio was divided into three equal portions based on its standard deviation. Those firms with a high ratio were coded 2, those with a medium ratio were coded as 1, and those with the smallest ratio received a 0. Given the ordered ranking of the dependent variable from small HR departments (0) to large HR departments (2), an ordered probit model was estimated (Greene, 2000).5
Human Resource Management DOI: 10.1002/hrm

Firm Size For the explanatory variables, firm size was measured by the number of employees in the organization. As its distribution was also skewed to the right, the natural log of total employees was used in the model. Sector Next, the impact of differences in firms operations was controlled for by creating dummy variables for the various industrial sectors. The model distinguishes among 11 different sectors. Organizations in the manufacturing and mechaniThe mean average cal engineering category were the reference group. value of the HR staff Country Eighteen country dummies were created to represent each of the countries, with the United Kingdom as the base group. Internal Factors
employed. A number of variables were included to reflect the internal environment within which the firms are organized and its impact upon the likely status of HR within the individual firm. First, a dummy was created to identify those firms with higher-than-average spending on training. Second, another dummy was created for those firms where the top HR employee has a seat on the board of directors. Finally, to control for the impact of a strong and effective trade union, union density was measured by the percentage of the workforce who are trade union members. ratio is 0.0159. Thus, on average per 1,000 employees, 15.9 HR staff members are

RESULTS
In the empirical analysis, we use the ratio of HR staff to total headcount as the dependent variable. Omitting those observations without adequate responses for each of the required variables leaves 2,953 cases in the relevant countries. The mean average value of

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the HR staff ratio is 0.0159. Thus, on average per 1,000 employees, 15.9 HR staff members are employed. The means by country are recorded in Table II. There is a large amount of cross-country variation, ranging from 0.0102 in Bulgaria to almost double that, 0.0199, in Ireland. The countries are then categorized based upon the classification outlined in Table I. There is a smaller degree of cross-category variation, with Japan being the highest at 0.0196 and the transitional nations having the lowest mean at 0.0126. Thus, on average, there are seven more HR staff per 1,000 employees in Japan than in these central and eastern European countries. Within the corporatist category, there is almost as much intragroup variation as there is intergroup, ranging from a low in Sweden of 0.0113 to a high in Norway of 0.0165.

The results from estimating the ordered probit model are reported in Table III. For each explanatory variable, the coefficient and t-ratio is reported to establish the significance level of that variable within the model. In addition, the marginal effects are reported, as they give a clearer indication of the impact of a change in that variable upon the likely HR staff ratio. For example, firms in Ireland are 14% less likely to have a small HR department and 14% more likely to have a large HR department than comparable firms in the United Kingdom. Similarly, firms in the building and civil engineering sector are 5% more likely to have a relatively small HR staff ratio than are firms in the metal, manufacturing, and mechanical engineering base category. Turning to the individual hypothesis tests, the first one presupposes that there is a negative relationship between the size of the

TABLE
Model

II

Mean Size of HRM Departments

Country U.K. Ireland Germany Mean HR Ratio .0150 .0199 .0146 .0181 .0171 .0183 .0196 .0113 .0171 .0165 .0143 .0128 .0121 .0129 .0130 .0102 .0152 .0114 .0159 Cases 520 154 330 92 138 91 445 194 255 178 131 86 38 24 118 22 43 93 2,953 .0159 2,953 .0126 276 .0127 148 .0149 758 .0196 445 .0162 651 Model Mean HR Ratio .0162 Cases 674

Anglo-American

Large Firm Model (Germany)

Belgium France Netherlands

Large Firm Model (Japan) Corporatist

Japan Sweden Denmark Norway Finland Spain

Peripheral

Portugal Greece Czech

Transitional

Bulgaria Estonia Slovenia

Total

Human Resource Management DOI: 10.1002/hrm

What Determines the Size of the HR Function?

13

firm and the relative size of the HR function. The size of the firm is measured by the log of total employees, and the coefficient on this variable is negative and significant at the 1% level. Hence, we conclude that there is indeed a negative relationship, and larger firms are able to take advantage of economies of scale in the provision of HR. The second hypothesis postulates that the industrial sector is an important explanatory component of the HR staff ratio. From Table III, the maximum value of the log likelihood function for the unrestricted model is 3024.1. Re-estimating the model without the sector dummies gives a maximum log likelihood value of 3098.2, and the LR test statistic outlined in the methodology equals 148.2. In effect, this tests that the 10 coefficients on the sector dummies in the unrestricted model are jointly equal to zero. The critical chi-squared value with 10 degrees of freedom at the 1% level is 23.2; hence, we are able to reject the null hypothesis and confirm that sector is an important explanatory element within HR size. Looking more closely at some of the individual sector dummies, it is clear that some of them have a very strong influence on the size of the HR department. For example, organizations in central government are 32% more likely to have a large HR staff ratio, while firms in health services are 12% more likely to have a small HR function. The third hypothesis relates to international factors determining the size of the HR staff ratio. Hypothesis 3 simply states that country is an important factor explaining this ratio. Testing this hypothesis in the same fashion as Hypothesis 2 gives an LR test statistic of 176.6. The results show that country is indeed a key component, as the 17 country dummy coefficients jointly equal zero and the critical chi-squared value is 33.4 (at 1% with 17 d.f.). We speculated that these international differences would reflect the business system to which the economy is most closely aligned, and there is a certain amount of evidence to support this idea. First, as predicted, we found that all of the countries with transitional economies tend toward smaller HR departments compared to the U.K. base group. Second, it was
Human Resource Management DOI: 10.1002/hrm

