8 HR Metrics – Strategic Human Resource Management and Development, 1e

CHAPTER 8

HR Metrics

“Always Aim at perfection, for only then will you achieve excellence”

 

JRD Tata

CHAPTER OUTLINE
  • HR metrics
  • Balanced scorecard
  • Effectiveness metrics
  • Efficiency metrics
  • Model of HR
  • Strategic asset
  • HR architecture
LEARNING OUTCOMES
  • HR metrics-meaning
  • Evolution of HR metrics
  • HR scorecard
  • Impact of HR practices on organisational performance

OPENING CASE

Lupin Pharmaceuticals is the US wholly owned subsidiary of Lupin Limited and is among the top five pharmaceutical companies in India. The company is headquartered in Mumbai and delivers its products across the globe.

Mission: To become a transnational pharmaceutical company through the development and introduction of a wide portfolio of branded and generic products in key markets.

Vision: Lupin Pharmaceuticals is committed to bringing innovative products for the healthcare professional to improve the health and well-being of individuals.

The company is committed to achieving its vision and mission of innovation and hence has a strong research focus facilitated by its R&D center in Pune and also has a programme for new chemical entitites.

It is critical for the companies of pharmaceutical sector to be complaint of the local laws and maintain all documents. All the stakeholders of the pharmaceutical sector expect this compliance. To build the “brand” of the company and develop reputational capital, the company invests in the audits which weaves it into the organisational culture and assures the stakeholders that the company adheres to the law of land.

The company follows both compliance and the process review audit. The compliance audit is undertaken to evaluate and monitor the legal and social accountability. As part of legal compliance audit the monitoring of the set up for following law of land is conducted, where as social accountability audit evaluates the workplace practices for their social acceptance.

The process review audit includes auditing of the processes followed at Lupin and developing the metrics. The company closely monitors and evaluates its learning and development (L&D) process. The auditing is two-fold: the audit of delivery and the impact on the learner. The delivery audit, includes the evaluation of the programme, facilitator, and the pedagogy, is conducted by the third party. The impact on learner is evaluated at four levels: reaction, learning, behaviour, and results. The baseline scores against which the L&D outcome is evaluated and based on the past performance. The comparison of the L&D outcome with the baseline score reflects the change in performance across the regions. How does audit help “Lupin”?

The importance of human capital in determining organisational effectiveness is increasing by leaps and bounds; the potential exists for human resource (HR) to play a key role in developing and implementing corporate strategy and to become a high value added part of organisations (Lawler 2003). Hence, If HR has to take up and justify this role; they are expected to provide metrics that assess HR processes and practices from a strategic perspective. It also needs to formulate analytic models that show the relationship between HR practices and the effectiveness of the organisation.

HR functions often does not analyse the impact of the HR programmes and practices on the organisational effectiveness. But, If HR wants to play a strategic role in organisations, it needs to develop its ability to measure how human capital decisions affect the business and how business decisions affect human capital.

 

If HR wants to play a strategic role in organisations; it needs to develop its ability to measure how human capital decisions affect the business and how business decisions affect human capital.

 

Research Insight 1: CORPORATE INDIA’S HR STRATEGY

The HR Trends 2012 report comes at a time when HR professionals are struggling to forecast the future and prepare for it.

What kind of an impact will the economic environment have on the HR strategy of an organisation; are new roles emerging for HR professionals; and what could be some of the important priorities for HR managers in 2012?

The new research is based on data collated from ~ 234 organisations that participated in this study and in-depth interviews with over a dozen senior HR leaders from leading national and multinational organisations (Fortune 50).

With so much uncertainty and complexity surrounding today’s corporate India, this research report presents some of the upcoming trends and priorities for HR professionals for this year.

Some of the interesting trends for 2012 include:

“Employer value proposition” will be the key to attraction. “Advertisements goodbye: Welcome social media” will be the mantra for branding in 2012.

Work-life balance is no more a “nice to offer” but “must do” parameter for retention. Work-life balance is emerging as a retention strategy as 34 percent respondents termed it as effective.

“Talent Custodians” is the new perception of HR function among employees: 35 percent of the organisations surveyed perceive the HR department as a talent officer; 20 percent feel the HR department is the employee’s best friend; and 19 percent feel it is perceived as the messenger of bad news.

HR metrics and HR analytics are the way forward: HR metrics will not only help in building the credibility of the HR function but will also help the HR function build more sustainable processes and make informed decisions, as re-affirmed by 95 percent of organisations surveyed.

Key excerpt from the report:

Increasingly firms find themselves operating in business environments loaded with a lot of uncertainty. The uncertainty is mainly driven by unprecedented and unpredictable change. A complex nexus of forces set off the HR function: pressures to reduce costs, higher expectations of customers, the constant drive to meet global competitive challenges and opportunities offered by advancements in information technology. This complexity heightens when the business environments are faced with global economic recessions. This is true for organisations operating in India-be it Indian, multinational, or Indian multinational organisations.

