The Measurable Value of Human Resources

Organizations today are moving faster than ever and too many HR leaders are assuming that what they are doing is working.  A recent study revealed that 64% of HR practitioners thought their practices were actively contributing to the organization, yet only 23% of line managers agreed.  Like it or not a global economy is emerging and with it comes an entirely new suite of competitive pressures.  It is not OK for HR leaders to think they know what is working, they must know what works, how to measure the efficiency and effectiveness of various programs, and be able to prove it to line managers and corporate leadership.

While a few organizations possess phenomenal metrics, the vast majority do not.  Measures of work activity are not the same as measures of outcome or performance.

To be successful, HR leaders need to understand their business colleagues, design consistent processes, and measure more than work and cost.  For HR measures to be valuable, they need only be accepted, and more often than not, it doesn’t require a Ph.D. in mathematics, robust organization wide samples, or complex formulas.

But for me, and I would imagine for many of you, it’s hard to know where to begin your measurement — what should you measure and how should you measure it? Fortunately, there are experts such as Dr. John Sullivan & Associates, a human resource management advisory services and training firm, based on the thought leadership of author, advisor, and educator Dr. John Sullivan. His expertise on how to measure the value of Human Resources is phenomenal and easy to understand — easy enough for a non-mathematical person such as me to understand.

Why are Metrics Important?

Dr. Sullivan identified several reasons as to why metrics are important for HR. Below are some of the ones that I found most valuable to me and what I do:

Distributing metrics can change individual behavior – Only rewards change behavior faster that distributing ranked metrics to all. By ranking and distributing your metrics to everyone, you provide visible side-by-side comparisons that can be embarrassing to some and a challenge to others that are highly competitive. Both spur employees and managers into action.

Metrics are superior to culture in changing the behavior of your managers – Instead of solely relying on your corporate “culture” to drive actions you should instead rely on metrics and rewards to send the message about how you expect people to behave in a certain situations. You will find that by simply changing the metrics and rewards you can quickly change the behavior of most everyone. In contrast, most find that changing a corporate culture is extremely difficult and slow, which inevitably slows the needed change in behavior.

Metrics can allow HR to provide evidence of its strategic impact – In many organizations, people costs are the highest variable budget expense.  Between 35 and 60% of all variable costs of corporations are people costs.  With people being that high of an expense, HR really has no choice but to prove it’s economic value through the use of metrics. Nearly everything in HR can be measured but it’s smarter to focus on the few items that have the biggest cost and the most impact.  If you can prove their value most CFO’s will assume the rest of HR is operating efficiently. Most strategic HR metrics focus on productivity, recruiting, retention and employee relations. Of these, productivity is the most important. Whenever you can demonstrate to top management that you can produce one unit of your product or service at a lower labor cost (because of efficient hiring, retention, training or motivation) you will be a hero.  You don’t have to demonstrate individual program effectiveness if overall worker productivity continually increases.

Top Metrics to Measure HR ROI

Workforce productivity: The single, most powerful measure is return on investment. Employee ROI is the total dollar amount spent on labor costs divided by total revenue. The premise is that if you hire, train and place employees effectively, the average revenue per employee will increase as a result. An easier-to-benchmark alternative is revenue per employee (total revenue/the number of employees).

Dollar-impact metrics: HR can show the direct dollar impact of specific actions. For example, measure the revenue increase as a result of reducing “position vacancy days” for revenue-generating jobs. Also assume that actions to reduce turnover among top performers increases revenue by three times their salary. Ask your chief financial officer for approval to calculate the impact of other actions.

Top problem metric: You need a current “hot issue” metric. Ask executives to select the biggest workforce issue and select a metric for it. If it’s recruiting, measure the quality of hire. For retention, measure the turnover rate of top-rated employees. If it’s leadership, survey the executive team on their satisfaction with leadership bench strength.

