Toward a Real Options Theory of Strategic Human Resource Management

Abstract

Traditional HR architecture, which views different employee groups as a portfolio based on specificity and value, is static and insufficient under uncertainty. We develop an alternative real options portfolio framework based on human capital (HC) flexibility or adaptive capability to respond to a range of future contingent landscapes. Linkage between dynamic capabilities and HC options enables transforming HR (make, buy, lease, or ally) strategies into flexible ones. This dynamic portfolio framework guides allocating, valuing and inter-temporally managing HC in a contingent landscape. In dynamic environments there is strategic flexibility value in maintaining active presence in a variety of employment modes, both base and flexible ones. Both the initial allocation among the modes matters as well as their contingent reallocation and management across time. The flexible modes act as a buffer, contracting or expanding in response to external demand or unexpected environmental shocks with less cost and time delays. This explains the recent rise in flexible workforce and delays in permanent hiring following uncertain down markets. We develop testable propositions about HC portfolio management with implications for staged internal development, the timing and type of market hiring in up or down markets, subcontracting and outsourcing policy, HR alliances, and multinational operations. Firms should develop adaptive firm-specific skills and manage HC flexibility for base employees, leveraged by utilizing flexible strategies involving a changing mix of external workers across organizational boundaries. ABSTRACT FROM AUTHOR]

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