However, HR professionals are always in a constant flux to predict the future and prepare for it. Irrespective of the size of the organisation or where they are placed in terms of HR practice maturity, the challenges keep evolving from time to time.

So what then are the trends for 2012?

While it appears that recession is going to impact the HR function in the next 6 months, it will be important for HR functions to start building in the agility in their processes to better deal with the impact. How organisations build and implement this will be the key success factor for organisations in 2012. This demands the HR function to partner as a strategic thinker, and focus on helping organisations adaptable to continuous change. While organisations would become more return on investment (ROI) focused and would like to become strategic partners to the organisation on the one hand, it appears that 2012 will not see outsourcing as an option to achieve these two goals. In order to help HR professionals build their skills to deal with the forthcoming challenges, it is important and critical to train and equip them. To be effective talent officers, it is critical that the organisation processes support the same.

HR metrics and HR analytics are the way forward. Using HR metrics and analytics to their full potential will turnaround the game in favour of HR. HR metrics will not only help in building the credibility of the HR function, but it will also help the HR function build more sustainable processes and make informed decisions.

While organisations don’t seem to be bogged down by the economic environment, and would continue hiring based on their requirements, at the same time the challenges in attracting talent are also changing. Unavailability of skilled talent and lack of focused employee value proposition will be the biggest challenge for organisations in terms of attracting talent.

2012 will be a year for HR professionals to pull up their sleeves and come up with innovative practices to deal with the challenges that they would face due to the economic instability and thereby build agile HR organisations.

HR METRICS: MEANING

Metrics are data (numbers) that reflect some descriptive detail about given processes or outcomes, for example, success in recruiting new employees. In the alleys of HR, these reflect characteristics of the organisation’s HR programmes and activities.

HR metrics are a vital way to quantify the cost and the impact of employee programmes and HR processes and measure the success (or failure) of HR initiatives. They enable a company to track year-to-year trends and changes in these critical variables. It is how organisations measure the value of the time and money spent on HR activities in their organisations.

 

HR metrics are a vital way to quantify the cost and the impact of employee programmes and HR processes and measure the success (or failure) of HR initiatives. They enable a company to track year-to-year trends and changes in these critical variables.

Workforce analytics refer to strategies for combining data elements into metrics and for examining relationships or changes in metrics. The combination of HR metrics and work force analytics informs managers about the current or changing state of human capital in an organisation in a way that can impact managerial decision making.

 

Workforce analytics refer to strategies for combining data elements into metrics and for examining relationships or changes in metrics.

The adoption of HR information systems has shifted the paper and pencil processes to electronic processes and, as a result, greatly increased the capacity of organisations to access and examines transaction-level data. These changes fundamentally altered the dynamics of human capital assessment in organisations, driving the marginal cost of assessment lower while providing the potential for near real-time analysis and distribution of information.

Evolution of HR Metrics

The evaluation of employee effectiveness was proposed in early 1900s under scientific management concepts and also industrial and organisational psychology. The concept of HR metrics was propounded by Dr. Jac Fitzenz.

Kaplan and Norton (1996) introduced the balanced scorecard. Balanced scorecards focus on developing leading indicators of performance from several important perspectives, including customer satisfaction, process effectiveness, and employee development, as well as financial performance.

 

Balanced scorecards focus on developing leading indicators of performance from several important perspectives, including customer satisfaction, process effectiveness, and employee development, as well as financial performance.

 

Table 8.1: Measures in the Saratoga Institute/SHRM HRs Effectiveness Report

Source: Adapted from Fitzenz (1995).

 

Huselid’s (1995) work on high performance work systems demonstrated that the systematic management of HRs was associated with significant differences in organisational effectiveness. This work provided evidence that HR management (HRM) did indeed have strategic potential. Becker, Huselid, and Ulrich (2001) brought the ideas together to formulate the HR scorecard, which highlights how the alignment of HR activities with corporate strategy improves organisational outcomes.

Figure 8.1: Evolution of HR Scorecard

HR Metrics: The Activities Involved

A number of important HR activities fall within HR metrics and workforce analytics. The HR activities that are covered under HR metrics are described below.

 

Described in Table 8.2. HR scorecard highlights how the alignment of HR activities with corporate strategy improves organisational outcomes.

 

Table 8.2: The Activities Involved in HR Metrics

Type of Metrics

Efficiency: The first kind of metric is the one which reflects the efficiency of the HR function, in particular how well the HR function does its basic administrative tasks. For example, productivity and cost metrics for the HR function such as time to fill open positions, HR headcount ratios, and administrative cost per employee. The administrative cost is large so it is certainly worth measuring not just how much is spent but how well it is spent in terms of the quality and impact of the services provided. It focuses on how well the HR department accomplishes its critical processes to support organisational effectiveness.

