Mathews - HR Metrics: The Basics

HR METRICS:
Speaking the Language of Profitability
The Basics

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

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,
etc.

Copyright Patricia Mathews 2010 2

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.


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
by:
• 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
easy.


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
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
• 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
HR

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


Mathews - HR Metrics: The Basics

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