Knowledge work and new organisational forms: the HRM challenge

Introduction 
The networked organization (Dyer and Nobeoka, 2000) has become a prominent means of operating within knowledge intensive industries (Ahuja, 2000; Dyer, 1996; Dyer & Singh, 1998). Knowledge intensive firms (KIF) work closely with their clients and other stakeholders in the network in both loosely and tightly coupled ways (Birkinshaw, 2002) to deliver knowledge rich products and/or services. This organisational form facilitates knowledge creation and flow and allows several organisations within the network to benefit from joint knowledge development. However, within this context the boundaries between firms begin to blur and it would be naïve to assume freedom of strategic HR choice within the KIF. The organisation of knowledge work is therefore influenced by client pressures as well as prominent employment practices within the network.   

This paper carefully considers the impact of external pressures (client demands and influences) and internal pressures (employment mode of core knowledge workers, employee expectations, knowledge ownership) on the management of knowledge workers. It pays attention to the nature of the network within which the firm operates and considers the influence that wider professional networks have on the choice of HR systems.  We look beyond the boundaries of the firm to understand how different knowledge configurations (Lepak & Snell, 1999) are managed.

We begin our argument by reviewing the nature of knowledge work and develop an understanding of the prominence of the networked organisation. Here we consider how both the structure of the knowledge network and the dynamic nature of the relationships within the network impact on the strategic choice of HR practices. Hereafter we use empirical data to illustrate how two medium-sized software organisations addressed the HR challenges of the networked organisation.

We argue that successful organisations can gain competittive advantage (Boxall and Purcell, 2003) at the firm and network level where the choice of employment models (Lepak and Snell 1999) becomes critical.  Here the distinction is between an acquisition mode where the dominant HR configuration is essentially market based, and an internal development mode where the HR configuration is commitment based.  Although the acquisition mode is expected because there is high mobility of software professionals, our more successful case study firm opted for a commitment based approach while encouraging professional network activities which are expected to increase the individual software engineers’ external market value.

The nature of knowledge work and knowledge workers:

The purpose of knowledge work is to provide knowledge rich solutions or services (Tsoukas, 1996) to clients through a process of innovation and knowledge creation. Hence, knowledge intensive firms mainly engage in business-to-business relationships with their clients (Swart & Kinnie, 2003). Indeed, small-to-medium sized knowledge intensive firms are often dependant upon a small number of relatively large clients. These client relationships are of critical importance to the firm and will often be nurtured at any cost. This puts the knowledge intensive firm in a vulnerable position and requires the firm to respond to client demands as well as external pressures on employment practices such as the level of skill scarcity in the labour market and legislative requirements.

The dominant form of work organisation in the knowledge intensive firm is the project team which centres on a product, service or a client.  These teams present two important gateways of influence into the organisation. The first is through professional networks that are built-up by working closely with employees from other organisations (including the client organisation). Here employees are exposed to and have conversations with other knowledge workers regarding their employment practices. They can ascertain how their peers are managed and which advantages are available to them. Secondly, these project teams resemble one of the key ways in which the client influence impacts on the knowledge intensive firm. Clients can demand that certain employees work on their projects and therefore have an impact on resource allocation (Alvesson, 2000), thereby influencing the skill development and resource availability within the knowledge intensive firm. It is through the project-based access that the client can influence rates of pay, training and development and performance appraisal criteria (Kinnie, et al., 2005). The project teams are therefore central to understanding both external (through clients) and internal (through knowledge workers themselves) pressures on employment practices

The organisation and management of knowledge work is not only influenced by client pressures but, as illustrated above, the demands of knowledge workers themselves play an important role in the adoption of management practices. To understand the nature of this internal pressure on employment practices we briefly review the literature on the characteristics of knowledge workers.

The notion of identifying a particular group of employees as knowledge workers can be problematic (Alvesson, 1995).  There are often strong variations between professional service in high tech companies on the one hand and more routinised service and industry companies on the other (Alvesson, 2000: 1103). The key characteristic that differentiates the professional service group of knowledge workers is that their work requires high levels of knowledge input in a non-routinised manner, i.e. bespoke designs and the subsequent output results in a product/service within which their knowledge is embedded. 

