Which Metrics Do You Need to Give Your CFO to Get Approval for an HR Investment
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The document provides tips for HR professionals on the types of metrics they should provide to their CFO in order to get approval for an HR investment. It recommends focusing on metrics that show cost savings or returns on investment, like cost of hire/onboarding/termination, minimum service period, reasons for termination, and benchmarks. An example is provided showing how to calculate potential savings from a new training strategy by outlining costs, participants, and expected impact on preventable terminations. The document stresses presenting relevant numbers in the context of the business issue being addressed rather than just presenting data.
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Which Metrics Do You Need to Give Your CFO to Get Approval for an HR Investment
- 1. Which Metrics Do You Need to Give Your CFO to Get Approval for an HR Investment Chris Chamberlain Manager, Benefits and HR Analysis Christopher.chamberl@safelite.com Twitter: @ceclsj
- 2. Who We Are • Safelite Repair, Safelite Replace • Columbus, OH • 10k employees in nearly 700 locations, + 850 “mobile” • Went live with UltiPro on 10/1/2009 • SaaS: HR/Payroll/Benefits, Recruiting, Onboarding, Performance Management, Life Events/Open Enrollment • In 2011 we had 73,803 employee/manager transactions processed in .Net (only 23,454 administrator transactions) • Ultipro BI helped elevate our reporting from “Data Dumps” to Business Intelligence
- 3. Reality of HR • Not good at numbers • Information, not answers • Proving their value, not providing a value
- 5. Don’t Do This Experience Rating PMPM A Incurred Medical Claims PMPM $275.38 $274.27 B Pooled Claims Over $125,000 $13.89 $1.55 C Adjusted Medical Claims (A - B) $261.49 $272.71 D Incurred Rx Claims PMPM $39.46 $46.62 E Total Incurred Claims (C + D) $300.95 $319.33 F Trend Factor (Current 21 mos, Prior 33 mos) 1.248 1.416 G Plan Change Adjustment 1.000 1.000 H Trended/Adjusted Claims (E * F * G) $375.58 $452.29 I Claim Period Weighting 70% 30% $398.59 J Adjustment for Membership Shift 1.000 K Pooling charge for $125,000 $29.97 L Expected claims (I * J + K) $428.56 Retention: M Administration 13.9% N Commission 2.0% O Premium tax 1.4% P Other adjustment 0.0% Q Total retention (M + N + O + P) 17.3% R Experience Premium PMPM [L / (1 - Q)] $518.24
- 6. Example: New Benefit • What is the identified issue? • What are your measures? – Early Detection = Savings – Participation – Cost What does it mean?
- 7. Example: New Benefit A No of Eligible 1000 Using a Deductible Credit of B Expected Participation 50% $50 (including admin cost) C Pct Who Use Deductible 40% D Pct Already Getting Physical 25% E Savings per Early Discovery $ 20,000 F No of New Diagnoses 10 G Average Preventive Visit $ 200 H Cost of Preventive Visits $ 75,000 How much will your claims go up? A * B * (1-D) * G I Projected Cost $ 85,000 How much total expense, including (A * B * C * CREDIT) + GH deductible credit? J Projected Savings $ 75,000 How much will you save in claims? B * (1-D) * E * F K Net Cost $ 10,000
- 8. Metrics That Matter • Cost of Hire • Cost of Onboarding • Cost of Termination • Minimum Service • Termination Reason History • High Performance Voluntary Termination
- 9. Cost of Hire • Job Posting • Advertisement Cost + (Recruiter Hours*Pay) • Screening • (Screen Hours*Pay) per Position • 1st Interview • Interview Time*Pay • Testing • Material cost + (Scoring time*Pay) • Staff Interviews • Interview Time*Pay • Travel Expense • Average Travel cost • Offer and Post-Offer • Material cost + (Recruiter Hours*Pay) • Pre-Hire Testing • MVR, Drug Testing, Health Testing costs
- 10. Cost of Onboarding • Orientation • Orientation Hours*Pay • New Hire Material • Cost of Material • Initial Training • (Trainer Hours*Pay) + (Trainee Hours*Pay) • Job Training • ((Total Trainer Hours + Pay)*Reduced Productivity) + (Trainee Hours*Pay)
- 11. Cost of Termination • Exit Interview/Process • Exit time*Pay • Severance • Average Severance • Administrative Process • Termination Hours*Pay • Unemployment Penalty • Penalty*(min(Earnings,70 00))
- 12. Minimum Service How many days does someone need to be employed before the investment is paid off? • Earnings / EE / Hour = E • Average Daily Work Hours = W • Cost of Hire = H • Cost of Onboarding = O (H + O) / (E * W)
- 13. Termination Reason History • Don’t show how many people are leaving, explain why • Pick something small and dig deep • Repeat and build continual process
- 14. High Performance Voluntary Terminations • Who is leaving that you really want to keep? • Why are they leaving? • What could you have done?
