Metrics and measuring up HR

by 04 Mar 2008

It is impossible to have a strategically-driven HR function unless you have a good handle on your human capital metrics. Teresa Russell investigates worlds best practice and speaks to an expert who says the only HR metrics that are important have dollar signs in front of them

Dr John Sullivan, once dubbed the father of HR metrics, is professor of management at San FranciscoStateUniversity. He says HR metrics are divided into two types – the “Who Cares?” numbers and the “Oh shit!” numbers. “These are responses you get when you show the CFO your HR statistics,” he says, adding that the only ones your really need to report on are the ones that the CFO cares about. (see box). “I advise HR people to talk with their CFOs to determine which four metrics would mean most to them,” he says.

The “Who Cares?” numbers include measures such as employee engagement scores, costs per hire and employee turnover rates – and all the hundreds of traditional statistics that HR likes to measure and report on. The “Oh shit!” numbers includes measures such as productivity improvement rates per employee; turnover and time-to-fill rates of high revenue generating positions; and revenue per employee compared to competitors.

“HR professionals have to decide if they are protectors of people or working to drive business results,” he says. “Every other area of business in every organisation around the world speaks the language of money. So if you want to be taken seriously by sales, marketing, finance and manufacturing, you have to speak their language too.”

He gives the example of a golf team with 100 members. One of them leaves, so employee turnover is running at 1 per cent. Who cares? However, if you then find out that it was Tiger Woods who left, the person who generated more than 50 per cent of the team’s revenue – and he has joined your competitor – Oh shit! “Companies are in business to make money, so HR should measure the impact that people have on revenue, profit and productivity,”says Dr Sullivan.

He adds that it is okay for HR to collect and analyse a few other metrics, but there is no need to report them outside of HR. For example, if it is clear that employee engagement drives productivity, there is nothing wrong with understanding engagement levels and keeping them within HR. But because productivity is what is important to the business, that is what should be tracked and reported on.

Predicting the future

Innovators add so much value to an organisation. This is why Nintendo, Apple and Google focus efforts on recruiting and developing their innovators and can report impressive revenues per employee. “When you look at these numbers, you see that IBM needs 10 times more employees than Nintendo to generate the same revenue. What does this tell you? Even though IBM is operating at a rate per employee that is 25 per cent better than the average company, it has ‘headcount fat’. HR needs to be competitive and proactive and move on numbers like this, to prevent large lay-offs of permanent employees during downturns,” he says.

When tougher times begin, HR can only have the organisation in a position to weather the shock if they have been measuring the right numbers. “You can reduce headcount fat in areas that traditionally require lay-offs by hiring people on contract. Only make them permanent if they turn out to be a great performer,” he says. One of his more challenging metrics is the accuracy percentage of HR alerts and forecasts. All sales people are measured against their forecasts, so HR should be too if it wants to be taken seriously, according to Dr Sullivan.

Australian Customs Service

Due to the unwelcome dawning of the new age of terrorism, the role of Australia’s Customs Service (Customs) changed in 2005 from just facilitating the movement of people and goods across our borders, to including a strong emphasis on border protection. Staff numbers have increased by 2,000 people (or 33 per cent) since then. Most of these roles are frontline staff. New skill-sets were required throughout the organisation to operate new technology in the areas of monitoring, detection and forensics.

“In early 1999, we started looking at ways to effectively respond to future workforce requirements. The issues Customs identified were – and still are – skills shortages, an aging workforce and a tightening labour market,” says Andrea Hope, national manager of staffing. As a result of this, Customs appointed an external HR information management service to help it measure and analyse demographics, leave, OHS data, recruitment and separations, absenteeism, reviews, performance appraisals and online learning.

Hope says that Customs supplies its HRIS data to the external provider, who then analyses it and provides regular HR metrics that can also be benchmarked against other similar organisations. “The more automated the data capture, the better,” she says. A range of metrics, including an analysis of trends, hot spots and recommendations is provided to the organisation on a quarterly basis.

“Last year, we asked all the division managers what HR metrics they would find valuable on a quarterly and annual basis. We asked the business areas what would affect them from a workforce planning perspective. We also looked externally at expected legislative changes and researched what other organisations measure. It’s all about understanding what’s going to add the most value to the organisation. Measure the things that cost you a lot,” concludes Hope.

BT Asia Pacific

BT is one of the world’s leading providers of communications solutions and services. Its principal activities include networked IT services, local, national and international telecommunications services, and higher-value broadband and internet products and services. The company directly employs 1,500 people in Asia-Pacific, but over 20,000 if you include its joint ventures, vendors and call centres.

Doreen Chiu, vice-president HR Asia-Pacific says the company has a long history of measuring HR metrics because it wants to be able to link the people indices that have a bearing on their business. “Just like other metrics, such as a financial scorecard, HR metrics give insight into the state of your business. For example, a higher turnover rate in a particular function or country will trigger questions, because it will have an adverse effect on productivity,” she says.

Chiu says they measure a range of statistics quarterly – turnover, total labour costs, ratio of labour costs to productivity and absenteeism. They also track completion of quarterly performance reviews and performance management outcomes, as well as monthly performance exits. “Although we track performance management outcomes, we also facilitate the people side and work with line managers to own the issues that affect their part of the business,” she adds.

“We realise that people – or human resources –drive our business. We strive for a high-performance culture, which rolls into a focus on training and development. We have done the analysis on statistical inputs to come up with action plans [to create a high-performance culture]. Implementing these plans now surpasses the need for more statistical analysis,” says Chiu.

HR metrics are shared with the management team, which agrees each year on the top priorities for action. Chiu says the HR metrics are devised after reviewing the organisation’s HR strategic intent, the group’s imperatives and the business vision. “Metrics must have a meaning behind them. We never measure items just for the sake of measuring them.”

Measuring HR

1. Percentage improvement in productivity - improvement in cents spent on people costs for every dollar of revenue generated (compared to previous year)

2. Recruiting quality - average performance appraisal score of new hires

3. Retention - performance turnover in key jobs

4. Compensation and benefits - percentage of the average employee's pay that is 'at risk' based on their job performance

5. Employee relations - turnover percentage of the bottom-rated/performing managers and employees

6. Training and development impact ratio - percentage of employee's that take one of our jobs based on development opportunities minus the percentage that say they left due to a lack of development opportunities

7. Give away/take away ratio with key competitors

8. HR impact on a manager's business results - ranking of HR on a survey of all managers, which ranks all overhead functions on their relative contribution to helping the manager meet their business performance goals

9. HR expenses per employee - total HR budget divided by number of employees

10. Employment brand strength - percentage of surveyed applicants that have a positive image of firm's management practices

Source: John Sullivan, professor of management, San FranciscoStateUniversity