Mathews - HR Metrics: The Next Level

HR METRICS:
Speaking the Language of Profitability
The Next Level

Patricia Mathews
President
HR Audits, Etc. and
Workplace Solutions Consultants

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.

Copyright Patricia Mathews 2010 2

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.


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


Purpose of an Organization -
Examples
• Maximize profits
• Increase market value
• Grow talent
• Best quality
• Best service
• Safe work environment
• Advance technology
• Environmental integrity


Competitive Advantage

• A unique asset or capability
• Drives an organization‟s performance
on a continuing basis


Competitive Advantage

• Physical assets
• Capital resources
• Core competencies


Core Competencies

Unique people-related knowledge, skills
and behaviors that help an organization
to achieve its business objectives by
creating alignment across the
organization.


Core Competencies

• Sources of leverage
• Areas where the organization
dominates
• Associated with intellectual inputs


Core Competencies

• Not easily duplicated or replaced
• Cut across traditional functions
• Reflected in activities that are based
on knowledge


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.


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.

Organizations Measure
Performance

• Market Outcomes
• Financial Outcomes
• Organizational Outcomes
• People Outcomes


Organizations Measure
Performance

• Efficiency
• Effectiveness


Efficiency

Measures the rates of resource usage
in achieving objectives.


Effectiveness

Measures how well objectives were
achieved.


Organization Performance
Measures - Examples
• Sales (Revenues)
• Net Profits
• Cost of Goods Sold
• Productivity
• Cycle Time
• Earnings
• Stock Market Value/Shareholder Value

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


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.

Mission and Strategy
Alignment

At all levels:
– Organizational level
– Department or business unit level
– Operating level


Mission Statement

Brief statement of the
purpose of an
organization.


Mission Statement

• Clarifies the organization‟s values.
• Used to develop the strategic goals and
objectives of the organization.
• Used to measure organizational
performance.


Department or Unit Mission
Statement

Brief statement of
the purpose of the
unit.


Department or Unit Mission
Statement

• Ties to the organization‟s values.
• Used to establish strategic operating
goals and objectives.
• Used to measure performance.


Alignment With HR

Achievement of the organization‟s
mission and strategic objectives is
dependent upon employee behavior
and performance.


How HR Fulfills its Purpose

The alignment of strategic HR practices
and systems with organizational goals
and objectives.


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.”


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


Mission Statement Alignment -
Example
Organization Mission… Human Resources Mission…

”To provide first class ”To ensure the organization
service and innovative has the right people in the
products to our customers right jobs at the right time
and consistently attractive their skills are needed in
returns to the owners of order to meet/exceed
our business.” customer and shareholder
expectations.”



Specific results
that the
organization
seeks to achieve
in pursuing its
mission.


Department Or Business Unit
Specific results
that the
department or
business unit
seeks to achieve
to help the
organization
pursue its mission.

Department Or Business Unit

Strategy execution must support the
organization‟s competitive advantage.


Challenge: HR’s Relationship to
the Organization’s Performance

Relationships between HR and an
organization‟s performance are:
– Not universal.
– Not consistent.


Challenge: HR’s Relationship to the
Organization’s Performance

Organizational performance outcomes

HR outcomes which impact

HR strategic objectives impact


Challenge: Organizations
Exist Over Time

• Organizations have specific stages of
growth.
• No definitive endpoint for measurement.
• Timeframes can vary by stakeholder.


Strategic Objective
Organization Mission… Organization Strategic
Objective…
”To provide first class
service and innovative ”Deliver a high-quality,
products to our web-based marketing
customers and software solution within the
consistently attractive next three years.”
returns to the owners of
our business.”


Strategic Objective
Organization Strategic Human Resources
Objective… Strategic Objective…

”Deliver a high-quality,
web-based marketing
software solution within
the next three years.”


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


Strategic Objective Alignment -
Example
Organization Strategic Human Resources
Objective… Strategic Objective…

”Deliver a high-quality, ”Identify and hire top
web-based marketing talent web-based
software solution within software developers
the next three years.” within the next 18 to 24
months.”


Link Between HR Practices and
Organizational Performance

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

40 Copyright Patricia Mathews 2010

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.


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


Example - HR System to Improve
the Quality of the IT Workforce

Recruitment
+
Selection
+
Opportunities For Internal Movement
+
Separation

Alignment: HR Practices with
Organization HR Strategic HR Practices:
Strategic Objective…
Objective…
”Identify and
”Deliver a high- hire top talent
quality, web- web-based Human Resources
based marketing software System:
software solution developers
within the next within the next
three years.” 18 to 24
months.”

Strategic Objective… •Recruitment
•Selection
Objective… •Onboarding
”Identify and •Reward
”Deliver a high- hire top talent •Recognition
quality, web- web-based
based marketing software HR System:
software solution developers
within the next within the next
months.”