There are a number of stereotypical characteristics of knowledge workers which marks out key differences from other types of workers. They tend to work exceptionally long hours (Deetz, 1995), where commitment is related more to the nature of the work (designing an exceptional system) than to the organisation (May, et al., 2002). They have a strong sense of intrinsic motivation and are mostly interested in challenging work (Blackler, 1995; Smith, et al., 2005, Swart, et al., 2003). They also tend to identify with other high-tech professionals rather than the organisation for which they work (Alvesson, 2000; Scarborough, 1999; von Gilnow, 1988) and therefore develop strong interpersonal networks that span organisational boundaries (Leana & van Buren, 1999; Reed, 1996; Sherer, 1995).

In most employment situations the management of the knowledge workers will be loosely structured with fluid project teams, rotation of leadership positions and low degrees of monitoring and control being present in the employing organisation (Smith, et al., 1995, Frenkel, et al., 1999). This fits with the professional need for autonomy and self-directed development. Knowledge workers are often in control of the networks that they develop and the skills that they acquire (Bouty, 2000). These characteristics when present, pose particular challenges for the design and application of HR policies as elaborated in the rest of the paper. Choice can be heavily constrained, however, because of the networked nature of the firm in its environment.

The networked organisation

The conduct and performance of firms can be more fully understood by examining the network of relationships in which they are embedded (Gulati, et al., 2000, p. 203). This approach is more widely referred to as the relational approach and is often contrasted with the atomistic approach, which focus mainly on ‘within firm variables’ to explain various outcomes. The relational approach considers the social context within which firms operate in order to understand between-firm-differences. This approach is highly relevant to firms that have fewer and more long-term business-to-business relationships. Here we need to consider how suppliers, partners, clients and customers influence the way in which people are managed in the focal firm¹. In other words how the network influences the strategic choice of HR practices (Uzzi, 1997; Wetsphal et al., 2001; Powell, et al, 1996). 

Research into inter-firm networks originated from joint-venture studies but has developed considerably during the last decade, with attention being paid to learning and knowledge sharing (Dyer & Nobeoka, 2000, Powell, et al., 1996), the pooling of resources (Oliver, 1997), imitation and innovation (Brusoni, et al., 2001). Considerably less research is conducted into the constraints placed upon individual firms who operate in the network. 

Within knowledge intensive industries the networked organization (Dyer and Nobeoka, 2000) has become a prominent means of operating (Ahuja, 2000; Dyer, 1996; Dyer & Singh, 1998), however, literature on the impact of this organizational form on HR practices is undeveloped.  These organisations are often faced with several challenges which serve to constrain their choice of HR system. They need to respond to pressures from clients when acquiring and managing contracts whilst retaining and developing their key employees in the context of an often highly competitive labour market. In order to understand how these network relationships impact on employment practices we review the literature on the structure (how the network looks) and dynamic relationships (how the network operates).  This develops a framework for analysing two case studies in the latter half of the paper. 

Table 1: Network characteristics

Network structure

Previous research indicates that inter-organizational networks often provide the advantage of a shared division of labour where various firms specialize in the value-creation activity supported by their particular skill-set (Park, 1996). Here the purpose of establishment of the network is the advantage that stems from complimentary skill-sets within the network. This may, however, not always be the case. Literature often overlooks outsourcing arrangements brought about by delayering and cost saving drives. For instance, firms may outsource activities previously conducted by them. In these instances the network is more characteristic of a re-configuration of skills, or ‘farming out of skills’ (Park, 1996) than a true integration of complimentary skill-sets (Dyer & Nobeoka, 2000; Powell, et al., 1996). We differentiate between two extreme purposes of establishment: the first being the farming out model, where skills previously developed internally are outsourced to save costs and the second is the innovation model where investment is made in combining unique skill-sets in order to gain competitive advantage as a network. 

Although complementary skill-sets within the network are central to the innovation model, a focal firm may also naturally be in an advantageous position due to the distribution of expertise in the network. This refers to shared professional expertise in the network, often expressed through a shared language. For example, a life science research organization that employed mainly PhD chemists worked closely with universities and pharmaceutical organizations that were staffed by similar professionals (all chemists but working in different specialisms). The competence of these employees were governed by professional associations and a high degree of respect and shared language or ‘one of us’ was evident across the various organizations (Swart et al., 2003). Where professional skills are dispersed among several firms there tends to be less external interference with the management of employees in the focal firm and therefore a higher degree of strategic choice that can be enacted by the firm.