- 15. Benchmarks • Internal – What has worked in the past – What hasn’t worked in the past – How does it compare to other parts of the organization • External – Incorporate DOL, Mercer, Kaiser into your own data
- 16. Example: New Training Strategy • What is the identified issue? • What are your measures? – High ‘Preventable’ terminations – Cost of Replacement – Cost of Material What does it mean?
- 17. Example: New Training Strategy A Cost of Hire $ 1,500 B Cost of Onboarding $ 500 C Cost of Termination $ 200 What does it cost to replace? D Minimum Service (Days) 14 E No of Preventable Termination 400 How many might be affected? F No of Preventable Terminations Inside Minimum Service 75 G Cost of Material (including internal project hours) $ 10,000 What will it cost 1st year? H Current Preventable Termination Cost $ 880,000 (A + B + C) * E I Current Non-Earning Preventable Termination Cost $ 165,000 (A + B + C) * F J Variable Savings Ratio 10% How many are likely to be affected? Net Cost $ (78,000) G - (H * J) Great place for a Benchmark
- 18. Example: New Review Strategy • What is the identified issue? • What are your measures? – Internal Hours – Performance Cost What does it mean?
- 19. Example: New Review Strategy A No of High Performing Terminations 20 Who is your target? B No of High Performers 50 C Average Salary $ 80,000 What is it worth? D Difference in Compa-ratio/productivity 40% E Per Review cost in hours $ 200 How much to administer? F Average Merit Overall 3% What’s it going to cost to keep them? G Average Merit Hi-Performers 6% H Estimated Reduction in HP Terminations 25% What’s it going to cost if we lose them? I Replacement Cost (Hire+OB+Term) $ 2,200 J Plan Cost (B * E) + (B * (G - F) * C) $ 130,000 K Plan Savings $ 149,000 ((A * H) * (C * D)) - ((A * H) * I) Net Cost $ (19,000) J-K
- 20. Answers, Not Numbers • Ask questions: “What are you trying to do with this?” • Numbers without relevance are useless • Make it repeatable
- 21. It’s not all about the data • Ask for what you need • Ask for feedback • Make it personal
- 22. Final Notes • Understand your own area • Have the right talent • Don’t forget internal costs • Think like your audience • Maintain and Repeat Christopher.chamberl@safelite.com www.linkedin.com/in/christopherchamberlain Twitter: @ceclsj
Editor's Notes
- Unfortunate reality – HR is not known for being good at numbers. You could have a PhD in Statistics and your CFO will still give your analysis to a 1 st year finance intern to double-check We’re great at giving information, but not answers….Turnover, retention, time-to-hire. They’re only part of the equation. What’s worse is that no one seems to care There’s also a new trend in HR proving their value…kind of a “look at this, this is what your ‘real’ paycheck looks like” or “hey, did you know we’ve given our avg employee 15 hours of training this year”. Has anyone, ever, been able to calculate the impact to the bottom line of delivering total comp statements? Does it make employees work smarter, or stay another year – or do they look at once and mutter to themselves “I still need a raise”. This is not lost on the company leadership – instead of showing off what we’re doing, we need to focus on showing the impact we’re making, and capable of making.