expected that the large firm models would tend to have larger HR departments. Results confirm this hypothesis in Japan and in the Netherlands, but the evidence is less strong in the rest of Europe. Finally, although no formal predictions were made relating to the corporatist and peripheral economies, they both display a tendency toward smaller HR functions. Within the corporatist group, Sweden and Finland have negative and significant estimated coefficients, as have Spain and Greece within the peripheral group. Finally, having established these antecedents to the size of the HR function, we also examined aspects of the operating environment and . . . it seems that, the perceived status of HR within the organization. Hypothesis 4 re- contrary to popular lates to the impact of the internal environment upon the size of the wisdom, small is not department. Not surprisingly, necessarily there is a clear link between aspects of the environment and the HR beautiful and staff ratio. Investing heavily in training and having the head of downsizing does not HR on the board are both correnecessarily make lated with larger HR ratios. By contrast, having a higher proportion for greater of trade union members has a negadministrative ative impact on the staff ratio.
efficiency.

DISCUSSION
This study underscores the contradictory pressures of the external environment on the HR department. First, it seems that, contrary to popular wisdom, small is not necessarily beautiful and downsizing does not necessarily make for greater administrative efficiency. Rather, larger organizations tend to have proportionately smaller HR departments, perhaps because they are able to reap bureaucratic economies of scale or perhaps because they have moved from a transactional approach to HRM to a more strategic one (above the line, in Ulrichs [1995] famous model). In the case of a smaller firm, proportionately more resources will necessarily be consumed in the transactional dayto-day administration and troubleshooting. Hence, the role of the HR department is, to

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TABLE
Variable

III

Ordered Probit Results

Coefficient t-ratio Mean Effect, y0 Marginal Effect, y2 Marginal

Constant Firm Size Log of total employees Country Ireland Germany Belgium France Netherlands Japan Sweden Denmark Norway Finland Spain Portugal Greece Czech Republic Bulgaria Estonia Slovenia Industrial Sector Energy and water Chemical products Building and civil engineering Retail and distribution; hotels; catering; repairs Banking; finance; insurance; business services Health services Other services Local government Central government Other industry or service Internal Environment Above-average spending on training Head of HR on board of directors

1.21** .09** 41** .09 .11 .26* .42** .21** .56** .03 .06 .31** .28* .26 .46* .28* .89** .21 .77** .61** .33** .16 .15* .46** .36** .32** .26** .94** .10 .17** .16**

11.76 8.49 3.8 1.07 .86 2.37 2.96 2.82 5.5 .34 .66 3.02 1.99 1.33 2.17 2.29 4.1 1.12 6.05 3.69 3.19 1.59 2.01 5.68 3.23 2.69 2.68 6.34 1.63 3 3.36 3.74 7.23 .05 .11 .03 .05 .03 .15 .07 .09 .06 .04 .03 .01 .01 .04 .01 .01 .03 .02 .05 .05 .1 .09 .04 .04 .06 .03 .17 .18 .58 42.8 .03 .14 .03 .04 .09 .14 .07 .19 .01 .02 .1 .09 .09 .16 .1 .3 .07 .26 .21 .11 .05 .05 .16 .12 .11 .09 .32 .03 .06 .05 .02 .03 .14 .03 .04 .09 .14 .07 .19 .01 .02 .11 .1 .09 .16 .1 .31 .07 .26 .21 .11 .05 .05 .16 .13 .11 .09 .32 .04 .06 .05 .02

% of workforce who are trade union members .05**

Human Resource Management DOI: 10.1002/hrm

What Determines the Size of the HR Function?

15

TABLE
Variable

III

(continued)
Coefficient t-ratio Mean Effect, y0 Marginal Effect, y2 Marginal

Dependent Variable: Log of HR staff ratio Mean Observations Log likelihood function Restricted log likelihood function Chi-squared Degrees of freedom
*p .05 and **p .01.