The strategic purpose of formation of the network will be directly related to the membership of the network. If a network is created with a  focus on innovation  it will attract firms with diverse skill-sets and will engage in knowledge sharing and collaborative product and process development. In this context membership will also have an important influence on the competitive ability of the focal firm. For instance, Afuah (2000) found that the suppliers’ capabilities influence the performance of the focal firm to a great extent. A resource-rich partner can enable the focal firm to be more successful. If a key firm, such as Tesco in the retail industry, is part of the focal firm’s network then all the firms may benefit from the key firm’s knowledge (Powell, et al., 1997), operational processes and customer base. These dominant firms may also have a high degree of power over smaller firms in the network and may severely constrain intra-firm relationships (with employees) as well as strategic choice. In a similar way the effect of non-membership or exit of a major firm (Oliver & Ebers, 1998) may cause negative effects to ripple through the network and may even lead to the destruction of some of the smaller firms. The existing choices of partner firms can therefore both restrict and enlarge the opportunity set of future relationships available to the focal firm (Gulati, 1995). In summary, network membership can influence strongly what each of the members can and cannot do as well as how successful they will be.

Research in the auto industry (Dyer & Nobeoka, 2000) in particular show that networks are often dominated by a resource-rich firm, such as Toyota, which have highly specified demands and  partners with firms with well developed but not necessarily unique skills. Here the dominant firm has the opportunity to influence the management of human capital within some of the member firms. This is often accomplished through consulting teams, voluntary learning teams, inter-firm employee transfers and the supplier association known as kyohokai that has three stated purposes

1. information exchange between member companies
2. mutual development and training among members
3. socializing events (Dyer & Nobeoka, 2000, p. 352).

This joint management of human capital is often seen in a positive light and related to network learning and knowledge sharing that leads to innovation and high quality production. 

We argue, however, that these ‘positive influences’ often result in severe constraints over strategic choice and smaller members of the network have to ‘put up with’ the dominant influence of the resource-rich organization in order to firstly, remain part of the network and secondly, given themselves the opportunity to eventually occupy a more central position in the network. These characteristics represent a snapshot of how the network looks and we view this as a fundamental building block in understanding how the network functions. 

The following set of characteristics that we review is the network relationships which sit at the heart of the dynamic network processes.

Network structure

Literature on network structures often couple the concepts of structure and social capital in order to explain how cohesive ties foster cooperation and innovation (Gargiulo & Benassi, 2000). Social capital in this context relates to network resources (Gulati, et al., 2000) and is defined as the sum of the resources that accrue to [a group] by virtue of possessing a durable network (Bourdieu & Wacquant, 1992, p. 119). Van Deth (2003) provides a useful framework for the analysis of social capital and identifies two key dimensions of social capital, i.e. structural and cultural. The former refers to the relationship configuration (structural density and structural holes) whilst the latter informs the nature of these links and includes variables such as trust, shared values and norms. We do recognize that many other frameworks exist for analyzing the nature of relationships but feel that the Van Deth model is particularly useful in this context because it captures the configurations of relationships across boundaries. In the section that follows we firstly look at the structural aspects of relationships in the network.

Relationship configuration comprises both structural density as well as structural holes, which refer to the extent to which individuals and groups in and across firms are connected in the network. According to the structural density view, tight social ties facilitate the establishment of social norms, sanctions and trust. This may, however, be associated with coercive relationships and attempts by the dominant firm to control (and constrain) the free choice of the focal firm. Structural holes (Burt, 1992) are seen as loosely coupled relationships which allow for innovation but could also lead to fewer shared norms and less likely to be governed by trust.

As firms enter and become part of a network they develop sets of institutionalized rules and norms through their interaction with other organisations in the network. The nature of these relationships (cultural aspect of social capital) is often influenced by the structural network characteristics. For example the position of the firm in the network as well as its brokerage opportunities created by its skill-set may influence the degree of power it has over other firms or whether truly cooperative relationships are fostered. We refer to the nature of the inter-firm relationship as tie modality and are mindful of both cooperative and coercive relationships.

