HR Metrics

This was a business consulting project with Bear Stearns in 2007.

Question: What are some specific types of metrics and analytics used to determine HR’s ability to influence and be a change agent, HR’s effectiveness as a strategic business partner, and HR’s ability to contribute to the bottom line?

Clarification: How does HR influence business? How does one measure influence of HR practices on bottom lines?

Introduction:

In recent years HR has come under the strong scrutiny of top management and boards. Human resource management, in order to become a strong influence and business partner, will need to construct new plans to affect their organization in the long run. Keith Hammond wrote “Why We Hate HR” in response to failing HR systems he encountered, thereby sparking article related to failing HR systems1. However, contrary to these bleak articles, HRM is a vital and inimitable influence on organizational performance. HR can be instrumental in affecting business decisions, change, and contribute greatly to the bottom line in organizations if implemented and presented correctly.2 Becker and Gerhart explain specific measures of HR effect on company performance in financial and concrete terms are essential to becoming a strategic business partner. 2 Below are recommendations for HR professionals to present their worth to the business, and examples of companies that have used specific metrics to identify HR effectiveness.

Delivery:

Faragher explains in Bridging the Divide that Human Resources must breech barriers that are often presented to HR personnel. HR practitioners often find themselves faced with credibility issues and reporting to finance managers and missing a board seat. Faragher urges HR to step up the challenge.3 Additionally HR professionals must also resist the pressures of being rushed into decisions. Decisions that HR make are inevitably trickled through the entire organization and the effects can be catastrophic if not carefully weighed. As such, Causon urges HR to hire well -educated and thorough persons who are capable of making strong and effective decisions for the organization.Sullivan concurs, arguing that HR must be capable of identifying specific areas where change can be made to positive boost the organization. In order to do this, HR need to develop strong leaders who can then present specific metrics and evaluations to executive members to correlate investments in HR to increased revenues and profitability.5

HR professionals need to shift to a performance-based culture and recognize their effect on the company’s bottom line. Executives typically underestimate savings from HR initiatives and overestimate time for benefits to be realized. For example, a program that leads to any reduction in turnover rate could be converted into the savings for the company due to reduced spending on hiring new employees. If two months are required for the program to begin saving money for the corporation, that should be stated. HR also must refocus its objectives to recognize that customers create revenues. Decisions should be based more on data and strategic alignment. HR professionals who communicate in terms of productivity, return on investment, and profit are better prepared to attain support from executives and improve the company’s finances.6

Business Best Practices:

AstraZeneca adopted a “one team” model that increased teamwork, improved communication, and created a customer-focused culture. They used HR metrics such as productivity, customer satisfaction, and cost per employee to show that the new program was effective in each aspect. In addition, AstraZeneca noticed that the percent of calls answered by the HR service center within 10 seconds far exceeded their original target. HR services are now more efficient, aligned with organizational strategy, and contributing to the bottom line.7

Scott Baker, director of human resources at Level 3 Communications Inc., supports the use of HR metrics such as “revenue and income per full-time employee (FTE), average FTE overtime, the level of turnover and its associated costs, and overall expenses.” The HR staff analyzes these metrics to staff more effectively with the preferred employees, structure, and cost. Analysis of metrics found that turnover was too high because the employees who were hired had more experience than necessary for the position. Staffing strategy was altered, and as a result, turnover decreased and employee satisfaction increased. Steve McElfresh, SPHR, principal and founder of HR Futures, agrees that metrics can increase productivity and improve the bottom line, and adds that employee productivity should be measured rigorously. He recommends that HR professionals look at EBITDA — earnings before interest, taxes, depreciation and amortization — to better determine the earnings produced by employees. Some consultant recommend the subtraction of the return on debt or equity per employee demanded by holders of the company’s debt or stock to indicate total employee contribution to the company.8

UnitedHealth Group implemented a new system to “free HR from the burden of administrative transactions.” This new system allowed HR to track metrics such as staffing costs, cost per hire, time to hire, and return on sourcing. UnitedHealth Group realized a savings of US$7 million in agency and advertising spending. The average amount of annual new hires per recruiter increased from 130 to 185.9

