Professional Documents
Culture Documents
Karachi, Pakistan
Afshan.rauf@yahoo.com
Saba.gulzar@iobm.edu.pk
Juveria.baig@iobm.edu.pk
Abstract
The inclination for this manuscript is to look at value of HR metrics on Return on Investment of
an organization. With the continuous changes in business dynamics, it has become imperative for
organizations to rationalize their cost elements and return on investments, HR Metrics leads to
measure the effectiveness of cost effective decision for the organizations. A survey has been
conducted from human resource (HR) professionals to identify and better comprehend their
perceptions and expectations of human capital measures (HCM) content, its connection with
strategy and impact on performance. This paper is based on a quantitative analysis of survey
questionnaires based upon a five point Likert Scale, collected from 100 HR Professionals of
different organizations. After carrying out preliminary analysis including reliability, validity and
normality overall model was tested through multiple regression analysis results showing that
there is a significant relationship between HR metrics and organizational performance in terms
of return on investment. The findings of the study were consistent with earlier studies.
Implications for managers drawn from the results will help policy makers to develop policies and
procedures for improving HR productivity and decision making.
The use of metrics is not new. Researchers have articulated that metrics is a helpful tool in giving
objective information for decision making. For HR, still in transition, research (Jamrog &
Overholt, 2004) contends that the function of Human Resource has to take a Strategic
Partnership stance. There continues to be a growing emphasis towards determining
organizational effectiveness and its connection with human capital. Metrics can therefore assist
in bringing out the value addition for HR. The traditional use of metrics has focused on turnover,
absenteeism, time to fill and so on. However, this information needs to be tied to strategic
business goals to give it a real sense. The use of metrics is becoming a practice to justify every
amount spent on each HR initiative. HR working with intangibles is having a paradigm shift
towards quantitative HR. This research has the purpose to align most commonly used metrics to
align with the benchmarks. Although the use of HR analytics and metrics is still in its infancy in
most Pakistani organizations, this paper is an attempt to gauge if HR managers and decision
makers can identify potential in the use of metrics and subsequently their impact on
organizational profitability. This stance is supported by earlier research (Chhinzer & Ghatehorde,
2009) that HR needs to quantify and determine financials to utilize for bottom line results.
Therefore in this research we have taken the three most commonly used metrics to identify the
connection between HR metrics and the return on its investment in relation to the HR Bridge
Framework.
Literature Review
Measurement of human capital has been in existence since the era of Scientific Management.
The method to quantify efficiency has progressed with multiple metrics developed to date to
understand the connection of HR function with the organizational strategy. Since the core aim is
to determine how organizational performance can be enhanced through employee behavior and
how HR activities affect such behaviors (Trivedi, 2015). It is imperative that HR professionals
learn to utilize these metrics as a decision making tool for not just historical review but also for
real time and predictive use. Similar stance has been provided by (Sullivan, 2004) in his earlier
and recent studies (Sullivan, 2012) about the failure with the use of metrics. He strongly focuses
on the monetary value impact that is the desired by management. ROI being calculated for
financial measures has totally been ignored for HR function. Sullivan (2012) articulates that ROI
is simply the workforce productivity metrics (i.e. the comparison of corporate profits to the HR
combined costs and total labor costs). HR professionals are failing to deliver in this area and
therefore lagging its real worth. Practitioners are using the benchmarking surveys to assist in
managing the internal and external comparisons for HR costs; nonetheless the use of HR metrics
and analytics is necessary for the optimization of human capital and the human resource
management (Biswas & Director, 2013).
Research proposes that HR metrics acts as a measure to evaluate the role of how investments in
HR lead to success and how people make contributions towards organizational success (Becker,
et al., 2001). Therefore this research has involved the theory behind HR metrics with special
focus on three metrics:
Cost per Hire (CPH), Turnover Ratios (TR) and Revenue per Employee (RPE); the use of ROI is
a determinant of organizational profitability and the link between HR Metrics and Organizational
ROI. Boudreau (2002) explicate that the Global Human Resource Management as a field has
significantly advanced in its strategies over the years. Organizations have always been using HR
metrics in one form or another. However, the use of metrics was more prominent after the
influence of HRIS in 1990’s (Karikari, et al., 2015) and even more so since the migration from
industrial age and traditional economy to the technological age and knowledge economy.
