HR METRICS: Speaking the Language of Profitability The Basics Patricia Mathews President HR Audits, Etc. and Workplace Solutions Consultants
May 10, 2015
HR METRICS:
Speaking the Language of Profitability
The Basics
Patricia Mathews
President
HR Audits, Etc. and
Workplace Solutions Consultants
Copyright Patricia Mathews 2010
Today’s Objectives
• Learn the importance of using metrics to
demonstrate value to your organization.
• Gain a basic understanding of business metrics.
• Review basic HR metric concepts and terms.
• Gain a basic understanding of what to measure, the
types of measurements you can use, sources of data,
etc.
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Copyright Patricia Mathews 2010
Evolution of HR Metrics
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Predict the effects of HR initiatives.
Link HR initiatives to organizational performance.
Monitor HR department performance.
Measure HR transactions.
What is the purpose of HR?
• Help build and maintain the organization‟s competitive advantage.
• Help the organization achieve its mission and strategic goals and objectives.
• Add value to the organization.
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What Are Metrics?
Numbers that indicate how well an entity is performing.
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Qualities of Metrics
• Can be expressed as percentages, ratios, formulas, or incremental differences.
• Can be individual or aggregated.
• Can be tracked over time to show trends.
• Can be quantitative or qualitative
• Can be predictive
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Why Are Metrics Important?
• Part of the language of business.
• Provide a context around which organizational or unit performance can be analyzed more precisely.
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Why Are Metrics Important For HR?
• Demonstrate HR‟s ability to understand the business of the organization.
• Demonstrate HR‟s ability to communicate in the language of business.
• Establish the „business image‟ of HR
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Performance Measurement Principle
A measurement system promotes productivity by focusing attention on the strategic issues, tasks, and objectives.
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Performance Measurement Principle
The efficiency and effectiveness of any
organizational function can be measured
by:
• cost
• time
• quantity
• quality
• people
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Organization Performance
Measurements
• Capital Market Outcomes
• Financial Outcomes
• Organizational Outcomes
• Human Capital Outcomes
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Organization Performance
Measurements
• Efficiency
• Effectiveness
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Organizational Performance
Measurements - Examples
• Profits
• Productivity
• Cycle Time
• Earnings
• Stock Market Value/Shareholder Value
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Metrics: Challenges for HR
• „Connecting the Dots‟
• Time and Resources
• Nature of HR Practices
• Calculating HR Costs
• Using Data
• Organizational Culture
• HR Staff Competencies
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Challenge: ‘Connecting the Dots’
Relationships between HR performance
and organizational performance are:
• Not universal
• Not consistent
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Challenge: Time and Resources
• Organizations exist over time
• People assets ebb and flow
• Timeframes can vary by objective
• HR staff time and resources
• Data collection processes
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Time and Resources: HR Staff
• Cycle time for processing employee
transactions
• Time spent on administrative work
• Peak demands versus average workload
• Processors found throughout the organization
• Automating capability
• Outsourcing capability
• Alignment
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HR Transactions
• Average employee up to 50 HR transactions in the first 14 days after acceptance of employment.
• Average employee up to 35 HR transactions in the 14 days following termination.
• HR staff needed to track and report on employee information approximately: 1 HR person per 100 employees.
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Data Collection Process
• Efficient
• Effective
• Integrated
• Generates reliable data– Complete
– Timely
– Meaningful to management
– Accurate
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Data Collection: Integrated HRIS
• Increase accuracy of employee information
• Decrease cycle time for processing employee transactions
• Reduce time spent by HR on administrative work
• Facilitate quick access to employee information for non-HR employees and management
• Enable HR to manage without adding staff
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Data Collection: Methods
• Organizational performance monitoring
• Questionnaires and surveys
• Tests and assessments
• Interviews
• Focus groups
• Observations
• Video, audio and computer monitoring
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Data Collection: Sources of Data
• Internal
• External
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Sources of Data: Internal
• HRIS
• ATS
• Internal non-HR databases
• Employee files
• Organizational records, surveys and reports (HR and non-HR)
• HR program participants, their managers, their peers, their work group
• Benchmarking
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Internal Sources of Data:
Benchmarking
• Adds value to HR metrics
• Protects programs that are performing well
• Creates support for organizational change
• Helps in strategic decision-making
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Sources of Data: External
• Industry and trade groups
• Associations
• Regulatory agencies
• Consultants
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External Sources of Data:
Benchmarking
• Can be a starting point to make HR metrics more valuable
• Must be used wisely
• Emphasize results not processes
• Competitive benchmarking may not be valid
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Data Collection: Considerations
• Type of data
• Time
• Cost
• Disruption
• Accuracy
• Usefulness
• Cultural preference
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Challenge: Nature of HR
Practices
• Need right HR practices in place at the
right time to support the organization‟s
strategic objectives.
