HR has traditionally struggled to adequately quantify a hard contribution to an organisation. Craig Donaldson speaks with the authors of the report Evaluating Human Capital and the Human Resources Function about the latest trends in the area and outlines the steps HR professionals need to take in order to measure their work
HR has traditionally struggled to adequately quantify a hard contribution to an organisation. Craig Donaldson speaks with the authors of the report Evaluating Human Capital and the Human Resources Function about the latest trends in the area and outlines the steps HR professionals need to take in order to measure their work
HR is under scrutiny to manage costs better, demonstrate its effectiveness and show how its contributions add value for the business. Evaluation and measurement have become a central HR issue. Yet, functions typically misunderstand the subject and make little progress.
UK-based HR and business management research and publishing firm, CRF Publishing, will release its report, Evaluating Human Capital and the Human Resources Function, this month. Co-authored by Mike Haffenden, Andrew Lambert and David Creelman, the report details research, case studies, the CRF evaluation model and analysis of several critical aspects of evaluating the role of HR.
HR’s measurement baggage
Despite decades of measuring HR activities, and different approaches espoused by HR luminaries, such as Kirkpatrick, Phillips, Fitz-Enz, Becker and the like, Haffenden believes little progress has been made in evaluating people management and the business impact of HR.
“There’s plenty of debate, but many functions still think HR evaluation is about whether they stay within budget or collect unimportant headcount figures,” he says. “Too little is expected of HR anyway – they are often left to get on with things. And, for those HR practitioners keen to measure and evaluate, there is a paucity of learning about how you do it well.”
Haffenden believes a significant factor in weak evaluation at both HR and organisation levels, is the general confusion over terms like ‘monitoring’, ‘validation’ and ‘evaluation’. Without a clear definition and understanding of such terms, he says, HR evaluation will lack rigour, both conceptually and in practice. “Such clarity should also help avoid the common practice of producing masses of HR data without knowing what to do with it. The issue is for HR evaluation to become a core, not peripheral management practice – for both the business and HR.”
Co-author Lambert argues that little progress is being made because of a lack of numbers orientation and metric abilities in HR. This is coupled with the reality that only recently – mainly through the maturing of OD specialists – have there been practitioners in HR able to adopt a business perspective.
“Shortcomings are also evident among numbers specialists in finance and accounting. Most appear weak in intangibles, HR work and people-related business drivers. Their perspective is often centred on budgets and historic rather than predictive data, and they have little grasp of productivity measures or of the opportunity cost calculations of good people management,” he says.
“Finance people are often unsympathetic towards HR colleagues because of their lack of precision in metrics and data collection. So, many organisations have two partially sighted people [HR and finance] trying to make sense of HR evaluation.”
Latest trends in HR evaluation
Haffenden is not surprised that HR chases fads and one-size-fits-all solutions in evaluation, much as it has done in other areas of its work. “The question is whether a model, tool or trend has value for the two critical aspects of HR evaluation – what and how people contribute to business results, and the efficiency/effectiveness of HR as a function.”
Human capital is a good example of this, he says. “I feel this is a demeaning term. Can you really value people as assets such as capital and plant? In any case, people are not a depreciating asset – the more you use and manage them well, the better they get.”
Haffenden says HR really only needs four relatively simple sets of measures:
• Efficiency: costs, turnover, attrition – Saratoga’s work here is useful and continues to develop.
• Effectiveness: employee engagement because ‘engaged’ people will usually be more productive – the work of Gallup, Sirota and Kenexa is particularly useful.
• Talent: high potentials, succession cover, ‘key’position vacancies, turnover, dissatisfaction signals – such tools as talent/workforce dashboards or scorecards.
• Breakthroughs: evaluating what HR contributes to major business moves such as a new factory, sales function or product launch – resourcing, training.
“The issue is to be circumspect of any trend or ‘new’tool,” Haffenden stresses. He advises HR professionals to ask a number of questions: What does the business want from HR? What are you looking for? How will the adoption of an approach suit your needs and circumstances? Will it be peripheral, or core? And, finally, can a tool help you progress anyway?
