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Mathews - HR Metrics: The Basics

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  • 1. HR METRICS: Speaking the Language of Profitability The Basics Patricia Mathews President HR Audits, Etc. and Workplace Solutions Consultants
  • 2. Today’s Objectives • Learn the importance of using metrics to demonstrate value to your organization. • Gain a basic understanding of business metrics. • Review basic HR metric concepts and terms. • Gain a basic understanding of what to measure, the types of measurements you can use, sources of data, etc. Copyright Patricia Mathews 2010 2
  • 3. Evolution of HR Metrics Predict the effects of HR initiatives. Link HR initiatives to organizational performance. Monitor HR department performance. Measure HR transactions. Copyright Patricia Mathews 2010 3
  • 4. What is the purpose of HR? • Help build and maintain the organization‟s competitive advantage. • Help the organization achieve its mission and strategic goals and objectives. • Add value to the organization. Copyright Patricia Mathews 2010 4
  • 5. What Are Metrics? Numbers that indicate how well an entity is performing. Copyright Patricia Mathews 2010 5
  • 6. Qualities of Metrics • Can be expressed as percentages, ratios, formulas, or incremental differences. • Can be individual or aggregated. • Can be tracked over time to show trends. • Can be quantitative or qualitative • Can be predictive Copyright Patricia Mathews 2010 6
  • 7. Why Are Metrics Important? • Part of the language of business. • Provide a context around which organizational or unit performance can be analyzed more precisely. Copyright Patricia Mathews 2010 7
  • 8. Why Are Metrics Important For HR? • Demonstrate HR‟s ability to understand the business of the organization. • Demonstrate HR‟s ability to communicate in the language of business. • Establish the „business image‟ of HR Copyright Patricia Mathews 2010 8
  • 9. Performance Measurement Principle A measurement system promotes productivity by focusing attention on the strategic issues, tasks, and objectives. Copyright Patricia Mathews 2010 9
  • 10. Performance Measurement Principle The efficiency and effectiveness of any organizational function can be measured by: • cost • time • quantity • quality • people Copyright Patricia Mathews 2010 10
  • 11. Organization Performance Measurements • Capital Market Outcomes • Financial Outcomes • Organizational Outcomes • Human Capital Outcomes Copyright Patricia Mathews 2010 11
  • 12. Organization Performance Measurements • Efficiency • Effectiveness Copyright Patricia Mathews 2010 12
  • 13. Organizational Performance Measurements - Examples • Profits • Productivity • Cycle Time • Earnings • Stock Market Value/Shareholder Value Copyright Patricia Mathews 2010 13
  • 14. Metrics: Challenges for HR • „Connecting the Dots‟ • Time and Resources • Nature of HR Practices • Calculating HR Costs • Using Data • Organizational Culture • HR Staff Competencies Copyright Patricia Mathews 2010 14
  • 15. Challenge: ‘Connecting the Dots’ Relationships between HR performance and organizational performance are: • Not universal • Not consistent Copyright Patricia Mathews 2010 15
  • 16. Challenge: Time and Resources • Organizations exist over time • People assets ebb and flow • Timeframes can vary by objective • HR staff time and resources • Data collection processes Copyright Patricia Mathews 2010 16
  • 17. Time and Resources: HR Staff • Cycle time for processing employee transactions • Time spent on administrative work • Peak demands versus average workload • Processors found throughout the organization • Automating capability • Outsourcing capability • Alignment Copyright Patricia Mathews 2010 17
  • 18. HR Transactions • 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. Copyright Patricia Mathews 2010 18
  • 19. Data Collection Process • Efficient • Effective • Integrated • Generates reliable data – Complete – Timely – Meaningful to management – Accurate Copyright Patricia Mathews 2010 19
  • 20. Data Collection: Integrated HRIS • Increase accuracy of employee information • Decrease cycle time for processing employee transactions • Reduce time spent by HR on administrative work • Facilitate quick access to employee information for non-HR employees and management • Enable HR to manage without adding staff Copyright Patricia Mathews 2010 20