The modality of the ties that a firm creates and maintains, whether cooperative or opportunistic, strong or weak, multiplex or single, has clear implications for a firm’s strategic behaviour and performance (Gulati, et al., 2000, p. 208). The majority of research indicates that strong ties in supplier networks can benefit both the dominant firm and the member firms in the network. It is also the nature of the relationship that is regarded as the unique advantage of the network, i.e. inimitable resources. However, overly strong ties may put strain on the focal firm as they are restricted in their strategic choice. Uzzi (1997) warns of the implication of overly embedded networks for stifling economic action and releasing intense negative emotions (p. 59). Similarly, Dore (1983) found that embedded actors will focus more on exploiting dependency to cultivate long-term cooperative ties than maximizing rents for resources.

Both inter-and intra-firm relationships have informal/personal (Oliver, 1997) as well as formal/contractual dimensions to them. Research conducted in the Japanese auto and Italian knitwear industries (Uzzi, 1997) indicates that relationships in these networks are mainly governed by trust and personal ties rather than explicit contracts. Here ‘thick information exchange’ and the flow of tacit knowledge are facilitated by the strong ties in social communities that cut across various firm boundaries (Dyer & Nobeoka, 2000).

When considering tie modality it is important to classify the various relationships in the network. Here we differentiate between the suppliers, customers, clients, the parent organization and the employees. Previous research considers mainly the nature of the relationships between firms in the network but we consider it important to include intra-firm relationships when we analyse tie modality. This links directly to the management of human capital and specifies how network relationships influence employment relationships. In the section that follows we apply the framework developed here of the networked organization to analyse the network influences on employment practices in two medium-sized software firms.

Method 
The qualitative and quantitative data that we present here were gathered between 2001 and 2002 in six small-to-medium knowledge intensive firms where the emphasis was on the provision of professional services to other businesses (clients) where task ambiguity is high (Thompson, 1967) and product and labour markets are fluid (Swart, Kinnie and Purcell 2003)². We use the case examples of two medium-sized software development firms (FinSoft and SoftwareCo) who operate within financial service networks to illustrate the importance of understanding the effect of network influences on the strategic choice of HR practices. In each firm we interviewed senior managers about their firm’s strategies, network ties and choices made in managing their knowledge workers. Project leaders were also interviewed about the management of teams and the application of HR policies. This was followed by an administered questionnaire with a random sample of professional employees. The carefully designed employee attitude survey was designed to explore their experiences of HR practices and their levels of satisfaction with them. Further questions tested levels of affective organisational commitment, job achievement and the quality of line management in leadership and people management.  In the main these replicated questions used in the National Workplace and Employee Relations Survey (WERS98)which were based on validated scales (Cully, et al., 1999). The scales used were appropriate as shown in appendix 1.

In addition we asked a series of questions about knowledge sharing and forms of social capital. A typical question was "How frequently do you make a contribution to development of solutions in other teams?" and "On completion of designing a project, do you share your insight and experience with others in 'the company'?". The employee interview took an average of one hour to administer and included the opportunity to record verbatim comments in answer to the follow question "Why did you say that?" Survey results were fed back to the participating organisation allowing for debate and reflection further adding to our understanding of the complexities of HRM in these firms. We choose to focus on two firms because they both operate in the same industry, are similar in size and focus on similar products offerings (software products in the financial services industry), however, there are marked differences in their approach to network management and HRM.

The cases 
SoftwareCo provides software products and services for around 20 clients in the financial services sector.  It was established in 1986 and at the time of the research employed around 400 people. This firm’s competitive advantage derives from the firm’s expertise at managing its relations with its clients and with its employees. SoftwareCo offer their clients a mix of software services and products.  The services involve the development of bespoke software especially for clients who are looking to integrate existing data bases and improve customer services.  This involves a high level of customised work to fit the client’s needs. Contracts vary in length, size and value.  Some may be relatively short (just a few weeks) small (a handful of employees) and of low value whereas others are longer (up to 2 years) involves a large team (20) and are of high value. Recently SoftwareCo have been developing a more standardised product which they can sell to clients and then gain a licence income.  This move was because the services work produced income which was unpredictable and variable.  This meant that close relationships had to be formed with clients although, by choice, employee time spent on clients’ sites was minimised and was much lower for example than in FinSoft (the other case).  For SoftwareCo, products provide a smoother income stream, less time on client’s site and less attention is given to the precise demands of individual clients. 

