HR METRICS: Speaking the Language of Profitability The Next Level Patricia Mathews President HR Audits, Etc. and Workplace Solutions Consultants
HR METRICS:
Speaking the Language of Profitability
The Next Level
Patricia Mathews
President
HR Audits, Etc. and
Workplace Solutions Consultants
Copyright Patricia Mathews 2010
Today’s Objectives
• Understand the concept of organizational strategic
objectives and competitive advantage.
• Understand the competencies HR needs to be
viewed as a profit driver.
• Understand how to align the HR mission and
strategic objectives with the organization‟s mission
and strategic objectives.
2
Copyright Patricia Mathews 2010
Today’s Objectives
• Begin to identify HR measurements that are
strategically aligned with the organization‟s objectives.
• Examine your HR metrics for their strategic relevance.
• Understand the importance of communicating the
numbers that will engage your executives.
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Organizations Have a Purpose
• Not all are focused on wealth
• Can have many purposes
• Vary in importance from organization to organization
• Communicated in the Mission Statement
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Purpose of an Organization -
Examples
• Maximize profits
• Increase market value
• Grow talent
• Best quality
• Best service
• Safe work environment
• Advance technology
• Environmental integrity
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Competitive Advantage
• A unique asset or capability
• Drives an organization‟s performance on a continuing basis
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Competitive Advantage
• Physical assets
• Capital resources
• Core competencies
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Core Competencies
Unique people-related knowledge, skills and behaviors that help an organization to achieve its business objectives by creating alignment across the organization.
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Core Competencies
• Sources of leverage
• Areas where the organization dominates
• Associated with intellectual inputs
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Core Competencies
• Not easily duplicated or replaced
• Cut across traditional functions
• Reflected in activities that are based on knowledge
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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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Strategic Objectives
• Tie to the organization‟s values.
• Provide a sense of direction and a focus
for the organization‟s activities.
• Establish operating goals and objectives
for the entire organization.
• Used to measure the organization‟s
performance.
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Organizations Measure
Performance
• Market Outcomes
• Financial Outcomes
• Organizational Outcomes
• People Outcomes
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Organizations Measure
Performance
• Efficiency
• Effectiveness
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Efficiency
Measures the rates of resource usage
in achieving objectives.
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Effectiveness
Measures how well objectives were
achieved.
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Organization Performance
Measures - Examples
• Sales (Revenues)
• Net Profits
• Cost of Goods Sold
• Productivity
• Cycle Time
• Earnings
• Stock Market Value/Shareholder Value
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Risks and Opportunities
Risk = is a short- or long-term threat or
concern
Opportunity = enables the organization to
achieve significant improvement in an area
the organization values
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Mission and Strategy
Alignment
• Keeps everyone moving in the same
direction.
• Serves to focus activities throughout the
organization.
• Eliminates or reduces internal inconsistency.
• Helps the organization to sustain or build a
competitive advantage.
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Mission and Strategy
Alignment
At all levels:
– Organizational level
– Department or business unit level
– Operating level
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Mission Statement
Brief statement of the
purpose of an
organization.
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Mission Statement
• Clarifies the organization‟s values.
• Used to develop the strategic goals and
objectives of the organization.
• Used to measure organizational
performance.
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Department or Unit Mission
Statement
Brief statement of
the purpose of the
unit.
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Department or Unit Mission
Statement
• Ties to the organization‟s values.
• Used to establish strategic operating
goals and objectives.
• Used to measure performance.
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Alignment With HR
Achievement of the organization‟s
mission and strategic objectives is
dependent upon employee behavior
and performance.
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How HR Fulfills its Purpose
The alignment of strategic HR practices and systems with organizational goals and objectives.
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Mission Statement - Example
Organization Mission…
”To provide first class
service and innovative
products to our customers
and consistently attractive
returns to the owners of
our business.”
Copyright Patricia Mathews 2010 27
HR Must Understand the
Organization
• What it values
• What adds value
• How it makes money
• Its key measurements and metrics
• Its competitive advantage
• Its risks and opportunities
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Mission Statement Alignment -
Example
Organization Mission…
”To provide first class
service and innovative
products to our customers
and consistently attractive
returns to the owners of
our business.”