Nonetheless, researchers have been on the fence about which metrics truly deliver value for
organizations (Boudreau, 2002; Lawler, Levenson, & Boudreau, 2004; Rasmussen & Ulrich,
2015). Historically companies need to differentiate whether they want to concentrate on cost or
value. With human resource function still in turmoil in transmitting its impact and effectiveness,
the right metrics can make all the difference (Edison, 2011). With the advent of metrics and
analytics in Human Resource Management, a series of researchers have viewed the HR function
as a factor of decision sciences (Boudreau, Ramstad, & Dowling, 2002). Contemporary research
also identifies a significant vacuum in terms of the metrics and the tangible relationship for the
decisions on human capital leading towards the major success factors globally. A recent study by
IBM (Lesser & Hoffman, 2012) of more than 700 Chief Human Resource Officers highlights
that fact that people are given significant importance by CEO’s in today’s organization.
However the same study revealed that the use of analytics doesn’t reflect the effective use in
making strategic decisions and questions whether the organization was unable to connect and
apply fact – based decisions while managing their workforce.
It can be surmised from the stated researches that organizations feel some kind of paralysis when
it comes to actually using HR Metrics for improved decision making. One reason for that could
be identifying which metrics to pursue. SHRM Benchmarking Database has a database of 400
metrics for its clients (SHRM, 2011). Earlier Metrus Group, a management consultancy based in
the US, has reported as high as 157 metrics being used in one of their client firms (Schiemann,
2007). ERE Media, a recruitment consultancy puts the number to 37 basic metrics (Sullivan,
2004). The significant fact here is metrics have reached from 37 to 400, therefore there has to be
some criticality for its use. Establishing this research on the three tiered model of (Boudreau &
Ramstad, 2013); this article wants to review each element of efficiency, effectiveness and impact
with each core metrics associated with it. This theoretical model forms the base of our research
where efficiency focuses on whether the organization deploying resources without wastage,
effectiveness delivers whether the practices affect the targeted talent and impact highlights
whether the right talent is being worked on (Boudreau & Ramstad, 2013)
The metrics chosen to formulate the framework for this article are Cost per Hire (Efficiency),
Turnover Ratio (Effectiveness) and Revenue per Employee (Impact). The first hypothesis to
correlate HR metrics and organizational performance in terms of its ROI is:
Since it is argued that the three metrics chosen for this paper are most commonly used and
provide a value driven approach (SHRM, 2012), the discussion is shifted towards the
determinant variables of HR Metrics.
The efficiency variable Cost per Hire determined in this research measures the costs tied with the
sourcing, recruiting and other staffing activities carried out by an employer to plug a vacant
position in the organization. CPH is a ratio of the total dollars expended (in both external and
internal costs) to the total number of hires in a specified time period (SHRM, 2011). Cost-per-
hire measures the value of the work done to close a vacancy in an organization. However, it is
believed that organizations that base decisions about their recruiting efforts solely on volume of
applicants or the costs and time involved in staffing activities can lead to potentially disastrous
decisions (Boudreau & Ramstad, 2001). There is also an apprehension about this metrics not
measuring the actual productivity of an employee post-hire in case of a successful hire or the
economic losses occurring from staff turnover (SHRM, 2012). CPH has its limitations, but
nevertheless it does manage to identify the cost effectiveness of a recruiting intervention
whereby attempting to hire the best available talent in the least internal and external costs, which
makes it a valuable efficiency driven metric. Being simplistic in its use and interpretation, it is
highly recommended that organizations use CPH to monitor their recruitment efforts and draw
meaningful results from them that can increase organizational efficiency. This leads to second
hypothesis to evaluate CPH impact on ROI:
Turnover Ratio
Secondly, the Turnover Ratio metrics that is viewed on the effectiveness level is often calculated
as a simple differential of departing employees and total employees. However this simplistic
view does not take into account the reason for turnover, which is critical for decision making.
