MG: 211 Human Resource Management TERM PAPER
Human Resource Metrics
05-April-2012 J Malini SR No: 08424 Department of Management Studies Indian Institute of Science
TERM PAPER Human Resource Metrics
J Malinia a
M.Mgt 2011-13, Department of Management Studies, IISc, Bangalore – 560012
Abstract Human resource has been playing n vital role in every organisation. But still it has always been considered as a cost centre which has no output. This paper makes an attempt to understand the use of HR metrics in showing the output and contribution of the HR department towards the organisation. The paper analyses the meaning of HR matrics, its usage, and how to develop a meaningful metrics for any organisation. Keywords: HR metrics,
department is seldom measured. Around 57% of
1. Introduction
the companies don’t track the impact of HR
in the race, irrespective of the technology changes.
department on their business.* This is because HR has been accepted as ‘soft’ unavoidable cost of doing business. Thus even when HR department is acknowledged to play a very vital role in the organisation, it is not given a place in the strategic management team. This is because HR departments are not able to show their contribution in terms of the
Thus recruitment of people with necessary skill for
impact of the HR initiatives on the organisation.
the
the
Thus the top management, even though realises
employees to keep them competent is vital for the
the importance of HR department in the existence
survival of organisation in the current global
of
market.
department
In the current competitive world, the human resource is proving to be most important resource. Technology
up
gradation
without
proper
employees who can use it, will prove to be wastage. But companies with the right kind of employee can train and develop them stay ahead
job,
training
and
development
of
the
organisation, can
is
not
contribute
sure in
how
HR
strategic
management. Thus HR departments need to find a The importance of human resource is gaining
way to show their impact on the organisation to
acknowledgement by top managers and lot of
gain a place in the development of strategic
efforts and money are being invested to develop
management.
the human resource of the organisations. The Human Resource department has started being
It is said that what cannot measured, cannot be
given more importance in every organisation. HR
managed . Thus measuring the output of the HR
departments have found a place in every
department is important if the HR department is
organisation around the world. The money spent
to be monitored and managed. One of the
on the people contributes to around half or more
methods of measuring the output is using HR
of the total company’s expenses. *
metrics. Lawler and Mohrman (2003b) identify the use of metrics as one of the four characteristics
Even though lot of time and money is being invested in HR department, the output of the HR
that lead to HR being a strategic partner.
*HR METRICS- moving beyond absenteeism and turnover stat s, Koenig and associates Inc
Metrics is defined as a standard for measuring or
identified. Rapidly cutting underperforming assets
evaluating
helps to increase the efficiency of the organisation.
something,
basis
for
assessment.
Metrics are standards of measurement by which efficiency, performance, progress, or quality of a
Metrics eliminate confusion – weighted metrics
plan, process or product can be measured.
helps the HR department to clearly define and communicate what is important and what level of
HR metrics are measurements used to measure
performance is expected from the employees.
the HR contributions to the business. These
Thus, metrics helps everyone to focus their
measure the efficiency of the HR department,
attention on the important issues.
effectiveness of the HR initiatives and training programs and the impact of the HR on the
Metrics helps in bench marking – Metrics helps
organisation.
comparison between different companies from the same industry. By bench marking against a
This paper will focus on the uses of HR metrics, the
company, these metrics helps the organisation to
different types of HR Metrics and methods to
know where it stands and the places where
develop effective metrics.
improvement is necessary. Metrics helps to track the improvement – By
comparing metrics of different time frames, an
2. Uses of HR metrics
idea about how the organisation has been
Metrics provide a context around which the
changing can be got.
organisational performance can be measured
Metrics changes the behaviour of the employees’ –
more
By clearly defining the important metrics,
precisely.
