HR METRICS: Speaking the Language of Profitability The Next Level

Patricia Mathews President HR Audits, Etc. and Workplace Solutions Consultants

Today’s Objectives
• Understand the concept of organizational strategic objectives and competitive advantage. • Understand the competencies HR needs to be viewed as a profit driver. • Understand how to align the HR mission and strategic objectives with the organization‟s mission and strategic objectives.
Copyright Patricia Mathews 2010 2

Today’s Objectives
• Begin to identify HR measurements that are strategically aligned with the organization‟s objectives. • Examine your HR metrics for their strategic relevance. • Understand the importance of communicating the numbers that will engage your executives.

Copyright Patricia Mathews 2010

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Organizations Have a Purpose • Not all are focused on wealth • Can have many purposes • Vary in importance from organization to organization • Communicated in the Mission Statement Copyright Patricia Mathews 2010 4 .

Purpose of an Organization Examples • • • • • • • • Maximize profits Increase market value Grow talent Best quality Best service Safe work environment Advance technology Environmental integrity Copyright Patricia Mathews 2010 5 .

Competitive Advantage • A unique asset or capability • Drives an organization‟s performance on a continuing basis Copyright Patricia Mathews 2010 6 .

Competitive Advantage • Physical assets • Capital resources • Core competencies Copyright Patricia Mathews 2010 7 .

Copyright Patricia Mathews 2010 8 .Core Competencies Unique people-related knowledge. skills and behaviors that help an organization to achieve its business objectives by creating alignment across the organization.

Core Competencies • Sources of leverage • Areas where the organization dominates • Associated with intellectual inputs Copyright Patricia Mathews 2010 9 .

Core Competencies • Not easily duplicated or replaced • Cut across traditional functions • Reflected in activities that are based on knowledge Copyright Patricia Mathews 2010 10 .

The Purpose of HR • Help build and maintain the organization‟s competitive advantage. • Add value to the organization. Copyright Patricia Mathews 2010 11 . • Help the organization achieve its mission and strategic goals and objectives.

• Provide a sense of direction and a focus for the organization‟s activities. Copyright Patricia Mathews 2010 12 . • Establish operating goals and objectives for the entire organization.Strategic Objectives • Tie to the organization‟s values. • Used to measure the organization‟s performance.

Organizations Measure Performance • • • • Market Outcomes Financial Outcomes Organizational Outcomes People Outcomes Copyright Patricia Mathews 2010 13 .

Organizations Measure Performance • Efficiency • Effectiveness Copyright Patricia Mathews 2010 14 .

Efficiency Measures the rates of resource usage in achieving objectives. Copyright Patricia Mathews 2010 15 .

Copyright Patricia Mathews 2010 16 .Effectiveness Measures how well objectives were achieved.

Organization Performance Measures .Examples • • • • • • • Sales (Revenues) Net Profits Cost of Goods Sold Productivity Cycle Time Earnings Stock Market Value/Shareholder Value Copyright Patricia Mathews 2010 17 .

or long-term threat or concern Opportunity = enables the organization to achieve significant improvement in an area the organization values Copyright Patricia Mathews 2010 18 .Risks and Opportunities Risk = is a short.

Mission and Strategy Alignment • Keeps everyone moving in the same direction. Copyright Patricia Mathews 2010 19 . • Serves to focus activities throughout the organization. • Eliminates or reduces internal inconsistency. • Helps the organization to sustain or build a competitive advantage.

Mission and Strategy Alignment At all levels: – Organizational level – Department or business unit level – Operating level Copyright Patricia Mathews 2010 20 .

Mission Statement Brief statement of the purpose of an organization. Copyright Patricia Mathews 2010 21 .

• Used to measure organizational performance. Copyright Patricia Mathews 2010 22 . • Used to develop the strategic goals and objectives of the organization.Mission Statement • Clarifies the organization‟s values.

Department or Unit Mission Statement Brief statement of the purpose of the unit. Copyright Patricia Mathews 2010 23 .

• Used to measure performance. • Used to establish strategic operating goals and objectives.Department or Unit Mission Statement • Ties to the organization‟s values. Copyright Patricia Mathews 2010 24 .

Alignment With HR Achievement of the organization‟s mission and strategic objectives is dependent upon employee behavior and performance. Copyright Patricia Mathews 2010 25 .

Copyright Patricia Mathews 2010 26 .How HR Fulfills its Purpose The alignment of strategic HR practices and systems with organizational goals and objectives.