Effectiveness: Effectiveness means that HR programmes and practices have the intended effect on the people or talent pools toward which they are directed. For example, training and development, the metrics should reflect the skill development of the employee via training and development programme rather than mere participation. A potentially meaningful set of effectiveness metrics for the HR function concerns talent and talent management. In most corporations, HR has the lead responsibility for acquiring, developing, and facilitating deployment of talent. In order to assess how well organisations are carrying out this responsibility, measures of talent quality, talent development, and talent deployment are needed. Typical metrics in this area include measures of the strategic skills and core competences embodied in the work force, as well as metrics that classify how well pivotal jobs are filled and the type of development activities that are taking place for critical talent. A strong case can be made that talent metrics need to be regularly updated so that organisations have ongoing data with respect to the condition of their human capital.

 

Type of metrics: Efficiency and effectiveness. Effectiveness metrics are classified as strategic and operational.

The objective is to utilize the technical competence of the HR professionals in HRM regarding their understanding of how best to recruit, select, deploy, train, design jobs for, motivate, develop, evaluate, and retain employees in order to help organisational units more effectively accomplish their objectives. The outcomes are the business units’ operational metrics, that is, percentage of on-time deliveries, operational down-time, lost time accidents, units sold, or cost per unit. Analyses will attempt to identify what changes in HRM practices can help organisations or specific business units improve their operational effectiveness. HR managers need to first identify what processes most effectively accomplish organisational objectives at multiple unit levels and then find ways to maximize the efficiency and effectiveness of the implementation of those processes in the organisation.

Strategic effectiveness: These are the metrics having to do with developing and optimizing the capabilities and the core competencies of the organisation can be collected in order to measure the impact of HR programmes and practices (Lawler 2003). Note that impact in this case means demonstrating a link between what HR does and tangible effects on the organisation’s ability to gain and sustain competitive advantage. Operational effectiveness impact metrics might focus on changes in the performance of business processes (e.g., reduced defects, increased speed, more frequent innovations) that occur when the quality of talent is improved or when new HR practices are introduced.

Although the development of organisational capabilities and core competencies is typically not the sole responsibility of HR, HR needs to and usually is expected to play a key role in shaping and developing them. Both are highly talent dependent for their development and both involve the development of organisational social capital and individual skills and knowledge. These are clearly areas where HR has a potential role to play and where it can actively influence how quickly and effectively an organisation develops its capabilities and competences.

HR Scorecard

The HR scorecard aligns HR deliverables and objectives with business strategy to provide a statistical basis by which HR efficiency and contribution to strategy implementation can be measured.

 

The HR scorecard aligns HR deliverables and objectives with business strategy to provide a statistical basis by which HR efficiency and contribution to strategy implementation can be measured.

The HR scorecard is a management tool which allows a business to the following:

  1. Manage HR as a strategic asset and a source of competitive advantage.

    As the financial performance of the organisation and HR is difficult to relate directly, it has always been a challenge for HR to prove its strategic worth. In order to directly link HR to the strategy implementation process, Kaplan and Norton has devised the concept of strategy map, which describes how value is created through the strategy implementation process. The driver of strategy implementation process is a HR and hence the strategy map describes the value created by the HR and this in turn makes a strong representation of the HR as a strategic asset.

  2. Quantitatively demonstrate HR’s contribution to the firm’s financial results and bottom-line profitability.

    As has been discussed above, the strategy maps help in identifying the value creation and addition in the process of strategy implementation, HR scorecard helps in quantifying the value creation.

  3. Create and measure the degree of alignment between the strategy of the business and its HR architecture.

    HR scorecard links the activities of workforce with the strategy of the company.

    Line managers, as well as HR professionals, are required to have strategic approach about HR and need to think in terms of a value creating process that combines the HR function and the HR system to produce strategically focused employee performance. The HR scorecard allows HR architecture to evolve.

HR Architecture

The focus of HR is now on how people create value within the firm, and the metrics by which the creation of value can be measured and ultimately optimized. And to measure that, HR architecture is required.

A firm’s HR architecture has three components or dimensions:

  • The HR function
  • The HR management system
  • Strategic employee behaviours

Components of HR architecture: HR management system, strategic employee behaviour, HR function.

The HR Function

Historically, HR managers focused on the delivery of services such as recruiting, compensation, and benefits. Today’s HR managers tend to be more interested in finding ways to deliver HR services that directly support the designated strategy of the business.

