HR Metrics: How to Effectively Measure – and Communicate – Your Strategic Value in Bottom-Line...

HR Metrics:How to Effectively Measure – and

Communicate – Your Strategic Value in Bottom-Line Terms

Monday, January 10, 2011Presented by the Employer Resource Institute

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About Our SpeakersRonald Adler is the president and chief executive officer of Laurdan Associates, Inc., a veteran-owned human resources management consulting firm specializing in HR audits, employment practices risk management, HR metrics, strategic HR, and general HR management issues.

Ron has almost four decades of HR consulting experience working with U.S. and international firms. He is co-developer of ELLA®, the Employment-Labor Law Audit™ (the nation's leading HR auditing process) and an adjunct professor at Villanova University, where he teaches a graduate course on HR auditing. Ron also serves as a subject matter expert (SME) on HR metrics to SHRM.

He is ERI’s leading speaker on the topic of HR metrics.

[email protected]

www.laurdan.com


About Our SpeakersTheresa Murphy is an independent human resources consultant based in Raleigh, N.C., and a longtime popular speaker for ERI. She is also an instructor with Johnston County Community College in Smithfield, N.C., teaching courses on HR development, harassment prevention, and business management.

She has delivered HR results for both small and large employers in many different industries across the United States, specializing in employee relations, training, compliance, and coaching. Her services range from benefit renewals and employee policies and procedures to layoffs and new hire development.

Theresa earned her undergraduate degree at Johnson & Wales University.

[email protected]

HR Metrics:How to Effectively

Measure – andCommunicate – Your

Strategic Value inBottom-Line Terms

Ronald Adler – Laurdan Associates

www.laurdan.com – [email protected]

Theresa Murphy

[email protected](Numerous slides contain content used with permission from Laurdan Associates)

Copyright 2011 BLR, Inc.

The Current Role of HR

As organizations recognize the value of their human capital, HR management is increasingly expected to provide quantitative and qualitative information about:

The valued added by the organization’s human capital;

How human capital increase competitiveness;

How human capital helps the organization achieve its business objectives; and

How human capital helps the organization manage risks.

8Copyright 2011 BLR, Inc.

The Current Role of HR

From management’s perspective, HR should:

1) Demonstrate its ability to support companywide initiatives

2) Monetize HC related activities and results

3) Make the linkage between investments in human capital and organizational results

4) Identify and assess human capital related risks

5) Provide HC related information that allows the organization to make business decisions

6) Help link business decisions to the right results


HR Metrics: A Tool in HC Management

• The goal of HR metrics is to help communicate the achievement of these goals.

• As Jac Fit-enz, noted scholar and HR metrics expert,

notes: “… 70% of communications are persuasive in nature…Success at HR requires using numbers to persuade others.”


What Are HR Metrics?

• “HR Metrics” is Misnomer – should be “business metrics” that measure the impact of human capital

• Standards of measurement to assess Human Capital value, HR efficiency, performance and progress, and human capital outcomes

• HR Analytics: The use of historical data and trends to predict future occurrences and the help management make decisions – Example: Google uses HR Analytics to predict when

top performers are going to leave


Trends in HR Metrics

• Higher expectations for HR Professionals– HR professionals must have necessary business

acumen to achieve strategic objectives• Increased use of HR Analytics

– Qualitative and quantitative measures to make decisions AND obtain desired results

• Increased standardization of the HR profession– International standards

• Greater attention to risk assessment and management


Trends in HR Metrics

• Transition from Cost/Efficiency Formulas to Impact Analysis, Risk Assessment and development of priorities– How does Human Capital contribute to the Bottom

Line?– What are the right levels of investment in HR?

• ROI & Cost/Benefit Analysis • Assessing missed opportunities

– Why missed?


Why Do HR Metrics Matter?

• Determine and measure risk exposure– Risks: Inherent, residual, material

• Allows HR to communicate value

• Allows HR professionals to communicate, speak the business language

• Identify responsibilities and assign accountability


HR Metrics: Importance

• The recession has refocused management’s attention on revenue generation, asset value, expense control, cash flow, profitability, competitiveness, and risk management.

• Metrics play a critical role in ensuring that management’s attention remains focused on those factors that contribute to the organization’s survival, sustainability, and success.


HR Metrics: Limitations

Unfortunately for HR practitioners, there are hundreds of HR metrics to choice from. As Albert Einstein noted:

“Everything that counts can’t be measured and everything that can be measured does not count”

Thus the acid test of HR metrics:

Do your metrics give rise to a “so what” or

an “Ah Ha” response?


HR Metrics: Limitations

“An organization cannot possibly assign

a meaningful financial value to an intangible asset

like ‘a motivated and prepared workforce’ in

a vacuum because value can be derived only in

the context of the [organization’s] strategy.

What a company can measure, however, is

whether its workforce is properly trained and

motivated to pursue a particular goal.”

Robert S. Kaplan and David P. Norton


HR Metrics:Strategic-Business Context

1) How does your organization produce revenue?