1.01 2,953 3024.1 3219.9 391.8 31

some extent, bounded by firm size. This finding suggests that the current fashion of downsizing does not necessarily yield any further efficiency gains. The development and maintenance of specialized bureaucratic capacity underpins the rationalization of economic activity (Weber, 1968). Second, we found clear evidence that the HR ratio is a function of the sector in which the organization is based. This result reflects variations in the effects of technological innovation, the extent of interorganizational cooperation in the sector, and the state of the market for specific products (Hirst & Zeitlin, 1997). In turn, this constrains any objective forces to the homogenization of practice, as we find little sign of an emerging management paradigm that cuts across sectors (Belussi & Garibaldo, 2001). Rather, it seems that in certain sectors firms continue to rely on traditional, easily administered, standardized forms of work organization, whereas in other sectors firms make greater use of skilled, better-paid employees, necessitating more complex forms of people management (Wright & Dwyer, 2003). While this finding helps us to understand sector differences, there is no obvious single solution across these variations. Arguably, much of employment in health services or retail, with smaller HR departments, is as administrative (Ulrich, 1995) as much of central government. The finding is clear, but more research is needed to explain it.
Human Resource Management DOI: 10.1002/hrm

Third, the direct impact of the national environment on resources invested in people will also be a factor in comparative HR department size. The results suggest that the HR function is in some manner path-dependent; the role of the HR practitioner is likely to, at least in part, be determined by the regulatory environment. Thus, it appears that where HR departments have less credibility, they are likely to be smaller. We found that HR departments are smaller in the former Communist countries of central Europe and in the peripheral countries of southern Europe. In Japan, HR departments are heavily focused on transactional work and, as such, are much larger. The remaining business systems have a wider range of choice of transactional or strategic HR available. Since organizational size and sector and individual country differences are conflated, we should not be too surprised that there is no direct correlation between these approaches and HR department size. The research confirmed a clear connection between national context and HR department size, but the influence of business systems remains complex.6 These three factorsorganizational size, sector, and national contextare not entirely independent, of course, as stated in the business systems theories. However, they appear not to be mutually dependent and to give organizations a choice in the internal HR poli-

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cies and practices they will pursue. This result is implied by the finding that irrespective of these factors, training spending, HR on the board, and the presence or absence of trade unions is an indicator of HR department size. Finally, there is clear evidence that where organizations are focused on employee development, as indicated by the senior HR specialists having a role at the board level and increased spending on training and development, HR departments tend to be larger. The experts are needed to ensure that this crucial aspect of strategy is carried out effectively. Where relationships with employees are bureaucratized or standardized through there is clear trade union contracts, HR departevidence that where ments tend to be smaller. A deal with the trade union made by organizations are one or a few people in the HR department will cover many emfocused on ployees through standardized terms and conditions of employemployee ment. development, as
indicated by the senior HR

CONCLUSIONS

This article highlights the relationship among organizational specialists having a size, sector, national context, and the size of the HR department role at the board within organizations. Clearly, each of these factors plays a part, level and increased and the relationships among spending on training them are complex. Summarized, the proportion of staff engaged in and development, the HR function will tend to be smaller where the organization is HR departments larger. The HR ratio will be lower in specific areas of the service sectend to be larger. tor (retailing and distribution), probably reflecting the predominance of relatively low valueadded HR policies in this area (Wright & Dwyer, 2003). In contrast, HR departments are relatively large in the state sector, probably reflecting political pressures against excessive outsourcing. The HR ratio will be higher in countries in the large firms, AngloAmerican, or corporatist business systems categories.

Size of organization, sector, and country are not entirely independent variables. Country will affect the other two. For example, countries with strong stock markets are more likely to experience intensified pressures for downsizing (Carroll, 1994), whereas countries where longer-term relationships are the norm are more likely to experience a large firms model (Whitley, 1999). The relationship between these factors is inevitably complex and is reflected in and correlated with the manner in which HRM is conducted in these organizations. Having HR directors on the board and higher spending on training will be correlated with comparatively larger HR departments since developing human resources is taken more seriously; greater trade union presence will tend to correlate with comparatively smaller departments since it will be correlated with standardized employment relationships. This article provides evidence of the extent to which two contradictory forces are at work in determining the size of the HR function. First, the amount of resources allocated to HR reflects national context and, in many respects, is path-dependent. In specific contexts, HR departments are likely to be relatively small and under-resourced, and/or their activities confined to a short-term reactive role, rather than proactive and strategysetting. In national contexts that encourage a high degree of mutual employer-employee interdependence, HR departments are likely to have a broader role, involved in planning and operationalizing more extensive human resource development, resourcing, and involvement and participation systems. In other words, the range of strategic choices available to the HR manager is likely to be circumscribed by the external setting. Second, strategic choice is central to molding the role of the HR function. Within each size and sector category and each national context there are a range of possibilities. Far-ranging choices on the size and scope of the HR function may reflect subjective managerial perceptions as to its role and the degree of internal organizational integration (Lever, 1997). In other words, while the resources allocated to HR departments and
Human Resource Management DOI: 10.1002/hrm

What Determines the Size of the HR Function?