The HR Management System

This system attempts to maximize the overall quality of the organisation’s human capital by putting in place and supporting policies and practices which

  • create links between promotions and competencies,
  • provide skills training, and
  • attract and retain high performers.

Strategic Employee Behaviours

All the employee actions which are productive in implementing the firm’s preferred strategy are strategic employee behaviours. Therefore, this area will incorporate behaviours that flow from core competencies as well as situation-specific behaviours required at key points in the value chain. HR focuses on motivating the appropriate behaviours.

Figure 8.2: The Seven-Step Model-HR as a Strategic Asset

Step 1: Clarify and articulate the business strategy

Before implementing the strategy of the business, there must be the capacity to definitively state the preferred business strategy clearly, concisely, and free of ambiguities. The HR role within a firm has evolved over the past century. In the emerging knowledge economy and digital era, the wealth is created from intangible assets. This new paradigm suggests HR has a direct impact on business performance since the HR architecture influences how effectively a business can execute its preferred business strategy.

Step 2: Develop the business case for HR as a strategic asset

HR professionals need to be able to build a strong and persuasive business case for why and how HR can support that strategy. This must focus on HRs contribution to implementation through creating value and controlling costs.

Step 3: Create a strategy map for the firm

The essential part of the HR scorecard is the strategy map. Kaplan and Norton (1996) introduced the strategy map to represent the firm’s value chain. They are diagrammatic representation of the value chain.

 

Strategic maps are diagrammatic representation of the value chain.

 

Figure 8.3: A Simple Illustration of Value Creation.

Huselid, Becker, and Beatty (2005) declared that the elements in the HR scorecard are key leading indicators for workforce success. Key performance indicators (KPIs) are assigned to each perspective in strategy map. Further, KPIs can be divided into lagging and leading. Kaplan and Norton (2007) explained the difference between them. Leading indicator is a metric that mainly refers to future developments and drivers/causes. Lagging indicator is a metric that mainly refers to past developments and effects/results, for example, reflects history and outcomes of certain actions and processes.

 

Leading indicator is a metric that mainly refers to future developments and drivers/causes. Lagging indicator is a metric that mainly refers to past developments and effects/results, e.g., reflects history and outcomes of certain actions and processes.

From an HR perspective, the strategy map is developed by seeking the answers to questions such as:

  • “What strategic goals are critical to achieve rather than simply nice to have if possible?”
  • “What are the performance drivers for each goal?”
  • “How can progress toward each goal be measured?”
  • “What are the barriers that can block the achievement of each goal?”
  • “How do employees need to behave in order to ensure the firm achieves each of these goals?”
  • “Is the HR architecture providing the firm with the employee competencies and behaviours needed to achieve those goals?”
  • “If not, what needs to change within the HR architecture?”

The strategy map should outline how the six core HR competencies are integrated and measured. These HR competencies are as follows:

  1. Knowledge of the business

    HR managers and professionals must understand the financial indicators of business success, the measures customers use to determine success, competitor strengths and weakness, and must have a working knowledge of the firm’s processes.

  2. Delivery of HR services

    HR managers need viable measurement metrics so that they can make informed decisions about the HR systems, the trade-offs of various HR options and to identify HR practices which are generating the high returns and therefore should receive more attention.

  3. Management of culture

    Whatever gets measured gets valued and ultimately is integrated into the culture of the firm. HR professionals and managers take the lead in this area because of their competency in management and their ability to articulate the benefits of the firm’s culture from the customer’s perspective.

  4. Management of change

    HR managers are well versed in the demands and rigors of rapid organisational change. Therefore, they are advantageously positioned to understand the most likely internal impacts of the change process and develop ways to facilitate those changes effectively. By acting as change agents, HR managers generate an internal capacity to move quickly in response to evolving market conditions which can be a sustainable competitive advantage for any firm.

  5. Personal credibility

    Good HR managers “walk the walk and talk the talk.” They exemplify and live the firm’s values and effectively act as good role models. That gives them credibility and acceptance from other line managers.

  6. Strategic HR performance management

    This is the ability to orchestrate the firm’s implementation of strategy by using balanced performance measurement systems. HR managers not only need to know what to measure but also how to measure it. The strategy map will contain both performance drivers and indicators (predictions about which specific processes drive the performance of the firm) and the results generated in graphical format. The clearer the strategy map is, the greater the confidence that will exist throughout the organisation of its ability to implement that strategy.

Strategy map highlights the HR competencies like knowledge of the business, delivery of the HR system, management of culture, management of change, personal credibility, strategic HR performance management.

Step 4: Identify HR deliverables within the strategy map

Most of the HR outputs are created at the intercept of the HR system and the strategy implementation system. Thus, HR managers should identify the HR performance drivers and HR enablers or deliverables which exist within the strategy map and then HR policies which enhance those factors can be developed.

