MG: 211 Human Resource Management TERM PAPER

Human Resource Metrics 05-April-2012 J Malini SR No: 08424 Department of Management Studies Indian Institute of Science

TERM PAPER Human Resource Metrics J Malinia

a

M.Mgt 2011-13, Department of Management Studies, IISc, Bangalore 560012

Abstract
Human resource has been playing n vital role in every organisation. But still it has always been considered as a cost centre which has no output. This paper makes an attempt to understand the use of HR metrics in showing the output and contribution of the HR department towards the organisation. The paper analyses the meaning of HR matrics, its usage, and how to develop a meaningful metrics for any organisation. Keywords: HR metrics,

1. Introduction
In the current competitive world, the human resource is proving to be most important resource. Technology up gradation without proper employees who can use it, will prove to be wastage. But companies with the right kind of employee can train and develop them stay ahead in the race, irrespective of the technology changes. Thus recruitment of people with necessary skill for the job, training and development of the employees to keep them competent is vital for the survival of organisation in the current global market. The importance of human resource is gaining acknowledgement by top managers and lot of efforts and money are being invested to develop the human resource of the organisations. The Human Resource department has started being given more importance in every organisation. HR departments have found a place in every organisation around the world. The money spent on the people contributes to around half or more of the total companys expenses.* Even though lot of time and money is being invested in HR department, the output of the HR

department is seldom measured. Around 57% of the companies dont track the impact of HR department on their business.* This is because HR has been accepted as soft unavoidable cost of doing business. Thus even when HR department is acknowledged to play a very vital role in the organisation, it is not given a place in the strategic management team. This is because HR departments are not able to show their contribution in terms of the impact of the HR initiatives on the organisation. Thus the top management, even though realises the importance of HR department in the existence of the organisation, is not sure how HR department can contribute in strategic management. Thus HR departments need to find a way to show their impact on the organisation to gain a place in the development of strategic management. It is said that what cannot measured, cannot be managed. Thus measuring the output of the HR department is important if the HR department is to be monitored and managed. One of the methods of measuring the output is using HR metrics. Lawler and Mohrman (2003b) identify the use of metrics as one of the four characteristics that lead to HR being a strategic partner.

*HR METRICS- moving beyond absenteeism and turnover stats, Koenig and associates Inc

Metrics is defined as a standard for measuring or evaluating something, basis for assessment. Metrics are standards of measurement by which efficiency, performance, progress, or quality of a plan, process or product can be measured. HR metrics are measurements used to measure the HR contributions to the business. These measure the efficiency of the HR department, effectiveness of the HR initiatives and training programs and the impact of the HR on the organisation. This paper will focus on the uses of HR metrics, the different types of HR Metrics and methods to develop effective metrics.

identified. Rapidly cutting underperforming assets helps to increase the efficiency of the organisation. Metrics eliminate confusion weighted metrics helps the HR department to clearly define and communicate what is important and what level of performance is expected from the employees. Thus, metrics helps everyone to focus their attention on the important issues. Metrics helps in bench marking Metrics helps comparison between different companies from the same industry. By bench marking against a company, these metrics helps the organisation to know where it stands and the places where improvement is necessary. Metrics helps to track the improvement By comparing metrics of different time frames, an idea about how the organisation has been changing can be got. Metrics changes the behaviour of the employees By clearly defining the important metrics, the employees know what is important in the organisation and work hard towards the goal. Comparison based on this metrics can also be done by the managers, thereby retaining the focus on the things that are important to the organisation. Metrics helps in reward and punishment As metrics helps to clearly define the output in quantitative methods, it helps to detect who and what should be rewarded or punished. Metrics allows HR to provide evidence on its strategic impact Metrics help HR to prove its economic value and efficiency. Metrics can demonstrate the dollar impact of HR programs Instead of defining the impact of the HR programs in qualitative terms like worker satisfaction or engagement, Metrics helps to define them in terms of dollar impact of these programs like ROI. As mentioned by Dr. John Sullivan, Without data, it is just an opinion. Thus, it can be seen that with the proper metrics, the HR department can contribute to the strategy formulation of the organisation.