2) How does human resources add value to your organization?

3) Are HR activities and employment practices aligned with your organization’s strategic and business goals and objectives? How do human resources impact these objectives?



4) What are your organization key business measurements and metrics? How does your organization measure success?

General Rule of Metrics #1 : Organizations measure what they treasure.

General Rule #2: What gets measured, gets done.

5) How do human resources impact your organization’s key business measurements and metrics?



6) What are your organization’s business imperatives, i.e., what distinguishes your organization in the marketplace? How do HR activities and employment practices impact these imperatives?

7) What are your organization’s risks and opportunities? How do HR activities and employment practices impact these risks?



8) What decisions do you want to influence?

9) Can you connect the dots between the metric and decision making ?

10) Who is the owner of the metric?


Deciding What Data to Collect and What Metrics to Measure

Metrics are a good thing, but like most good things, you can have too many. When first utilizing metrics, an HR professional may utilize a wide array of measurements to develop benchmarks for key functions and to evaluate programs.

However, the real power of a good metric is to focus resources on key areas in order to improve efficiency, increase profitability, expand capacity, or plan for future needs. What is measured and rewarded sends a clear message to employees at all levels of the organization about where their efforts should be focused. Likewise, if something isn't measured, it will be perceived to have a lower priority.

Deciding what to measure is very important. Metrics should be tied directly to the business issues facing the company. These might include a need to cut costs because of price competition, improve customer satisfaction, or develop new technology to keep pace with competitors.


Deciding What Data to Collect and What Metrics to Measure

To be effective, the metric should not just report results but show a cause- and- effect relationship. In addition, to the extent possible, the HR professional should try to use formulas, ratios, and language that is commonly used by the organization's other business leaders. For instance, ROI, or return on investment, is universally understood in the business world. The HR professional needs to take the lead in identifying where a company's investment in human capital (its employees) can best be allocated to meet the company's goals and how to hire, develop, and retain the human capital the company needs to stay competitive now and in the future.

As noted above, metrics focus employees on the key issues and can effectively drive the change a company needs to achieve its goals. However, this works only if employees know what is being measured and how they will be rewarded for meeting the goals. Therefore, communication is key. Metrics should not be kept secret. Rather, they should be widely distributed and easy to understand.


Components of aGood HR Metric

A good metric is one that provides decision makers with the data they need to make fact-based decisions. One example of a metric is measuring turnover in an organization. It is helpful to know what percent of the total number of employees left the company during the year. However, it is probably more useful to know how many of those people left voluntarily as opposed to those who left involuntarily.

Even more useful might be a metric that measures voluntary and involuntary turnover but also measures the number of employees who left voluntarily that were among the company's top performers. Going one step further, if the company is losing top performers, it will want to know if they are leaving companywide or if the turnover is concentrated in one department. Not all turnover is bad, as some of the employees leaving may be those who are not making a large contribution to the business. However, if the top performers are leaving voluntarily, the company will want to identify the reasons they are leaving and take steps to correct the situation. This is data that can drive decision-making.


Components of aGood HR Metric

A metric should provide the HR leader with a complete story that includes a measure of quantity, quality, time, cost, and customer satisfaction. Each of these items may not be appropriate for every metric, but they are all important measures of performance. A measure of quantity is important and might include things like the number of employees who left the company, the number of employees hired, or the cost of benefits. Measuring quality refers to the quality of the output. For example, are those leaving the company the high performers or those with certain specialized skills? Likewise, metrics related to hiring might measure quality by looking at how new hires are performing in their jobs after one year.

Additional measures such as the time it took to fill a job or the costs associated with the hiring process are also key to understanding the whole story. For instance, let's assume that the HR department hired 50 people during the year with an average time to fill a job of 6 weeks and a cost per hire of $5,000. It is difficult to know what this means without a measure of quality--did we hire the right people measured by job performance after one year?


Key Considerations forChoosing What to Measure

• Use data that are readily available and can be gathered at regular intervals. • Use the ratios, formulas, key performance measures, and language used by business

leaders. • Don't limit the focus to costs, but include measures of results and quality. • Tie metrics directly to the key challenges facing the business and the results that

must be achieved. • Stop using metrics that don't add value in making decisions. • Keep it simple; metrics don't have to be complicated. • Identify and compare results with key competitors whenever possible. • Establish goals for continuous improvement. • Measure ROI, cost/benefit ratios, and impact on problems identified by business

leaders. • Avoid soft metrics based on feelings or intuition about a program and use hard

metrics or data to drive fact-based decision-making.


What Do HR Metrics Measure?

