Beyond Benchmarking - Value Adding Metrics

Article by Dr. Jac Fitz-enz Ph.D, Founder and CEO Human Capital Source
 

BEYOND BENCHMARKING - VALUE ADDING METRICS
 

In 1989 Robert Camp’s book, Benchmarking, was published. At that point Saratoga Institute had already been reporting human resources (HR) benchmarks for four years. The first benchmark data collected compared organizations on basic HR functions. Examples were cost of hire, time to fill jobs, payroll and benefits expenses, training volume and costs, and turnover. There was value in it because there was a good deal of uniformity of practices within industries and to some extent across HR. There was no internet, outsourcing and limited data management capability within the function. Remember, smart desktop systems were just emerging. HR had to depend on corporate IT and finance for much of its information.

Today, life in HR is much different. First of all, we have sophisticated computer technology decision sciences advancements and software analytic packages at our finger tips. If we know how to use them we can identify causes and find solutions greatly increasing the return on investment in HR services and human capital in general. Second, outsourcing has come along and stripped away the commonality that previously existed. How can we compare an organization’s results when one runs a function internally that another outsources? Or where some are global and others only domestic operations? Third, HR has grown up a bit in the past twenty years. Comparing internal operating variables is no longer a valuable exercise. Today, the game is on analytics, forecasting and predictability.

Show Me the Value

What would be the most valuable thing to know about the organization and the role of the HR function? Wouldn’t it be great to know the future; to have a good idea of what is most likely to happen in hiring, paying, developing, engaging and retaining talent? If we really knew the future our competitive advantage would be enormous. Even if we had a high confidence estimate we would be light years ahead of continually reacting to the latest trend, fad or crisis. This is where analytics and predictability come in. There are two ways to build that capability. One is with a new operating model. The other is through more useful data, data focused on the future.

Human Capital Management

A major and fundamental weakness of HR is that the human resources profession does not have a well-defined operating model. An organization chart is not an operating model. We have various functions and services but they are not collected into a model such as production has with Enterprise Requirements Planning or marketing has with Customer Relationship Management. Of course, finance has a 500 year old accounting system around which to organize its various units of cost accounting, payables, receivables and cash management.

Human resources is a relatively new profession. Twenty-five years ago it could not be called a true profession. Quantitative formulas to measure and report human resources work were nonexistent before 1980. Now it appears that human capital management is a new, slowly evolving movement. It is only since the turn of the 21st century that people started talking about employee commitment and talent management. Still, these terms are not yet well defined. If HR is going to become a strategic contributor to the enterprise it needs an operating model that integrates its various functions, has predictive capability and a measurement system.

In 2006 Human Capital Source, through its research arm Workforce Intelligence Institute, carried out a study of 740 human resources departments and gathered field research from 70 research centers and universities throughout North America. The objective was to find evidence that human resources’ services could have an effect on organizational outcomes. Through statistical analysis this was proven conclusively.

For example, we learned that companies who maintained a succession planning program and updated it annually also increased revenue per employee. We also found that investments in learning and development correlated with productivity and service improvements, which in profit making companies led to revenue growth. Third, we discovered that organizations that aligned manager and professional objectives with organizational goals and paid for achievement of the objectives also enjoyed significantly better operating results than others who did not.

Integrated Operations

While having accurate, predictive data is an advantage, to obtain and optimize that advantage we need to work together. One of the major failings of human resources departments is that they are not integrated. The various functions of hiring, paying, training and retaining operate on their own time lines with their own interests.

Independently operating units within a single department such as human resources do not achieve optimum levels of performance. Additionally, they cause confusion for students, employees and managers with inconsistent messages and schedules. An example is that staffing people often do not communicate with compensation or development staffs. This can result in a new hire expecting something about pay increases and training opportunities that are not true. The point is not to take away one function’s need to operate but to improve the total department’s outputs.

These and other observations led us to the next step in workforce evaluation. In the spring of 2007 we began the development of the Human Capital Management (HCM) model shown in Figure 1 and focusing it on predictability. We are defining the model’s phases along with appropriate software. In the end, model users will be able to accomplish the following:

• Design a human capital plan that supports the strategic business plan.
• Work with senior management to facilitate necessary changes in the organization.
• Audit HR processes and redesign them to meet future needs.
• Carry out a workforce plan that is linked to institutional initiatives and budget processes.
• Deliver integrated HR services to optimize the institution’s investment.
• Design a future-facing measurement system with strategic performance metrics, leading indicators and intangible measures.
   

With a model such as this the HR function can guide management on the optimum deployment and development of its human capital. This capability will position the human resources function squarely in the middle of strategic organizational management.