2. Uses of HR metrics
Metrics provide a context around which the organisational performance can be measured more precisely. HR metrics helps the HR department to keep a track of their performance and their impact on the organisation. The advantages of having a HR metrics are as follows: Metrics helps to stay focussed - metrics helps in managing the resources well. They give an indication of what is done more or less than required and thus helps to focus the limited resources on tools and strategies that have most significant impact on the organisation. Metrics ensure that the HR department meets the goals and customer needs - The metrics gives the hard data on the output of the HR department, whether the employees needs are satisfied and whether the HR goals have been met. Metrics gives information on the money spent As mentioned above, around half of the organisation cost is spent on the people. HR metrics helps to keep track of how money is spent on the different HR functions. This gives an indication of where to increase or decrease the expenditure, based on the set goals. Metrics helps proper utilisation of resources By comparing the metrics of different programs, the places where the resources should be cut can be

3. Types of HR metrics:
There are three types of HR metrics They are efficiency, effectiveness and impact (Boudreau and Ramstad, 2003). The first type of metrics is used to measure the effectiveness of the HR department. These give an indication of how well the HR function does its basic administrative tasks. The metrics used here usually measures the time and money used by the HR department and the outcomes. The examples of this type of metrics are time to fill vacant positions, HR headcount ratios, cost per hire and administrative cost per employee. The metrics of different companies and different industries is now made available which makes it easy for the organisations to compare the metrics and know if there is any chance of improvement and if so, where improvement can be done. Organizations vary in terms of the cost per employee for HR administration but typically the cost falls in the range of $1,200 to $1,600 (Fitz-enz, 2000). This is a large enough cost so that it certainly is worth measuring not just how much is spent but how well it is spent in terms of the quality and impact of the services provided. But these types of metrics are alone not enough as they do not tell anything about the service quality and impact of the HR services on the organisational effectiveness. The second kind of metrics focuses on the effectiveness of the HR department. These indicate whether the HR programs and practices have the intended effect on the organisation and the employees. The effectiveness of programs like training and development cannot be measured with the rate of participation but with whether the program had helped the employees to build the desired skills. The main function of HR department is to acquire, develop and deploy talent. A measure of whether the correct talent has been acquired, trained and deployed can, to a certain level, be measured by using ratios like ROI and human capital revenue. The last kind of metrics relates to the impact of the HR programs and policies. These metrics demonstrate a link between the HR initiatives and action and tangible effects on the organizations ability to gain and sustain competitive advantage. These are usually in terms of business results like HR performance impact strategic success, Time to integration/adoption, Closed loop feedback. These measures might be difficult to measure when

compared to the first type of metrics. Each organization should find a way to measure these based on their own business strategy and goals, measurement standards in their industry, and their own unique organizational expectations of the HR function. The pyramid of hierarchy of these metrics is shown in figure 1.*

IMPACT

EFFECTIVENESS

EFFECIENCY
Fig 1. Measurement Hierarchy Pyramid. Taking up an example of the hierarchy in the area of talent acquisition may prove helpful. An HR organization might measure speed of hire as a measure of the efficiency. However, many of the employees might quit as soon as they come. So judging recruiting and selection effectiveness by speed alone may not indicate the true story. But even if the retention rates are high, the retained employees might lack the necessary talent and hence might not meet the customer expectation or damage the work culture. Thus customer satisfaction or cultural values are far more strategic in judging whether the hires are adding value to the organization. This is shown in the second pyramid in fig 2.

IMPACT
talent meets customer needs

EFFECTIVENESS
recruit talent that stays

EFFECIENCY
no.of requisitions filled

Fig 2. Measurement Hierarchy Pyramid depicting recruitment process.