• Are interdependent; work as systems.
• Shared responsibility for design and
administration.
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HR Practices: Examples
• Recruitment
• Selection
• Employment
• Benefits
• Compensation
• Performance Management
• Reward and recognition
• Separation
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HR Practices: Shared Responsibility
• HR processes are administered by non-HR management.
• Line managers are not trained to perform HR activities.
• Limited interaction between HR and the line.
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Challenge: Calculating HR Costs
• Often are not apparent in the budgeting or accounting systems.
• Are distributed throughout the organization.
• Requires considerable resources.
• May not include indirect processing costs.
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Calculating HR Costs:
Processing Costs
• Non-strategic
• Overhead
• Transactions
• Can be complex
• Paper-based versus paperless
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What attracted you to HR?
• Work with facts and data
• Work with systems and processes
• „Run‟ a business
• Work with people
• The $$$$$$ money
• By default
• The creativity
• A career path to a higher level job
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Challenge: Using Data
• Data measurement – easy-peasy
• Data analysis – not so easy
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Challenge: Using Data
• Fear of math!
• Aptitude for business
• Understanding what metrics to use
• Analytical skills
• Ability to focus on more than HR activities.
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Using Data: Aptitude for
Business
• Understanding basic financial principles.
• Understanding the organization‟s key business measurements and metrics.
• Ability to use financial metrics to link HR initiatives to organizational outcomes.
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Using Data: What Metrics to Use
Understanding what metrics to use is not
easy.
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Using Data: Analytical Skills
• Ability to handle and effectively interpret
large amounts of data.
• Ability to identify causes vs. symptoms.
• Understanding of key HR metrics.
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Using Data: Errors in Using Data
• Mistake data for information
• Value only HR data
• Generate irrelevant data
• Measure activity instead of impact
• Rely on gross numbers
• Rely on data that does not tell the whole picture
• Analysis paralysis
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Challenge: Organizational Culture
• Unclear strategy or conflicting priorities
• Ability to work with the C-suite
• Organization‟s management style
• Quality of communications
• Quality of collaboration
• Many cultural levels
• HR‟s image
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Organizational Culture:
HR’s Image
• Overhead
• Tactical/transactional
• Does not generate revenue
• Not seen as a business partner
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Challenge:
HR Staff Competencies
• Amount of business education
• Business experience
• Line experience
• Strategic HR skills
• Functional HR experience
• Presentation skills
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Performance Measurement
Principle
Organizational performance must be measured at many levels to be effective.
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Data is Used at Many Levels
• Operating Unit
• Business Unit
• Corporate
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Performance Measurement
Principle
Measure managers by the efficiency and effectiveness of the units they manage.
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Operating Unit Level
• Tactical /Transactional
• Measures of output
– Productivity
– Efficiency
– Time
– Cost
– Quality
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Business Unit Level
• Operational data
– Output
– Quality
– Time
– Cost
– Customer satisfaction
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Corporate Level
• Strategic
– Financial
– Focused on organizational performance
• Internal vs. external
• Predictive
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Data Characteristics
• Hard
• Soft
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Hard Data
• Objective
• Common measures of organizational performance
• Associated with tangible assets
• Relatively easy to collect
• Easy to measure and quantify
• Relatively easy to convert to $ values
• Has credibility with management
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Hard Data: Examples
• Output
• Quality
• Cost
• Time
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HR Metrics:
Examples of Hard Data
• Headcount
• Turnover
• Total performance appraisals completed
• Total employees trained
• Total missed days of work
• Number of applications processed
• Total training hours
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Soft Data
• Subjective
• Not as common but most closely connected to organizational performance
• Associated with intangible assets
• More difficult to collect
• More difficult to measure and quantify
• Difficult to convert to $ values
• May not carry as high a level of credibility with management
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Soft Data: Examples
• Culture
• Reputation
• Innovation
• Ethics
• Customer service
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HR Metrics:
Examples of Soft Data
• Work climate
• Employee satisfaction
• Engagement
• Diversity
• Employee development
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HR Metrics: Caution!
The same data can be both soft and hard depending on how it‟s used.