Future-Facing Data

As uncertainty grows the need for information about the future becomes increasingly important. Almost all data developed in organizations are what is called “lagging indicators”. Accounting, production, sales and service data all report the past. The only formal approach to future information is market research. An example is consumer confidence. If this is increasing the economy is probably set for an upswing. This is an example of a “leading indicator.”

Leading indictors apply as much in an educational institution as in business. Schools track population demographics to anticipate future supply and demand of students. Yet, on the administrative side when it comes to numbers about employees, our human capital, usually we see only reports of past activity. We can manage future employment, development and retention more effectively if we have leading indicators.

Two Types of Leading Indicators

Inherent within some lagging indicators is the potential to be a leading indicator. One example is retention or turnover. While turnover tells us what percent of the workforce left in the past year, a deeper look at it can yield indicators of current and future effects. Currently, how is turnover affecting our ability to service other departments, the faculty and the students? Looking ahead, if turnover continues along its present trend what does that imply for the future?

If we study who left, why they left, and at what point in their career they left we can begin to see what can be done in the future to reverse the trend, if necessary. We can also look at the effect of unwanted turnover on outcomes such as productivity, quality or service. By tracking turnover trends in parallel with institutional outcomes we might see increased cost, late delivery of services or unhappy customers (parents/students). Finally, we can look for correlations between turnover and other employee activity. Absence and turnover usually correlate. A ten year study of absenteeism showed that as absence rose, within six months turnover increased. When we know that we can monitor absenteeism and work to prevent it in the future.

A second type of leading indicator can be found within what are called intangibles. These are activities that cannot be measured with one number, such as the cost of something. Typical intangibles are leadership, planning and employee commitment. These are concepts. We cannot see leadership, but we can see people behaving in ways that we call leadership. Through observation we might say that in our company people who provide a vision, make it a point to be visible in the workspace, encourage new ideas, listen to employees and recognize performance are good leaders. Through observation and surveys we can gather data on how well a leader does these things. The same applies to planning wherein we see people gathering and organizing data, analyzing it, preparing reports and delivering the plan on time and complete. Finally, committed employees are those who have a low absence rate, work effectively with co-workers, contribute ideas for better ways to work, produce more than the average worker, speak well of the company and do not quit.

A short list of leading indicators and intangibles are as follows:

Employer of Choice Company Image Satisfaction Engagement Leadership Commitment Training Spend Turnover Readiness Competence
Brand Awareness Performance Culture Agility Reputation

Anything that cannot be defined by a single point is an intangible, but might not always be a leading indicator. Leading indicators can be tangible such as training spend or turnover percent.
A measurement system that is composed of the appropriate mix of both can be very valuable. The test is, what will I do with this indicator or intangible if I have it?

How to Convert Intangibles to Tangibles

The problem some people have with intangibles is that they cannot define them in visible terms. For instance, when asked to define culture they respond with statements such as, “A good culture has good leadership.” That is probably true but “good” and “leadership” are intangibles themselves. A better definition might be a healthy culture is one in which people do the following; i.e., support each other, contribute ideas, are not absent, commit to the vision, et cetera. Leadership was defined above.

What is Missing?

If you accept the arguments above the obvious next question is what does it take to begin moving in these directions? Change is always a problem and change of this magnitude is a big problem. There are many points of resistance to change. Most of them are human rather than financial or technological.

• Recalcitrants often claim that there is no money to make large scale changes. That might be true; however we don’t have to save the world. Change can come in small increments that are not costly and do not require technology.
• Others claim that someone “out there” does not support it and will even oppose it. If that is true a little salesmanship backed by good data pointing to the benefits to “them” often carries the day.
• The change often requires relearning the job, gaining new skills or giving up a position of power. This is where leadership comes in. It is up to the head of HR to show the new vision and its benefits. Here the salesmanship is directed toward “us” rather then “them”.

The point is that we can always find a reason not to change something. However, if the will is there we can also find a way to make progress, even if it does not take us to the ultimate goal in the near term.

When I introduced metrics to HR around 1978 the level of resistance was monumental. However, in time most people discovered that having quantitative data was beneficial for them for several reasons. First, it wasn’t so difficult. Second, they discovered for the first time how well they were, or weren’t, performing. Third, they were able to communicate with management in a language that managers use; namely numbers. Fourth, their position in the organization gained some level of respect, which it may not have had in the past.

It is time to move beyond benchmarking operating variables and focus on more strategic issues. Leading indicators and intangibles are where the future values lie.

Meet Dr. Jac Fitz-enz at HR Metrics Lisbon 2010 - Conference & Exlusive Pre-Conference Workshops on 24 -25 November 2010