Figure 1 – The network of SoftwareCo

Competition in the marketplace is intense with alternatives provided by in house specialists and other software houses.  As Figure 1 shows the network has various members.  Aside from existing clients the most important member of the network is a large management consultancy organisation with whom SoftwareCo have a strategic alliance.  This firm provides new business opportunities by passing on contacts or sub-contracting work.  Other ways of getting new business include extending work for existing clients or responding to a formal Invitation to Tender.  These invitations and more informal approaches often arise because SoftwareCo is well known for its expertise in the relevant industry networks.  This is established not only by word-of-mouth but also by its networking activities such as making presentations of its research findings and hosting seminars.  

This mix of products and services has an impact on the internal structures.  There are a series of client based project teams and a separate product team.  These project teams vary in size depending on the client needs and the stage of the project.  The boundaries between these teams are weak and there is an emphasis on knowledge sharing across the organisation.  In addition SoftwareCo has a number of other teams or communities to facilitate knowledge sharing.  The vocational teams are comprised of employees doing the same job (for example testers) and they are designed to share best practice throughout the company.  There are also non-hierarchical committees which are used for the communication of information vertically and horizontally within the company.  Extensive efforts are made to communicate information by technical and non-technical means. 

The multiple teams and multiple role structure are designed not only to share knowledge, but also to develop a high level of organisational commitment.  Indeed, SoftwareCo is very conscious of the need to manage relationships with clients and to manage relationships with employees.  This is summed up by their stated intention to be ‘the best company in the world to work with and the best company in the world to work for.’  They are relatively successful in doing this.  Employees in SoftwareCo showed the highest level of affective organisational commitment (mean 2.04, sd .817 on a 5 point scale 1 highest, 5 lowest levels of commitment) of any of the companies we studied and had a very high sense of job achievement (see Table 3 for descriptive statistics of both cases).  The sense of team working is also strong (mean 2.00, sd .1.121), as evidenced in their 2001 5^th place in the Sunday Times survey of the best companies to work for in theUK. 

Table 3: Employee attitudes in SoftwareCo and FinSoft

SoftwareCo  – N=38, FinSoft – N=25

Scale: 1- strongly agree/very good/very satisfied, 2 – agree/good/satisfied, 3 – neither agree nor disagree, 4 – disagree/poor/dissatisfied, 5 – strongly disagree/very poor/very dissatisfied

This emphasis on commitment to the organisation is also reflected in various HR practices and the role of HR specialists in decision making in the organisation.  New project team software designers are recruited principally directly from University, while a smaller group of business analysts tend to be older and have business experience in the sector. These analysts are responsible for maintaining relationships with the client, allowing project team workers to stay on the SoftwareCo site. The selection criteria emphasise the fit with the organisation’s culture rather than technical expertise. Training for new employees lasts for three months and is designed to develop generic rather than client specific skills. 

Employees are also appraised not only on their contribution to a particular client project but also more generally on the extent to which they have developed their skills.  Similarly the reward strategy is not linked only to individual contribution to projects but is based on an overall appraisal of their contribution to the organisation as well as their place in the salary structure.

The overall emphasis in this company is the creation of dynamic intra-organisational networks to facilitate integration and knowledge sharing.  The HR Director (whose title is Director of Intellectual Capital) and her two subordinates (Knowledge Sharing Managers) pay particular attention to recruitment, selection and induction of fresh staff straight from university wherever possible. 

Crucially, it is the HR team which allocates staff to project teams in order to encourage learning and cross fertilization.  As each staff member belongs to at least three teams (project, professional and social/consultative), with little overlapping membership, significant levels of social capital are created.  Professionals are strongly encouraged to develop and utilize external professional networks and share learning (for example over lunch in ‘brown bag’ seminars) and the office layout facilitates exchange ‘around the water cooler’ – or in this case kitchens/coffee bars. 

This sense of integration is reinforced first by the avoidance of contract staff from temporary work agencies (TWA) as far as possible and second by keeping knowledge workers on site.  Customer relations are managed by more senior staff like project leaders or business analysts.  This means there is a conscious preference to build intra-organisational networks while inhibiting external clients from being able to exert undue influence on resource allocation within SoftwareCo.

FinSoft provides software products and services to the mortgage, life, pensions and investment sectors of the financial services industry.  It concentrates on products which form part of the clients’ IT platforms that support core business processes.  It therefore tries to lock itself into the network by contributing to the clients’ core business processes. Established in 1987 it employed around 500 people at the time of the research and its turnover had increased by 58% between 1998 and 2000 to reach £50m.  It gains its competitive advantage from paying very close attention to client needs and by developing expertise over time about client products and IT systems.