To be able to link HR deliverables and the strategy map, analytical methods are required to assess the short- and long-term payoffs. In practice, this is usually achieved using a cost-benefit analysis the costs of the HR deliverables are weighed against the benefits generated for the firm. And that, in turn, should allow the ROI in HR to be calculated.

Step 5: Align the HR architecture with HR deliverables

To align the HR system with the firm’s strategy implementation system, a competency model and development programme will be needed to generate the requisite HR deliverables. This will require internal alignment (between all three components of the HR architecture) and external alignment with all other elements in the value chain.

Alignment between the HR architecture and the strategic requirements of the firm is obviously of vital importance in producing a strategically focused workforce. There are two types of alignment:

  1. Internal alignment: The ability and potential for the firm to use HR as a strategic asset. Internal alignment is measured by evaluating the feedback from those who interact with the HR system on a daily basis line managers and front-line employees. If those people feel there is a high degree of fit and consistency, then there is most likely a strong correlation between the HR architecture and its deliverables. Conversely, internal misalignment means the HR system is consistently sending conflicting signals about what the organisation values. By diagnosing and analysing internal alignment, HR managers can spot problems within the HR architecture and undertake quick remedial actions.
  2. External alignment: The HR deliverables are mapped against the organisation’s strategic value drivers.

    External alignment is usually measured by making tests. The HR deliverables are evaluated on how closely they match the strategy map. Then the HR system is tested to determine specifically what HR deliverables are being generated. That will show whether or not the HR deliverables are, in fact, the key performance drivers for the firm’s strategy.

Step 6: Design the HR strategic measurement system

The HR scorecard is a tool to measure the tangible and intangible results. Ideally, the HR scorecard will accurately measure the impact of all HR policies on firm performance and capture the full impact of HR. The more sophisticated and detailed this measurement is, the greater the potential benefits are.

Dimensions of HR Scorecard

  1. HR Deliverables

    HR deliverables help to identify the causal relationships through which HR generates value in the firm, with an emphasis on HR performance drivers and HR enablers. Ideally, HR deliverables whose actual impact on the firm’s performance can be measured should be used. The acid test for whether the HR deliverables are clearly stated is line managers will understand them and be willing to pay for them.

  2. The High-Performance Work System

    Once the HR deliverables have been clearly defined, the high-performance work system (consisting of HR policies, processes, and practices) implements the business strategy and generates the deliverables specified.

  3. External HR System Alignment Measures

    This dimension measures how well the HR system is aligned with the firm’s key performance drivers. When properly aligned, the HR system should be making a definable and significant contribution to the value creation process.

    Regular measures should be incorporated, so if alignment slips, the appropriate action can be taken quickly and appropriately.

  4. HR Efficiency Measures

    These are the metrics, benchmarks, and standards by which the HR system’s performance will be gauged and evaluated. Most HR managers divide their key efficiency metrics into two categories:

    • Core efficiency measures: The expenditure items which do not contribute directly to the strategy execution and are considered cost rather than investment. For example, costs of benefit and workers compensation.
    • Strategic efficiency measures: HR activities and processes designed to produce HR deliverables for direct application in strategy implementation.

These are accounted as investments in human capital. Some examples: cost per new hire, costs per trainee hour, HR expenses per employee. As far as possible, the HR scorecard should show what the actual impact of HR deliverables is on the firm’s performance.

Benefits of HR Scorecard

  1. Distinction between doables and deliverables: It distinguishes clearly HR doables from HR deliverables. HR deliverables influence the firm’s ability to implement strategy while HR doables do not. This facilitates the strategic role of HR.
  2. Balancing cost and value: It empowers HR managers to control costs and create value. HR will always be encouraged to control costs as effectively as possible, but the HR scorecard also details HRs complementary strategic role as a value creator. In fact, the HR scorecard approach makes it possible for HR professionals to balance the two objectives realistically.
  3. Measure of HR performance: It measures the firm’s leading indicators. The HR scorecard links HR deliverables with implementation of the firm’s strategy. The HR management system will have performance drivers, measures (leading and lagging), and preferred outcomes. The HR scorecard measure how well all of those factors are aligned and provides continuous feedback.
  4. Linking HR’s contribution to organisational performance: It clarifies HRs contribution to profitability. The HR scorecard enables a HR manager to answer the question, “What is HRs contribution to firm performance?” with measures that are credible, relevant, and measurable. In fact, for every measure used, the HR manager will also beable to provide a rationale as well. This will be the framework for a superior system of metrics for quantifying results. It allows HR professionals to manage better.
  5. Flexibility: It encourages flexibility and ongoing change. When a performance measurement system becomes institutionalized, it is more likely to inhibit rather than encourage adaptability and change. As a firm’s strategy evolves in response to changing market conditions, the measurement system needs to move with those changes if it is to remain completely relevant. The HR scorecard actually encourages flexibility and constant evolution because it encourages people to focus on the underlying strategy and not the arbitrary measures being used. By encouraging people to see the bigger picture, the organisation is then much better positioned to change direction as required.