Human Resources Mission…
”To ensure the organization
has the right people in the
right jobs at the right time
their skills are needed in
order to meet/exceed
customer and shareholder
expectations.”
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Strategic Objectives
Specific results
that the
organization
seeks to achieve
in pursuing its
mission.
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Department Or Business Unit
Strategic Objectives
Specific results
that the
department or
business unit
seeks to achieve
to help the
organization
pursue its mission.
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Department Or Business Unit
Strategic Objectives
Strategy execution must support the
organization‟s competitive advantage.
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Challenge: HR’s Relationship to
the Organization’s Performance
Relationships between HR and an
organization‟s performance are:
– Not universal.
– Not consistent.
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Challenge: HR’s Relationship to the
Organization’s Performance
Organizational performance outcomes
HR outcomes which impact
HR strategic objectives impact
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Challenge: Organizations
Exist Over Time
• Organizations have specific stages of
growth.
• No definitive endpoint for measurement.
• Timeframes can vary by stakeholder.
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Strategic Objective
Organization Mission…
”To provide first class
service and innovative
products to our
customers and
consistently attractive
returns to the owners of
our business.”
Organization Strategic
Objective…
”Deliver a high-quality,
web-based marketing
software solution within the
next three years.”
Copyright Patricia Mathews 2010 36
Strategic Objective
Organization Strategic
Objective…
”Deliver a high-quality,
web-based marketing
software solution within
the next three years.”
Copyright Patricia Mathews 2010 37
Human Resources
Strategic Objective…
HR Must Understand the
Organization
• What it values
• What adds value
• How it makes money
• Its key measurements and metrics
• Its competitive advantage
• Its risks and opportunities
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Strategic Objective Alignment -
Example
Organization Strategic
Objective…
”Deliver a high-quality,
web-based marketing
software solution within
the next three years.”
Human Resources
Strategic Objective…
”Identify and hire top
talent web-based
software developers
within the next 18 to 24
months.”
Copyright Patricia Mathews 2010 39
Copyright Patricia Mathews 2010
Link Between HR Practices and
Organizational Performance
40
Market value of the organization
Revenues, profits, return on assets, return on equity, etc.
Productivity, quality, service, satisfaction, etc.
Quality of the workforce
HR practices
Challenge:
Select the Right HR Practices
HR must identify the HR practices and
HR systems needed to execute both
HR‟s and the organization‟s mission and
strategic objectives.
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Characteristics of HR
Practices
• Interdependent
• Work synergistically to:
– Affect the value of the workforce
– Affect the performance of the organization
• Can be linked to work as systems
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Example - HR System to Improve
the Quality of the IT Workforce
Recruitment
+
Selection
+
Opportunities For Internal Movement
+
Separation
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Alignment: HR Practices with
Strategic Objectives
Organization
Strategic
Objective…
”Deliver a high-quality, web-based marketing software solution within the next three years.”
HR Strategic
Objective…
”Identify and hire top talent web-based software developers within the next 18 to 24 months.”
HR Practices:
Human Resources
System:
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Alignment: HR Practices with
Strategic Objectives
Organization
Strategic
Objective…
”Deliver a high-quality, web-based marketing software solution within the next three years.”
HR Strategic
Objective…
”Identify and hire top talent web-based software developers within the next 18 to 24 months.”
HR Practices:
•Recruitment
•Selection
•Onboarding
•Reward
•Recognition
HR System:
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Alignment: HR Practices with
Strategic Objectives
Organization
Strategic
Objective…
”Deliver a high-quality, web-based marketing software solution within the next three years.”
HR Strategic
Objective…
”Identify and hire top talent web-based software developers within the next 18 to 24 months.”
HR Practices:
•Recruitment
•Selection
•Onboarding
•Reward
•Recognition
HR System:
Improve the
composition of the
workforce to meet
technology needs.
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Challenge: Shared Responsibility
for HR Practices
• Administered by non-HR management.
• Line managers not trained to perform HR activities.
• Limited interaction between HR and the line.