This firm has developed a diverse set of products and services and offers these to clients in a variety of combinations.  A combination of insourcing, outsourcing, third party administration, managed services and application series provision are made available.  As Figure 2 suggests FinSoft operates in a complex network.  Aside from clients, with whom it may operate joint ventures, other members of the network include informal relationships with companies regarded as being influencers in the industry.  This might include management consultants and consulting actuaries with whom knowledge is shared, company development discussed and mutual opportunities explored.  This is clearly an important way of winning business (aside from formal invitations to tender) since FinSoft is recommended by word-of-mouth and via the use of reference sites.  A third important group is the ‘. Net’ group of companies who work with Microsoft.  The final group in the network is the local educational providers who have co-operated with FinSoft to provide courses which are well suited to the company’s skill requirements.

Figure 2:  The network of FinSoft

Competition for business in the industry is very tough.  The alternatives are in-house providers and other software houses.  These market conditions combined with the nature of the product and services offered mean that potential clients can specify their demands to possible providers quite precisely.  The contracts with major clients are large, long and of high value and typically involve multiple releases of software within the same product dedicated to a client.  Teams of employees often work closely with clients on their own sites over long periods.  FinSoft staff are on the client’s site and face the client’s operational pressures for the release of a piece of software by an agreed date.  Clients retain a lot of power throughout the life of the product. As one respondent said, "The client is King.’  This emphasis on products has an impact on the internal structure of the company.  FinSoft is structured around three major products and within there are then various project teams linked to particular clients. 

The firm is organised in a traditional manner according to functional specialisms, e.g. finance, HR, legal, sales, marketing, training, research and development.  There is a high level of fragmentation, specialism and hierarchy within the firm.  These functional departments and the project team structure contributed to what one respondent referred to as a ‘silo mentality.’  The HR department, although large, is separated from mainstream decision making within the business.  It is also separated from the training activity (known as The Academy) which is responsible for the extensive induction training. Apart from this initial training, however, there is little formal training for existing employees and most emphasis is placed on on-the-job training. 

Although line managers are supposed to carry out an important role in HR they do not always do this in practice. For example performance appraisals are not always carried out and there is not always a clear link between this and reward.  There is a strong philosophy of ‘work them hard’ and promotion tends to take the form of ‘up or out.’  This is reflected in employees’ relatively low levels of satisfaction with performance appraisal (mean 2.47, sd 1.172) and career opportunities (mean 2.44, sd 1.294).  As one interviewee said: "We have no appraisals and I believe the managers are unwilling to do this."(#111) and another stated: "I do the same sort of thing for about 12 months" (#124). More generally this is shown in the satisfaction which employees have with their relationship with their line manager which was one of the lowest of the companies studied (mean 2.86, sd .805). One knowledge worker expressed this strongly: "They are little Hitlers - they don't treat the staff well. They do not listen, they dismiss our ideas and they are very backhanded." (#101). Senior managers and directors retain a high degree of control over the running of the company and employees expressed low levels of satisfaction with their involvement in decision making (mean 2.83, sd .702).  As an interviewee put it: "Decisions are taken at the level above project manager and if you are lucky you hear about it." (#103)

There is a clear feeling that the management style is one which is more suited to a small company, in fact one respondent argued that there was a clear intention to run FinSoft as if it were a series of small companies. "This is a big company with a small company mentality. The procedures are what you would expect of a small company. The immediate managers cannot manage" (#102). This ‘series of small companies’ within the larger firm was symptomatic of the fragmented nature of the company with each product area, and project team managing its own relationships in the network and solving its own problems in a reactive way.    Labour shortages were dealt with by working with TWAs and recruiting urgently to fill vacancies.  There was no sense of an internal labour market and no attempt at making strategic choices in the people management area.  As a result the firm was exposed to its network of clients unable to constrain client demands for on-site working for example.  A summary of the network characteristics and employment modes in the two cases are shown in Table 2.

Discussion and analysis

Our two case study organizations have very different network conditions and equally different HR responses to these external influences. Before analyzing these differences it is important to note the similarities between the two firms. Both firms are medium-sized and operate in the same industry (software development). They compete in the same client market (financial services) and were subject to the same market pressures (technology crash of 2000, tight labour market and internal pressure from professional knowledge workers). It is just these similarities that make for a fascinating study of the varying employment modes adopted in response to network influences (see Table 2).

