Mathews - HR Metrics: The Next Level

4,235 views

Published on

Published in: Business
1 Comment
1 Like
Statistics
Notes
No Downloads
Views
Total views
4,235
On SlideShare
0
From Embeds
0
Number of Embeds
6
Actions
Shares
0
Downloads
363
Comments
1
Likes
1
Embeds 0
No embeds

No notes for slide

Mathews - HR Metrics: The Next Level

  1. 1. HR METRICS: Speaking the Language of Profitability The Next Level Patricia Mathews President HR Audits, Etc. and Workplace Solutions Consultants
  2. 2. 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
  3. 3. 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 3
  4. 4. 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
  5. 5. 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
  6. 6. Competitive Advantage • A unique asset or capability • Drives an organization‟s performance on a continuing basis Copyright Patricia Mathews 2010 6
  7. 7. Competitive Advantage • Physical assets • Capital resources • Core competencies Copyright Patricia Mathews 2010 7
  8. 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. Copyright Patricia Mathews 2010 8
  9. 9. Core Competencies • Sources of leverage • Areas where the organization dominates • Associated with intellectual inputs Copyright Patricia Mathews 2010 9
  10. 10. Core Competencies • Not easily duplicated or replaced • Cut across traditional functions • Reflected in activities that are based on knowledge Copyright Patricia Mathews 2010 10
  11. 11. 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 11
  12. 12. Strategic Objectives • Tie to the organization‟s values. • Provide a sense of direction and a focus for the organization‟s activities. • Establish operating goals and objectives for the entire organization. • Used to measure the organization‟s performance. Copyright Patricia Mathews 2010 12
  13. 13. Organizations Measure Performance • Market Outcomes • Financial Outcomes • Organizational Outcomes • People Outcomes Copyright Patricia Mathews 2010 13
  14. 14. Organizations Measure Performance • Efficiency • Effectiveness Copyright Patricia Mathews 2010 14
  15. 15. Efficiency Measures the rates of resource usage in achieving objectives. Copyright Patricia Mathews 2010 15
  16. 16. Effectiveness Measures how well objectives were achieved. Copyright Patricia Mathews 2010 16
  17. 17. 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
  18. 18. Risks and Opportunities Risk = is a short- 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
  19. 19. Mission and Strategy Alignment • Keeps everyone moving in the same direction. • Serves to focus activities throughout the organization. • Eliminates or reduces internal inconsistency. • Helps the organization to sustain or build a competitive advantage. Copyright Patricia Mathews 2010 19
  20. 20. Mission and Strategy Alignment At all levels: – Organizational level – Department or business unit level – Operating level Copyright Patricia Mathews 2010 20
  21. 21. Mission Statement Brief statement of the purpose of an organization. Copyright Patricia Mathews 2010 21
  22. 22. Mission Statement • Clarifies the organization‟s values. • Used to develop the strategic goals and objectives of the organization. • Used to measure organizational performance. Copyright Patricia Mathews 2010 22
  23. 23. Department or Unit Mission Statement Brief statement of the purpose of the unit. Copyright Patricia Mathews 2010 23
  24. 24. Department or Unit Mission Statement • Ties to the organization‟s values. • Used to establish strategic operating goals and objectives. • Used to measure performance. Copyright Patricia Mathews 2010 24
  25. 25. Alignment With HR Achievement of the organization‟s mission and strategic objectives is dependent upon employee behavior and performance. Copyright Patricia Mathews 2010 25
  26. 26. How HR Fulfills its Purpose The alignment of strategic HR practices and systems with organizational goals and objectives. Copyright Patricia Mathews 2010 26
  27. 27. Mission Statement - 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
  28. 28. 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
  29. 29. Mission Statement Alignment - Example Organization Mission… Human Resources Mission… ”To provide first class ”To ensure the organization service and innovative has the right people in the products to our customers right jobs at the right time and consistently attractive their skills are needed in returns to the owners of order to meet/exceed our business.” customer and shareholder expectations.” Copyright Patricia Mathews 2010 29
  30. 30. Strategic Objectives Specific results that the organization seeks to achieve in pursuing its mission. Copyright Patricia Mathews 2010 30