  • 21. Data Collection: Methods • Organizational performance monitoring • Questionnaires and surveys • Tests and assessments • Interviews • Focus groups • Observations • Video, audio and computer monitoring Copyright Patricia Mathews 2010 21
  • 22. Data Collection: Sources of Data • Internal • External Copyright Patricia Mathews 2010 22
  • 23. Sources of Data: Internal • HRIS • ATS • Internal non-HR databases • Employee files • Organizational records, surveys and reports (HR and non-HR) • HR program participants, their managers, their peers, their work group • Benchmarking Copyright Patricia Mathews 2010 23
  • 24. Internal Sources of Data: Benchmarking • Adds value to HR metrics • Protects programs that are performing well • Creates support for organizational change • Helps in strategic decision-making Copyright Patricia Mathews 2010 24
  • 25. Sources of Data: External • Industry and trade groups • Associations • Regulatory agencies • Consultants Copyright Patricia Mathews 2010 25
  • 26. External Sources of Data: Benchmarking • Can be a starting point to make HR metrics more valuable • Must be used wisely • Emphasize results not processes • Competitive benchmarking may not be valid Copyright Patricia Mathews 2010 26
  • 27. Data Collection: Considerations • Type of data • Time • Cost • Disruption • Accuracy • Usefulness • Cultural preference Copyright Patricia Mathews 2010 27
  • 28. Challenge: Nature of HR Practices • Need right HR practices in place at the right time to support the organization‟s strategic objectives. • Are interdependent; work as systems. • Shared responsibility for design and administration. Copyright Patricia Mathews 2010 28
  • 29. HR Practices: Examples • Recruitment • Selection • Employment • Benefits • Compensation • Performance Management • Reward and recognition • Separation Copyright Patricia Mathews 2010 29
  • 30. HR Practices: Shared Responsibility • HR processes are administered by non-HR management. • Line managers are not trained to perform HR activities. • Limited interaction between HR and the line. Copyright Patricia Mathews 2010 30
  • 31. Challenge: Calculating HR Costs • Often are not apparent in the budgeting or accounting systems. • Are distributed throughout the organization. • Requires considerable resources. • May not include indirect processing costs. Copyright Patricia Mathews 2010 31
  • 32. Calculating HR Costs: Processing Costs • Non-strategic • Overhead • Transactions • Can be complex • Paper-based versus paperless Copyright Patricia Mathews 2010 32
  • 33. What attracted you to HR? • Work with facts and data • Work with systems and processes • „Run‟ a business • Work with people • The $$$$$$ money • By default • The creativity • A career path to a higher level job Copyright Patricia Mathews 2010 33
  • 34. Challenge: Using Data • Data measurement – easy-peasy • Data analysis – not so easy Copyright Patricia Mathews 2010 34
  • 35. Challenge: Using Data • Fear of math! • Aptitude for business • Understanding what metrics to use • Analytical skills • Ability to focus on more than HR activities. Copyright Patricia Mathews 2010 35
  • 36. Using Data: Aptitude for Business • Understanding basic financial principles. • Understanding the organization‟s key business measurements and metrics. • Ability to use financial metrics to link HR initiatives to organizational outcomes. Copyright Patricia Mathews 2010 36
  • 37. Using Data: What Metrics to Use Understanding what metrics to use is not easy. Copyright Patricia Mathews 2010 37
  • 38. Using Data: Analytical Skills • Ability to handle and effectively interpret large amounts of data. • Ability to identify causes vs. symptoms. • Understanding of key HR metrics. Copyright Patricia Mathews 2010 38
  • 39. Using Data: 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 39
  • 40. Challenge: Organizational Culture • Unclear strategy or conflicting priorities • Ability to work with the C-suite • Organization‟s management style • Quality of communications • Quality of collaboration • Many cultural levels • HR‟s image Copyright Patricia Mathews 2010 40
  • 41. Organizational Culture: HR’s Image • Overhead • Tactical/transactional • Does not generate revenue • Not seen as a business partner Copyright Patricia Mathews 2010 41