Researchers have been of the opinion that calculating turnover on the basis of voluntary and
involuntary turnover shows a completely different picture and have different consequences (Park
& Shaw, 2013). Center for American Progress published a report in 2012, showing findings from
31 case studies and concluding that “it costs businesses about one-fifth of a worker’s salary to
replace that worker. For businesses that experience high levels of turnover, this can add up to
represent significant costs” (Boushey & Glynn, 2012). Highly skilled employees have high
performance and therefore have more probability of leaving organization for external
opportunities of employment. It can come as a surprise and unmanageable tasks for organizations
to deal with voluntary quits and this relates to a negative effect on organizational performance
(Park & Shaw, 2013). This generates the third hypothesis to evaluate:
The third and last metrics taken into account is Revenue per Employee (RPE), which has been
placed on the impact level of the HC Bridge® Framework. Sales/Revenue per employee is a
widely used measure of productivity (Huselid, 1995). It was found that organizations having
sophisticated HR systems have considerable financial impact in terms of sales per employee,
profits per employee and market value per employee. These HR systems are generally known as
High Performance Work System which provides valuable information. In subsequent researches,
it was found that Huselid’s earlier findings gained the attention of other academics and industry
executives interested in better assessment of HR systems. The practitioners were encouraged to
revamp executive appraisals in order to create accountability towards leaders in generating the
bottom line results by enhancing their workforce’s contribution (Beatty, et al., 2003). The
Revenue per Employee metric has the ability to provide HR with a niche understanding of
human capital in organization and thus HR practitioners can discover new opportunities to
becoming revenue center from only being a cost center by developing some outsourcing
activities of talent pool for maximizing human asset utilization (Khan, 2014). To gage this, the
hypothesis developed is:
Return on Investment
The significant role that HR plays in evolvement of competencies and capabilities makes it a
critical element. The transference in the outlook from a cost center to a Strategic Business
Partner role must be rapid as it is time to defend the various cliché’ associated with metrics; due
to the fact that the functioning remains historical instead of forward looking and predictive
(Trivedi, 2015). The size of the organization must not be a determinant but the right use of data
of HR metrics. The Meta – analysis research (Park & Shaw, 2013) reveals that 82 percent of
focus is on financial metrics in various studies. This has reflected positive correlation between
human resource investments and organizational effectiveness. However, this positive impact can
be so vigorous that the direct relationship cannot be determined between the two. The research
highlights that the key is to understand the causal relationships that goes beyond the equations
and mathematics (Chhinzer & Ghatehorde, 2009). On the whole, HR has evolved from Personnel
Management to the Strategic Partnership towards the ROI of HR, all this leads toward the ends
rather than the means (Becker, et al., 2001). This ROI can be simply measured through total
investments made in HR initiatives to workforce productivity as stated by Sullivan (2012).
Philips (2005) earlier provided it by ROI%= Total Benefits (in$) x 100 / Total Program Cost.
Not just this but HR is still in transition to provide prescriptive analytics to give more rigorous
data that is able to give quantitative HR to shift the function from cost to value added division
and have its ultimate positioning within the organizational structure and bottom line results to
enhance organizational performance. Literature for this paper urges to improve decision making
for organizational sustainability in terms of employee satisfaction, retention, training, growth
Conceptual Framework
Research Methodology
This research involves explanatory research design to study the possible reasons for HR metrics
to enhance in decision making. Data has been collected through Online survey questionnaire has
been adapted from the research report of (CIPD, 2011) to gain maximum insight about the use of
HR Metrics within industry and to gauge to what extent it is assisting in enhancing cost
effectiveness in HR investments. The questionnaire is based upon the 5 sections and comprising
of 23 questions containing Likert scale from 1 to 5 and its reliability has been checked through
SPSS Software version 19.0.
As suggested by the (Kumar, 2011), the researcher needs to identify their study population.
