Mathews - HR Metrics: The Basics

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,

Evolution of HR Metrics

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.

Copyright Patricia Mathews 2010 4

What Are Metrics?

Numbers that indicate how well an entity is performing.

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

Why Are Metrics Important?

• Part of the language of business.

• Provide a context around which organizational or unit performance can be analyzed more precisely.

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

Performance Measurement Principle

A measurement system promotes productivity by focusing attention on the strategic issues, tasks, and objectives.

Performance Measurement Principle

The efficiency and effectiveness of any

organizational function can be measured

• cost

• time

• quantity

• quality

• people

Organization Performance

Measurements

• Capital Market Outcomes

• Financial Outcomes

• Organizational Outcomes

• Human Capital Outcomes

Organization Performance

Measurements

• Efficiency

• Effectiveness

Organizational Performance

Measurements - Examples

• Profits

• Productivity

• Cycle Time

• Earnings

• Stock Market Value/Shareholder Value

Metrics: Challenges for HR

• „Connecting the Dots‟

• Time and Resources

• Nature of HR Practices

• Calculating HR Costs

• Using Data

• Organizational Culture

• HR Staff Competencies

Challenge: ‘Connecting the Dots’

Relationships between HR performance

and organizational performance are:

• Not universal

• Not consistent

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

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

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.

Data Collection Process

• Efficient

• Effective

• Integrated

• Generates reliable data– Complete

– Timely

– Meaningful to management

– Accurate

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

Data Collection: Methods

• Organizational performance monitoring

• Questionnaires and surveys

• Tests and assessments

• Interviews

• Focus groups

• Observations

• Video, audio and computer monitoring

Data Collection: Sources of Data

• Internal

• External

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

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

Sources of Data: External

• Industry and trade groups

• Associations

• Regulatory agencies

• Consultants

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

Data Collection: Considerations

• Type of data

• Time

• Cost

• Disruption

• Accuracy

• Usefulness

• Cultural preference

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.

HR Practices: Examples

• Recruitment

• Selection

• Employment

• Benefits

• Compensation

• Performance Management

• Reward and recognition

• Separation

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.

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.

Calculating HR Costs:

Processing Costs

• Non-strategic

• Overhead

• Transactions

• Can be complex

• Paper-based versus paperless

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

Challenge: Using Data

• Data measurement – easy-peasy

• Data analysis – not so easy

Challenge: Using Data

• Fear of math!

• Aptitude for business

• Understanding what metrics to use

• Analytical skills

• Ability to focus on more than HR activities.

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.

Using Data: What Metrics to Use

Understanding what metrics to use is not

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.

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

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

Organizational Culture:

HR’s Image

• Overhead

• Tactical/transactional

• Does not generate revenue

• Not seen as a business partner

Challenge:

HR Staff Competencies

• Amount of business education

• Business experience

• Line experience

• Strategic HR skills

• Functional HR experience

• Presentation skills

Performance Measurement

Principle

Organizational performance must be measured at many levels to be effective.

Data is Used at Many Levels

• Operating Unit

• Business Unit

• Corporate

Principle

Measure managers by the efficiency and effectiveness of the units they manage.

Operating Unit Level

• Tactical /Transactional

• Measures of output

– Productivity

– Efficiency

– Time

– Cost

– Quality

Business Unit Level

• Operational data

– Output

– Quality

– Time

– Cost

– Customer satisfaction

Corporate Level

• Strategic

– Financial

– Focused on organizational performance

• Internal vs. external

• Predictive

Data Characteristics

• Hard

• Soft

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

Hard Data: Examples

• Output

• Quality

• Cost

• Time

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

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

Soft Data: Examples

• Culture

• Reputation

• Innovation

• Ethics

• Customer service

HR Metrics:

Examples of Soft Data

• Work climate

• Employee satisfaction

• Engagement

• Diversity

• Employee development

HR Metrics: Caution!

The same data can be both soft and hard depending on how it‟s used.

Data Characteristics

• Lagging indicators

• Leading indicators

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

Lagging Indicators: Examples

• Sales

• Profit

• Inventory

• Time to market

• Expenses

Lagging Indicators:

HR Examples

• Number of employees hired

• Number of employees trained

• Cost of training

• Turnover

Leading Indicators

• Precede the future

• Predict or affect the future

• Show trends, patterns

Leading Indicators: Examples

• Stock market

• Political decisions

• Changes in government

• Changes in the economy

Leading Indicators:

HR Examples

• Engagement survey score

• Readiness rate

• L&D investment per employee

• Employee commitment level

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)

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

Principle

The ultimate measurement is not activity (efficiency) but getting the right outcomes (effectiveness).

HR Metrics

Link to organizational performance outcomes.

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

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)

HR Metrics

All HR processes and systems in the cycle of employment must support desired organization performance outcomes.

Cycle of Employment

1. Recruit

5. Separate 2. Acquire

3.Utilize

4. Develop and Reward

Capital

Recruiting Metrics: Examples

• Cost per hire

• Time to fill jobs

• Ratio of offers accepted to offers extended

• Quality of hire

• Internal hire rate

Acquiring Metrics: Examples

• New hire processing cost

• Orientation cost

• Opportunity cost

• Management satisfaction

Utilizing Metrics: Examples

• Revenue per employee

• Profit per employee

• Absenteeism rate

• Frequency/severity ratio of accidents

• Employee satisfaction

Employee Satisfaction Metrics:

Examples

• Retention rate

• Workforce flexibility measures

• Diversity turnover

• Average time for dispute resolution

• Employee engagement index

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

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

Separation Metrics: Examples

• Turnover rate

• Cost of turnover

• Reasons for turnover

• Opportunity cost of turnover

HR Department Metrics:

Examples

• HR expense as percent of total operating expenses

• Ratio of HR staff to total FTEs

• HR process cycle time

Strategic HR Metrics

• Tie to financial metrics

• Help to identify priorities

• Assess risk

• Identify missed opportunities

• Include predictive analytics

Financial Metrics: Examples

• Cost/Benefit Analysis

• Internal Rate of Return (IRR)

• Payback Period

• Net Present Value (NPV)

• Return on Investment (ROI)

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

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

Major Metrics Challenges for

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.

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

THANK YOU! MERCI!

GRACIAS!

Patricia Mathews, President

HR Audits, Etc. and Workplace Solutions

Consultants

Sarasota, FL

pmathews@workplacesolutions.cc

941-727-1692

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