Lambert has witnessed trends in this area at two levels – the HR function, and in evaluation, which affects the function itself. “First, metrics expertise is beginning to be injected into some functions, with increasing numbers of OD people who are more adept at asking the right questions and making the right connections. Second, pressure is building on HR to demonstrate what value it adds, to justify its proposals and also to justify its headcount,” he says.
Other trends, according to Lambert, are the development of scorecards such as specific HR and workforce scorecards, a realisation that employee surveys, if designed and used rigorously, provide powerful measures of the effectiveness of management processes and people practices, and the extension of concepts such as ‘excellence’ frameworks along with the employer brand. “All intrinsically require HR measurement and evaluation,” he says.
Latest issues in HR evaluation
Choice of approach is a critical issue, according to Haffenden. “HR measurement and evaluation has become an industry of models, frameworks and tools – with little evidence of them being fit for purpose,” he claims. “Some are too complex and difficult to implement – human capital, Boudreau’s analytics and even the HR scorecard, for example. And, recognising that some validate particular activities rather than evaluating the overall business impact is also an issue.”
“HR must be knowledgeable enough to be able to make distinctions between many offerings and establish what we believe is critical, but often missing – the link between HR activities, their evaluation and the organisation’s goals,” he says.
The starting point of HR evaluation must be the business itself, Haffenden explains. This is the line of sight/cause and effect issue which should be supported by having a feedback loop to learn from what happened – this issue is not well understood by HR as it can be difficult to isolate and control variables.
“HR still has a measurement capability and mindset gap to fill with numerical abilities, analysis and business focus,” Lambert adds. “This requires HR to become less focused on process and inputs in favour of the net impact of what it does to improve the organisation’s effectiveness.”
More controversially, he says, there is a powerful argument to suggest that an over-concentration on building up HR metrics will miss the point – that what counts are business performance numbers and results. “Building more sophisticated functional metrics capability in finance, HR, marketing, IT etc only serves to reinforce functional silos, at the expense of what helps the business succeed. This is a potentially unhelpful red herring and dead end,” he says.
“As argued in our report, the healthier aiming point is for an integrated business metrics capability, which includes the HR perspective and insights. HR’s central purpose must be to enable strategy implementation not to promote separate functional agendas.”
Emerging tools and practices in HR evaluation
Haffenden advocates a high level strategic framework for HR measurement and evaluation which helps ensure that evaluation efforts are based on secure foundations – and avoids the problem of collecting metrics only to find people saying ‘so what?’It also makes sense of differing understandings and objectives in evaluation, he argues.
The model provides a holistic view of how people strategy and management should be orchestrated and measured. These are the main features.
• A sound basis for evaluation begins with clarity about organisational direction – and from this, clarity around HR’s mission and purpose.
• The various roles HR plays should flow from business objectives – including roles which are jointly performed with managers. This helps frame measurement against objectives.
• We make an important distinction between whether an activity is being done well and being clear about whether it is the right thing to do –the model thus distinguishes between ‘relevance’and ‘excellence’.
• Once it is clear who is doing what and why, it is important to develop appropriate plans to effect implementation – delivering outcomes that are aligned with organisational goals.
• The model gives insights into the causality of how people management activities impact on business outcomes.
• In assessing the achievement of these outcomes, it identifies three different aspects of measurement – monitoring, validation and evaluation.
• There should be a recognised feedback loop to ensure that analysis of cause and effect is undertaken.
“The message for HR is to adopt a results-driven approach like that of the model and, crucially, to express outcomes in terms of business effects – in a language to which business executives can relate, rather than ‘traditional’ HR terminology,” he says.
Lambert adds that, apart from some useful texts and frameworks above, software tools are gradually developing that have real value – HR analytics is an example. “Importantly, they require functions to get their thinking and processes straight at the outset. In addition, higher level courses on HR evaluation would be very useful – though there is a gap in this provision,” he says.
Challenges and pitfalls in HR evaluation and measurement
Lambert says a significant pitfall in HR evaluation and measurement is matching the rhetoric about ‘more business-focused HR’ by acquiring and developing people who can deliver this, with a focus on the right kind of numbers and rigorous analysis. “There may be a generational issue here which has implications for when functions identify and source new HR talent,” he points out.