Example Organization Mission… ”To provide first class service and innovative products to our customers and consistently attractive returns to the owners of our business.” Copyright Patricia Mathews 2010 27 .Mission Statement .

HR Must Understand the Organization • • • • • • What it values What adds value How it makes money Its key measurements and metrics Its competitive advantage Its risks and opportunities Copyright Patricia Mathews 2010 28 .

” ”To ensure the organization has the right people in the right jobs at the right time their skills are needed in order to meet/exceed customer and shareholder expectations.” 29 Copyright Patricia Mathews 2010 .Mission Statement Alignment Example Organization Mission… Human Resources Mission… ”To provide first class service and innovative products to our customers and consistently attractive returns to the owners of our business.

Strategic Objectives Specific results that the organization seeks to achieve in pursuing its mission. Copyright Patricia Mathews 2010 30 .

Department Or Business Unit Strategic Objectives Specific results that the department or business unit seeks to achieve to help the organization pursue its mission. Copyright Patricia Mathews 2010 31 .

Copyright Patricia Mathews 2010 32 .Department Or Business Unit Strategic Objectives Strategy execution must support the organization‟s competitive advantage.

– Not consistent.Challenge: HR’s Relationship to the Organization’s Performance Relationships between HR and an organization‟s performance are: – Not universal. Copyright Patricia Mathews 2010 33 .

Challenge: HR’s Relationship to the Organization’s Performance Organizational performance outcomes HR outcomes which impact HR strategic objectives impact Copyright Patricia Mathews 2010 34 .

Challenge: Organizations Exist Over Time • Organizations have specific stages of growth. • No definitive endpoint for measurement. Copyright Patricia Mathews 2010 35 . • Timeframes can vary by stakeholder.

Strategic Objective Organization Mission… Organization Strategic Objective… ”Deliver a high-quality.” Copyright Patricia Mathews 2010 36 . web-based marketing software solution within the next three years.” ”To provide first class service and innovative products to our customers and consistently attractive returns to the owners of our business.

” Human Resources Strategic Objective… Copyright Patricia Mathews 2010 37 . web-based marketing software solution within the next three years.Strategic Objective Organization Strategic Objective… ”Deliver a high-quality.

HR Must Understand the Organization • • • • • • What it values What adds value How it makes money Its key measurements and metrics Its competitive advantage Its risks and opportunities Copyright Patricia Mathews 2010 38 .

” Human Resources Strategic Objective… ”Identify and hire top talent web-based software developers within the next 18 to 24 months.Strategic Objective Alignment Example Organization Strategic Objective… ”Deliver a high-quality. web-based marketing software solution within the next three years.” Copyright Patricia Mathews 2010 39 .

Link Between HR Practices and Organizational Performance Market value of the organization Revenues. etc. etc. satisfaction. Quality of the workforce HR practices 40 Copyright Patricia Mathews 2010 . return on assets. quality. Productivity. service. return on equity. profits.

Challenge: Select the Right HR Practices
HR must identify the HR practices and HR systems needed to execute both HR‟s and the organization‟s mission and strategic objectives.

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Characteristics of HR Practices
• Interdependent • Work synergistically to:
– Affect the value of the workforce – Affect the performance of the organization

• Can be linked to work as systems
Copyright Patricia Mathews 2010 42

Example - HR System to Improve the Quality of the IT Workforce
Recruitment + Selection + Opportunities For Internal Movement + Separation
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webbased marketing software solution within the next three years.Alignment: HR Practices with Strategic Objectives Organization Strategic Objective… ”Deliver a highquality.” HR Practices: Human Resources System: Copyright Patricia Mathews 2010 44 .” HR Strategic Objective… ”Identify and hire top talent web-based software developers within the next 18 to 24 months.

” HR Strategic Objective… ”Identify and hire top talent web-based software developers within the next 18 to 24 months.Alignment: HR Practices with Strategic Objectives Organization Strategic Objective… ”Deliver a highquality. webbased marketing software solution within the next three years.” HR Practices: •Recruitment •Selection •Onboarding •Reward •Recognition HR System: Copyright Patricia Mathews 2010 45 .

Alignment: HR Practices with Strategic Objectives Organization Strategic Objective… ”Deliver a highquality. 46 Copyright Patricia Mathews 2010 . webbased marketing software solution within the next three years.” HR Practices: •Recruitment •Selection •Onboarding •Reward •Recognition HR System: Improve the composition of the workforce to meet technology needs.” HR Strategic Objective… ”Identify and hire top talent web-based software developers within the next 18 to 24 months.

