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The impact of human resourcecapabilities on internal customersatisfaction and organisationaleffectivenessWan-Jing April Chang a & Tung Chun Huang ba Department of Educational Psychology and Counseling , NationalHsinchu University of Education , 9F No. 35 Xian-Zheng 7th Street,Chu-Pei City, Hsin-Chu County, 302, Taiwanb Department of International Business Management , Ching YunUniversity , No. 229 Jiansing Road, Jhongli City, Taoyuan County,320, TaiwanPublished online: 10 Jun 2010.
To cite this article: Wan-Jing April Chang & Tung Chun Huang (2010) The impact of human resourcecapabilities on internal customer satisfaction and organisational effectiveness, Total QualityManagement & Business Excellence, 21:6, 633-648, DOI: 10.1080/14783363.2010.483075
To link to this article: http://dx.doi.org/10.1080/14783363.2010.483075
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The impact of human resource capabilities on internal customersatisfaction and organisational effectiveness
Wan-Jing April Changa∗ and Tung Chun Huangb
aDepartment of Educational Psychology and Counseling, National Hsinchu University ofEducation, 9F No. 35 Xian-Zheng 7th Street, Chu-Pei City, Hsin-Chu County, 302 Taiwan;bDepartment of International Business Management, Ching Yun University, No. 229 JiansingRoad, Jhongli City, Taoyuan County, 320 Taiwan
This study examined the impact of human resource (HR) capabilities on internalcustomer satisfaction and organisational effectiveness. It drew on data from HRmanagers and line managers; a total of 238 valid matches was obtained. Structuralequation modelling was employed to examine the proposed model. The resultsshowed that some HR capabilities appear to be linked to internal customer satisfactionand organisational effectiveness. The implications for practitioners were to modifyand emphasise certain HR practices, and to emphasise the role of internal customersfor organisational effectiveness enhancement. These findings revealed the importanceof internal customers in enhancing employee morale, organisational commitment,employee productivity, turnover rate and the organisation’s ability to attract talent.
Keywords: human resource capabilities; internal customer satisfaction; organisationaleffectiveness
Numerous studies have examined the link between HR practices and firm performance in
recent decades (Arthur, 1994; Delery & Doty, 1996; Guest, 1997; Huselid, 1995; Pfeffer,
1994). The results showed that the proper use of human resource improves firm perform-
ance. Most empirical studies have assumed a causal chain between HR practices and
organisational outcomes, but have left out the intermediate step between the two as a
‘black box’. The remaining studies examined the relationships of HR practices–organis-
ational outcomes and HR practices–employee outcomes separately. The second problem
is the lack of consideration of employee opinion. Without employee contributions, it is
impossible to determine whether HR practices are beneficial to employees, or whether
they simply add to employee workload and stress levels, resulting in a negative quality
of working life (Pass, 2002). Thirdly, previous studies have debated how to measure
performance. Earlier research focused solely on improvements to financial performance
(Harel et al., 2003). However, current research has indicated the limitations of this
approach (Eccles, 1991) and the benefits of examining the variety of outcomes of HR
have now been demonstrated, including employee motivation, commitment, reduced
turnover, training levels and absenteeism rates (Jansen et al., 2001; Pass, 2002). Finally,
the findings supporting the relationship between HR practices and firm performance are
incomplete owing to excessive reliance on a single respondent and self-reporting
(Gerhart et al., 2000; Pass, 2002), resulting in limited analysis and a failure to examine
the organisation more broadly.
ISSN 1478-3363 print/ISSN 1478-3371 online
# 2010 Taylor & Francis
DOI: 10.1080/14783363.2010.483075
http://www.informaworld.com
∗Corresponding author. Email: [email protected], [email protected]
Total Quality Management
Vol. 21, No. 6, June 2010, 633–648
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This work attempts to improve upon the prior empirical literature by focusing on the
following objectives. First, this study proposes an integrated model, in which a process
perspective is adopted to examine the role of internal customer satisfaction, which links
HR capabilities and firm performance. Second, the opinions of HR internal customers
are gathered to assess whether the degree of HR capabilities has increased levels of
customer satisfaction and produced more effective organisational outcomes. Third,
wider performance criteria, such as HR outcomes, are used to address whether HR capa-
bilities have a greater impact than financial gains. Fourth, regarding data sources, this
study surveys HR managers and line managers to reduce the common method bias; and
also makes line managers the target customers, instead of employees, who are not only
HR practice users, but also members of organisational leaders with a broader perspective
on the evaluation of overall organisational effectiveness.