Metrics generally measure one of the following:

– Increased job performance (e.g., new recruiting program resulted in new employees with first year job performance ratings that are 30 percent higher than under the old program)

– ROI (e.g., new commission plan resulted in $100 of increased sales for each additional commission dollar paid)

– Impact of a program on revenue

– Decreased costs


Metrics for theRecruiting Function

– Time to fill a vacancy – Quantity and quality of applications based on recruiting source – HR cost per hire – Voluntary turnover rate of new hires during first year of employment – Percent of new hires performing above average by the end of the first year – Percent of new hires performing below expectations by the end of the first year – Involuntary turnover rate during the first year of employment – Satisfaction of managers with the hiring process based on survey of hiring

managers – Quality and retention rates of new hires by recruiting source – Diversity ratios of new hires


Metrics for theRecruiting Function

• Metrics to track stability of workforce– Predictability, variability

• Qualitative vs. Quantitative Metrics– New Hire Quality = Qualitative– Cost of New Hires, Time to Fill, Time to Start, Time

to Productivity = Quantitative


Metrics for theEmployee Relations Function

– Number of complaints filed by employees – Percent of complaints that proceed to a state agency, court, or other external

dispute resolution – Amount of time taken to resolve an internal complaint – Percent of cases resolved with no money paid out by the company – Percent of cases in which large financial settlements or awards were made – Breakdown of the types of complaints made by employees by department; e.g.,

sexual harassment, race, etc. – Costs associated with employee relations as percent of total operating costs



– Percent of cases in which documentation was inadequate – Number of sexual harassment complaints – Number of complaints of unfair treatment – Number of hours spent on training managers on employee relations issues – Data from employee surveys on various employee relations issues such as

understanding of policies – Dollars spent on attorney's fees – Dollars spent on attorney's fees as a percent of total employee relations costs



• Communication– To determine how effective the organization’s

values, mission, policies etc. are communicated

• Effectiveness of supervision– Understanding role of supervisor– Turnover by supervisor

• Employee surveys– Measure commitment, engagement


Metrics for theCompensation Function

– Compensation costs per dollar of profit – Compensation costs per dollar of revenue – Analysis of performance and production levels of employees paid in the top 30

percent of their salary range – Total compensation costs as a percent of total company operating costs – Analysis of compensation levels to the marketplace and key competitors – Forecast compensation needs based on future plans – Compensation mix, meaning fixed salaries versus performance-driven

compensation


Metrics for theCompensation Function

• Compensation must be justifiable

• Lilly Ledbetter Act

• Must examine compensation processes to determine internal and external equity


Metrics for theTraining Function

– Cost of sales training as a percent of total sales – Increase in hours of sales training compared with increases in sales – Changes in performance levels of employees who received training – Percentage of employees who cite lack of training or advancement as a reason

for leaving – Identification of key employees and percent who have received training – Percent of performance appraisals that include training goals for employees


Metrics for theTraining Function

• What should we track in terms of training?

• ROI of training programs

• Types of training– EEO

• Cash Flow implications– Pay back metrics of training


Practical Tips forUsing HR Metrics

– Metrics should give the whole picture, including quantity, quality, time, cost, and effectiveness.

– Focus on key areas where change is necessary.

– Develop a benchmark to use for evaluating progress toward goals.

– Set goals and establish metrics for measuring progress.

– If possible, compare the company's metrics with similar measures from key competitors.

– Use the language of the business leaders, including ratios and measurements they know.



• Hard metrics (real data) are always better than soft metrics.

• HR metrics should be directly related to important business issues.

• Metrics should be easy to understand, and data should be readily available.

• Don't keep the metrics a secret. In order to drive change, employees have to know

what is being measured and rewarded.

• Don't forget that the quality of results is as important as quantity or cost.

• Use metrics to identify trends and head off problems on the horizon.

• Don't be afraid of data or of measuring results. Metrics can add to the HR professional's credibility and garner support for HR programs.



• Benchmarking is the continuous study and process of comparing and assessing an organization’s practices, processes, and outcomes against internal standards and external “best practices.”

• Benchmarking is a learning process that emphasizes improvement.



• Measure results – not merely activities

• Provide accurate and timely data– Consider appropriate time period

• Do not inappropriately assign accountability– Understand cause/effect and correlation


How to Enhance theValue of HR Metrics

• HR Metrics should be business metrics– Know your stakeholders and customers– Will the data used advance organizational goals?

• Metrics should be aligned with organizational objectives• Emphasize Results, not just activity• Be able to make decisions going forward• Use data to identify and consider trends


BONUS: HR Metrics Calculators

BLR is pleased to offer you a set of nine HR metrics calculators (set up as Excel files) to automate several basic metrics:

• Cost per hire calculator• Labor cost per employee calculator• Pretax profit per employee calculator• Revenue per employee calculator• Staff ratio and expense factor calculator• Time to fill open positions calculator• Turnover cost calculator (single vacancy)• Turnover rate calculator during first year of employment• Turnover rate calculator for op performers

Please email [email protected] to request them!


Questions?

Ronald Adler, M.B.A., President-CEO

Laurdan Associates, Inc.

301.299.4117

[email protected]

Theresa Murphy

[email protected]

Copyright 2011 BLR, Inc.


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