• Limited interaction between HR and the line. • Line managers not trained to perform HR activities. Copyright Patricia Mathews 2010 47 .Challenge: Shared Responsibility for HR Practices • Administered by non-HR management.

Challenge: HR Silos • HR practices not internally aligned • HR practices not integrated • Quality of communications within HR Copyright Patricia Mathews 2010 48 .

organizational.Challenge: HR Competencies • Knowledge: business. HR • Strategic thinking • Analytical and diagnostic skills • Communication skills Copyright Patricia Mathews 2010 49 .

HR Competency: Knowledge • Business savvy • Strategic HR expertise . the different business functions. and the customers • Understanding of the industry or sector Copyright Patricia Mathews 2010 50 .and in your key area • Understanding of the organization.

HR Competency: Strategic Thinking • • • • See the „big picture‟ Have a long-term perspective Understand how complex systems work Understand that decisions are interconnected • Have a bottom-line orientation Copyright Patricia Mathews 2010 51 .

HR Competency: Analytical and Diagnostic Skills • Handle and effectively interpret large amounts of data • Identify causes vs. symptoms • Understand key HR and business metrics • Have financial intelligence Copyright Patricia Mathews 2010 52 .

HR Competency: Communication Skills • Intelligent listener and smart questioner • Effectively persuade or influence • Communicate successfully with diverse audiences • Assertive Copyright Patricia Mathews 2010 53 .

Copyright Patricia Mathews 2010 54 .Challenge: Measuring HR • Measuring at all levels of the organization • Using data • Using financial measures.

Corporate Level Measures • Strategic – Financial – Focused on organizational performance • Internal vs. external • Predictive Copyright Patricia Mathews 2010 55 .

Business Unit Measures Operational data – Output – Quality – Time – Cost – Customer satisfaction Copyright Patricia Mathews 2010 56 .

Operating Unit Measures • Tactical /Transactional • Measures of output – Efficiency – Time – Cost – Quality Copyright Patricia Mathews 2010 57 .

Using Data • Data measurement – easy-peasy • Data analysis – not so easy Copyright Patricia Mathews 2010 58 .

HR Errors in Using Data • • • • • • Mistake data for information Value only HR data Generate irrelevant data Measure activity instead of impact Rely on gross numbers Rely on data that does not tell the whole picture • Analysis paralysis Copyright Patricia Mathews 2010 59 .

Using Data • • • • • • Aptitude for business Understand data characteristics Understand what metrics to use Focus on more than HR activities Analytical skills Financial intelligence Copyright Patricia Mathews 2010 60 .

Copyright Patricia Mathews 2010 61 . • Use business metrics to link HR initiatives to organizational outcomes.Using Data: Aptitude for Business • Understand basic business principles. • Understand the organization‟s key business measurements and metrics. • Use business metrics to persuade management. • Understand business functions.

Using Data: Data Characteristics • Hard • Soft Copyright Patricia Mathews 2010 62 .

Business Example • Turnover data (hard data) is used to predict customer satisfaction. • That turnover data is now soft data. Copyright Patricia Mathews 2010 63 .

Using Data: Data Characteristics • Lagging indicators • Leading indicators Copyright Patricia Mathews 2010 64 .

Quiz • Sales • Percent of employees completing a sales training course • Screening processes at time of hiring sales staff • Quality of sales management Copyright Patricia Mathews 2010 65 .

• Communicate the financial results in the terms management understands.Financial Intelligence • Clearly understand the organization‟s total investment in human capital. Copyright Patricia Mathews 2010 66 . • Measure the financial results of the human capital investment.

Able to ‘Read’ Financial Reports • • • • Income statement Balance sheet Cash flow statement Annual report Copyright Patricia Mathews 2010 67 .

The Income Statement • Sales (Revenues ) • Expenses – Cost of goods sold/cost of services – Operating expenses • Profit • Net Profit Copyright Patricia Mathews 2010 68 .

The Income Statement: Expenses Above the line = COGS or Below the line = Operating expenses = Overhead Copyright Patricia Mathews 2010 69 .

The Balance Sheet Assets = Liabilities + Owners‟ Equity Copyright Patricia Mathews 2010 70 .

Balance Sheet: Assets • • • • • • • Cash and cash equivalents Accounts receivable Inventory Property. plant and equipment minus accumulated depreciation Goodwill Intangible assets Accruals and prepaid assets Copyright Patricia Mathews 2010 71 .

‟ • They are not an asset on the balance sheet: – Cannot assign a financial value to employees – Organizations don‟t own employees Copyright Patricia Mathews 2010 72 .Employees as Assets • Their knowledge and performance contribute to the value of an organization. • Their value is part of „goodwill.