Theory and hypotheses
Human resource capabilities
The resource-based approach views competencies, capabilities, skills or strategic assets as
a source of sustainable competitive advantage (Mabey et al., 1998) because of their valu-
able, rare, inimitable and non-substitutable attributions (Barney, 1991). Capabilities are
rooted in the ability to reconfigure and recombine resources, and their key properties
include tacitness, context specificity and temporality (Bhatt, 2000). Amit and Schoemaker
(1993) defined capability as a firm’s capability to deploy its assets, tangible or intangible,
to perform a task or an activity to improve performance. Important characteristics of
capabilities are that they are knowledge-based, firm specific and socially complex, and
they generally cannot be simply acquired in factor markets, and so are developed in the
firm (Maritan, 2001). Within this line of reasoning, Kamoche (1996) argued that a
firm’s capacity to secure, nurture, retain and deploy human resources via HR policies
and practices forms the basis for human resource capabilities. HR capabilities are based
on developing, carrying and exchanging information within the human capital of the
firm (Saa-Perez & Garcia-Falcon, 2002).
For a firm to compete effectively, best practice scholars have argued that HR practices
often outperform comparative practices (Arthur, 1994; Delery & Doty, 1996). If this is the
case, a set of properly developed HR practices may provide an important source of sus-
tained competitive advantage. Previous studies have suggested several HR best practices,
for example, Huselid (1995) examined how personnel selection, performance appraisal,
incentive compensation, job design, grievance procedures, information sharing, attitude
assessment and labour-management participation affect firm performance. Moreover,
Delery and Doty (1996) argued that the most important HR practices include the use of
internal career ladders, formal training systems, results-oriented appraisal, performance-
based compensation, employment security, employee voice and broad job definition.
Furthermore, Pfeffer (1998) identified seven HR practices, comprising the following:
employment security, selective hiring, self-managed teams, provision of high pay contin-
gent on company performance, extensive training, reduction of status differences, and
sharing information.
Additionally, many different classifications of HR practices have been formulated into
more general HR dimensions. For instance, Ulrich and his colleagues (1989) grouped HR
practices into organisation planning, staffing, rewards, development, appraisal and
communication. Meanwhile, Schuler and Jackson (1996) summarised five dimensions:
planning, staffing, appraising, rewarding and developing. Ramlall (2003) established
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a framework consisting of strategic planning, selection, training and development,
organisational development and change, performance management, a reward system, and
organisational behaviour and theory.
According to Huselid et al. (1997), institutional theorists view organisations as entities
that seek approval for their activities in a socially constructed environment. Key internal
stakeholders (line managers and executives) prefer high-quality HRM activities (Tsui,
1987). HRM activities have been increasingly regulated through stakeholder expectations
including recruiting and selection, employee training, performance appraisal, compen-
sation and employee relationships, which are adopted as dimensions of HR practices
in this study. The presence of these best practices reflects the level of HR professional
knowledge and resource allocation capabilities.
Internal customer satisfaction
A frequently overlooked aspect of service delivery in business is service quality among
internal organisational units. However, in practice many organisational departments are
service providers primarily to internal customers. For example, human resources, manage-
ment information systems and purchasing departments all support other employees as they
perform their jobs (Marshall et al., 1998).
Two philosophies have been put forward in relation to internal customer satisfaction in
previous studies. One is from marketing; the other is from total quality management
(TQM). Comparing the two philosophies, Marshall et al. (1998) argued that internal cus-
tomer service differs from internal marketing, in that the former focuses on how employ-
ees serve other employees, while the latter focuses on how a company serves employees.
However, Mohr-Jackson (1991) considered the marketing concept and TQM to be comp-
lementary business philosophies with potential for improving the success of a business.
Both share core concepts, namely, customer orientation, inter-functional coordination
and profitability, and aim at generating customer satisfaction as the key to satisfying
organisational goals.
Consistent with TQM philosophy, internal customer service is viewed as a two-way
exchange process between individuals in different functional departments of a firm
where the provider is charged with responding to the needs of his/her internal customers,
leading to satisfied internal exchange partners (Marshall et al., 1998). HR departments
have customers at all levels within the organisation. Being a business partner requires
that these customers are acknowledged, involved and central to the operation of the HR
department (Ulrich, 1987). HR functions have recognised the need to provide customers
with more responsive, value-added and efficient services (Yeung et al., 1994).
