Can HRO show its true value through continued measurements? The answer will depend on what gets measured.
In the last issue, I discussed several books promoting the long-term investment in human capital. I received many inquiries to elaborate further on “Ultimate Performance,” due out in April.
My perspective—one supported philosophically by the authors of “Ultimate Performance”—is that in its position as arbiter of human capital performance data, HR has the potential to create measurements that provide valuable insights into company performance. How to do this is relatively straightforward: establish the right metrics and measure them over time. Not a simple task, but HR has valuable and experienced partners in the outsourcing world.
Most organizations understand the basics of measuring human capital impact on business performance. For example, companies generally recognize that employee turnover can have an impact on financial performance and dutifully measure it. But a very low turnover rate might not markedly affect business performance, prompting a company to pursue other measures.
This suggests that a metric is important only if the data implies a problem. If a metric is valid—that is, if its variance can materially affect financial outcomes—then the metric must be continually monitored, not measured and discarded once the data is deemed satisfactory.
Consider free throw percentages in basketball. Even though a team may be hot at the foul line at a single point in time, teams must continually measure free throw performance over time.
The right set of metrics is critical. At PA Consulting, we have documented both efficient and incredibly inefficient outsourced operations. The only consistent difference between the two is that the best performers aggressively measure and report performance over time around the right set of metrics.
The emergence of the HR Scorecard concept, preempted by the work of Becker, Huselid & Ulrich in “The HR Scorecard: Linking People, Strategy & Performance” (2001), greatly advanced the ability to measure how human capital deliverables contribute to an organization’s success. While many HR functions continue to struggle with appropriate and meaningful measures to quantify their value, the HR Scorecard provides a tool that differentiates many HR deliverables.
In the past, the role of the HR function and the professionals within it has been limited to fulfillment and implementation. Those working within these groups were seen as “people people.” That role is evolving, albeit slowly, into that of human capital advisor, working as a strategic partner with senior executives on a wide variety of human capital-related issues with the goal of creating and maintaining an environment for the optimal use of human capital. As of today, few CEOs would say that their HR departments are truly strategic.
John W. Boudreau and Peter M. Ramstad have investigated the alignment or perceived lack thereof between HR and the core business of the firm (Boudreau & Ramstad, 2001). In their research they found the frustration of executives reflected in questions such as:
• Why is there so little logical connection between our core business management processes and talent?
• Why are people issues absent except as a headcount budget at the end of the strategic plan?
We have well-developed strategic planning, marketing, operations, and budgeting processes that connect deeply and logically with our understanding of how to create competitive success and shareholder value. Yet, at best, these core processes reflect only general talent goals like headcount, labor costs, or generic HR programs.
Can talent measures truly drive business decisions and investments? We invest heavily in the latest HR measurement techniques—scorecards, financial reports, ROI studies on HR programs, and studies in how HR programs enhance attitudes, skills, and abilities. Yet, these HR measurements seldom drive key business decisions such as acquisitions or entry into new markets. Moreover, investors can’t rely on these measures to show them the competitive value of our talent.
Boudreau and Ramstad have long espoused that the framework for valuing human capital and supporting critical decision-making involves investment. The application of it should be provided by HR, which dovetails into the current HR call for new and better metrics. However, much of the current HR hype focuses on metrics related to the staffing process (e.g., time to hire, cost of hire, etc.). These are intended to show the efficiency of one of the central HR processes.
The decisions these metrics support are internal to HR (sourcing choices, process improvements), leaving it to look like little more than an ongoing means of justifying the HR function and providing little meaningful visibility or consequence to the rest of the organization.