• Human capital‟s value generally increases over time. Copyright Patricia Mathews 2010 73 .Employees as Assets • Physical assets depreciate (decrease) in value and/or deteriorate as they age.

Correlation Between Employee and Other Assets • • • • Start up curve = Time to full productivity (TFP) Quality of system = Quality of hire Quality of upgrade = Promotion quality Economic impact of loss/failure = Economic impact of separation Copyright Patricia Mathews 2010 74 .

Balance Sheet: Liabilities • • • • Current portion of long-term debt Short-term loans Accounts payable Accrued expenses and short-term liabilities • Long-term liabilities Copyright Patricia Mathews 2010 75 .

Balance Sheet: Owners’ Equity • • • • Preferred shares Common shares or common stock Additional paid-in capital Retained earnings Copyright Patricia Mathews 2010 76 .

Able to Interpret Financial Data • • • • • • Revenue Profit Days in inventory Inventory turns Receivable days Cash flow Copyright Patricia Mathews 2010 77 .

Able to Interpret Financial Data • Cash flow Copyright Patricia Mathews 2010 78 .

Finance: A Science and an Art • Using limited data to as accurately as possible describe an organization‟s performance • Reflection of reality but includes: – Estimates – Assumptions – Educated guesses – Biases Copyright Patricia Mathews 2010 79 .

Large HR purchases like a HRIS add to ________and ____________. consulting services add to ________________. Copyright Patricia Mathews 2010 80 . travel.Quiz • • • • • Every payroll $ is in ________or ___________. Incentive comp is on the balance sheet either as _________or ___________. HR purchases like supplies. Cash flow is an indication of the _______ of an organization.

Copyright Patricia Mathews 2010 81 . Link HR initiatives to organizational performance. Monitor HR department performance. Measure HR transactions.Evolution of HR Metrics Predict the effects of HR initiatives.

82 Copyright Patricia Mathews 2010 .HR Metrics All HR processes and systems in the cycle of employment must support the organization‟s desired performance outcomes.

Organizational Performance Outcomes Examples • • • • • • Increased revenue or profit Asset strength and utilization Increased market share or new customers Increased employee productivity Increased shareholder value Reduced labor costs 83 Copyright Patricia Mathews 2010 .

84 Copyright Patricia Mathews 2010 .HR Metrics Must link to organizational performance outcomes.

Copyright Patricia Mathews 2010 85 .Financial Metrics Link most directly to organization performance outcomes.

Understanding What Metrics to Use – How will you measure success in HR? – What metrics are important to your industry sector? To your organization? – What HR practices and systems are needed to support your organization‟s strategic objectives? – How will you track them and measure their performance? Copyright Patricia Mathews 2010 86 .

Understanding What to Measure – Efficiency of HR operations – “Best practices” – HR dashboard or HR scorecard – Causal chain analysis Copyright Patricia Mathews 2010 87 .

Cycle of Employment 1. Acquire 3.Utilize 4. Separate Human Capital 2. Recruit 5. Develop and Reward Copyright Patricia Mathews 2010 88 .

Recruiting Metrics: Examples • Cost per hire • Time to fill jobs • Ratio of offers accepted to offers extended • Quality of hire • Internal hire rate 89 Copyright Patricia Mathews 2010 .

Acquiring Metrics: Examples • • • • New hire processing cost Orientation cost Opportunity cost Management satisfaction 90 Copyright Patricia Mathews 2010 .

Utilizing Metrics: Examples • • • • • 91 Revenue per employee Profit per employee Absenteeism rate Frequency/severity ratio of accidents Employee satisfaction Copyright Patricia Mathews 2010 .

Employee Satisfaction Metrics: Examples • • • • • 92 Retention rate Workforce flexibility measures Diversity turnover Average time for dispute resolution Employee engagement index Copyright Patricia Mathews 2010 .

Develop and Reward Metrics: Examples • • • • • • 93 Benefit cost per employee Benefit costs as percent of revenue Total compensation expense per FTE Percent of supervisory compensation Performance appraisal distribution Turnover by performance rating Copyright Patricia Mathews 2010 .

L&D Metrics: Examples • • • • • • • 94 L&D cost per employee trained Ratio of employees trained to total FTEs Training hours per FTE Satisfaction with training program Internal hire rate Percent of employees in succession planning Training staff ratio Copyright Patricia Mathews 2010 .

Separation Metrics: Examples • • • • Turnover rate Cost of turnover Reasons for turnover Opportunity cost of turnover 95 Copyright Patricia Mathews 2010 .