- Your senior leaders, the CFO in particular, want to know the financial impact of our decisions. We’re full of great ideas, and sometimes go to extreme lengths to try and prove that they’re worth it. What we need to do is master the basic first. Understanding our own data, and presenting it clearly is the first step. It gives confidence to our leaders and a solid platform to what we’re trying to achieve going forward.
- This is information, an example of an ROI analysis. It hurts to look at it. And why when we get stuff like from vendors, or potential vendors – do we pass it on as if it actually means something. The only person this benefits is the salesperson who’s trying to sell us a product. And this isn’t even the whole analysis. It’s confusing, full of lingo and laid out in a non-linear way that’s hard to follow. It’s essentially ‘showing your work’ and no one needs to see that
- A proposal shouldn’t be confusing, it should be linear and easy to understand. Your top leadership often make hundreds of decisions a week, anything from what color to paint the hallway to which amortization schedule to assign to a new building project. They don’t have the time to walk through every calculation, so the first goal should be simplicity. First, you’re trying to add or improve a benefit plan. Trying to justify wellness benefits are one of the hardest things to do, so let’s try that one. Whether it’s at the request of employees, or just because you feel it’s the right thing to do, it’s a minefield to justify – and everyone is always trying to give you a phantom ROI value to the programs. But we can get there using more concrete numbers. For this example, let’s say we want to give employees a deductible credit of 10% if they get their annual physical. An understanding of your well-status is important, but there’s a cost benefit to detecting health issues early – like in cancer. What do you need to measure? 1-How much cheaper is a cancer claim if it’s discovered early. Even if you don’t have enough claims to judge this, you can ask your tpa/carrier for their data. Even ask for certain kinds of cancer if you know you have a target group. What’s the difference in a diagnosis in stage1 vs. stage2. 2-How many people participate. You will have to look at other financial incentives you’ve tried in the past (even the failures) and how many participated. You’ll also need to know how many people use the first 10% of their deductible. How many new cancer diagnoses were there in the one year? And, what percent are already going for their annual physicals? 3-What are the costs? How much does the preventive visit cost. You’ll also be using some of the other numbers to figure out the likely cost in deductible
- Once you have all this information together, it’s pretty easy build an expectation of cost. You’ll notice this doesn’t look like the typical ROI you get. It’s pretty easy to follow each step from top to bottom with no confusion. It also doesn’t use any advanced math at all, no lingo, so it doesn’t look like you’re trying to hide anything. As long as you have the backup for each of the numbers in yellow, this is all anyone really wants to see. I would also suggest not even showing the calculations I show in italics when presenting (I really just showed those so you could see how I got there). How much will claims go up – how much more in preventive visits. How many are eligible, who are likely to participate, who are NOT already having physicals…times the amount of the average preventive visit Plus…how much will the deductible credit cost – How many are eligible, who are likely to participate, who already use their deductible times the amount of the credit PLUS the increased visits Then how much can you expect to save – How many will participate, who are NOT already having physicals, times the number of new diagnoses times the savings expected from early discovery The last reason why this doesn’t look like and ROI – there’s a net cost. Not everything can save money, and few things actually do. But, if the net cost is worth the investment in a program like this, why wouldn’t you fight for it.
- I’m first going to go through some of the basic metrics you’ll need. There will be examples of how to arrive at those numbers, but it’s really just one view. I like to look at everything on an average cost, then add them together. Others might find it easier to look at it on an aggregate level overall, then derive the per person cost. There might also be cost segments that are particular to your organization. When you’re building your own, it’s important to understand where you’re going with it, but to really take your company’s specifics into account. We’ll walk through these, and how to get to them – and then how to use them in a way that makes sense. Again, it’s not the only way, but hopefully it will give you a good example of how make them more persuasive and easier to understand.