Three well known projects have studied the ability of HR strategy to generate wealth for shareholders. Watson Wyatt’s Human Capital Index project analyzed HR practices from 150 companies since 1999 and tried to link it to financial performance. Accenture’s Human Capital Development Framework studied 50 companies, with the idea that HR initiatives may not have a direct and instant effect on business performance. The Human Capital Development Framework studies the impact of HR practices such as employee engagement and leadership, and then linked them to the impact on quality and innovation, which affect shareholder value. Deloitte & Touché’s Human Capital ROI studied 17 HR practices that were best related to financial performance. They determined that “effective human resources practices may explain as much as 43 percent of the difference in market value between one company and another.”10

Conclusion:

HR is capable of implementing great change in an organization, and may directly influence the bottom line of a business. Business impact HR differs from other HR by delivering demonstrated impact to organizations instead of the common process efficiency methods. If metrics such as return on investment, turnover, and EBITDA are used, they must be used properly, in alignment with the company’s overall strategy.

Resources

  1. Time to Reconstruct HR Practices. (January 6, 2006). Global News Wire.
    Abstract: Some critics wonder about the continued effectiveness of HR in organizations, however with serious evaluation, systems, and work HR has the capacity to affect every part of any organization is operates in to increase profitability.
  2. Becker, Brian and Gerhart, Barry. The Impact of Human Resource Management on Organizational Performance and Prospects. (August 1996) The Academy of Management Journal, Vol 39, No.4.
    Abstract: Our hope is that this research forum will advance research between HRM and organizational performance. It is evident from research that HRM does affect bottom lines in business, now the only thing left is to analyze this data and create effective metrics to measure effectiveness and bring HRM to the same level as other business partners.
  3. Faragher, Jo. Bridging the Divide. (January 31, 2006). Personnel Today. Reed Business Information Ltd.
    Abstract: When the HR director position opened up last year, it wasn’t the generous salary that turned prospective candidates away, it was the absence of board membership. HR needs to strategically change itself to become a business partner and sit at the table. Communication is essential with finance, and other departments to make this transition into back stage hand to major business help.
  4. Causon, Jo. HR Professionals Must Not Leave Decisions to Chance. (November 15, 2005). Personnel Today. Reed Business Information Ltd.
    Abstract: HR is still afraid of making mistakes. HR needs to cleanse itself of fear and to confidently make decisions that will affect the organization. HR decisions are not easy, but they need to be made in ways that will make obvious and positive impact on organizations.
  5. Sullivan, John. HR’s No. 1 Priority. (February 26, 2007). Workforce Management. Crain Communications.
    Abstract: Business impact HR is important in beginning to build a seat at the table. HR needs to redirect focus.
  6. Sullivan, John. HR’s No. 1 priority: profit. (Feb 26 2007). Workforce Management, 86 (4), 50.
    Abstract: To keep that seat at the table and remain a viable part of the executive committee, HR leaders must shift their approach from maintaining the status quo with only incremental gains in efficiency to a new model that is called “business impact HR.” Business impact HR shifts human resources away from its current process-efficiency focus and instead adopts a goal of delivering a demonstrated business impact. If you are ready to make that kind of shift, the first step is to identify high-impact activities. In the financial area, HR must work with the CFO’s office to learn how to convert HR results into dollar impacts. HR also must redefine its primary customer.
  7. HR transformation lowers costs and boosts efficiency at AstraZeneca: Site and functionally based service makes way for “one team” approach. (Oct 2005). Human Resource Management International Digest13 (6), 6 – 11.
    Abstract: Purpose – Describes how pharmaceutical giant AstraZeneca moved from site and functionally based human resources (HR) teams that offered a full range of generalist support, to a “one team” approach. A 15 percent cost reduction in service delivery over 3.5 years and a fall in the number of HR staff by 15 percent is intended to payback by 2006 the £5 million investment necessary to implement the new HR platform. Cost savings are firmly linked to improvements in service quality.
    Design/methodology/approach – Highlights the inefficiencies of the old system and the ways in which the change to the new system was brought about.
    Findings – Contends that the use of HR metrics helped to demonstrate to the AstraZeneca businesses the value of what HR does, and other business-support services within AstraZeneca are now considering adopting similar models to the HR delivery model. The fundamental rationale behind the programme – to create a more efficient and customer-oriented delivery of HR services by getting the right customer-oriented mindset across to HR, combined with the specific skills to manage customer interactions both at strategic and transformational levels – has become a reality. The “one team” approach has brought together everyone involved in HR delivery and there is a great sense of team working, improved communication, a much more consultative approach and a customer-focused culture. HR is now in line with organizational strategy and is a value-adding part of the business, contributing to the bottom line.
    Practical implications – Highlights the importance of training and good internal communications in helping to overcome reservations about the new system and bring about its smooth implementation.
    Originality/value – Contains plenty to interest top management in major corporations who are thinking about restructuring their HR function to achieve greater efficiency.
  8. Krol, Karen M. Repurposing Metrics For HR. (Jul 2006). HR Magazine, 51 (7), 64 – 69.
    Abstract: This article focuses on the use of chief financial officers’ (CFO) files or spreadsheets by human resource professionals to gain an understanding of employees’ productivity and to improve management of compensation, training, and staffing. The files of CFOs contains operations revenue and income per full-time employee.
  9. Snell, Alice. Measuring the financial impact of HR. (Jan/Feb 2007). Strategic HR Review, 6 (2), 28 – 32.
    Abstract: All organizations today are driven by people. This makes it the most significant portion of spend for most organizations. Understanding where the investments are made, what form such investments take, the economics of their impact and how to best optimize these resources, are the keys to unlocking hidden value. To control costs, businesses need to understand the full economic impact of each candidate, from their first day on the job, to reaching full productivity. Following these four steps will help you control some of the most substantial HR costs you are likely to encounter: 1. Accelerate the hiring process. 2. Reduce high turnover. 3. Avoid exposure to legal implications. 4. Cut the costs of temporary work. Understanding and being able to calculate total corporate spend and opportunity costs of talent acquisition and mobility, enables HR executives to articulate the true significance of HR to the overall corporate budget.
  10. HR’s Impact on Shareholder Value. (Dec 11 2006). Workforce Management, 85 (24), 77 – 80.
    Abstract: The importance of using human resources strategy to generate wealth for shareholders has been substantiated in recent year by research. Perhaps the best-known and most influential study on the subject is Watson Wyatt’s Human Capital Index project. Accenture, another consulting firm, has developed a tool called the Human Capital Development Framework, which takes a slightly different approach. The framework is based upon the idea that linkage between an HR initiative and business performance may not necessarily be direct and instantaneous. Accenture looked at the impact of human resources practices on employee engagement, leadership, things like that. And then, in turn, the impact of those factors on important business outcomes such as quality or innovation, which affect shareholder value.