HR
metrics
helps
the
HR
the
department to keep a track of their performance
employees’ know what is important in the
and their impact on the organisation. The
organisation and work hard towards the goal.
advantages of having a HR metrics are as follows:
Comparison based on this metrics can also be
Metrics helps to stay focussed - metrics helps in
managing the resources well. They give an indication of what is done more or less than
done by the managers, thereby retaining the focus on
the
things
that
are
important
to
the
organisation.
required and thus helps to focus the limited
Metrics helps in reward and punishment – As
resources on tools and strategies that have most
metrics helps to clearly define the output in
significant impact on the organisation.
quantitative methods, it helps to detect who and
Metrics ensure that the HR department meets the
what should be rewarded or punished.
goals and customer needs - The metrics gives the
Metrics allows HR to provide evidence on its
hard data on the output of the HR department,
strategic impact – Metrics help HR to prove its
whether the employee’s needs are satisfied and
economic value and efficiency.
whether the HR goals have been met. Metrics can demonstrate the dollar impact of HR Metrics gives information on the money spent – As
programs – Instead of defining the impact of the
mentioned above, around half of the organisation
HR programs in qualitative terms like worker
cost is spent on the people. HR metrics helps to
satisfaction or engagement, Metrics helps to
keep track of how money is spent on the different
define them in terms of dollar impact of these
HR functions. This gives an indication of where to
programs like ROI.
increase or decrease the expenditure, based on the set goals.
As mentioned by Dr. John Sullivan, “ Without data,
it is just an opinion” . Thus, it can be seen that with Metrics helps proper utilisation of resources – By
the proper metrics, the HR department can
comparing the metrics of different programs, the
contribute to the strategy formulation of the
places where the resources should be cut can be
organisation.
3. Types of HR metrics: There are three types of HR metrics – They are efficiency, effectiveness and impact (Boudreau and Ramstad, 2003). The first type of metrics is used to measure the effectiveness of the HR department. These give an indication of how well the HR function does its basic administrative tasks. The metrics used here usually measures the time and money used by the HR department and the outcomes. The examples of this type of metrics are time to fill vacant positions, HR headcount ratios, cost per hire and administrative cost per employee. The metrics of different companies and different industries is now made available which makes it easy for the organisations to compare the metrics and know if there is any chance of improvement and if so, where improvement can be done. Organizations vary in terms of the cost per employee for HR administration but typically the cost falls in the range of $1,200 to $1,600 (Fitz-enz, 2000). This is a large enough cost so that it certainly is worth measuring not just how much is spent but how well it is spent in terms of the quality and impact of the services provided. But these types of metrics are alone not enough as they do not tell anything about the service quality and impact of the HR services on the organisational effectiveness. The second kind of metrics focuses on the effectiveness of the HR department. These indicate whether the HR programs and practices have the intended effect on the organisation and the employees. The effectiveness of programs like training and development cannot be measured with the rate of participation but with whether the program had helped the employees to build the desired skills. The main function of HR department is to acquire, develop and deploy talent. A measure of whether the correct talent has been acquired, trained and deployed can, to a certain level, be measured by using ratios like ROI and human capital revenue. The last kind of metrics relates to the impact of the HR programs and policies. These metrics demonstrate a link between the HR initiatives and action and tangible effects on the organization’s ability to gain and sustain competitive advantage. These are usually in terms of business results like HR performance impact strategic success, Time to integration/adoption, Closed loop feedback. These measures might be difficult to measure when
compared to the first type of metrics. Each organization should find a way to measure these based on their own business strategy and goals, measurement standards in their industry, and t heir own unique organizational expectations of the HR function. The pyramid of hierarchy of these metrics is shown in figure 1.*
IMPACT
EFFECTIVENESS
EFFECIENCY Fig 1. Measurement Hierarchy Pyramid.
Taking up an example of the hierarchy in the area of talent acquisition may prove helpful. An HR organization might measure speed of hire as a measure of the efficiency. However, many of the employees might quit as soon as they come. So judging recruiting and selection effectiveness by speed alone may not indicate the true story. But even if the retention rates are high, the retained employees might lack the necessary talent and hence might not meet the customer expectation or damage the work culture. Thus customer satisfaction or cultural values are far more strategic in judging whether the hires are adding value to the organization. This is shown in the second pyramid in fig 2.
IMPACT talent meets customer needs
EFFECTIVENESS recruit talent that stays
EFFECIENCY no.of requisitions filled
Fig 2. Measurement Hierarchy Pyramid depicting recruitment process.
