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

Copyright Patricia Mathews 2010

Today’s Objectives

• Understand the concept of organizational strategic

objectives and competitive advantage.

• Understand the competencies HR needs to be

viewed as a profit driver.

• Understand how to align the HR mission and

strategic objectives with the organization‟s mission

and strategic objectives.

2


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.

3

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

Copyright Patricia Mathews 2010 4

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




products to our customers

and consistently attractive


our business.”

Human Resources Mission…

”To ensure the organization

has the right people in the

right jobs at the right time

their skills are needed in

order to meet/exceed

customer and shareholder

expectations.”



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




products to our

customers and

consistently attractive


our business.”

Organization Strategic

Objective…

”Deliver a high-quality,

web-based marketing

software solution within the

next three years.”


Strategic Objective


Objective…


web-based marketing

software solution within

the next three years.”


Human Resources

Strategic Objective…

HR Must Understand the

Organization

• What it values

• What adds value

• How it makes money

• Its key measurements and metrics

• Its competitive advantage

• Its risks and opportunities


Strategic Objective Alignment -

Example


Objective…


web-based marketing

software solution within

the next three years.”

Human Resources

Strategic Objective…

”Identify and hire top

talent web-based

software developers

within the next 18 to 24

months.”



Link Between HR Practices and

Organizational Performance

40

Market value of the organization

Revenues, profits, return on assets, return on equity, etc.

Productivity, quality, service, satisfaction, etc.

Quality of the workforce

HR practices

Challenge:

Select the Right HR Practices

HR must identify the HR practices and

HR systems needed to execute both

HR‟s and the organization‟s mission and

strategic objectives.


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

Strategic

Objective…

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

HR Strategic

Objective…

”Identify and hire top talent web-based software developers within the next 18 to 24 months.”

HR Practices:

Human Resources

System:




Organization

Strategic

Objective…


HR Strategic

Objective…


HR Practices:

•Recruitment

•Selection

•Onboarding

•Reward

•Recognition

HR System:




Organization

Strategic

Objective…


HR Strategic

Objective…


HR Practices:

•Recruitment

•Selection

•Onboarding

•Reward

•Recognition

HR System:

Improve the

composition of the

workforce to meet

technology needs.


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 paralysisCopyright Patricia Mathews 2010 59

Using Data

• Aptitude for business

• Understand data characteristics

• Understand what metrics to use

• Focus on more than HR activities

• Analytical skills

• Financial intelligence


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 assetsCopyright Patricia Mathews 2010 71

Employees as Assets

• Their knowledge and performance contribute

to the value of an organization.

• Their value is part of „goodwill.‟

• They are not an asset on the balance sheet:

– Cannot assign a financial value to

employees

– Organizations don‟t own employees


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

81

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

3.Utilize

4. Develop and Reward

Human

Capital

88

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

Mission…

”To provide first

class service and

innovative

products to our

customers and

consistently

attractive returns

to the owners of

our business.”

Organization

Strategic

Objective…


Organization

Metrics:


Aligning Metrics

HR Strategic

Objective…


HR Practices:

•Recruitment

•Selection

•Onboarding

•Reward

•Recognition


HR Metrics:

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

[email protected]

941-727-1692


mailto:[email protected]