Additional Resources

  • Ulrich, Dave and Brockbank, Wayne. Focusing on Customers: The Ultimate Measure of HR Programs. (June 1, 2005). HR Magazine. GaleGroup.
    Abstract: The success of an HR initiative should be measured not by how well its design and implementation went, but by what it did for the organizational stakeholders. HR actions create value only when they create financial impact.
  • Lawson Positioned in HRM Systems Report. (October 2006). Business Wire.
    Abstract: Lawson Human Capital Management applications provide organizations with information to maximize workforce potential, while helping HR leaders contribute to organizational excellence. See www.lawson.com for more information
  • Kannan, Nari. 10 Ways to Process Excellence Impacts Corporate Performance Management. (May 1, 2006). Global News Wire.
    Abstract: HR processes, how are they effectively used and implemented to impact corporate performance?
  • Donaldson, Craig. Weighing Up the Value of HR. (August 1, 2005). Human Resources Magazine, Australia.
    Abstract: Please see Appendix 1
  • Huselid, Mark A. Impact of Human Resource Management Practices on Turnover, Productivity, and Corporate Financial Performance. (June 1995). The Academy of Management Journal, Vol. 38, No. 3.
    Abstract: Use of in depth research of comparative industries on the affect HR has on organizational financial performance. Charts and other research are interesting and pertinent to topic
  • Salkey, Josie. HR metrics: Answering the right questions. (Nov/Dec2005). Strategic HR Review5 (1), p2-2.
    Abstract: The article focuses on issues related to personnel management. Human resource (HR) professionals agonize over the finer details of how to measure workforce absence levels or cost-per-hire without stopping to ask why. For author Andrew Mayo, the ultimate aim of HR measurement should be to deliver strategic outcomes. At BT Global Services – a company with 33,000 employees in 50 countries – a huge transformation program is underway to make the organization more dynamic and customer-focused.
  • HR Technology Is Fueling Profits, Cost Savings, & Strategy. (Jan 2006). HR Focus, 83 (1), 7 – 10.
    Abstract: The article presents the results of a survey on human resources technologies. It offers information on the impact of key applications on operating income. It also provides information on the application of service delivery approach in human resources management. It also presents information on human resources as the driving force behind metrics initiatives.
  • Jamrog, Jay J. The future of HR metrics. (Nov/Dec 2005). Strategic HR Review, 5 (1), p3-3.
    Abstract: The article discusses the future of human resources (HR) metrics. In most organizations, marketing, operations and budgeting metrics are connected deeply and logically to the business strategy. But for HR there is little or no logical connection between the company’s strategic plan and HR metrics. The most important goals for HR measurement should be to enhance human capital decisions and connect human resources to strategy. Knowing how many hours of training have been delivered provides about the same amount of information as knowing how many advertisements marketing is running.
  • Benchmark your HR metrics and practices. (Jul/Aug 2004). Strategic HR Review, 3 (5), p5-5.
    Abstract: Suggests ways in benchmarking Human Resources metrics and practices. Advice in choosing the right data to measure on a quantitative, statistical basis against other organizations; Consideration of internal benchmarking as a valuable way of flagging problem areas or high performers; Discussion of the process involved in qualitative benchmarking. 
  • Chrusciel, Donald. Exploring the facilities management effective rate as a useful metric. (2006). Facilities, 24 (1÷2), 18 – 30.
    Abstract: Purpose – The purpose of this paper is to investigate the use of the effective rate as a useful metric. Facilities management operations who function as re-charge organizations (public or private, non-profit or profit) are able to track performance and do comparisons for expense recovery while taking into account the organization’s unique environment.
    Design/methodology/approach – After providing a definition of the effective rate, some of the influences and the importance of measuring performance for facilities management operations are discussed. The remainder of the paper focuses on the findings based on a qualitative single case study that not only clarifies the use of the metric, but also confirms the usefulness for a service-oriented organization to measure and track performance.
    Findings – Taking into account the unique environment of each organization along with the differences for time not billed back to the customer (un-billable), the effective rate is offered as a quantitative means to measure performance as it influences the organization’s billing labor rates.
    Research limitations/implications – The single case study raises the issue of generalizability, but points out that much can be gained from the research. In the spirit of true qualitative research, the intent is to provide the findings allowing the reader to determine possible transferability where logic and reality is justifiable.