HR Department Metrics: Examples
• HR expense as percent of total operating expenses • Ratio of HR staff to total FTEs • HR process cycle time

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Challenge: Calculating HR Costs
• Often not apparent in the budgeting or accounting systems. • Distributed throughout the organization. • Requires considerable resources. • May not include indirect processing costs.

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HR Processing Costs
• Average employee up to 50 HR transactions in the first 14 days after acceptance of employment. • Average employee up to 35 HR transactions in the 14 days following termination. • HR staff needed to track and report on employee information approximately: 1 HR person per 100 employees.
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Strategic HR Metrics • • • • • Tie to financial metrics Help to identify priorities Assess risk Identify missed opportunities Include predictive analytics 99 Copyright Patricia Mathews 2010 .

Depreciation and Amortization (EBITDA) • Earnings per Share (EPS) 100 Copyright Patricia Mathews 2010 . Taxes.Common Financial Metrics Examples • • • • • • Return on Investment (ROI) Return on Assets (ROA) Return on Equity (ROE) Debt to Equity Ratio Earnings Before Interest and Taxes (EBIT) Earnings Before Interest.

Common HR Financial Metrics .Examples • • • • • • Revenue per FTE Sales per FTE Total expenses per FTE Compensation as a percent of revenue Compensation as a percent of total expenses HR dept. expense as a percent of total expenses Copyright Patricia Mathews 2010 101 .

Organization Metrics Organization Mission… ”To provide first class service and innovative products to our customers and consistently attractive returns to the owners of our business.” Organization Strategic Objective… ”Deliver a highquality. webbased marketing software solution within the next three years.” Organization Metrics: Copyright Patricia Mathews 2010 102 .

” HR Practices: •Recruitment •Selection •Onboarding •Reward •Recognition HR Metrics: Copyright Patricia Mathews 2010 103 .Aligning Metrics HR Strategic Objective… ”Identify and hire top talent web-based software developers within the next 18 to 24 months.

Other Financial Measures Examples • • • • • 104 Cost/Benefit analysis Internal Rate of Return (IRR) Payback Period Net Present Value (NPV) Return on Investment (ROI) Copyright Patricia Mathews 2010 .

Traditional ROI • • • • • Used to analyze capital investments to determine if they will benefit the organization Meant for things that can be quantified Represents the time value of money Not always possible or necessary for HR initiatives Used for initiatives linked to strategic or operational goals Copyright Patricia Mathews 2010 105 .

ROI Formula ROI = Program benefits – Program costs Program costs X 100 106 Copyright Patricia Mathews 2010 .

• Impact of employees in a particular job on the organization‟s success • ROI of a targeted training program 107 Copyright Patricia Mathews 2010 .Examples • Economic contribution per average employee.Advanced HR Financial Measures . • Variability of the impact of employee performance on the organization‟s financial performance.

The Future of HR Metrics: Predictive Analytics • • • • • • 108 Higher levels of analysis Predict what is most likely to happen in the future Uses the concepts of correlation and causation Minimizes risk for management Uses leading indicators Not in wide use in HR today Copyright Patricia Mathews 2010 .

Are Your HR Metrics Strategic? • • • • • • • 109 Goals are presented in business terms and connect to improving business results or productivity Impact will be felt outside of HR Have an impact on revenues Discussed in meetings with non-HR management Non-HR management wants updates Linked to a competitive advantage Future focused Copyright Patricia Mathews 2010 .

Benefits of Using Business and Financial Metrics • • • • • 110 Focus on what‟s important not what is urgent Work more effectively with business partners Help „sell‟ HR initiatives that will pay off for the organization Improve HR‟s image Demonstrate HR‟s value to the organization Copyright Patricia Mathews 2010 .

goals and performance 2. The economy 5. Having courage 111 Copyright Patricia Mathews 2010 . Focusing outside HR on organizational values. Making full use of business and financial metrics and fact-based decision-making 3.Major Challenges for HR 1. Full integration of and collaboration between HR functions 4.

” -. HR must be able to talk in quantitative.Jac Fitz-enz 112 Copyright Patricia Mathews 2010 .Speaking the Language of Profitability “To move to the center of the organization. Organizations are managed by data. objective terms.

President HR Audits. Etc. FL pmathews@workplacesolutions.cc 941-727-1692 Copyright Patricia Mathews 2010 113 . and Workplace Solutions Consultants Sarasota.THANK YOU! MERCI! GRACIAS! Patricia Mathews.

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