Table 2: Network characteristics and employment mode of the two case studies

The lower level of unique skills in the FinSoft network is particularly evident in their third party administration (TPA) arrangements. As a result of this particular network arrangement FinSoft creates more fluid boundaries between themselves and their clients which allows for a free flow of expertise across network partners. However, when firms outsource activities (which were previously housed in the firm) they tend to want more control over which staff work on their projects and over the quality of the end-product. This close working relationship, which often included extended working periods on the client site, led to a fragmentation within FinSoft’s culture and a higher degree of identification with the client than the organization.

Although there is a low level of uniqueness at the start of a contract, FinSoft employees build up an expertise over the life of the project.  They gain an intimate knowledge of the client’s products and IT systems by spending a lot of time on the client’s site.  This client dedicated knowledge also creates barriers to entry for competitors and ensures that the client and FinSoft project team become closely intertwined.  This approach produces a strong sense of teamworking among employees (mean 1.78, sd .850), as one employee said: "You feel like you can talk to someone - everyone will help" (#105). However the commitment to FinSoft as a whole is much weaker (mean 2.53, sd .577). When asked if they would recommend FinSOft as a place to work one employee said: "I wouldn't recommend anyone to experience the working experience that I have had" (#107).

This strong emphasis on the relationship between the team and the client and weak attachment to the organisation affects the distribution of expertise inside the FinSoft.  Expertise is not well distributed within FinSoft and there are strong barriers to knowledge sharing between the project teams. This is because individuals are seldom rotated between project teams and there are very solid boundaries between various project teams with very little knowledge flow between core teams.

The nature of relationships at the network level was rather different for these two firms. SoftwareCo valued their relationships with clients but always tried to ‘let the client in’ at the most senior level whilst maintaining their strong organizational culture. Here we see a case of structurally dense relationships which impact only at the senior levels in the organization. In the case of FinSoft there are very strong relationships at all levels in the network wherein employees work at various company sites (insourcing and outsourcing). In this case the client has a very direct influence on the day-to-day management of FinSoft employees.

It was not only the structure of the relationships that varied but their nature could be contrasted as well. SoftwareCo had unique skill sets in the network and was seen as thought leaders and consequently they did not only have less client pressure on employment practices but engaged in more cooperative relationships. This aided innovation and knowledge creation at the network level. FinSoft had mainly cooperative relationships but, given the sector of the market they serviced, they were exposed to some regulated and formally governed relationships (e.g. TPA of pension funds). This often stilted the development of new solutions to client problems. Furthermore, employees identified strongly with the client and would prefer to offer solutions that did not require change on behalf of the client. Their skill development was more client directed than innovation driven.

Within the context of varying network structures and relationships the two firms were faced with different external constraints on the strategic choice of HR practices and responded with the adoption of different employment models. The boundaries between SoftwareCo and the other members of the network were less fluid than in the case of FinSoft. One could argue that FinSoft chose to allow a greater degree of client influence in order to retain key clients. This did however have an impact on the strategic focus of the firm and the freedom of choice over how people were managed. Their focus was external and the formation of the organizational culture as well as individual skills was client led. In our interviews we found that different large teams within the firm had very different perceptions of what the culture was and spoke freely of a fragmented culture. There was also an internal competition to work on a ‘good client’ team. FinSoft had evolved its HR piecemeal and senior management were unaware of choices that could have been made or of the consequences of not making them in the sense of awareness of alternatives. They lacked strategic imagination of the firm as a social entity and of the value of social capital.

SoftwareCo, on the other hand, had taken a conscious and strategic decision on people management closely linked to their service and client strategies.  Their focus was on the internal organisation and the development of a strong organisational culture and generic skills which were valuable to the employee and the organisation rather than just concentrating on the needs of individual projects. The degree of external constraint over HR choice is also evident in the level of representation of HR within the firm. Within SoftwareCo the Intellectual Capital Director is closely integrated into strategic decision making.  She has a position on the board and so is able to influence major corporate decisions and also has the key role in allocating staff to client projects, to aid individual learning and collective knowledge sharing.  The concern here is to ensure that the allocation of staff takes account of both the needs of the client and the need for employee development, which are not always compatible. However FinSoft has split HR and Development functions and neither is represented at board level. Resource allocation and skill development are largely functions of client relationships and are undertaken by project managers in isolation.