Strategic Objective… •Recruitment
•Selection
Objective… •Onboarding
”Identify and •Reward
”Deliver a high- hire top talent •Recognition
quality, web- web-based
based marketing software HR System:
developers Improve the
software solution
within the next composition of the
within the next workforce to meet
technology needs.
months.”

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.


Challenge: HR Silos

• HR practices not internally aligned
• HR practices not integrated
• Quality of communications within HR


Challenge: HR Competencies

• Knowledge: business, organizational,
HR
• Strategic thinking
• Analytical and diagnostic skills
• Communication skills


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

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


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


HR Competency:
Communication Skills

• Intelligent listener and smart questioner
• Effectively persuade or influence
• Communicate successfully with diverse
audiences
• Assertive


Challenge: Measuring HR

• Measuring at all levels of the
organization
• Using data
• Using financial measures.


Corporate Level Measures

• Strategic
– Financial
– Focused on organizational performance
• Internal vs. external
• Predictive


Business Unit Measures

Operational data
– Output
– Quality
– Time
– Cost
– Customer satisfaction


Operating Unit Measures

• Tactical /Transactional
• Measures of output
– Efficiency
– Time
– Cost
– Quality


Using Data

• Data measurement – easy-peasy
• Data analysis – not so easy


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 paralysis

Using Data

• Aptitude for business
• Understand data characteristics
• Understand what metrics to use
• Focus on more than HR activities
• Analytical skills
• Financial intelligence

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.

Using Data:
Data Characteristics

• Hard
• Soft


Business Example

• Turnover data (hard data) is used to
predict customer satisfaction.
• That turnover data is now soft data.


Using Data:
Data Characteristics

• Lagging indicators
• Leading indicators


Quiz

• Sales
• Percent of employees completing a sales
training course
• Screening processes at time of hiring sales
staff
• Quality of sales management


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.


Able to ‘Read’
Financial Reports

• Income statement
• Balance sheet
• Cash flow statement
• Annual report


The Income Statement

• Sales (Revenues )
• Expenses
– Cost of goods sold/cost of services
– Operating expenses
• Profit
• Net Profit


The Income Statement:
Expenses

Above the line = COGS
or
Below the line = Operating expenses = Overhead


The Balance Sheet

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 assets

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


Employees as Assets

• Physical assets depreciate (decrease)
in value and/or deteriorate as they age.
• Human capital‟s value generally
increases over time.


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


Balance Sheet: Liabilities

• Current portion of long-term debt
• Short-term loans
• Accounts payable
• Accrued expenses and short-term
liabilities
• Long-term liabilities


Balance Sheet: Owners’ Equity

• Preferred shares
• Common shares or common stock
• Additional paid-in capital
• Retained earnings


Able to Interpret
Financial Data

• Revenue
• Profit
• Days in inventory
• Inventory turns
• Receivable days
• Cash flow


Able to Interpret
Financial Data

• Cash flow


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

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.

Evolution of HR Metrics

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.


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


HR Metrics

Must link to organizational performance
outcomes.


Financial Metrics

Link most directly to organization performance
outcomes.


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?

Understanding
What to Measure

– Efficiency of HR operations
– “Best practices”
– HR dashboard or HR scorecard
– Causal chain analysis


Cycle of Employment
1. Recruit

5. Separate 2. Acquire
Human
Capital

3.Utilize
4. Develop and Reward


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
• Percent of supervisory compensation
• Performance appraisal distribution
• Turnover by performance rating

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


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.


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.


Strategic HR Metrics

• Tie to financial metrics
• Help to identify priorities
• Assess risk
• Identify missed opportunities
• Include predictive analytics


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)

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

Organization Metrics
Organization Organization Organization
Mission… Strategic Metrics:
Objective…
”To provide first
class service and ”Deliver a high-
innovative quality, web-
products to our based marketing
software solution
customers and
within the next
consistently three years.”
attractive returns
to the owners of
our business.”

Aligning Metrics
HR Strategic HR Practices: HR Metrics:
Objective…
•Recruitment
”Identify and •Selection
hire top talent •Onboarding
web-based •Reward
software •Recognition
developers
within the next
18 to 24
months.”

Other Financial Measures -
Examples

• Cost/Benefit analysis
• Internal Rate of Return (IRR)
• Payback Period
• Net Present Value (NPV)
• Return on Investment (ROI)


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


ROI Formula

ROI = Program benefits – Program costs X 100
Program costs


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

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

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


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


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

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


THANK YOU! MERCI!
GRACIAS!

Patricia Mathews, President
HR Audits, Etc. and Workplace Solutions
Consultants
Sarasota, FL
pmathews@workplacesolutions.cc
941-727-1692


Mathews - HR Metrics: The Next Level

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