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Challenge: HR Silos
• HR practices not internally aligned
• HR practices not integrated
• Quality of communications within HR
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Challenge: HR Competencies
• Knowledge: business, organizational, HR
• Strategic thinking
• Analytical and diagnostic skills
• Communication skills
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HR Competency: Knowledge
• Business savvy
• Strategic HR expertise - and in your key
area
• Understanding of the organization, the
different business functions, and the
customers
• Understanding of the industry or sector
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HR Competency:
Strategic Thinking
• See the „big picture‟
• Have a long-term perspective
• Understand how complex systems work
• Understand that decisions are
interconnected
• Have a bottom-line orientation
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HR Competency: Analytical
and Diagnostic Skills
• Handle and effectively interpret large
amounts of data
• Identify causes vs. symptoms
• Understand key HR and business metrics
• Have financial intelligence
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HR Competency:
Communication Skills
• Intelligent listener and smart questioner
• Effectively persuade or influence
• Communicate successfully with diverse
audiences
• Assertive
Copyright Patricia Mathews 2010 53
Challenge: Measuring HR
• Measuring at all levels of the
organization
• Using data
• Using financial measures.
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Corporate Level Measures
• Strategic
– Financial
– Focused on organizational performance
• Internal vs. external
• Predictive
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Business Unit Measures
Operational data
– Output
– Quality
– Time
– Cost
– Customer satisfaction
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Operating Unit Measures
• Tactical /Transactional
• Measures of output
– Efficiency
– Time
– Cost
– Quality
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Using Data
• Data measurement – easy-peasy
• Data analysis – not so easy
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HR 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 paralysisCopyright Patricia Mathews 2010 59
Using Data
• Aptitude for business
• Understand data characteristics
• Understand what metrics to use
• Focus on more than HR activities
• Analytical skills
• Financial intelligence
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Using Data:
Aptitude for Business
• Understand basic business principles.
• Understand business functions.
• Understand the organization‟s key business measurements and metrics.
• Use business metrics to link HR initiatives to organizational outcomes.
• Use business metrics to persuade management.
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Using Data:
Data Characteristics
• Hard
• Soft
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Business Example
• Turnover data (hard data) is used to predict customer satisfaction.
• That turnover data is now soft data.
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Using Data:
Data Characteristics
• Lagging indicators
• Leading indicators
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Quiz
• Sales
• Percent of employees completing a sales training course
• Screening processes at time of hiring sales staff
• Quality of sales management
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Financial Intelligence
• Clearly understand the organization‟s total
investment in human capital.
• Measure the financial results of the human
capital investment.
• Communicate the financial results in the
terms management understands.
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Able to ‘Read’
Financial Reports
• Income statement
• Balance sheet
• Cash flow statement
• Annual report
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The Income Statement
• Sales (Revenues )
• Expenses
– Cost of goods sold/cost of services
– Operating expenses
• Profit
• Net Profit
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The Income Statement:
Expenses
Above the line = COGS
or
Below the line = Operating expenses = Overhead
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The Balance Sheet
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Assets = Liabilities
+
Owners‟ Equity
Balance Sheet: Assets
• Cash and cash equivalents
• Accounts receivable
• Inventory
• Property, plant and equipment minus
accumulated depreciation
• Goodwill
• Intangible assets
• Accruals and prepaid assetsCopyright Patricia Mathews 2010 71
Employees as Assets
• Their knowledge and performance contribute
to the value of an organization.
• Their value is part of „goodwill.‟
• They are not an asset on the balance sheet:
– Cannot assign a financial value to
employees
– Organizations don‟t own employees
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Employees as Assets
• Physical assets depreciate (decrease)
in value and/or deteriorate as they age.
• Human capital‟s value generally
increases over time.
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Correlation Between
Employee and Other Assets
• Start up curve = Time to full productivity
(TFP)
• Quality of system = Quality of hire
• Quality of upgrade = Promotion quality
• Economic impact of loss/failure =
Economic impact of separation
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Balance Sheet: Liabilities
• Current portion of long-term debt
• Short-term loans
• Accounts payable
• Accrued expenses and short-term liabilities
• Long-term liabilities
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Balance Sheet: Owners’ Equity
• Preferred shares
• Common shares or common stock
• Additional paid-in capital
• Retained earnings
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Able to Interpret
Financial Data
• Revenue
• Profit
• Days in inventory
• Inventory turns
• Receivable days
• Cash flow
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Able to Interpret
Financial Data
• Cash flow
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Finance: A Science and an Art
• Using limited data to as accurately as
possible describe an organization‟s
performance
• Reflection of reality but includes:
– Estimates
– Assumptions
– Educated guesses
– Biases
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Quiz
• Every payroll $ is in ________or ___________.