    Practical implications – The effective rate, once normalized for the particular environment, can be used as a benchmark for both internal and external evaluations of performance for facilities management organizations.
    Originality/value – The effective rate, whether actually calculated or not, influences the organization’s finances through the billing labor rate in its attempt to recover costs and can serve as a performance tracking metric.
  • Self, James. Metrics and management: applying the results of the balanced scorecard. (Dec 2004). Performance Measurement and Metrics, 5 (3), 101 – 105.
    Abstract: The paper reviews the balanced scorecard’s first year of operation at the University of Virginia Library. It focuses on outcomes, offering answers to some basic questions. How were the results used? What was done to address shortfalls? Were successful metrics and their targets revised? What changes were made to the overall suite of metrics? Has the scorecard improved the organization? The paper serves as a case study in the use of the balanced scorecard in an academic library, and informs the audience of the strengths and weaknesses of this management tool.
  • Kelly, Andrew. Measuring Payback from Human Resources Development. (Sep 1993). Industrial and Commercial Training, 25 (7).
    Abstract: From TQM we have learned that everything can and should be measured. Managers are now asking to be shown what difference training and development activities make to the effectiveness of the business. To demonstrate the change brought about by training and development it is necessary to measure the difference between the employee’s performance before and after the event or programme. Offers managers an evaluation model – which is the outcome of a 12-month study into evaluation best practice across the major Scottish companies-and a range of evaluation tools to apply to HR activity within their own organizations which will allow measurement of the return on HR investment. Offers guidance in the area of Investors in People which has been causing difficulties for HR managers.
  • Kolay, M.K. and Sahu, K.C. Performance measurement as a surrogate value of organizational human resource. (May 1995). International Journal of Operations & Production Management,15 (5), 40 – 59.
    Abstract: Proposes a method to assess the relative value of organizational human resource (HR) based on total performance. The total performance of the man-machine resource base of an organization includes its profitability together with how it affects the interests of consumers, the national economy and society (i.e. other than profitability performance). The total performance thus achieved, judged in relation to the plant base used, reflects the productivity of HR. Such a productivity level achieved by the HR viewed in relation to the man-related cost reflects the “external value” of HR. The impact of certain uncontrollable external factors (which may not be attributable to HR) has been assessed on the organizational total performance to reflect the controllable dimension of HR value, i.e. the “internal value” of organizational HR. The proposed method has been applied in an integrated iron and steel plant to study its HR value over a ten-year period. 
  • Communicating HR’s Value. (Jan/Feb 2007). Strategic HR Review, 6 (2), 7.
    Abstract: Using metrics to communicate HR’s value to an organization is critical to the perception of HR as a valuable resource. What many HR professionals miss is that how those metrics are used in making a business case is just as important as having metrics themselves. It is difficult to make gains in every area of HR in every budget cycle. If there is no time to gather metrics, benchmarking data can be crucial to quickly putting metrics and impact in context. When managing metrics, it is not only which HR metrics are gathered or even how big they are. It is also how well the metrics are translated into incremental value, in what timeframe and how regularly they are communicated that matters.
  • Katou, Anastasia A. and Budwar, Pawan S. The effect of human resource management policies on organizational performance in Greek manufacturing firms. (Jan/Feb 2007). Thunderbird International Business Review, 49 (1), 1.
    Abstract: This article investigates if human resource management (HRM) policies have an impact on organizational performance in the Greek manufacturing context. The research is based on a sample of 178 firms. The “universalistic model” of HRM is adopted to conduct the investigation. The results show strong support for the model, indicating that the HRM policies of recruitment, training, promotion, incentives, benefits, involvement, and health and safety are positively related with organizational performance. The study both contributes to HRM theory and has important implications for practitioners.
  • Sandler, Susan F. Benchmarking for Functional HR Metrics. (Nov 2006). HR Focus, 83 (11), 12 – 15.
    Abstract: A list of the leading metrics recognized by the Saratoga Institute, part of PricewaterhouseCoopers.
  • Gumbus, A. Introducing the Balanced Scorecard: Creating metrics to measure performance. (2005). Human Resources Abstracts, 40 (4).