Conclusion: The use of analytics in order to understand how HR practices and policies impact organisational performance is a powerful way for HR functions to add value to their organisation. Statistical techniques and experimental approaches can be used to tease out the causal relationship between particular HR practices and such performance metrics as customer satisfaction, sales per employee and, of course, the profitability of particular business activities. In many respects the “Holy Grail” for HR functions is the ability to show the bottom line impact of its activities. This is a powerful way to increase its influence on company business decisions and future business strategies.

Industrial Insight 2: C-SUITE EXECS BELIEVE HR METRICS WILL FUNDAMENTALLY CHANGE OVER THE NEXT 3 YEARS TOM NEWCOMBE , 16 OCT 2012 HR MAGAZINE

Over half of executives in an EIU/KPMG survey believe the metrics that define success in HR will fundamentally change over the next 3 years.

The report, Rethinking Human Resources in a Changing World, published yesterday by the Economist Intelligence Unit and sponsored by professional services company KPMG, found that HR is struggling with the challenges of managing a global, flexible workforce. It needs to find ways to engage with workers that will help address these challenges, the report added.

Robert Bolton, partner in KPMG management consulting and global lead of the firm’s HR Center of Excellence, told HR magazine: “HR should be the critical value driving function in an organisation, large or small. It can be more important than any other function, including sales and marketing.”

“There are many qualitative and quantitative measures that will define HR’s success in the coming years. These include capacity, where there needs to be a clean and clear definition between chief executives and the front-line employees. Some executives of global companies would be horrified to find how their organisational culture has changed and grown over the years.”

“There will be a change in capability-the retention of people in critical roles.”

“Compliance will change, as it now needs to be integrated with the organisation’s overall business strategy.”

Bolton added: “These metrics can be measured by taking steps such as checking career progression and retention of staff in critical roles. HR teams must make better use of technology such as social media to provide their managers with the data they believe will be of most use.”

The report stated that HR would remain the “poor relation” at the boardroom table until it fully embraced technology. HR needed to move away from its tendency to report historical data, in favour of forward-looking analytics designed to improve business understanding of employee demands and desires.

Bolton said: “This survey shows that, at the very least, HR has a perception problem, though in some cases it may have actually failed to deliver real value.”

“Given the high unemployment rates in many countries, you would forgiven for thinking that retention is an easy task for HR, but with employee engagement levels an increasing concern more effort must be put into understanding staff needs before today’s employees become tomorrow’s alumni.”

In the survey, three-quarters of the executives questioned said that their workforce is becoming increasingly global, virtual and flexible, but just 25 percent say HR teams within their company excel at sourcing and retaining international talent.

A quarter believed that HR teams are unable to support their company’s globalisation strategy, despite “hiring international talent” being a key concern for the “globally-minded CEO”.

The report by EIU and sponsored by KPMG surveyed 418 C-suite executives.

Research Insight 1: HR METRICS HELP HR TO PROVE ITS WORTH THURSDAY 09 OCTOBER 2008 11:01 PERSONNEL TODAY

With job cuts and redundancies becoming increasingly common, it’s more important than ever for HR to prove its worth and value to an organisation. But this is something that HR functions are historically bad at doing, according to Dave Millner, consulting director at Kenexa, a global recruitment and retention specialist.

As Millner puts it: “HR metrics give HR professionals a chance to prove their value to senior management, but they notoriously fail to grasp this opportunity. They focus instead on tactical measures, which give useful information and work fine in isolation, but don’t tell the full story. They only prove the existence of HR they don’t prove its value.”

HR software provider Computers In Personnel recently researched what HR functions usually measure. It found that 90 percent report on the number of vacancies and 82 percent of organisations assess the time it takes to recruit. But only 23 percent report on the direct cost of recruitment, such as adverts or agency fees, 6 percent report on indirect costs, and just 5 percent measure the retention rate of new hires.

Managing director Chris Berry says: “The evidence suggests that while there are some notable exceptions, most HR managers still have some catching up to do when it comes to measuring their performance and demonstrating their effectiveness.”

“This is partly because HR has no real tradition of measuring anything more than the most basic factors. But it’s also down to practical difficulties. It’s often hard to get your hands on meaningful data, and until recently, HR hasn’t had affordable tools to help it analyse data.”

This, however, is changing as advanced software that enables HR to assess results on everything from employee engagement to training becomes available.