- Cost of Hire is one of the most important to start with. How much does it cost to hire each person The cost of posting a job, through monster, etc, and the time it took to create the content How much time does it take to review the applications for the average hire There are typically 5-10 phone interviews for every applicant that comes in for a regular interview – that time adds up as well Many of us do pre-employment testing, either online, or in person, so you have the cost of the material and the time it takes to score them When you bring people in for the interview, that’s time spent for each person they’re interviewing with Don’t forget the expense of bringing people in, whether through flights or travel reimbursement, or just taking them to lunch After you offer them the job, you typically send them books, pamphlets, as well as even more time spent coordinating with the recruiter And finally, the pre-hire tests, which can include driver/criminal history, drug tests, health testing
- For orientation, you might have a schedule of the hire meeting for 30 minutes with 5 different people – and since you’re now paying the new hire, that’s 6 people at 30 minutes The cost of New Hire material, handbooks, etc You often have formal training, so you have the expense hours for the trainer and trainee And on-the-job training, which is hours of the trainee and an portion of the hours of the trainer – reduced for the amount of productive work they can still perform
- You have the amount of time it takes to exit a person, including interview, escort Even though you don’t give severance to everyone, you have to include the average paid to employees after they’re terminated (including taxes and benefits) There’s also time spent by HR and managers to terminate the employee in the systems, gather IT systems, building access, etc And often forgotten is the unemployment penalty, if applicable. If you have an assessed increase in unemployment rate, that has an impact on the cost of termination
- So, once you have a couple of these numbers you can do something very useful. This is one example of how to calculate how long someone has to work before the company’s investment is covered. First, figure out how much revenue the company earns per employee per hour. It’s pretty simple, just gross revenue / employee count / total hours. Next, calculate how many hours the average person works per day. Total Hours / total workdays Then take your calculated cost of hire, and your cost of onboarding. So, it’s the Cost of Hire + Cost of Onboarding / Earnings * Avg work hours.
- We all know about productive terminations and non-productive terminations. Productive – seasonal reductions, performance-based, consolidations; Non-productive – Better opportunity, bad hires. Why are people leaving for non-productive reasons, and could we have fixed it? Example – people who leave because of your benefits. Why would that ever happen? What didn’t you do during the interview process to fully explain their benefits? What can you do to improve that. There’s no purpose in hiring people if they don’t know what they’re getting into. Understand the history of your terminations. Start small. Pick something like Benefits – pull the managers for those terminations, the areas, regions, HR contact. Look for spikes, trends, and improvements. Map it all out into a chart, or a timeline – look back to figure out why things change and when. Were there business changes, advertising, layoffs, etc that impacted these? Then, repeat. Once you’ve spent the time gathering the data for one term reason, it will be so much easier the next time. A lot of that work is already done, because you’ll be able to re-use the information. It takes time to build the history, but it will make it easier going forward to only maintain. And, with the knowledge you’ve gained, you’ll feel more comfortable noting other influences that might be impacting your non-productive terminations.
- These are the worst. No one wants to lose their best people. Figure out who they are and why they left. Anyone with a non-productive termination in your highest performance rating groups. It’s worth looking back a couple years on this at least to get some really good answers. But this group needs a little extra attention. Start with everything you look at for other non-productive terms, area, manager….but look at other circumstances. Look at their promotions, pay increases, changes. Have they been stagnant, or moved around too much. Were they getting 10% increases every year, but just 4% for the last 2? All of these things should help take you to a better understanding of what you could have done. If it’s pay, do you really want to lose someone because of an arbitrary pay ceiling, or lack of development opportunities. Do you have other people at risk? Once you’ve identified the highest risk areas, look at your current high performers. Are the patterns repeating anywhere? What you’re doing here is a simpler version of predictive analytics – but most of us don’t have a large enough sample of this topic to look at this on a large scale.