APPENDIX ONE

(Taken from Donaldson, Craig. Weighing Up the Value of HR. (August 1, 2005). Human Resources Magazine, Australia.)

HR must be transformed to focus more on what they deliver instead of what they do. HR personnel should understand how HR actions will help your company compete. The following are criterion that should be in place so that leaders and HR professionals can act based on fulfilling these 14 criterion and investing ways to assure HR professionals can create and track value.

  1. An effective HR function, which has HR professionals who recognize external business realities and adapt HR practices and allocate HR resources accordingly.
  2. An effective HR function creates market value for investors by increasing intangibles
  3. An effective HR function increases customer share by connecting with target customers
  4. An effective HR function helps line managers deliver strategy by building organization capabilities
  5. An effective HR function clarifies and establishes an employee value proposition and enhances individual abilities
  6. An effective HR function manages people processes and practices in ways that add value
  7. An effective HR function manages performance management process and practices in ways that add value
  8. An effective HR function manages information processes and practices in ways that add value
  9. An effective HR function manages workflow design and processes in ways that add value
  10. An effective HR function aligns its organization to the strategy of the business
  11. An effective HR function has clear strategic planning process for aligning HR investments with business goals
  12. An effective HR function has HR professionals who play clear and appropriate roles
  13. An effective HR function builds HR professionals who demonstrate HR competencies
  14. An effective HR function invests in training and development of HR professionals.

Questions to Consider:

  1. What role do stakeholders play in HR transformation
  2. What sort of practices can HR adopt in order to realistically create value?
  3. What resources will HR need in order to effectively create value?
  4. HR functions are only as good as those who conduct them. How are your HR professionals?
  5. What are implications of change to general managers, senior HR executives?

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