• Incentive comp is on the balance sheet either as _________or ___________.
• Large HR purchases like a HRIS add to ________and ____________.
• HR purchases like supplies, travel, consulting services add to ________________.
• Cash flow is an indication of the _______ of an organization.
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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.
HR Metrics
All HR processes and systems in the cycle of employment must support the organization‟s desired performance outcomes.
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Organizational Performance Outcomes -
Examples
• 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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HR Metrics
Must link to organizational performance outcomes.
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Financial Metrics
Link most directly to organization performance
outcomes.
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Understanding
What Metrics to Use
– How will you measure success in HR?
– What metrics are important to your industry sector? To your organization?
– What HR practices and systems are needed to support your organization‟s strategic objectives?
– How will you track them and measure their performance?
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Understanding
What to Measure
– Efficiency of HR operations
– “Best practices”
– HR dashboard or HR scorecard
– Causal chain analysis
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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
• Percent of supervisory compensation
• Performance appraisal distribution
• Turnover by performance rating
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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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Challenge:
Calculating HR Costs
• Often not apparent in the budgeting or accounting systems.
• Distributed throughout the organization.
• Requires considerable resources.
• May not include indirect processing costs.
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HR Processing Costs
• 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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Strategic HR Metrics
• Tie to financial metrics
• Help to identify priorities
• Assess risk
• Identify missed opportunities
• Include predictive analytics
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Common Financial Metrics -
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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Common HR Financial Metrics
- Examples
• Revenue per FTE
• Sales per FTE
• Total expenses per FTE
• Compensation as a percent of revenue
• Compensation as a percent of total expenses
• HR dept. expense as a percent of total expenses
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Organization Metrics
Organization
Mission…
”To provide first
class service and
innovative
products to our
customers and
consistently
attractive returns
to the owners of
our business.”
Organization
Strategic
Objective…
”Deliver a high-quality, web-based marketing software solution within the next three years.”
Organization
Metrics:
Copyright Patricia Mathews 2010 102
Aligning Metrics
HR Strategic
Objective…
”Identify and hire top talent web-based software developers within the next 18 to 24 months.”
HR Practices:
•Recruitment
•Selection
•Onboarding
•Reward
•Recognition
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HR Metrics:
Other Financial Measures -
Examples
• Cost/Benefit analysis
• Internal Rate of Return (IRR)
• Payback Period
• Net Present Value (NPV)
• Return on Investment (ROI)
Copyright Patricia Mathews 2010104
Traditional ROI
• Used to analyze capital investments to determine if they will benefit the organization
• Meant for things that can be quantified
• Represents the time value of money
• Not always possible or necessary for HR initiatives
• Used for initiatives linked to strategic or operational goals
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ROI Formula
ROI = Program benefits – Program costs X 100
Program costs
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Advanced HR Financial
Measures - 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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The Future of HR Metrics:
Predictive Analytics
• Higher levels of analysis
• Predict what is most likely to happen in the future
• Uses the concepts of correlation and causation
• Minimizes risk for management
• Uses leading indicators
• Not in wide use in HR today
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Are Your HR Metrics Strategic?
• Goals are presented in business terms and connect
to improving business results or productivity
• Impact will be felt outside of HR
• Have an impact on revenues
• Discussed in meetings with non-HR management
• Non-HR management wants updates
• Linked to a competitive advantage
• Future focused
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Benefits of Using Business
and Financial 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
Copyright Patricia Mathews 2010110
Major Challenges for HR
1. Focusing outside HR on organizational values,
goals and performance
2. Making full use of business and financial metrics
and fact-based decision-making
3. Full integration of and collaboration between HR
functions
4. The economy
5. Having courage
Copyright Patricia Mathews 2010111
Speaking the Language of
Profitability
“To move to the center of the organization, HR must
be able to talk in quantitative, objective terms.
Organizations are managed by data.”
-- Jac Fitz-enz
Copyright Patricia Mathews 2010112
THANK YOU! MERCI!
GRACIAS!
Patricia Mathews, President
HR Audits, Etc. and Workplace Solutions
Consultants
Sarasota, FL
941-727-1692
Copyright Patricia Mathews 2010 113