- Before we move on to the examples, there’s one thing you can always do to add perspective – use benchmarks. The most important are the internal benchmarks. What has worked already? Is this change building on that success, or using lessons from a prior success? Especially if its something you can expand beyond HR – it never hurts to be aware of what everyone else is doing Don’t forget your mistakes – what hasn’t worked in the past and why. If you tried to lower theft by offering grilled cheese in the cafeteria, don’t hide from it. Include it, no matter what hindsight tells you – someone will inevitably say “remember the grilled cheese thing…”. Include it because you want to show why it didn’t work, lessons learned, and how those lessons are being applied. If you’re looking at Cost of Hire, don’t just run it for the whole company, run a comparable for each major section of the company. Show how you’re addressing an area needing improvement and give awareness to how it affects everyone in their own way We also pay for so many surveys, from PlanSponsor, Mercer and so many places to get free information, like the DOL and Kaiser. You should incorporate external benchmarks in anything you do. The main reason – every vendor presentation you sit through does, and you like seeing it too. It gives perspective, and shows that you’ve done your job. You shouldn’t strive for benchmarks, who wants to be average? But it lets you see an example of where you are, in what areas you’re behind, and in other areas that you’re not far enough ahead.
- How do you use all this data. Let’s walk through a couple examples of how you can use this to back up what you’re trying to accomplish. A good example of a new training strategy would be in onboarding. Let’s say you want to invest in a series of onboarding videos. So first, the issue is very likely, inconsistent onboarding When you have bad onboarding, you have a higher amount of terminations within the first 90 days, especially those reasons that are preventable with consistent education. This is the first step – figure out what you can identify as your target terminations How much do you spend every time you have to replace one of these terminations How much is it going to cost to create the videos
- First step, pull in those Hire, onboarding, and termination costs. That’s your cost of replacement every time someone leaves because of bad onboarding. I’ve also pulled in that Minimum Service number, but it’s not actively used here for calculations – just for reference. Pull in the count of those preventable terminations – like ‘don’t like benefits’, policy violation (if you make them sign non-competes or promissory notes) Also, to show on here, count the number of those terminations that happen within your Minimum Service – We’re going to show both of those as dollar impacts. Add in the cost of the new training videos, remember, these will only be a 1 st year cost – unless you plan on editing them every year. The last piece is making the Savings Ratio variable. The calculation should allow for this to be changed to you can see the difference if it impacted 1%, or 15% of these termination. By the way, this would be a great place to drop in a benchmark - relying on external data for this value helps you make your case.
- Compensation Strategy – what if we wanted to do something about our high potentials and high performers. We don’t want to lose them, and perhaps you noticed a high termination rate among them – and it all pointed to a couple reasons. So you want to go through a special process to give each of these a secondary review (which isn’t a bad thing anyway). You could always adopt a ‘double increase’ kind of model, if they’re highest ratings they get twice the merit; but I think most would agree that a more in-depth review would be miles above where most of us are. This is a little different – your measures will be mostly internal hours. There will be hours to create the communications, process for review The other measure is usually difference in performance cost. You can use Comp-ratio if you track it, or even just a standard ratio, usually 20%-40% - this is the lower productivity/quality of the replacement of a high performer.
- First - who’s the target. We need to know how many we identify as high performers, current and terminations during the period Next, Salary and what we think their value is Then we need to show the amount of internal resources we’ll use per each of these reviews Of course, if we want to keep the, we’ll probably have to pay them more. Finally, if we want to have a variable value we can play with to show how much the process will reduce these terminations, and what it would cost if we lost them.