4. Criteria for choosing the metrics
6. Building the Right Measures
There are three basic criteria for choosing the metrics for an organization:
1. Define business strategy . The metrics should finally help the organization relate to its business strategy. Hence it is best to start with the business strategy. When in doubt it helps to begin thinking about the unique business strategy that differentiates each organization from many others. As shown in figure3, the three different strategies (Tracey and Wiersema, 1993) require different talent to succeed.
Companies should ensure the metrics fit the corporate culture of what is important. The metrics
should be designed only for the things that are important for the company. For example, an organization that emphasizes on speed should select metrics related to time. A Metric should echo the critical success factor that makes a company’s product or service successful.
An example to this might be HR department choosing metrics related to satisfaction of managers and applicants.
POSSIBLE MEASURES
Cost Leadership
Innovation
Customer Intimacy
Financial/ Operational
• ROA • Productivity
• ROI • % revenue from new products
• ROS • Account share • Revenue dollars/ Customer
• % of deals closed • Market share •Price Orientation
•Customer
• Customer value
value
vs competitors •Customer loyalty/ retention
Product/ Service Quality
Attributes like… • Maintenance costs •Warranty costs
Attributes like… • Innovative • Serviceability
Attributes like… • Reliability • Responsiveness
People
• Efficiency • Revenue per Employee
• Idea Generation • Autonomy
• Empowerment •Service Skills
Metrics should focus on issues that are likely to be reported to the CEO. It is recommended (Kim
Villanueva) that HR selects metrics that have most impact on profit, revenue and product development.
5. Errors made in developing implementing the HR metrics
and
As mentioned by Dr. John Sullivan, the two common errors are:
Customer
Developing and implementing HR metrics in a vacuum Developing more metrics than it is feasible to maintain and utilize
The most common error is that HR managers try to create and implement metrics in a vacuum. Instead, a collaborative approach should be taken where the HR department lists the strategic metrics and the CFO selects the ones that are likely to be the best measure of business impact and which can be easily understood and considered strategic by top management. This reduces the thought difference between the HR department and the top management and make clear as what is important to them. The second most common error that HR managers make in developing metrics is that developing and track too many metrics. A large number of metrics is both unnecessary and difficult to maintain. Collecting data and calculating metrics is timeconsuming and expensive and hence it is important to focus only on the ones that really matter.
• Acceptance of
new products •Speed of migration
Fig 3: strategy driven measurement
2. Determine how to execute. After defining the business strategy, a plan of action for executing the strategies should be carefully decided. This gives the information of what needs to be done and hence provides the desired output at various points of time. 3. Link HR to strategy map. Once the strategy map has been formulated, the HR department should be linked to it. This clearly spells out the role of the HR department and spells out what is expected and required from the HR department. This gives the information of how the HR can contribute as a strategic business partner.
4. Create Measures. With the clear strategic map in place and the role of HR clearly defined, the HR department should chose metrics that measure and track how well the HR department is doing in reaching its end goals, and how effective various initiatives are in helping to the organisation forward. Care should be taken here to ensure that the measures are not just ones that are easy or readily available; if those measures do not capture the concept well, then the time and cost of measuring may be a waste of resources, and might lead to taking decisions in the wrong direction. Once when the variables that are to be measured is decided, it is important to sort out what already exists versus what new measures are needed. For the measures that lack information, plans need to be built to identify how the organization will obtain that information. 5. Link to strategic business results. A clear connection between the metrics and the business results should be there. Metrics should be chosen in such a way that the top executives can relate them to the business strategies and hence acknowledge the HR department’s role as a
strategic business partner. 6. Set targets. The targets should be set based on these metrics. As these metrics relate to the strategic map of the organization, setting targets around these metrics will help the organization to move in the right direction, along the planned strategic path. Also, some times, bench marking against an organization of the same industry might prove to be useful for the organization so that it improves the efficiency up to the possible level and stays in the race. 7. Communicate the result. The results should be communicated properly to all levels of the organization. This helps the organization to clearly communicate what is important to all the employees
and
to
show
them
how
the
organization is performing in the key areas. Communicating
the
metrics
also
helps
the
individual departments to stay focus on the important issues and also to compete on the same.