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Data Characteristics
• Lagging indicators
• Leading indicators
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Data Characteristics:
Lagging Indicators
• Information that is the result of something that happened
• Used to measure processes and outcomes to gauge organization‟s performance
• Does not connect directly to the future
• Not necessarily predictive
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Lagging Indicators: Examples
• Sales
• Profit
• Inventory
• Time to market
• Expenses
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Lagging Indicators:
HR Examples
• Number of employees hired
• Number of employees trained
• Cost of training
• Turnover
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Data Characteristics:
Leading Indicators
• Precede the future
• Predict or affect the future
• Show trends, patterns
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Leading Indicators: Examples
• Stock market
• Political decisions
• Changes in government
• Changes in the economy
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Leading Indicators:
HR Examples
• Engagement survey score
• Readiness rate
• L&D investment per employee
• Employee commitment level
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HR Indicators:
Business Example
• Percent of employees completing a sales training course can be a leading indicator of sales (lagging indicator)
• Screening processes at time of hiring sales staff can be a leading indicator of sales (lagging indicator)
• Quality of sales management can be a leading indicator of sales (lagging indicator)
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Data Characteristics:
Doables vs. Deliverables
• Doables: activity counts that show HR efficiency
• Deliverables: outputs that show HR effectiveness; support the execution of the organization‟s strategy; add value to the organization
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Performance Measurement
Principle
The ultimate measurement is not activity (efficiency) but getting the right outcomes (effectiveness).
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HR Metrics
Link to organizational performance outcomes.
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Organizational Performance
is Measured in Outcomes
• Increased revenue or profit
• Asset strength and utilization
• Increased market share or new customers
• Increased employee productivity
• Increased shareholder value
• Reduced labor costs
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Financial Outcome Measurements:
Examples
• Return on Investment (ROI)
• Return on Assets (ROA)
• Return on Equity (ROE)
• Debt to Equity Ratio
• Earnings Before Interest and Taxes (EBIT)
• Earnings Before Interest, Taxes, Depreciation and
Amortization (EBITDA)
• Earnings per Share (EPS)
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HR Metrics
All HR processes and systems in the cycle of employment must support desired organization performance outcomes.
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Copyright Patricia Mathews 2010
Cycle of Employment
1. Recruit
5. Separate 2. Acquire
3.Utilize
4. Develop and Reward
Human
Capital
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Recruiting Metrics: Examples
• Cost per hire
• Time to fill jobs
• Ratio of offers accepted to offers extended
• Quality of hire
• Internal hire rate
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Acquiring Metrics: Examples
• New hire processing cost
• Orientation cost
• Opportunity cost
• Management satisfaction
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Utilizing Metrics: Examples
• Revenue per employee
• Profit per employee
• Absenteeism rate
• Frequency/severity ratio of accidents
• Employee satisfaction
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Employee Satisfaction Metrics:
Examples
• Retention rate
• Workforce flexibility measures
• Diversity turnover
• Average time for dispute resolution
• Employee engagement index
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Develop and Reward Metrics:
Examples
• Benefit cost per employee
• Benefit costs as percent of revenue
• Total compensation expense per FTE
• Compensation as a percent of operating expense
• Performance appraisal distribution
• Learning and development
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L&D Metrics: Examples
• L&D cost per employee trained
• Ratio of employees trained to total FTEs
• Training hours per FTE
• Satisfaction with training program
• Internal hire rate
• Percent of employees in succession planning
• Training staff ratio
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Separation Metrics: Examples
• Turnover rate
• Cost of turnover
• Reasons for turnover
• Opportunity cost of turnover
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HR Department Metrics:
Examples
• HR expense as percent of total operating expenses
• Ratio of HR staff to total FTEs
• HR process cycle time
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Strategic HR Metrics
• Tie to financial metrics
• Help to identify priorities
• Assess risk
• Identify missed opportunities
• Include predictive analytics
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Financial Metrics: Examples
• Cost/Benefit Analysis
• Internal Rate of Return (IRR)
• Payback Period
• Net Present Value (NPV)
• Return on Investment (ROI)
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Strategic HR Metrics:
Examples
• Economic contribution per average employee.
• Variability of the impact of employee performance on the organization‟s financial performance.
• Impact of employees in a particular job on the organization‟s success
• ROI of a targeted training program
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Benefits to HR of Using
Business Metrics
• Focus on what‟s important not what is urgent
• Work more effectively with business partners
• Help „sell‟ HR initiatives that will pay off for the organization
• Improve HR‟s image
• Demonstrate HR‟s value to the organization
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Major Metrics Challenges for
HR
1. Ability to collect, measure and analyze HR
practices in terms that the organization
understands and values.
2. Increasing the competencies needed to
demonstrate organization and business
effectiveness.
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Speaking the Language of
Profitability
“When you learn to speak the universal language of
business, you can have meaningful discussions with
anyone in the company, at any level.”
-- Ram Charan
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THANK YOU! MERCI!
GRACIAS!
Patricia Mathews, President
HR Audits, Etc. and Workplace Solutions
Consultants
Sarasota, FL
941-727-1692
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