Therefore the target population for this study had been 150 HR professionals from various
organizations across Karachi. Based on the non-probability sampling technique, we have taken
convenience sampling calculating 109 sample size for this research study. With a 95%
confidence level and 5% margin of error. However we received only 100 completely filled
surveys giving a response rate of 66.67% in actual.
The study has attempted to provide clarity in few key areas of HR functioning and to develop
link between essential drivers (i.e. key HR Metrics). The changing work dynamics observed that
Human Resource is still the weakest in its form and this very reason has aspired to review the
existing theory behind human resource metrics and where and why it’s lacking the full
implementation of the same. Literature studied above comes across with a crevice in the
knowledge that is unable to bridge the link between its value additions in the functioning of HR.
Therefore the study tested a conceptual model based on the literature review. The conceptual
framework shows the relationship between return on investment, HR metrics, Cost per hire,
Turnover ratio and Revenue per employee.
Descriptive Statistics
In order to have standardized Z-scores, the data normality was initially asserted within a
prescribed limit of + 2.5. Summarized results of descriptive statistics are presented in table 1.
Table 1 shows that highest value of kurtosis (1.29) is for HR metrics (M= 3.7, SD= 0.51) and the
lowest value of kurtosis (- 1.38) is for return on investment (M= 3.1, SD= 0.50). Since highest
value of skewness (-0.30) is for revenue per employee (M= 3.3, SD= 0.45) and the lowest value
of skewness (-0.54) is for cost per hire (M= 3.5, SD= 0.68) therefore, the values of skewness and
kurtosis are in between + 2.5. The skewness and kurtosis are useful for testing univariate
normality of data (Carlo, 1997).
Correlation
Inter item correlation was carried out to check that the multicollinearity among the constructs.
Principal Factor Analysis along with Varimax rotation has been applied on the above five
constructs. The assumption of independent sampling, linear relationships, and moderate
correlations were met (Gulzar & Advani, 2016). The criteria used were: (1) The Barley Test of
Sphericity is significant P <.05. (2) Kaiser- Meyer Olikin Measure of Sampling should be greater
0.60. (3) To include the top 4-6 items with factorial loading of at least 0.60.
The reliability of each construct measured separately through the Cronbach’s Alpha. The
summarized results are presented below in table 3.
The above table shows that the turnover ratio (M= 3.5, SD= 0.73, α=0.88) has the highest
reliability followed by HR Metrics (M= 3.7, SD= 0.51, α = 0.78), return on investment (M= 3.1,
SD= 0.50, α = 0.73), revenue per employee (M= 3.3, SD= 0.45, α = 0.71) and cost per hire (M=
3.5, SD= 0.68, α = 0.69). Therefore, data seems to be reliable and possess normal trend.
According to (Field, 2009) the reliability of an instrument (questionnaire) should be between
values of 0.7 to 0.9 which is the case for the construct used in this study that is acceptable value
of Cronbach’s alpha.
Discriminant validity:
Exceptionality of the variables is tested through Discriminant validity (Hair, et al., 2010). The
discriminant validity was evaluated by comparing the value of average extracted (AVE) with the
square correlation coefficient. The summarized results are stated below. Below Table 4 shows
that the values of average variance extracted is lesser than all possible pairs of constructs the
variables are unique (Fornell & Larcker, 1981).
Multicollinearity of the Independent Variables
Hypothesis Testing
The hypothesis on the effect of HR Metrics on return on investment was tested through stepwise
regression analysis summarized results are presented below.
Hypothesis # 1
Since the p-value is less than the 0.05 level of significance this means reject null hypothesis. The
results of regression indicated that the predicator HR Metrics (M= 3.7, SD= 0.51) explains 55 %
of the variance towards return on investment ((M= 3.1, SD= 0.50), (R2=0.554, F (1,314)
=123.899, P< 0.05). It was found that HR metrics (ß _ = 0.39 p<0.05,) significantly predicted
return on investment.