HR’s impact on manager business results: The relative ranking of HR compared to other overhead functions can be powerful. This survey has managers rank each overhead function, based on its relative contribution to helping them meet their own performance goals.

Manager/employee satisfaction with HR: Managers and employees are important constituencies of HR, so they should be satisfied with HR service, programs and results. A yearly survey should be given to a random sample of both groups.

Know what HR does: You can’t be successful if your constituents don’t clearly understand your role. A yearly survey can determine the percentage that completely understand HR’s role (as many as 80 percent can be unsure).

HR costs: For cost-conscious executives, measure HR costs as a percentage of revenue or as a percentage of general and administrative expenditures.

Individual program effectiveness: The language of business is money and dollars.  HR gets itself into trouble by getting into the bad habit of using other “language”.  CFO’s don’t understand or appreciate the value of worker satisfaction or engagement; they do however understand costs and ROI.  It’s not wise for HR to report its results any differently than any other business function.  HR should demonstrate that for every dollar spent, it produces increased results and output. It’s possible to demonstrate the efficiency or impact of any HR program.  Below are a few examples of the potential dollar impact of various HR functions.

• Compensation — demonstrate that highly paid workers produce more than workers that are paid an average wage and that giving a worker at 10% raise increases their productivity by more than 10%.  Tying worker pay  to their output or productivity always pleases top management
• Training — demonstrate that there is a high correlation or connection between the number of hours a worker receives in training and their productivity. Show that worker productivity increases immediately after they receive training
• Recruiting — demonstrate that new hires produce more than the average (already on staff) worker.  Demonstrate that your hiring process produced recruits that score at the very top of your performance appraisal scale. Demonstrate that the sales people you hire under your “new recruiting system” produce average sales significantly higher than those hired under the old system.
• Employee relations — demonstrate that malcontents and bottom performers become average or better performers within a year after employee relations deals with them.  Also demonstrate that your program identifies, fixes or removes bad managers rapidly
• HRIS systems — HRIS systems demonstrate their effectiveness by their impact.  By demonstrating the “before and after difference after technology implementation you can show that for example applicant tracking systems result in faster and better quality hires then prior to the implementation of the system.  You can also demonstrate HRIS impact through manager satisfaction surveys, which show how satisfied managers are with the efficiency and effectiveness of the technology.  If technological systems do not produce outputs or results that are a higher quality, cheaper or faster than non-technology systems, there’s really no reason to implement them.

A More Intensive Look into HR Metrics

For you really intense metrics-oriented professionals, Dr. Sullivan has created a more extensive list of the 27 individual metrics in 10 different categories that he recommends HR organizations track within any large global company.  These are all strategic metrics that are relatively easy to understand and the data needed to populate them relatively easy to acquire.

First-Tier Metrics

I) Overall workforce productivity – the very best measure of overall HR success is workforce productivity.  Any HR department that takes responsibility for improving workforce productivity is sure to be a hero among senior executives.  The key is to continually improve the ratio between the dollars spent on employee costs (wages, benefits and overall HR expenses) and overall company revenue.  Metrics in this category include:

1. The % improvement in workforce productivity – Improvement in cents spent on people costs for every dollar of revenue/profit generated (compared to last year’s ratio)
2. The dollar value of the increased workforce productivity between this year and last year

II) Recruiting – managers consistently rate recruiting in their top three things they expect from HR. Without overdoing it, here are some simple metrics that you can use to assess recruiting effectiveness:

1. The number of overall days that “key positions” were vacant (due to recruiting)
2. Average performance appraisal score of new hires (this year compared to last in the same job)
3. Manager satisfaction with new hires (survey of hiring managers, results compared to last year’s average)
4. The turnover rate of new hires within the first year
5. % of diversity hires in managerial and senior positions

III) Retention – retention is also a highly rated management issue. In this case, most turnover measures are too simple.  Potential metrics include:

1. Performance turnover in key jobs (where performance turnover means that top performer turnover is “weighted” more heavily and bottom performer turnover more lightly than average worker turnover
2. Preventable turnover in key jobs (where a sample post exit survey is utilized to identify the real reasons that these individuals left the organization and if the turnover could have been reasonably prevented)
3. Diversity turnover in professional, managerial and technical positions

IV) Overall HR costs – even though overall HR costs are relatively small compared to all G&A expenditures, it never hurts to have a metric to ensure that the dollars spent in HR or resulting in a continuous rated improvement of workforce productivity.