In an era of growing concern with studying HRM in the context of contributing to the
business, it seems timely and necessary to re-emphasise the value and validity of conceiv-
ing HRM systems and services as involving real people in local realities (McCarthy,
1994). A valid approach to evaluating HR systems and services should consider the
views of employees (Gibb, 2001), namely, internal customers. Several studies (Barney
& Wright, 1998) evaluated line executives’ perceptions of the effectiveness of HR prac-
tices. They enabled us to analyse the responsiveness of HR departments to internal custo-
mer demands. Line executives’ perceptions of the effectiveness and importance of HR
practices will help indicate the potential of HR departments to become real business part-
ners. Additionally, Mitsyhashi et al. (2000) found significant differences exist between HR
and line executives in their perceptions of the effectiveness of these areas, and the former
consistently rated the effectiveness of functions more highly than the latter (Wright et al.,
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2001), though the study indicated a lack of significant differences between HR and line
executives’ perceptions of the importance of each functional area in HRM (Mitsyhashi
et al., 2000).
Therefore, in this study, we chose line managers as target customers to evaluate their
satisfaction regarding human resource practices. This is because they are not only the
direct users of HR practice, but also the members of organisational leaders who adopt a
broader view when assessing overall organisational effectiveness.
Organisational effectiveness
Organisational effectiveness refers to how successfully organisations achieve their mis-
sions. Organisational effectiveness measures are concerned with understanding the
unique capabilities that organisations develop to ensure that success. This includes
measuring the value of organisational human resources (Jamrog & Overholt, 2004).
Previously, scholars tended to use the term ‘organisational performance’ to mean
financial and economic-related measures such as profitability, return on investment, earn-
ings per share and so on (Harel et al., 2003). However, according to Eccles (1991), aca-
demics and practitioners have begun to demonstrate that accrual-based performance
measures are obsolete and often harmful. Consequently, business practices could be
assessed in terms of their contribution to subjective psychological wellbeing (e.g. commit-
ment, involvement or satisfaction), rather than in terms of objective criteria (Jansen et al.,
2001), since employers employ not just one part of a person but rather the whole person,
including personal, social and professional qualities (Harnesk, 2004). Therefore, in this
study, the focus of organisational effectiveness is a newer concept than organisational per-
formance, and implicitly considers a range of variables, which mainly focus on human
resource outcomes.
Several studies have assessed different sets of variables. For instance, Robbins (1984)
identified productivity, absenteeism, turnover, organisational citizenship behaviour and
job satisfaction as indicators of organisational effectiveness. Huselid (1995) and Sun
et al. (2007) suggested using employee productivity and turnover as measures of firm
performance. Ryan et al. (1996) used employee turnover as a measure of organisational
effectiveness. In Guest and Conway’s (1997) model, commitment is an attitudinal conse-
quence and intention to stay/quit is a behavioural consequence of the psychological con-tract. According to Bratton and Gold (1999), high employee commitment to organisational
goals is an important facet of human resource outcomes. Lawson and Hepp (2001)
measured employee results based on satisfaction, commitment and productivity. Addition-
ally, Huang (2001) asked respondents to compare the performance of their firms with that
of competitors, using five human resource outcome indicators: staff morale, organisational
climate, staff turnover, organisational commitment and job satisfaction.
To comply with this newer definition of organisation effectiveness, this study used a
multiple variable measure, which incorporates the HR aspects of organisational effective-
ness: employee morale, attraction of talent, employee productivity, organisational com-
mitment and employee turnover rate.
Human resource capabilities, internal customer satisfaction and organisationaleffectiveness
Yeung and Berman (1997) provided a model showing how HR practices contribute to
employee satisfaction and organisational capability, which in turn influence customer
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and shareholder satisfaction. One could assess HR capabilities through surveying a firm’s
customers. For example, Tsui (1990) examined how managers and supervisors as well as
line executives rated the importance and effectiveness of the HR function. Ulrich (1997)
suggested conducting an HR audit as part of a balanced scorecard approach to evaluating
the effectiveness of the HR function. One aspect of this audit is the customer value survey,
in which employees, as users of the HR programmes and practices, indicate their evalu-
ations of the value of these practices. Several studies have also addressed internal customer
service within the context of human resource departments. For example, Mohr-Jackson
(1991) examined how HR employees might develop and sustain a customer orientation
such that marketing concepts are implemented on an intra-organisational basis. Similarly,
Bowen (1996) described how the HR function can positively influence the satisfaction of
both its internal and external customers. When HR departments can offer more best prac-
tices and demonstrate their capabilities to reconfigure and recombine human resources, the
satisfaction of internal customers will increase accordingly. Therefore, the following
hypothesis was developed:
Hypothesis 1: Human resource capabilities have a positive impact on internal customersatisfaction.
