Proving HR’s Strategic Value: How Data, Metrics, and Leadership Transform Organizations

 

Importance of HR Performance Measurement and Balanced Scorecards

Measuring and reporting results has several important benefits for HR:

·          Reinforcing HR's role in strategic development by measuring the effectiveness of HR strategies and senior management's implementation of those strategies

·          Identifying opportunities for redirection and improvement through periodic measurement of progress on strategic objectives

·          Strengthening HR's relationship with internal business partners

·          Supporting future investment in HR programs

The process begins with establishing key performance indicators (KPIs). HR KPIs are sometimes established by applying a balanced scorecard approach to the function's mission. The function then collects data to compare performance with these KPIs and other metrics. Assessment can include variance analysis of outcomes or results-such as variances of recruiting costs from budget. It can also include assessment of processes-how HR performs its work; whether that performance meets the function's mission, values, and goals; and, if needed, how those processes can be improved or changed.

Creating an HR Balanced Scorecard

Balanced scorecards provide a concise yet overall picture of an organization's performance. They can be used to focus organizations and functions on key strategic activities, to craft responses to goals, and to create metrics to assess the effectiveness of these responses. Balanced scorecards help support a clear line of sight from strategic goals to strategic performance.

By linking clearly defined department objectives and performance to the company's strategic business goals, a balanced scorecard for HR can serve as a way of focusing human resource staff on activities that will support the company's goals. An HR balanced scorecard also demonstrates HR's strategic value by defining and measuring HR's contribution in concrete, clearly understood terms.

 

For example, consider an HR function that has analyzed the organization's strategy and has identified the following ways in which it can contribute, based on the four perspectives of the balanced scorecard:

·          Financial: Develop alternative staffing strategies to provide more flexibility to meet shifts in production demands.

·          Customers (other functions and employees): Provide easier access to HR services, including consultation with functional leaders.

·          Internal business processes: Apply technology to increase efficiency and capture data.

·          Learning and growth: Make sure that future leaders will be available across functions, throughout the organization.

These goals lead to actions or programs. For example, the focus on leader development leads HR management to contract with an outside consultant to assess and work with identified high-value employees. To measure the effectiveness of this action, HR must identify the right metrics. What will indicate that the program is, in fact, resulting in a growth in leadership capabilities? Results from simulation exercises? Retention of key employees? Fill rate of leadership positions from internal candidates?

For an HR balanced scorecard to be truly effective, it must:

·          Contain accountability and measurable results.

·          Be valid. The measurement system must contain understandable measures, metrics, and targets that are aligned to the objective and can be supported with solid data.

·          Contain only those measures that are most important to the objective and the organization's strategic plan; that is, the measures must result in actionable items.

·          Focus on results. Simply measuring turnover or time to fill is ineffective if no action is taken as a result. More meaningful measures that are aligned clearly with the organization's strategic plan include productivity and retention.

·          Be carefully planned and executed.

HR Metrics

HR metrics focus on traditional measures of efficiency and effectiveness (such as budget performance, hiring ratios and costs) as well as strategic HR activities (for example, metrics indicating increased employee engagement, such as reduced absenteeism or discipline issues, or reduced risk, such as accident rates and compliance audit results).

Exhibit lists common HR metrics.

                                                      Exhibit: Sample HR Metrics

Metric	Description	Possible Use
Absence rate	Ratio of lost days to number of employees	To reflect benefits of a change in workplace conditions
Accruals	Comparison of budget to actual assignee costs	To monitor expense accruals and make sure that assignment budget and financial goals are met
Applicant yield ratio	Percentage of applicants who proceed to the next step of the selection process	To demonstrate effectiveness of recruiting methods
Cost per hire	Total costs of hiring divided by number hired	To demonstrate increased efficiencies in recruitment and hiring process
Customer satisfaction	Measure of various different customer opinions across services offered by HR	To demonstrate increased satisfaction as a result of specific program changes or new service offerings
HR staff per full- time employee	Ratio of the number of HR staff retained to number of overall full- time staff retained	To show if HR is adequately staffed to support the needs of the workforce
Human capital return on investment	Ratio of employment-related expenses to revenue minus nonemployment expenses	To demonstrate value of HR programs
Human capital value added	Revenue minus nonemployment expenses divided by number of full-time employees	Used comparatively to indicate increase in employee productivity as the result of HR activities
Key talent retention	Percentage of key talent retained	To demonstrate effectiveness of employee development and reward strategies
Promotion pattern	Percentage of internal promotions	To demonstrate effectiveness of development programs and strong culture
Success ratio	Proportion of selected applicants who are later judged to be successful on the job	To indicate effectiveness of recruiting, selection, and orientation methods
Training return on investment	Economic benefit of enhanced performance minus costs of developing, producing, and delivering training	To demonstrate value of strategic choice to invest in training
Transfer	Number or percentage of employees moving across divisions to new jobs	To track internal competency development and global talent management
Turnover costs	Costs associated with separation, vacancy, replacement, and training	When turnover rate is combined with costs of turnover, to demonstrate economic benefits of a change in pay or benefits
Turnover rate	Proportion of exiting employees to all employees	When turnover rate is combined with costs of turnover, to demonstrate economic benefits of a change in pay or benefits
Vacancy costs	Costs of substitute labor (temporary workers, contractors, outsourcing partners) minus wages and benefits not paid because vacant	To support decision to outsource function or area and decrease internal head count

Each organization must choose the metrics that are meaningful for its activities and strategic focus. Note that formulas for the same metric can vary; it is important to use a consistent formula throughout your organization and when benchmarking.