  31. 31. 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
  32. 32. Department Or Business Unit Strategic Objectives Strategy execution must support the organization‟s competitive advantage. Copyright Patricia Mathews 2010 32
  33. 33. Challenge: HR’s Relationship to the Organization’s Performance Relationships between HR and an organization‟s performance are: – Not universal. – Not consistent. Copyright Patricia Mathews 2010 33
  34. 34. 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
  35. 35. Challenge: Organizations Exist Over Time • Organizations have specific stages of growth. • No definitive endpoint for measurement. • Timeframes can vary by stakeholder. Copyright Patricia Mathews 2010 35
  36. 36. Strategic Objective Organization Mission… Organization Strategic Objective… ”To provide first class service and innovative ”Deliver a high-quality, products to our web-based marketing customers and software solution within the consistently attractive next three years.” returns to the owners of our business.” Copyright Patricia Mathews 2010 36
  37. 37. Strategic Objective Organization Strategic Human Resources Objective… Strategic Objective… ”Deliver a high-quality, web-based marketing software solution within the next three years.” Copyright Patricia Mathews 2010 37
  38. 38. 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
  39. 39. Strategic Objective Alignment - Example Organization Strategic Human Resources Objective… Strategic Objective… ”Deliver a high-quality, ”Identify and hire top web-based marketing talent web-based software solution within software developers the next three years.” within the next 18 to 24 months.” Copyright Patricia Mathews 2010 39
  40. 40. Link Between HR Practices and Organizational Performance Market value of the organization Revenues, profits, return on assets, return on equity, etc. Productivity, quality, service, satisfaction, etc. Quality of the workforce HR practices 40 Copyright Patricia Mathews 2010
  41. 41. 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. Copyright Patricia Mathews 2010 41
  42. 42. 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
  43. 43. Example - HR System to Improve the Quality of the IT Workforce Recruitment + Selection + Opportunities For Internal Movement + Separation Copyright Patricia Mathews 2010 43
  44. 44. Alignment: HR Practices with Strategic Objectives Organization HR Strategic HR Practices: Strategic Objective… Objective… ”Identify and ”Deliver a high- hire top talent quality, web- web-based Human Resources based marketing software System: software solution developers within the next within the next three years.” 18 to 24 months.” Copyright Patricia Mathews 2010 44
  45. 45. Alignment: HR Practices with Strategic Objectives Organization HR Strategic HR Practices: Strategic Objective… •Recruitment •Selection Objective… •Onboarding ”Identify and •Reward ”Deliver a high- hire top talent •Recognition quality, web- web-based based marketing software HR System: software solution developers within the next within the next three years.” 18 to 24 months.” Copyright Patricia Mathews 2010 45
  46. 46. Alignment: HR Practices with Strategic Objectives Organization HR Strategic HR Practices: Strategic Objective… •Recruitment •Selection Objective… •Onboarding ”Identify and •Reward ”Deliver a high- hire top talent •Recognition quality, web- web-based based marketing software HR System: developers Improve the software solution within the next composition of the within the next workforce to meet three years.” 18 to 24 technology needs. months.” Copyright Patricia Mathews 2010 46
  47. 47. Challenge: Shared Responsibility for HR Practices • Administered by non-HR management. • Line managers not trained to perform HR activities. • Limited interaction between HR and the line. Copyright Patricia Mathews 2010 47
  48. 48. Challenge: HR Silos • HR practices not internally aligned • HR practices not integrated • Quality of communications within HR Copyright Patricia Mathews 2010 48
  49. 49. Challenge: HR Competencies • Knowledge: business, organizational, HR • Strategic thinking • Analytical and diagnostic skills • Communication skills Copyright Patricia Mathews 2010 49
  50. 50. HR Competency: Knowledge • Business savvy • Strategic HR expertise - and in your key area • Understanding of the organization, the different business functions, and the customers • Understanding of the industry or sector Copyright Patricia Mathews 2010 50
  51. 51. 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
  52. 52. 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