According to TQM philosophy, internal customer satisfaction is one of the critical
issues. Through employee satisfaction, human resource practices have a positive impact
on organisational outcomes. There is empirical evidence to support this claim. For
instance, the major predictors of the improvement in the overall effectiveness of HR
were changes in employee satisfaction level (Teo & Crawford, 2005). Molina and
Ortega (2003) indicated that more training can positively impact on firm performance
through factors such as employee satisfaction and customer loyalty. Additionally,
Hoque (2003) suggested that by adopting a balanced scorecard a firm that has adopted
TQM can in turn increase employee satisfaction and subsequently firm performance.
Wright et al. (1994) also argued that human resource practices embedded in the HR
system of a firm can affect employee performance by influencing employee skills and
motivation.
Scholars have also examined the relationship between employee satisfaction and
various human resource outcomes. For instance, Matzler et al. (2004) found that employee
satisfaction drives productivity. Vora (2004) focused on key factors to create an
environment for employee satisfaction, leading to improved employee morale to
achieve enterprise-wide success in a global economy. Min (2004) claimed that firms
have to formulate various employee retention strategies, including pay rises, bonuses,
gain sharing and paid time off, to reduce turnover.
This study expects to find a positive relationship between internal customer satisfac-
tion and HR aspects of organisational effectiveness. Therefore, the following hypothesis
is proposed:
Hypothesis 2: Internal customer satisfaction has a positive impact on organisationaleffectiveness.
Human resource management, in the form of high performance work practices, can
directly influence organisational effectiveness. This proposition has become a staple
within the HRM literature at the theoretical level. Pfeffer (1994) and Guest (1997)
suggested that universalistic HR practices should be studied as antecedents to organis-
ational effectiveness. Most scholars have emphasised HR as a determinant of firm per-
formance (Karami et al., 2004), and a relationship between core competencies and firm
performance is expected, particularly with a special focus on the relationship between
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HR capability and organisational effectiveness. Several studies have consistently found a
statistically significant relationship between HR and organisational effectiveness, which
includes employee productivity, turnover, morale, organisational climate, organisational
commitment and job satisfaction (Arthur, 1994; Chang & Chen, 2002; Huang, 2001;
Huselid, 1995; Pfeffer, 1994). Consequently, the following hypothesis is proposed:
Hypothesis 3: Human resource capabilities have a positive impact on organisationaleffectiveness.
Methods
Sample
The sample was drawn from the database of China Credit Information Service Company.
Firms with fewer than 100 employees were excluded from the analysis since Taiwanese
companies are mainly small–medium enterprises, and usually do not have a formal organ-
isational unit dealing with human resources. Similar studies performed in Asia (Lau &
Ngo, 2001; Wan et al., 2002) used 50 employees as a cut-off point in sample selection.
A total of 1236 questionnaires were sent to HR managers and line managers of each
firm. Of these questionnaires, 270 HR manager questionnaires and 242 line manager ques-
tionnaires were returned. Only firms for which questionnaires were obtained from both
respondents were considered in this study. A total of 238 valid matches was obtained,
for a response rate of 19.3%, exceeding that of other similar studies including 13.8% by
Orlando and Johnson (2004). A comparison of respondent and non-respondent firms
revealed no significant differences in size and industry. The number of employees
ranged from 104 to 15,000 with a median of 360 and a mean of 951. There were 79.9%
of firms involved in the manufacturing sectors, 15.2% in the service sectors, and 5.1%
in other sectors.
Measures
Human resource capabilities
Twenty-five items were developed based on the literature and are used to represent the five
dimensions of human resource capabilities: recruitment and selection, employee training,
performance appraisal, compensation and employee relationship. Each dimension scale
was measured using five items. Based on the scale used by Huselid et al. (1997) to
assess HR capabilities through the extent of their application, the HR managers were
asked to indicate the frequency of HR practice implementation on a five-point Likert
scale ranging from ‘always’ (5) to ‘never’ (1). Reliability tests were conducted for each
scale, and the alpha coefficients are 0.80, 0.82, 0.86, 0.83 and 0.85 for recruitment and
selection, employee training, performance appraisal, compensation and employee
relationship, respectively. Internal consistency measures all exceeded 0.80, indicating
that the human resource capabilities scale was reliable.