- It’s not all in the projects, and funding requests. If you really want to give your leadership what they need, it’s going to really be on a daily basis. As keepers of the employee information, we are often bombarded with data requests. If you take the time to delve into it, they’re almost always asking the wrong question. Unless you’re filling out a census request for the DOL, no one really ever needs a headcount. Ask the single most important question for report writer – “What are you trying to do with this?” Last week someone asked me how many people were fired in one department last year. I asked my favorite question “What are you trying to do with this?” - his response was, “I want to know how many people I’ll need to hire next year”. Those two topics have very little to do with each other, and if I gave him what he asked for he’d probably be back in a week to ask for more data. Or even worse, try to use that data for his budgeting. So in this example, it’s more than just involuntary termination. You’re going to have to provide him with numbers of hires and type (new or replacements), terminations and type (layoff, voluntary, seasonal, discharges), and probably go back a couple years with the same data. But don’t just give him these numbers. They don’t mean any more to him than the sales history on a random sku mean to you. This is what we do, or at least what we’re supposed to do. Give the numbers relevance: e.g. “for the past few years you’ve had about 3 replacements a year, last year adding 1 net increase in headcount. Assuming no change in your strategy, it would be safe to assume 3 replacement hires next year” Give him the numbers as well, because he’ll still want to see him, but this gives him the answer he really needed, and reinforced the value HR is providing. I love cognos, and one reason is it’s versatility. Use your reporting systems to their fullest extent. If you’re going to go through pulling this data, make sure you can do it again for anyone else in a fraction of the time. Take the time to write something like this into a report, with all the prompts you could imagine. It’s great to be providing a value, but better if you can provide it faster the next time.
- Couple of notes – you’re not going to have all the answers. Reach out to other departments, and don’t keep it a secret either. If you need some cost information from finance, let them know what you’re trying to do. The same way that people error by not asking the right questions, you might do the same. If you just ask for the ytd balance of cost center 123456, you might forget that in some cases something can be coded in multiple ways. Only someone who’s familiar with the data is going to be able to give that to you Ask for feedback, even if you have beg for it. You’re never going to be able to give them everything they want – so leave it open, and ask what else they want to see or any questions they have. Every organization is different, and if you are in one of those where some of the leaders need a little push, then push. You’d hate for an idea to fail because no one thought to ask the question. Sometimes it’s hard to get perspective. When we were trying to revamp our HSA plans, no matter how many ways we explained how much money was at risk, it just wasn’t hitting the target. That is, until we made it personal. We took the past years claims for each person in the room and made them a personal re-pricing for each of the medical plans, calculating their total personal impact. Once they were able to see just how much extra they were spending, or how much extra they could be saving to an HSA they were convinced. Of course they wanted us to do that for all 7k in the medical plan, but luckily we talked them out of that.
- The most important thing that I want to say is to understand your own area. It sounds silly, but you’d be surprised how many years you might work while never taking the time to understand your basic measurements. Whether you’re in benefits, comp, recruiting – take the time to understand what you’re actually doing. One thing at time, take your process and rip it apart. Think about every step in the process and assign a value to it. By understanding what things actually cost, you have a better view of how you can improve. You will also be able to explain to others what these costs actually mean. You have to have the right people building these. We all have to wear many hats, and a lot of people slip on an analysis hat every once in a while, even though it doesn’t fit right or look good on them. Even if it creates some awkward conversations for you, make sure you have the right people doing the analysis. It takes a certain kind of mind to be able to think in these ways. If you have the right talent, you will see a dramatic improvement in the quality of your metrics. It’s easy to pull out all these costs, but don’t forget the hours. Time is usually your most important and most ignored expense. There are internal costs, hours spent creating, tracking, administering. Every time you build one of these, include the internal expense. Think like your audience. If you’re presenting to your leaders, they don’t want the minute pieces of data explained to them. They want to be able to quickly follow what you want, what the cost is, and how it’s going to affect the employees. They might want to look at the data later, so don’t forget to include it, but it shouldn’t be part of what you’re presenting. Make it repeatable and easy to maintain. Don’t spend hours pulling this all together only to have to re-do it again 6 months later. One reason, consistency. What if the next time you try to pull cost of hire you forget something – now your numbers don’t match. If you can, use your reporting systems to make it easier – build everything versatile and easy to run. It will take a little extra time, but there’s nothing worse than trying to remember something you did 6 months ago and having to rebuild.