  53. 53. HR Competency: Communication Skills • Intelligent listener and smart questioner • Effectively persuade or influence • Communicate successfully with diverse audiences • Assertive Copyright Patricia Mathews 2010 53
  54. 54. Challenge: Measuring HR • Measuring at all levels of the organization • Using data • Using financial measures. Copyright Patricia Mathews 2010 54
  55. 55. Corporate Level Measures • Strategic – Financial – Focused on organizational performance • Internal vs. external • Predictive Copyright Patricia Mathews 2010 55
  56. 56. Business Unit Measures Operational data – Output – Quality – Time – Cost – Customer satisfaction Copyright Patricia Mathews 2010 56
  57. 57. Operating Unit Measures • Tactical /Transactional • Measures of output – Efficiency – Time – Cost – Quality Copyright Patricia Mathews 2010 57
  58. 58. Using Data • Data measurement – easy-peasy • Data analysis – not so easy Copyright Patricia Mathews 2010 58
  59. 59. 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
  60. 60. 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
  61. 61. Using Data: Aptitude for Business • Understand basic business principles. • Understand business functions. • Understand the organization‟s key business measurements and metrics. • Use business metrics to link HR initiatives to organizational outcomes. • Use business metrics to persuade management. Copyright Patricia Mathews 2010 61
  62. 62. Using Data: Data Characteristics • Hard • Soft Copyright Patricia Mathews 2010 62
  63. 63. Business Example • Turnover data (hard data) is used to predict customer satisfaction. • That turnover data is now soft data. Copyright Patricia Mathews 2010 63
  64. 64. Using Data: Data Characteristics • Lagging indicators • Leading indicators Copyright Patricia Mathews 2010 64
  65. 65. 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
  66. 66. Financial Intelligence • Clearly understand the organization‟s total investment in human capital. • Measure the financial results of the human capital investment. • Communicate the financial results in the terms management understands. Copyright Patricia Mathews 2010 66
  67. 67. Able to ‘Read’ Financial Reports • Income statement • Balance sheet • Cash flow statement • Annual report Copyright Patricia Mathews 2010 67
  68. 68. The Income Statement • Sales (Revenues ) • Expenses – Cost of goods sold/cost of services – Operating expenses • Profit • Net Profit Copyright Patricia Mathews 2010 68
  69. 69. The Income Statement: Expenses Above the line = COGS or Below the line = Operating expenses = Overhead Copyright Patricia Mathews 2010 69
  70. 70. The Balance Sheet Assets = Liabilities + Owners‟ Equity Copyright Patricia Mathews 2010 70
  71. 71. 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
  72. 72. Employees as Assets • Their knowledge and performance contribute to the value of an organization. • Their value is part of „goodwill.‟ • 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
  73. 73. Employees as Assets • Physical assets depreciate (decrease) in value and/or deteriorate as they age. • Human capital‟s value generally increases over time. Copyright Patricia Mathews 2010 73
  74. 74. 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 74 Copyright Patricia Mathews 2010
  75. 75. 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
  76. 76. Balance Sheet: Owners’ Equity • Preferred shares • Common shares or common stock • Additional paid-in capital • Retained earnings Copyright Patricia Mathews 2010 76
  77. 77. Able to Interpret Financial Data • Revenue • Profit • Days in inventory • Inventory turns • Receivable days • Cash flow Copyright Patricia Mathews 2010 77
  78. 78. Able to Interpret Financial Data • Cash flow Copyright Patricia Mathews 2010 78
  79. 79. 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
  80. 80. Quiz • Every payroll $ is in ________or ___________. • Incentive comp is on the balance sheet either as _________or ___________. • Large HR purchases like a HRIS add to ________and ____________. • HR purchases like supplies, travel, consulting services add to ________________. • Cash flow is an indication of the _______ of an organization. Copyright Patricia Mathews 2010 80
  81. 81. 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 81
  82. 82. HR Metrics All HR processes and systems in the cycle of employment must support the organization‟s desired performance outcomes. 82 Copyright Patricia Mathews 2010
  83. 83. 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. 84. HR Metrics Must link to organizational performance outcomes. 84 Copyright Patricia Mathews 2010