  • 42. Challenge: HR Staff Competencies • Amount of business education • Business experience • Line experience • Strategic HR skills • Functional HR experience • Presentation skills Copyright Patricia Mathews 2010 42
  • 43. Performance Measurement Principle Organizational performance must be measured at many levels to be effective. Copyright Patricia Mathews 2010 43
  • 44. Data is Used at Many Levels • Operating Unit • Business Unit • Corporate Copyright Patricia Mathews 2010 44
  • 45. Performance Measurement Principle Measure managers by the efficiency and effectiveness of the units they manage. Copyright Patricia Mathews 2010 45
  • 46. Operating Unit Level • Tactical /Transactional • Measures of output – Productivity – Efficiency – Time – Cost – Quality Copyright Patricia Mathews 2010 46
  • 47. Business Unit Level • Operational data – Output – Quality – Time – Cost – Customer satisfaction Copyright Patricia Mathews 2010 47
  • 48. Corporate Level • Strategic – Financial – Focused on organizational performance • Internal vs. external • Predictive Copyright Patricia Mathews 2010 48
  • 49. Data Characteristics • Hard • Soft Copyright Patricia Mathews 2010 49
  • 50. Hard Data • Objective • Common measures of organizational performance • Associated with tangible assets • Relatively easy to collect • Easy to measure and quantify • Relatively easy to convert to $ values • Has credibility with management Copyright Patricia Mathews 2010 50
  • 51. Hard Data: Examples • Output • Quality • Cost • Time Copyright Patricia Mathews 2010 51
  • 52. HR Metrics: Examples of Hard Data • Headcount • Turnover • Total performance appraisals completed • Total employees trained • Total missed days of work • Number of applications processed • Total training hours Copyright Patricia Mathews 2010 52
  • 53. Soft Data • Subjective • Not as common but most closely connected to organizational performance • Associated with intangible assets • More difficult to collect • More difficult to measure and quantify • Difficult to convert to $ values • May not carry as high a level of credibility with management Copyright Patricia Mathews 2010 53
  • 54. Soft Data: Examples • Culture • Reputation • Innovation • Ethics • Customer service Copyright Patricia Mathews 2010 54
  • 55. HR Metrics: Examples of Soft Data • Work climate • Employee satisfaction • Engagement • Diversity • Employee development Copyright Patricia Mathews 2010 55
  • 56. HR Metrics: Caution! The same data can be both soft and hard depending on how it‟s used. Copyright Patricia Mathews 2010 56
  • 57. Data Characteristics • Lagging indicators • Leading indicators Copyright Patricia Mathews 2010 57
  • 58. Data Characteristics: Lagging Indicators • Information that is the result of something that happened • Used to measure processes and outcomes to gauge organization‟s performance • Does not connect directly to the future • Not necessarily predictive Copyright Patricia Mathews 2010 58
  • 59. Lagging Indicators: Examples • Sales • Profit • Inventory • Time to market • Expenses Copyright Patricia Mathews 2010 59
  • 60. Lagging Indicators: HR Examples • Number of employees hired • Number of employees trained • Cost of training • Turnover Copyright Patricia Mathews 2010 60
  • 61. Data Characteristics: Leading Indicators • Precede the future • Predict or affect the future • Show trends, patterns Copyright Patricia Mathews 2010 61
  • 62. Leading Indicators: Examples • Stock market • Political decisions • Changes in government • Changes in the economy Copyright Patricia Mathews 2010 62
  • 63. Leading Indicators: HR Examples • Engagement survey score • Readiness rate • L&D investment per employee • Employee commitment level Copyright Patricia Mathews 2010 63
  • 64. HR Indicators: Business Example • Percent of employees completing a sales training course can be a leading indicator of sales (lagging indicator) • Screening processes at time of hiring sales staff can be a leading indicator of sales (lagging indicator) • Quality of sales management can be a leading indicator of sales (lagging indicator) Copyright Patricia Mathews 2010 64