Internal customer satisfaction
Ten items were used to measure internal customer satisfaction. Line managers were asked
to indicate the degree of their satisfaction with recruitment, selection, training for new-
comers, training for current employees, career planning, promotion system, performance
management, compensation, benefits and employee relationship. The responses were
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recorded using a five-point Likert scale ranging from ‘strongly agree’ (5) to ‘strongly
disagree’ (1). The internal consistency reliability was 0.91.
Organisational effectiveness
Organisational effectiveness was measured using a scale composed of five items. Line
managers were asked to compare employee morale, attraction to talent, employee pro-
ductivity, organisational commitment and employee turnover rate with competing firms.
A five-point Likert scale was also used to assess the responses, and ranged from ‘much
better than competitors’ (5) to ‘much worse than competitors’ (1). The internal consistency
reliability was 0.85.
Since the responses regarding international customer satisfaction and organisational
effectiveness both used self-report measures and came from line managers, factor analysis
was performed to confirm that common method variance is not serious in the present study
(Podsakoff & Organ, 1986). The results indicated that the items used to measure inter-
national customer satisfaction and organisational effectiveness were completely separate,
and no single factor was dominant (Table 1).
Table 1. Factor analysis on customer satisfaction and organisational effectiveness.
Factor loading
ItemsCustomersatisfaction
Organisationaleffectiveness
1. I am satisfied with performance managementpractice in my company.
0.784
2. I am satisfied with selection practice in my company. 0.7483. I am satisfied with benefits practice in my company. 0.7364. I am satisfied with promotion system practice in mycompany.
0.732
5. I am satisfied with compensation practice in mycompany.
0.727
6. I am satisfied with training for newcomer practice inmy company.
0.725
7. I am satisfied with recruitment practice in mycompany.
0.723
8. I am satisfied with training for employees practice inmy company.
0.684
9. I am satisfied with career planning practice in mycompany.
0.663
10. I am satisfied with employee relationship practice inmy company.
0.648
11. Our employee productivity compares favourablywith that of our competitors.
0.785
12. Our employee morale compares favourably with thatof our competitors.
0.769
15. Our organisation’s attractiveness to talent comparesfavourably with that of our competitors.
0.747
13. Our employee turnover rate compares favourablywith that of our competitors.
0.696
14. Our organisational commitment comparesfavourably with that of our competitors.
0.666
Eigenvalue 5.702 3.493Explanation of variance 38.014 23.287
Notes: Extraction method: principal component analysis. Rotation method: varimax with Kaiser normalisation.
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Analytical technique
This study used the structural equation modelling (SEM) technique to establish the model.
Before conducting the model analysis, the data were screened and it was determined that
the statistical assumptions of normality and linear relationship were both met. First the
assumption of normality for each continuous variable was examined. According to
Kline (1998), if the absolute value of skewness is greater than three or the absolute
value of kurtosis is greater than 10, the distribution is considered as abnormal. The skew-
ness and kurtosis measures of the variables ranged from 0.105 to 0.505, and from 0.033 to
0.428, respectively. The sample distribution thus did not violate the normality assumption.
Second, the assumption of a linear relationship was examined, which is critical when
adopting SEM analysis. The mostly commonly used method is to calculate the Pearson’s
r to determine whether a linear relationship exists. As shown by the data in Table 2, the
correlation coefficients of all variables are significant; that is, the linear relationship
assumption is also validated. Finally, this study selected maximum likelihood (ML) as
the estimating method. ML is widely used and is based on the normal distribution
theory, which is the appropriate approach to employ.
Results
Descriptive statistics and correlation coefficients among the variables are shown in
Table 2. The five HR capability dimensions are all significantly and positively related
to internal customer satisfaction and organisational effectiveness (p , 0.01). Also,
internal customer satisfaction is significantly and positively related to organisational
effectiveness at p , 0.01 level. This study employs structural equation modelling with
LISREL for hypothesis testing. The maximum likelihood method of estimation is
applied to analyse the covariance matrix. LISREL enables the simultaneous evaluation
of all the predicted relations in the integrated model.
Table 3 lists the structural equation results and estimated coefficients for the statistics
of the hypothetical model. The chi-square statistic of the model is non-significant (x2 ¼
4.88, df ¼ 5, p ¼ 0.43), which means that no significant difference exists between the pro-
posed data and the model. Additionally, all the fit indices clearly exceed the recommended
cut-off values. The GFI and NFI values of 0.99, the AGFI value of 0.97, and the RMSEA
value of 0.019 indicate that the hypothesised model closely fits the data. Furthermore, 50%
and 43% of the variance in internal customer satisfaction and organisational effectiveness,
respectively, were explained by the proposed model. Figure 1 illustrates the significant
paths of the structural model.