Line management responsibility for the implementation of HR practices also varied across the two firms. In SoftwareCo line managers have a clear responsibility for carrying our HR policy and they are monitored to check that they are carrying this out.  For example they are responsible for conducting performance appraisals of their staff and the HR department will monitor this process.  This emphasis is reflected in the high level of satisfaction which employees have with their line manager relationships (mean 2.02, sd .589). Line managers in FinSoft are under a high degree of pressure to deliver to the client on time and a low priority is given to the importance of HR and people management issues.  This is reflected in employees’ lower level of satisfaction with their line managers (mean: 2.86, sd.80)

Conclusion and implications

In SoftwareCo the nature of the competitive advantage is derived both from the relationship between the organisation and its clients and the development of internal cohesion and high levels of human and social capital which are idiosyncratic. Using the language of the resource-based view of strategy its internal competencies and capabilities are rare, imperfect, inimitable, non-substitutable and appropriable (Barney, 1991). Here the network has an innovation focus and is structurally dense at senior levels in the organisation, creating structural holes which stimulate innovation and knowledge creation. The aim is to develop expertise within the organisation which has value to a variety of clients.  This is supported by the sophisticated internal structures which are designed to maximize knowledge sharing.  This is reflected in the approach to managing HR which is aimed at maintaining a strong organisational culture and developing a set of skills HR polices and practices which support and maintain the achievement of this.  They have created a commitment based HR configuration in an industry characterized by high levels of employee mobility.  This has helped to develop an environment where there are high levels of both organizational commitment and team spirit and satisfaction with careers. This is markedly different for the stereotypical characteristics of the industry.

However in FinSoft the network shows facets of both innovation and ‘farming out’ models. In this network the structurally dense relationships at all levels impacts directly on HR practices: that is, clients place demands on the composition of teams and the length of time spent on the client site. Here the FinSoft employees become accustomed to the culture and practices of the client organisation, which in turn leads to greater fragmentation when the employees return to FinSoft. The HR structure, policy and practice reflect the conditions which exist within the network.  The competitive advantage of the organisation is based upon developing expertise over the products and services of the client over time and then producing the software releases which the client wants on time.  The success of the firm is centered on the client relationship.  This highly specialised, fragmented and segmented approach is reflected in the reactive approach taken to managing employees and the internal organisation of the firm which is based on hierarchy and specialisation with close monitoring of performance from the top.

In essence our two case studies draw our attention to the degree of external constraint placed upon the strategic HR choice in contrast to assumptions often made in HR that each firm has both rational choice and high degrees of freedom of senior management to make choices (Lepak & Snell, 1999).  This is problematic since, as we have seen in the networked organisation the ability to choose is constrained by clients, which are usually bigger and resource rich and by professional networks allowing employees a high degree of choice. 

SoftwareCo, in contrast, took rather more deliberate actions to try to manage their external constraints.  When the firm began to grow from its small owner-manager base senior managers chose to build strong internal cohesion and integration by careful recruitment of young graduates and through multiple team structures, integrated reward systems and job allocation models based on personal development and skill enhancement.  This is clearly a high commitment employment mode.  As in the Lepak and Snell model here there is a mixture of high levels of human capital applicable across the sector and thus mobile, and unique human capital built through the acquisition of firm specific idiosyncratic knowledge including operating procedures which becomes a resource mobility barrier (Mueller 1996).  In a sense SoftwareCo consciously choose to keep the centrifugal pressures emanating from the network – the client and professional career opportunities – at bay through the creation of particularly powerful centripetal forces maximizing knowledge workers’ commitment to the firm and engendering a sense that professional career building was best achieved by staying within the firm.

The danger for networked organizations is that they can loose internal cohesion especially if they are dependent on a few, powerful clients in a highly competitive product and service market, and where the labour market favours the mobility of knowledge workers. These pressures are particularly evident when firms have less unique skill offerings and overemphasize client relationships through structurally dense networks. In these case examples knowledge workers tend to identify more strongly with their client and their profession, which over time, fragments the knowledge organisations.  The development of conscious HR strategies emphasizing integration and organisational commitment may be a more sensible option in the networked organisation.