17

what they do is likely to be affected by the external environment, the impact of subjective attitudes and the subjective reinterpretation of objective external pressures should not be discounted. For practitioners, the implications of this research are that benchmarking (and the resultant pressure to downsize the HR function) needs to be used carefully. Previous prescriptive texts offering generic assumptions about the proper size of the HR function compared to the overall size of the organization will be misleading, as the size of the organization, the country location(s), and the sector need to be taken into account. A costeffective HR department in one organization may well be a different size from a cost-effective HR department in a different context. This finding is especially important for conglomerates and internationally operating organizations. An important agenda for future research would be to shed further light on the intersection of subjective individual and organizational choices, and the broader external environmental factors that undeniably impact on the amount of resources devoted to the HR function. Overall, none of these findings relates to the philosophical question of whether, as implied in much of the popular literature, smaller HR departments are better. Is it better, for example, that line managers access data immediately and resolve their own staff problems without the intervention of HR specialists (fewer people in the HR department)? Or is it better that issues such as equal opportunities, innovative thinking on people management, and careful monitoring of employment legislation are taken seriously (more specialists in the HR department)? But these, as philosophical issues, may not be susceptible to research.

Acknowledgment
The authors are grateful to three anonymous reviewers and, in particular, to Associate Editor Paula Caligiuri for insightful and valuable comments on earlier drafts of this article.

NOTES
1. An important reason for the absence of consistent results is that the administrative component is not a unitary structural element, but a heterogeneous category composed of employees with different functional roles (Blau & Schoenherr, 1971; Scott, 1992); hence, in this study, we focus on HR departments, a core administrative department with no line functions. 2. A sixth form, fragmented, is argued with Hong Kong as the exemplar, but our data do not cover that territory. 3. In some exceptional cases, employment regulation may reduce bureaucracy, since it may reduce the need for employers to bargain with employees. For example, in Denmark, the actual holiday entitlements are specified in national legislation and apply to almost all workers. As a result, employers and employees in Denmark do not bargain on holidays. However, in general, employment regulation does not set exact forms of working arrangements, but does set boundaries. 4. The authors are grateful to the members of Cranet, who have collected the data, discussed it with the authors, and given the authors permission to use it. 5. Though, in fact, a regression analysis gives almost identical results. 6. Using this same data to check the effect of the countries grouped into cultural categories, following Hofstede (1991), gave a similarly complex picture (Brewster, Wood, Brookes, & van Ommeren, 2004). Since the influence of size and sector is not included in these analyses, it is, perhaps, not surprising that there is no clear sight-line between these cultural analyses and HR department size.

CHRIS BREWSTER is a professor of international human resource management at Henley Management College in the United Kingdom. He had substantial experience in trade unions, government, specialist journals, personnel management in construction and air transport, and consultancy before becoming an academic. He has conducted extensive research in the field of international and comparative HRM and published some 20 books and over 100 articles. In 2002, he was awarded the Georges Petitpas Memorial
Human Resource Management DOI: 10.1002/hrm

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HUMAN RESOURCE MANAGEMENT, Spring 2006

Award by the World Federation of Personnel Management Associations in recognition of his outstanding contribution to international human resource management. GEOFFREY WOOD is a professor of HRM in the School of Management at the University of Sheffield. He is also an overseas research associate of the University of the Witwatersrand. He served as commissioned researcher for the South African Truth and Reconciliation Commission. He has authored/coauthored/edited seven books and more than 100 articles in peer-reviewed journals. His current research interests include regulation theory and workplace practice, trade union renewal, the disjunctures between HR theory and practice, human resource development in the shipping and textile industries, neocorporatism, and maritime industrial policy. MICHAEL BROOKES is a senior lecturer in economics at Middlesex University. He became an academic relatively late in life, having for many years taught economics and business studies in a number of secondary schools. His research interests include labor market discrimination, industrial relations, and comparative HRM, and he has already published a number of articles in each of these areas. JOS VAN OMMEREN is an associate professor in economics at the Free University, Amsterdam, the Netherlands. He is a fellow of the Tinbergen Institute. His research interest is mainly in commuting and the relationship with labor and housing markets, and transport in general. Further, he focuses on human resource management and, in particular, recruitment. His research has been published in several books and a large number of scientific journals.

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