Table 2. Descriptive statistics and Pearson correlations.
Mean SD 1 2 3 4 5 6
1. Staffing 3.7709 0.68872. Training 3.4833 0.7101 0.670∗∗
3. Performance 3.7377 0.7311 0.602∗∗ 0.688∗∗
4. Compensation 3.6466 0.7262 0.584∗∗ 0.640∗∗ 0.731∗∗
5. Relationship 3.3948 0.8636 0.544∗∗ 0.642∗∗ 0.666∗∗ 0.710∗∗
6. Satisfaction 3.3797 0.5992 0.508∗∗ 0.599∗∗ 0.625∗∗ 0.618∗∗ 0.628∗∗
7. Effectiveness 3.5422 0.6660 0.328∗∗ 0.418∗∗ 0.451∗∗ 0.548∗∗ 0.425∗∗ 0.616∗∗
Notes: ∗∗p , 0.01, N ¼ 238.
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Hypothesis 1
Regarding tests of the effect of human resource capabilities on international customer sat-
isfaction, four of five HR capability dimensions were demonstrated to have positive and
significant impacts on internal customer satisfaction with recruitment and selection
being the two exceptions. Employee training is positively and significantly related to
internal customer satisfaction (g ¼ 0.20, t ¼ 2.85, p , 0.01; supported). Moreover, per-
formance appraisal is positively and significantly related to internal customer satisfaction
(g ¼ 0.20, t ¼ 2.57, p , 0.01; supported). Compensation is positively and significantly
related to internal customer satisfaction (g ¼ 0.18, t ¼ 2.33, p , 0.05; supported).
Finally, employee relationship is positively and significantly related to internal customer
Table 3. Structural equations results and estimated coefficients (standardised).
Independent variables
Dependent variables
Internal customersatisfaction
Organisationeffectiveness
Effect t Effect t
Exogenous variableRecruitment and selection
Direct – – – –Indirect – – – –Total – – – –
Employee trainingDirect 0.20 2.85∗∗ – –Indirect – – 0.09 2.64∗∗
Total 0.20 2.85∗∗ 0.09 2.64∗∗
Performance appraisalDirect 0.20 2.57∗∗ – –Indirect – – 0.09 2.42∗∗
Total 0.20 2.57∗∗ 0.09 2.42∗∗
CompensationDirect 0.18 2.33∗ 0.27 4.16∗∗
Indirect – – 0.08 2.22∗∗
Total 0.18 2.33∗ 0.35 5.16∗∗∗
Employee relationshipDirect 0.24 3.38∗∗∗ – –Indirect – – 0.11 3.05∗∗
Total 0.24 3.38∗∗∗ 0.11 3.05∗∗
Endogenous variableInternal customer satisfaction
Direct 0.45 7.07∗∗∗
Indirect – –Total 0.45 7.07∗∗∗
Squared multiple correlation for structural equation 0.50 0.43Goodness of fit statisticsChi-square 4.88 (p ¼ 0.43)RMSEA 0.019GFI 0.99AGFI 0.97NFI 0.99
Notes: ∗p , 0.05, ∗∗p , 0.01, ∗∗∗p , 0.001.
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satisfaction (g ¼ 0.24, t ¼ 3.38, p , 0.001; supported). However, recruitment and selec-
tion does not influence internal customer satisfaction. Therefore, Hypothesis 1 is partially
supported.
Evidence is found for four out of five HR capability dimensions impacting on internal
customer satisfaction. First, for employee training, line managers are satisfied when the
human resource department demonstrates its capabilities regarding the process of training
needs assessment, structural training programmes and training evaluation, job rotation
implementation and training budget allocation. The training programme is customer
oriented, which is based on consistent objectives from design, through to implementation
and evaluation. Job rotation provides opportunities for employees to acquire new experi-
ences with different knowledge and skills, thus benefiting their future development. More-
over, the training budget indicates the basic resources which employees need and is a
symbol of organisational support.
Second, regarding performance appraisal, line managers are satisfied when human
resource departments demonstrate their capabilities in effective performance system
implementation: align employee objectives with organisational goals from the beginning,
employees set criteria with supervisors, supervisors give frequent feedback to employees,
Figure 1. The result of structural equation modelling.Notes: x2 ¼ 4.88, df ¼ 5, p ¼ 0.43, RMSEA ¼ 0.019. Standardised coefficients for the model arepresented. ∗p , 0.05, ∗∗p , 0.01, ∗∗∗p , 0.001.