Software

Mark Barlow, managing director at Qikker Solutions HR software and consultancy, believes that technology is the answer to better measurement of HR effectiveness.

“Many organisations still have paper-based performance systems,” he says. “This makes it difficult to gather HR metrics around people performance and engagement. Automated employee performance management systems allow an organisation to quickly and easily access these types of performance metrics from across the whole organisation. Real-time ‘dashboards’ can provide critical performance metrics at a glance in visually intuitive graphical formats.”

But is this enough to prove HR’s value?

Objectives

Weightmans is a national law firm, employing 800 staff with an HR team of 12. HR director Sam Airey says her team produces monthly and quarterly reports on all the standard HR metrics: recruitment, retention, absence, training, and development. These show what HR has been doing and provide a measure of how well the department has performed compared to historical data.

While Airey is certain that measuring HR is vital, she’s not convinced that what the firm measures genuinely reveals the impact her department has made. “It’s not as clear cut as something like finance,” she explains. “It’s easy to gather all this data, but I’m not sure it gets to the heart of the matter. I’m sure we could do more to demonstrate the impact of people performance on the business.”

Airey is not alone in feeling that traditional HR metrics are inadequate. Dilys Robinson, principal research fellow at the Institute for Employment Studies, and author of the What Customers Want From HR report, says: “HR spends a lot of time beating itself up about metrics like time to hire, retention, absence and so on, when it would be much better off finding out what its internal customers need it to achieve, and then just doing that.”

Fiona D’Arcy, a consultant at management consultancy Berkshire, agrees. “You can measure recruitment, development, promotion, benefits and retention. You can run staff attitude surveys, 360-degree feedback, measurement of recruitment rates, even negative indices such as legal actions, and disciplinary action. However, the most important metrics are those that match the business objectives. The key is for HR to work closely with senior management to understand those objectives, devise strategies for HR to help deliver them, and then measure how well it achieves that.”

Some companies already do this successfully. Enterprise Rent-a-Car has 3,500 UK staff and an HR team of 60. It measures staff retention, gender and ethnic equality, the timing and quality of appraisals, and recruitment. European HR director Donna Miller says: “The process begins with me discussing business objectives with the managing director. If how I measure the effectiveness of my team doesn’t link in to those objectives, it’s a waste of time.”

“Once we know what we’re trying to achieve we can measure it, then give each HR executive a monthly review to review and set objectives. This means that HR executives are accountable for their individual performance and are contributing to the company’s overall performance.”

Focus

As Miller says, the focus needs to be on outcomes, rather than input. David Cumberbatch, director at business psychologist Xancam, says: “When it comes to evaluating the spend on HR initiatives, too many organisations focus on internal, HR-focused measures rather than on business outcomes. HR can be obsessed with costs and focus more on cost than return.”

He believes that by demonstrating how investment in HR contributes to the bottom line and desired business outcomes, HR professionals are more likely to get support from managers across the organisation.

Regardless of the sector, metrics must be linked to the organisation’s objectives, says Andreas Ghosh, lead officer of workplace strategy at the Public Sector People Manager’s Association. “Many introduce measurement and it remains static, but to be successful these measures need to adapt over time to reflect the changing business objectives,” he says.

By doing all this, HR can use metrics to show senior management how it adds value, which will become increasingly important as the recession bites. Millner believes identifying the top five issues senior managers are concerned about and finding ways to measure their success is fundamental. “It can be tricky, as HR departments might find out that their initiatives failed. But at the same time, it’s the best way for HR to prove its value to senior management,” he concludes.

Top tips for getting HR metrics right

For HR to demonstrate its value to an organisation, it must measure its performance against targets.

While in the past measuring performance against targets was time-consuming, it’s now possible to invest in software that will automate the collection and analysis of this data.

Key metrics to consider include: time to recruit, cost of recruitment, retention rates, promotion rates, training and development provision and take-up, gender and racial equality, absence and productivity per employee.

The metrics that are most suitable for your organisation are those that link in to your business objectives. HR should always aim to set its metrics in isolation the process must always begin in consultation with senior management.

Business objectives change over time, and so must HR metrics.

Summary

HR functions often does not analyse the impact of the HR programmes and practices on the organisational effectiveness. But, If HR wants to play a strategic role in organisations, it needs to develop its ability to measure how human capital decisions affect the business and how business decisions affect human capital.

HR metrics are a vital way to quantify the cost and the impact of employee programmes and HR processes and measure the success (or failure) of HR initiatives. They enable a company to track year-to-year trends and changes in these critical variables. It is how organisations measure the value of the time and money spent on HR activities in their organisations.

Workforce analytics refer to strategies for combining data elements into metrics and for examining relationships or changes in metrics.

Balanced scorecards focus on developing leading indicators of performance from several important perspectives, including customer satisfaction, process effectiveness, and employee development, as well as financial performance.