1. Cents spent on HR costs for every dollar of revenue generated (compared to last year)

V) Manager satisfaction – I recommend you use a forced ranked survey of line manager’s satisfaction with HR.  Within that survey managers are asked just one particularly important question, which is… “Rate each of these individual HR functions on how much they contributed directly to your business unit’s productivity and its success at reaching its goals?”

1. Average ranking of all individual HR functions in a all managers survey where managers are asked to rate all individual overhead functions specifically on their contribution to productivity and in helping the manager to meet their performance goals

Second-Tier Metrics

These metrics are still important but they tend to be less valued among senior executives.

VI) Compensation and benefits – rather than trying to use a statistical method to determine pay fairness, I recommend that you instead survey employees on their perception of pay fairness compared to work expectations.

1. the number of “cents” (insert your local currency here) in total compensation and benefits costs that it took to generate a dollar of revenue (as an indication of compensation effectiveness, where this year’s ratio would be compared to last years ratio)
2. % of employees that are satisfied with their compensation (survey of a sample of employees on their satisfaction between the rewards and the expectations of the firm)
3. % of employees that are rated in the top performance appraisal level… that are paid above the average salary for their position and vice versa
4. What % of the average employee’s pay is “at risk” based on the employees on the job output

VII) Employee relations – the metrics focus in the employee relations area is on whether poor performing employees rapidly improve their performance or are terminated within a year.

1. Percentage of employees that report that they have a “bad manager” (survey of employees comparing this year’s percentage to last years)
2. Turnover percentage of the bottom rated/ performing managers and employees within one year of receiving the bottom rating
3. % of bottom level performance appraisal rated employees that are on a performance management program
4. % of employees that are all in any performance management program that improve at least one level on performance appraisal ratings within 1 year

VIII) Training & Development – I recommend a training and development metrics focus on the aspect of learning, development and growth.

1. % of employees that report that they are satisfied with the learning and growth opportunities provided by the firm (survey of a sample of employees)
2. % of employees that report that they are satisfied with on-the-job learning, project assignment’s for growth/ development and job rotations (survey of a sample of employees)
3. Percentage of employees that report that they are in the leading edge of knowledge in their profession (survey of a sample of employees)
4. Percentage of new hires that report excellent training opportunities among the top three reasons that they accepted the job

IX) Generalist activities – In many HR departments a significant percentage of all HR services are provided by generalists.  As a result, it is important to identify metrics that measure generalist’s satisfaction and impact.

1. % of Managers satisfied with generalists (survey of all managers that are serviced by generalists)
2. The average % improvement in workforce productivity (ratio of employee costs too dollar value of output) within the division’s that each generalist serves

X) HR goals met – HR departments frequently set unclear and unquantifiable goals at the beginning of the year but that are seldom measured throughout the year and formally assessed at year-end.  In order to improve HR performance and ensure that HR professionals are focused on the appropriate goals and activities, it is essential that the goal assessment process be more formalized.

1. % of top priority HR goals that were met or exceeded during the year (goals are set, quantified, prioritize and approved by senior management at the beginning of the fiscal year)

Be careful when trying to build a balanced score card—executives and CFOs place lopsided emphasis on money. A better measure of success is whether an individual reaches the expected percentage of improvement (pre-set by executives) each year. Executives may also expect comparisons to industry averages or direct competitors. Work with the CFO to revise and improve your metrics each year.

Source: Metrics — The Future of HR and Strategic HR Metrics for a Global Organization, by Dr. John Sullivan