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supervisors conduct performance interviews with employees, and HR departments
monitor and audit performance systems. It is only when individual objectives fit organis-
ational goals that employee efforts contribute to firm performance. Additionally, the close
interaction and consensus generated between supervisors and employees increase the like-
lihood of goal achievement. Finally, monitoring and auditing ensure that the performance
system maintains its appropriateness and timeliness.
Third, regarding compensation and benefits, line managers are satisfied when human
resource departments demonstrate capabilities in job evaluation, market surveys, a pay-
for-performance system, competitive compensation and benefits in the labour market.
Job evaluation is designed to pursue internal equity, while a market survey pursues exter-
nal equity. Equity theory suggests that people evaluate the fairness of their situation by
comparing it with that of others, and such comparisons influence their work attitudes
and behaviours. Additionally, the pay-for-performance system rewards employee contri-
butions, while competitive compensation and benefits attract and retain organisational
talent. These are critical methods used by line managers to motivate employees.
Fourth, for employee relationships, line managers are satisfied when human resource
departments demonstrate their capabilities in two-way communication, including top-
down communication to release information regarding business operations and payment
systems, and bottom-up communication to establish mechanisms for employees to
express opinions via an employeemeeting and grievance system.Additionally, they encour-
aged employees to involve themselves in work-related decision making. Since employees
are well informed, there is relatively little chance of them misunderstanding policies and
systems. Also, through involving themselves in the process of decision making, employees
not only express their needs, but also gain respect from the organisation.
However, there was no support for recruitment and selection impacting on internal cus-
tomer satisfaction. This might result from the different emphases of HR professionals and
line managers. HR professionals focus on whether the recruitment plan fits business strat-
egy, recruitment effectiveness, and are concerned about the multi-methods, reliable and
valid selection instruments, as well as the fit between applicants and the organisation.
From the perspective of users, line managers may care more about the length of time
required to recruit the right person, as well as the cooperative ability and stability of the
newcomers. Therefore, the capabilities demonstrated by the HR department in recruitment
and selection do not affect internal customer satisfaction.
Hypothesis 2
As predicted, internal customer satisfaction is positive and significantly related to organ-
isation effectiveness (b ¼ 0.45, t ¼ 7.07, p , 0.001). Therefore, Hypothesis 2 is fully
supported.
When internal customers are satisfied with human resource practices, recruitment,
selection, employee orientation, employee training, career planning, promotion, perform-
ance appraisal, compensation, benefits and employee relationship, attitudes such as morale
and commitment of employees are enhanced, in turn increasing employee behaviours such
as productivity and decreasing turnover rate. This positive loop also increases the ability of
an organisation to attract talent.
Hypothesis 3
To test the effect of human resource capabilities on organisational effectiveness, only
one of five HR capabilities was found to have a positive and significant impact on
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organisational effectiveness. Compensation is positively and significantly related to organ-
isational effectiveness (g ¼ 0.27, t ¼ 4.16, p , 0.01; supported). However, recruitment
and selection, employee training, performance appraisal and employee relationship have
no influence on organisational effectiveness. Therefore, Hypothesis 3 is partially
supported.
Compensation was one of the issues that employees are concerned with. According to
equity theory, employees perceive that they are fairly treated based on comparing them-
selves with other people inside and outside the organisation, or based on expectation
theory, when employees obtained what they gave based on their efforts. It is more
likely to enhance employee morale and organisational commitment, increase productivity
and decrease turnover rate. Additionally, if organisations provide higher compensation
and benefits than their competitors, they are more likely to attract and retain talent.
Full model
Putting all the hypotheses together, the result of standardised total effects shows that
employee relationship is the most important determinant (0.24) of internal customer sat-
isfaction, followed by employee training (0.20), performance appraisal (0.20) and com-
pensation (0.18). They share almost the same influence in terms of enhancing internal
customer satisfaction. On the other hand, internal customer satisfaction exerts the greatest
influence on organisational effectiveness (0.45), while the subsequent predictors of organ-
isational effectiveness are compensation (0.35), employee relationship (0.11), employee
training (0.09) and performance appraisal (0.09). The last three also share almost identical
levels of influence. Compensation exerts the greatest effect on organisational effectiveness
and the least impact on internal customer satisfaction among the five HR capability
dimensions.