4. Criteria for choosing the metrics

There are three basic criteria for choosing the metrics for an organization: Companies should ensure the metrics fit the corporate culture of what is important. The metrics should be designed only for the things that are important for the company. For example, an organization that emphasizes on speed should select metrics related to time. A Metric should echo the critical success factor that makes a companys product or service successful. An example to this might be HR department choosing metrics related to satisfaction of managers and applicants. Metrics should focus on issues that are likely to be reported to the CEO. It is recommended (Kim Villanueva) that HR selects metrics that have most impact on profit, revenue and product development.

6. Building the Right Measures

1. Define business strategy. The metrics should finally help the organization relate to its business strategy. Hence it is best to start with the business strategy. When in doubt it helps to begin thinking about the unique business strategy that differentiates each organization from many others. As shown in figure3, the three different strategies (Tracey and Wiersema, 1993) require different talent to succeed.
POSSIBLE MEASURES Cost Leadership ROA Productivity Innovation Customer Intimacy ROS Account share Revenue dollars/ Customer

Financial/ Operational

ROI % revenue from new products

Customer

5. Errors made in developing and implementing the HR metrics

As mentioned by Dr. John Sullivan, the two common errors are: Developing and implementing HR metrics in a vacuum Developing more metrics than it is feasible to maintain and utilize
People

% of deals closed Market share Price Orientation

Customer value Acceptance of new products Speed of migration

Customer value vs competitors Customer loyalty/ retention

Product/ Service Quality

Attributes like Maintenance costs Warranty costs Efficiency Revenue per Employee

Attributes like Innovative Serviceability

Attributes like Reliability Responsiveness

The most common error is that HR managers try to create and implement metrics in a vacuum. Instead, a collaborative approach should be taken where the HR department lists the strategic metrics and the CFO selects the ones that are likely to be the best measure of business impact and which can be easily understood and considered strategic by top management. This reduces the thought difference between the HR department and the top management and make clear as what is important to them. The second most common error that HR managers make in developing metrics is that developing and track too many metrics. A large number of metrics is both unnecessary and difficult to maintain. Collecting data and calculating metrics is timeconsuming and expensive and hence it is important to focus only on the ones that really matter.

Idea Generation Autonomy

Empowerment Service Skills

Fig 3: strategy driven measurement 2. Determine how to execute. After defining the business strategy, a plan of action for executing the strategies should be carefully decided. This gives the information of what needs to be done and hence provides the desired output at various points of time. 3. Link HR to strategy map. Once the strategy map has been formulated, the HR department should be linked to it. This clearly spells out the role of the HR department and spells out what is expected and required from the HR department. This gives the information of how the HR can contribute as a strategic business partner.

4. Create Measures. With the clear strategic map in place and the role of HR clearly defined, the HR department should chose metrics that measure and track how well the HR department is doing in reaching its end goals, and how effective various initiatives are in helping to the organisation forward. Care should be taken here to ensure that the measures are not just ones that are easy or readily available; if those measures do not capture the concept well, then the time and cost of measuring may be a waste of resources, and might lead to taking decisions in the wrong direction. Once when the variables that are to be measured is decided, it is important to sort out what already exists versus what new measures are needed. For the measures that lack information, plans need to be built to identify how the organization will obtain that information. 5. Link to strategic business results. A clear connection between the metrics and the business results should be there. Metrics should be chosen in such a way that the top executives can relate them to the business strategies and hence acknowledge the HR departments role as a strategic business partner. 6. Set targets. The targets should be set based on these metrics. As these metrics relate to the strategic map of the organization, setting targets around these metrics will help the organization to move in the right direction, along the planned strategic path. Also, some times, bench marking against an organization of the same industry might prove to be useful for the organization so that it improves the efficiency up to the possible level and stays in the race. 7. Communicate the result. The results should be communicated properly to all levels of the organization. This helps the organization to clearly communicate what is important to all the employees and to show them how the organization is performing in the key areas. Communicating the metrics also helps the individual departments to stay focus on the important issues and also to compete on the same.