Hypothesis # 1a
The hypothesis two is postulated that there is significant impact of cost per hire on return on
investment. Since the p-value is less than the 0.05 level of significance this means reject null
hypothesis. The results of regression indicated that the predicator cost per hire (M= 3.55, SD=
0.70) explains 82% of the variance towards return on investment (M= 3.1, SD= 0.50), (R2=0.82,
F (2,313) =466.646, P< 0.05). It was found that cost per hire (ß _= 0.072 p<0.05,) significantly
predicted return on investment.
Hypothesis # 1b
Hypothesis three was created to determine that there is an impact of turnover ratio on return on
investment. Since the p-value is less than the 0.05 level of significance this means reject null
hypothesis. The results of regression indicated that the predicator turnover ratio (M= 3.55, SD=
0.73) explains 90% of the variance towards return on investment (M= 3.1, SD= 0.50), (R2=0.83,
F (5,310) =466.646, P< 0.05). It was found that turnover ratio (ß _ = 0.436 p<0.05,) significantly
predicted return on investment.
Hypothesis # 1c
The hypothesis four is on given the impact of revenue per employee on return on investment.
Since the p-value is less than the 0.05 level of significance this means reject null hypothesis. The
results of regression indicated that the predicator revenue per employee (M= 3.3, SD= .45)
explains 80% of the variance towards return on investment (M= 3.1, SD= 0.50), (R2=0.80, F
(4,311) =186.010, P>0.05). It was found that revenue per employee (ß _ = 0.05 p<0.05,)
significantly predicted return on investment.
Findings and Discussion
Trivedi (2015) agree that HR metrics gives a positive influence on return on investment. Recent
study outlined by Edison (2011) suggested that the organizations should use HR metrics to
investigate the return on investment. This finding is consistent to earlier literature (Trivedi, 2015)
and has found the significant relationship among HR Metrics and return on investment. In our
study, it is concluded that there is a significant correlation between the costs per hire on return on
investment that is our hypothesis 1a is accepted. Our second hypothesis 1b also correlate with
earlier research and concluded that there is a strong effect of turnover ratio on return on
investment. Further tested, the hypothesis 1c comprising of revenue per employee and its impact
on the return on investment and the results were significant and we accept our hypothesis.
Managerial Implications
Henceforward, this research can pave the way for future researches since no earlier study has
been conducted in Pakistan in this sphere. Earlier studies had limited focus on organizational
effectiveness and human capital variables; however the variables have been more towards skills,
knowledge, motivation and performance. This study will act as a building block for researchers
and practitioners to emphasize not just on the benchmarking surveys but to move a step ahead
and utilize the knowledge to predict the paradigm shift from cost to revenue and even investment
center. HR over the last three decades has failed (Rasmussen & Ulrich, 2015). It is time to utilize
all the available tools by given by Ulrich as Strategic Business Partner to Kirkpatrick’s ROI
model and deliver the HR ROI to reflect the monetary impact of its investments into various HR
initiatives. Since these investments enhance human capital productivity and behavior, it becomes
a must to shift attention on three tier HR Bridge framework and reflect not just the efficiency for
operational costs of HR practices but also a more forward looking approach towards prescriptive
analytics to justify and highlight the ROI of HR in organizational performance and
organizational ROI.
HR metrics have an undoubtedly become one of the essential tools by organizations at large to
improve its working with people and their management. Yet researchers over the period have
argued on the underutilization of the analytical tool and blamed the HR professionals who are
mostly focusing on cost aspect of metrics rather than value. Value addition through the forward
looking data gathered through metrics is the only way Human Resource will be able to quantify
the bottom line impact and avoid the roadblocks towards it becoming Strategic HR Business
Partner. We therefore can conclude that whether its small or large organization or it’s the
employee engagement or retention metrics, Human Resource Metrics can become a means to
justify the ends of Return on Investments in people and their cost effective management strategy.
There have been limitations in this research like any other research of time constraints and lack
of participative responses by respondents. Nevertheless, this study can act as a fundamental
study in HR Metrics and future researches can be conducted by involving consultancy firms and
interview approach to review a more comprehensive side of research and can be tested in various
industries.
References