For employees, compensation is the least important influence on satisfaction, which
may reflect the fact that employees have already accepted the compensation offered
before entering the organisation; however, they are served by the other human resource
practices until they became organisation members. Thus compensation is not the major
determinant of satisfaction. On the other hand, compensation affects organisational effec-
tiveness mostly among five HR dimensions, which shows that compensation is the final
outcome of employee efforts, and thus directly influences organisational effectiveness,
i.e. morale, organisational commitment, productivity, turnover and the organisation’s
ability to attract employees.
Discussion
Implications
Overall, the results of this study are consistent with the proposed hypotheses, and the
model that we have adopted is a good fit. This study has some significant implications.
These implications are discussed below, first by modifying and emphasising certain HR
practices, and second by focusing on the role of internal customers for organisational
effectiveness enhancement.
Regarding the first point, some HR practices might need to be reconsidered based on
customer needs. For example, recruitment and selection, the fit between recruitment plan
and business strategy, recruitment effectiveness, multiple recruitment methods, reliable
and valid selection instruments, and the fit between applicants and the organisation with
which the HR professional is concerned may have lower priority than other factors such
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as the length of time required to recruit the right person, the cooperation ability of new-
comers and their stability which are key concerns for internal customers.
Other HR practices might play a critical role in boosting organisational effective-
ness. For example, compensation and benefits are the issues of most concern to
employees. HR professionals should devote considerable efforts to demonstrating
their capabilities in job evaluation, market surveys, a pay-for-performance system, com-
petitive compensation and benefits in the labour market. Such efforts will not only
satisfy their customers, but also increase the possibilities for enhancing organisational
effectiveness.
Regarding the second point, to enhance the satisfaction of internal customers, HR pro-
fessionals should understand and remain close to their customers, and improve HR service
quality. On the one hand, HR professionals can use various methods to learn about the
business and its customers. For example, they can send HR professionals to technical con-
ferences, invite talent such as engineers, marketers, financiers, research and development
specialists to meet with HR groups, ensure that HR professionals join business teams, and
distribute to HR professionals copies of strategic plans, technical reports and customer
reviews of products and services. Additionally, at staff meetings, the business can be
discussed as frequently as compensation, appraisal, or training and development. Such
discussion can require that customers are acknowledged, involved, and central to the
operation of the HR department.
On the other hand, HR professionals not only are responsible for managing people-
related practices, but also deal with employee problems. Besides shaping HR practices,
HR professionals may involve line managers in HR responsibilities. Many of these prac-
tices and problems can be more effectively handled by line managers because of their
closer interaction with and greater understanding of employee needs and problems. HR
professionals should see their primary role as helping managers improve management
quality and helping them cope with employee problems. By emphasising the special
role of managers in people management, HR professionals can better enhance service
quality.
Limitations and future directions
Although the proposed model demonstrates satisfactory results, it focuses on only a few
critical variables that affect organisational effectiveness. However, the structural equation
modelling technique can be used to examine the effects of many other variables. There-
fore, future research can consider alternative elaborate models. Regarding the mediating
relationship, the present study only focused on the role of internal customer satisfaction
in the relationship of HR performance, and the antecedents of HR capabilities and conse-
quences of organisational effectiveness thus can be further explored. Second, the balanced
scorecard approach provides a framework for evaluating firm performance; one could
develop internal process, customer and financial dimensions following organisational
effectiveness to examine the consequent effects of employee outcomes. Third, organis-
ational effectiveness in this study includes attitude and behaviour variables, and atti-
tude-behaviour-performance logic can be adopted to develop more insights in the black
box. Additionally, for the moderating relationship, different groups of internal customers
could be surveyed, such as employees, line managers and CEOs. Owning to the different
nature of their tasks, it is reasonable to assume that the relationship between HR capabili-
ties and organisational effectiveness via internal customer satisfaction might differ
according to the target customers.
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This work focused on Taiwanese employees of 2002, and the results are only relevant
for research on a similar subject area. Longitudinal data may prove a valuable casual
relationship in a comparative study.
This study measures human resource capabilities based on the frequencies of each
HR practice as reported by HR managers. Though this study avoided mixing written
HR policies with implementation, as scholars recommend, future researchers may wish
to consider quality rather than quantity of HR capabilities, since the quantity of HR prac-
tices alone does not guarantee enhancement of HR capabilities.
This work integrated HR capabilities, internal customer satisfaction and organisational
effectiveness to capture the picture inside the black box. A more sophisticated model of
HR performance, one that simultaneously integrates insights instead of addressing them
separately, would offer fertile ground for additional contributions. Future studies might
also explore the relationship between the proposed model and more expansive models
embracing a broader range of issues.
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