  • 65. Data Characteristics: Doables vs. Deliverables • Doables: activity counts that show HR efficiency • Deliverables: outputs that show HR effectiveness; support the execution of the organization‟s strategy; add value to the organization Copyright Patricia Mathews 2010 65
  • 66. Performance Measurement Principle The ultimate measurement is not activity (efficiency) but getting the right outcomes (effectiveness). Copyright Patricia Mathews 2010 66
  • 67. HR Metrics Link to organizational performance outcomes. Copyright Patricia Mathews 2010 67
  • 68. Organizational Performance is Measured in Outcomes • Increased revenue or profit • Asset strength and utilization • Increased market share or new customers • Increased employee productivity • Increased shareholder value • Reduced labor costs Copyright Patricia Mathews 2010 68
  • 69. Financial Outcome Measurements: 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, Taxes, Depreciation and Amortization (EBITDA) • Earnings per Share (EPS) Copyright Patricia Mathews 2010 69
  • 70. HR Metrics All HR processes and systems in the cycle of employment must support desired organization performance outcomes. Copyright Patricia Mathews 2010 70
  • 71. Cycle of Employment 1. Recruit 5. Separate 2. Acquire Human Capital 3.Utilize 4. Develop and Reward Copyright Patricia Mathews 2010 71
  • 72. Recruiting Metrics: Examples • Cost per hire • Time to fill jobs • Ratio of offers accepted to offers extended • Quality of hire • Internal hire rate Copyright Patricia Mathews 2010 72
  • 73. Acquiring Metrics: Examples • New hire processing cost • Orientation cost • Opportunity cost • Management satisfaction Copyright Patricia Mathews 2010 73
  • 74. Utilizing Metrics: Examples • Revenue per employee • Profit per employee • Absenteeism rate • Frequency/severity ratio of accidents • Employee satisfaction Copyright Patricia Mathews 2010 74
  • 75. Employee Satisfaction Metrics: Examples • Retention rate • Workforce flexibility measures • Diversity turnover • Average time for dispute resolution • Employee engagement index Copyright Patricia Mathews 2010 75
  • 76. Develop and Reward Metrics: Examples • Benefit cost per employee • Benefit costs as percent of revenue • Total compensation expense per FTE • Compensation as a percent of operating expense • Performance appraisal distribution • Learning and development Copyright Patricia Mathews 2010 76
  • 77. L&D Metrics: Examples • 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 77
  • 78. Separation Metrics: Examples • Turnover rate • Cost of turnover • Reasons for turnover • Opportunity cost of turnover Copyright Patricia Mathews 2010 78
  • 79. HR Department Metrics: Examples • HR expense as percent of total operating expenses • Ratio of HR staff to total FTEs • HR process cycle time Copyright Patricia Mathews 2010 79
  • 80. Strategic HR Metrics • Tie to financial metrics • Help to identify priorities • Assess risk • Identify missed opportunities • Include predictive analytics Copyright Patricia Mathews 2010 80
  • 81. Financial Metrics: Examples • Cost/Benefit Analysis • Internal Rate of Return (IRR) • Payback Period • Net Present Value (NPV) • Return on Investment (ROI) Copyright Patricia Mathews 2010 81
  • 82. Strategic HR Metrics: Examples • Economic contribution per average employee. • Variability of the impact of employee performance on the organization‟s financial performance. • Impact of employees in a particular job on the organization‟s success • ROI of a targeted training program Copyright Patricia Mathews 2010 82
  • 83. Benefits to HR of Using Business Metrics • 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 83
  • 84. Major Metrics Challenges for HR 1. Ability to collect, measure and analyze HR practices in terms that the organization understands and values. 2. Increasing the competencies needed to demonstrate organization and business effectiveness. Copyright Patricia Mathews 2010 84
  • 85. Speaking the Language of Profitability “When you learn to speak the universal language of business, you can have meaningful discussions with anyone in the company, at any level.” -- Ram Charan Copyright Patricia Mathews 2010 85
  • 86. THANK YOU! MERCI! GRACIAS! Patricia Mathews, President HR Audits, Etc. and Workplace Solutions Consultants Sarasota, FL pmathews@workplacesolutions.cc 941-727-1692 Copyright Patricia Mathews 2010 86