  85. 85. Financial Metrics Link most directly to organization performance outcomes. Copyright Patricia Mathews 2010 85
  86. 86. 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
  87. 87. Understanding What to Measure – Efficiency of HR operations – “Best practices” – HR dashboard or HR scorecard – Causal chain analysis Copyright Patricia Mathews 2010 87
  88. 88. Cycle of Employment 1. Recruit 5. Separate 2. Acquire Human Capital 3.Utilize 4. Develop and Reward Copyright Patricia Mathews 2010 88
  89. 89. 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
  90. 90. Acquiring Metrics: Examples • New hire processing cost • Orientation cost • Opportunity cost • Management satisfaction 90 Copyright Patricia Mathews 2010
  91. 91. Utilizing Metrics: Examples • Revenue per employee • Profit per employee • Absenteeism rate • Frequency/severity ratio of accidents • Employee satisfaction 91 Copyright Patricia Mathews 2010
  92. 92. Employee Satisfaction Metrics: Examples • Retention rate • Workforce flexibility measures • Diversity turnover • Average time for dispute resolution • Employee engagement index 92 Copyright Patricia Mathews 2010
  93. 93. Develop and Reward Metrics: Examples • 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 93 Copyright Patricia Mathews 2010
  94. 94. 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 94 Copyright Patricia Mathews 2010
  95. 95. Separation Metrics: Examples • Turnover rate • Cost of turnover • Reasons for turnover • Opportunity cost of turnover 95 Copyright Patricia Mathews 2010
  96. 96. HR Department Metrics: Examples • HR expense as percent of total operating expenses • Ratio of HR staff to total FTEs • HR process cycle time 96 Copyright Patricia Mathews 2010
  97. 97. 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. Copyright Patricia Mathews 2010 97
  98. 98. 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. Copyright Patricia Mathews 2010 98
  99. 99. Strategic HR Metrics • Tie to financial metrics • Help to identify priorities • Assess risk • Identify missed opportunities • Include predictive analytics 99 Copyright Patricia Mathews 2010
  100. 100. 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, Taxes, Depreciation and Amortization (EBITDA) • Earnings per Share (EPS) 100 Copyright Patricia Mathews 2010
  101. 101. 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
  102. 102. Organization Metrics Organization Organization Organization Mission… Strategic Metrics: Objective… ”To provide first class service and ”Deliver a high- innovative quality, web- products to our based marketing software solution customers and within the next consistently three years.” attractive returns to the owners of our business.” Copyright Patricia Mathews 2010 102
  103. 103. Aligning Metrics HR Strategic HR Practices: HR Metrics: Objective… •Recruitment ”Identify and •Selection hire top talent •Onboarding web-based •Reward software •Recognition developers within the next 18 to 24 months.” Copyright Patricia Mathews 2010 103
  104. 104. Other Financial Measures - Examples • Cost/Benefit analysis • Internal Rate of Return (IRR) • Payback Period • Net Present Value (NPV) • Return on Investment (ROI) 104 Copyright Patricia Mathews 2010
  105. 105. 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 105 Copyright Patricia Mathews 2010
  106. 106. ROI Formula ROI = Program benefits – Program costs X 100 Program costs 106 Copyright Patricia Mathews 2010
  107. 107. Advanced HR Financial Measures - 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 107 Copyright Patricia Mathews 2010
  108. 108. The Future of HR Metrics: Predictive Analytics • 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 108 Copyright Patricia Mathews 2010
  109. 109. Are Your HR Metrics Strategic? • 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 109 Copyright Patricia Mathews 2010
  110. 110. Benefits of Using Business and Financial 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 110 Copyright Patricia Mathews 2010
  111. 111. Major Challenges for HR 1. Focusing outside HR on organizational values, goals and performance 2. Making full use of business and financial metrics and fact-based decision-making 3. Full integration of and collaboration between HR functions 4. The economy 5. Having courage 111 Copyright Patricia Mathews 2010
  112. 112. Speaking the Language of Profitability “To move to the center of the organization, HR must be able to talk in quantitative, objective terms. Organizations are managed by data.” -- Jac Fitz-enz 112 Copyright Patricia Mathews 2010
  113. 113. 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 113

×