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Formal and Informal Control

As the example of Atos shows, organizations have to ensure that the different actors that make up the HR function are working together effectively. This means, their HRM activities need to be coordinated and aligned. To understand this, it is important to differentiate between a principle and an agent, with the latter being responsible for acting on behalf of the former.

For instance, the corporate HR department can be considered the principal while it sets company-wide HR policies that are executed/implemented on its behalf by HR business partners, HR shared service centres, centres of expertise and line managers (i.e. the agents). Business units and their leadership teams can also be considered a principal while they work with agents (incl. HR business partners and HR shared service centres) that execute HRM activities on their behalf. To ensure (HRM) agents act in line with the interest of the corporate HR department or a business unit (i.e. the principals), the latter can rely on control mechanisms to ensure corporate HR policies are implemented as intended.

Control mechanisms serve to align the interests between the principal and agent. We can distinguish two types of control mechanisms: formal control mechanisms and informal control mechanisms. Formal controls represent “arm’s length” relationships where an agent is constrained through monitoring and evaluating the actions of the agent. In HRM functions, these formal control mechanisms include the use of contracts with an HR outsourcing vendor or service level agreement that specify criteria against which an HR shared service centre has to deliver HRM services to end-users. These formal controls help to secure alignment as all actors have to comply with a standard. Formal controls are best used when the principal is not dependent on the agent, and thus is able to keep the agent at arm’s length.

Informal control mechanisms on the other hand involve collaboration, building trust and fostering strong relationships. Within HRM functions, informal control mechanisms involve regular meetings between representatives of the corporate HR department and HR business partners to discuss changes in HRM policies. Moreover, HR shared service centres and business units may establish project groups to improve the service delivery by the HR shared service centre. Ultimately, such informal control mechanisms help to ensure alignment across HRM actors since they build shared understanding of what needs to be done. Informal controls are particularly needed in cases when principals and agents are interdependent.

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This article is from the free online course:

The Future of Human Resource Management (HRM)

University of Twente