HR scorecard highlights how the alignment of HR activities with corporate strategy improves organisational outcomes

The HR scorecard aligns HR deliverables and objectives with business strategy to provide a statistical basis by which HR efficiency and contribution to strategy implementation can be measured.

Type of metrics: Efficiency and effectiveness. Effectiveness metrics are classified as strategic and operational

Components of HR architecture: HR management system, strategic employee behaviour, HR function.

Strategic maps are diagrammatic representation of the value chain.

Strategy map highlights the HR competencies like knowledge of the business, delivery of the HR system, management of culture, management of change, personal credibility, strategic HR performance management.

Leading indicator is a metric that mainly refers to future developments and drivers/causes. Lagging indicator is a metric that mainly refers to past developments and effects/results, e.g. reflects history and outcomes of certain actions and processes

References

Becker, Huselid, Ulrich (2001). Linking People, Strategy and Performance. The HR Scorecard. Harvard Business Press.

Carlson and Kavanagh(2012). HR Metrics and Workforce Analytics. Human Resource Information Systems-Basics, Applications, and Future Directions Second Edition. Sage publishing Inc. p 151.

GabčanováIveta (2012). Human Resources Key Performance Indicators. Journalof Competitiveness. pp 118.

Holmes(2010). HR Metrics. Ultimate HR Manual. pp 501.

HR Metrics Interpretation Guide (2011) BC HRMA. Version 2.5 /October 19, 2011.

HR Metrics Standards &Glossary (2012). The HR Metrics ServiceVersion 7.0 /November 2012.

Lawler III, Levenson, Boudreau (2004). HR Metrics and Analytics:Use and Impact. Human resource planning. Center for Effective Organisations, University of Southern California. pp 27–35.

Robert S. Kaplan and David P. Norton, “Having Trouble with Your Strategy? Then Map It”, Harvard Business Review, September-October 2000, p 169.

http://www.indiaincorporated.com, Interview by Neishaa Gharate, accessed July 2018.

Adapted from Kaplan and Norton (2000, p. 169).

Kaplan and Norton, The Balanced Scorecard.

http://www.hrmetricspro.com

HR Metrics Standards & Glossary published by the HR Metrics Service Version 7.0—November 2012.

APPENDIX: 8.1 HR METRICS STANDARDS AND GLOSSARY

Review Questions

  1. What is HR metrics and how does it help in strengthening the case of SHRM?
  2. Explain different types of HR metrics with an example.
  3. Discuss the steps of developing HR scorecard.
  4. What is HR architecture? How is it created?
  5. Explain different HR activities involved in metrics.

Time to Apply Theory to Practice: Assignment

Prepare a report with the following details:

  1. Choose one of the companies which is listed in top 100 companies of India.
  2. Browse their web sites and annual reports and report their HR metrics and develop the HR Scorecard.

Critical and Analytical Thinking: Recruitment Metrics of MOI

Magnum Opus International (MOI) is a company in machine and tools industry. It was established in 2000. The company specializes in manufacturing and trading of laboratory equipments. The cost per hire is 28 percent of base pay which is too high as per the industry standards, as it is 17 percent of Base pay in the industry benchmark. Despite that the hiring is a problem area. The time to fill the vacancy is 57 days at MOI where as the industry standards are 44 days. Hiring managers are puzzled as the hiring costs are spiralling and the workload is increasing for the employees. The company hires 65 percent of its employees through agencies and 35 percent through Internet, referrals, and university. Because of the problems in hiring, the company revisited its hiring strategy and made the following changes:

  • For specialized skills, they decided to leverage Internet (46 percent).
  • For all other positions they decided to focus on company website/Internet, Monster.com, HotJobs.com, and so on.
  • Enhance employee referral programme (11 percent) and increased bonus from Rs. 2,500 to Rs. 15,000.
  • Increase university (15 percent).
  • Agencies used only for C-level of niche positions (25 percent).

These strategies culminated in decreased cost of hiring. Refer to the tables below.

Expenses:

Impact on income statement

Appendix: The formulas used for the above calculations are following:

  • Cost per hire = (Advertising + Agency fees + Referral fees + Travel costs + Relocation costs + Recruiter pay/benefits, etc.) ÷ Number of hires.
  • Time to fill = Total days elapsed to fill requisitions + Number hired.
  • Vacancy costs = Contingency worker costs + OT for employees + Lost opportunities − Vacancy salary and benefits.

Questions

  1. Calculate the saving in expenses and hiring costs?
  2. Analyse the importance of HR metrics by observing expense table, HR metrics, and income statement.
  3. Analyse the alignment of HR metrics with the change in strategy?
  4. Develop an HR scorecard for MOI.

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