Another challenge is matching metrics capability with an understanding of business and organisational psychology among HR practitioners. “Very often these types of practitioners are two very different kinds of people.”
Similarly, Haffenden argues the main challenge for HR professionals is a mindset issue – to recognise that good HR evaluation is relatively simple in practice using a dashboard of indicators for efficiency and effectiveness and the relevance/excellence aspects of the above model. He advises HR professionals to ask four questions:
• What must HR be efficient in, and how?
• What does the business want the function to be effective in?
• Are you focused on and doing the right things?
• Are you executing these things as well as you possible can?
“Then use uncomplicated metrics to measure progress and end results. Overall, the key is to focus, prioritise and ensure that analysis always comes before action,” he says.
Lambert also advises HR professionals to keep an eye on what you want to use the numbers for. “Data for its own sake will be a smokescreen. Similarly, don’t fall for tools and techniques for the sake of it –how will they suit your purpose and the end results you seek from evaluation efforts?”
Lambert also encourages HR professionals to focus on what helps the business at all levels: “Don’t just be fixated with the top level strategic agenda – HR evaluation also needs to serve line managers and employees.”
Securing executive and line manager support
Lambert says it’s critical that HR professionals be able to demonstrate how evaluation both identifies and helps to resolve real business issues – at both strategic and front line levels. “This includes things line management aren’t thinking about, as well as those that interest them or which cause them sleepless nights. Examples include evaluating talent and talent management, sustaining performance improvement, or building the right capability the business and line operations need,” he says.
Haffenden agrees that productive dialogues with executives and line management are essential. “At a basic level, ascertain what HR can do for the business – what are the four or five things you want HR to support? Better still, initiate those discussions or prove that you can be a valued part of the business team. At stake – or the inhibitor to progress – is an HR credibility issue,” he says.
“Speak to non-HR executives in the language of business and operations, not in HR-speak or jargon –the lesson here is to change how you talk to people outside the function if you don’t already do this. After all, performance management, improving people, how more product can be sold, how capability can be built and how costs can be taken out of HR are all business issues first.”
Lambert also says that by ensuring that measurement/evaluation becomes a part of shaping and testing business performance, not following a narrow functional agenda that isn’t integral to what the business wants. “This links to a deeper debate about what line managers are responsible for.”
A related point, he argues, is that it is difficult to separate HR’s contributions from those of managers. Moreover, HR does not own the organisation’s people development and management processes, But more important, he says, is joint ownership and accountability led by ongoing dialogue.
HR should become “clearer about how to demonstrate cause and effect, how to identify priorities, how to identify both opportunities and blockages to business or operational plans, and to show how numbers can help connect HR activities to business solutions”, Lambert says.
Examples of internal and external HR measures
Three groups of measures apply to the HR function:
• Operational measures: accuracy, cost, quantity, speed, etc.
• Service quality measures: program effectiveness, service performance and relationships, etc.
• Cost efficiency of the HR function.
Measures for the objectives of HR work will include those:
• Focused on results achieved: skills levels, recruitment, talent retention, etc.
• Measures of business impact: additional revenues or profits from HR strategies.
• Costs of HR processes and initiatives bymeasuring investments of cash, time and other resources in relation to process outcomes.
The challenge of cause and effect
When processes are being designed, initiatives planned or decisions contemplated, questions need asking:
• Do we understand the effects of what we are about to do?
• What evidence do we have that this will work?
• What benefits are likely to be achieved, for whom?
• How valuable are these?
• How robust is this evidence?
These questions will help justify an HR activity that will consume significant resources, take time and impact on HR and, possibly, the organisation’s reputation. Responses to them will create the basis for subsequent measurement. Evaluation should then be used to test the initial hypotheses and assumptions, to determine what and how much benefit has been achieved – and identify learning for the future.
Evaluating Human Capital and the Human Resources Function will be published by CRF Publishing of London in September 2005. Human Resources readers may benefit from the discounted rate of AU$495 (normally AU$695) for orders received by 30 September 2005. For more information, email [email protected] or [email protected].
