Measuring both internal and external factors helps provide HR with critical insight for business decisions.
By Sandhya Johnson
Measuring HR is a daunting task for many professionals in the field. There is typically a flurry of activity at the end of each month, quarter, and financial year to gather and report many of the traditional, delivery-based HR metrics. The five usual suspects are turnover, time-to-fill, tenure, training hours/days, and total HR spend. These metrics are useful in monitoring if core HR functions are performing, but they are not enough. These measurements have limitations—they are lagging and aren’t specific to the overall human capital strategy of an organization.
The three main HR measurement frameworks that have been widely used include:
• Balanced Scorecard developed by Robert Kaplan and David Norton in 1996;
• Accenture’s Human Capital Development Framework in 2006; and
• Human Capability Scorecard by Laurie Bassi and Daniel McMurrer of McBassi & Company in 2008.
All three frameworks emphasize business strategy execution, use leading as well as lagging indicators for measurement, and evaluate the utilization of both tangible and intangible assets. However, the gap in all three frameworks is that there is not a strong external environmental focus. Given the extremely dynamic and ever-changing talent landscape, it is critical for HR to consider the impact of external factors and risks, including the economy, employment and job growth, legal risks, technological threats, and shifting customer preferences.
A new structure for HR measurement that takes into account external factors is defined by two underlying dimensions (See Figure 1 on page 25). The first distinguishes between core and strategic HR activities. While core HR activities (payroll, benefits) are required for the day-to-day running of any business, the strategic activities are the ones that make the most difference
to performance (talent acquisition and development, culture, and engagement). The second dimension distinguishes between internal and external focus. An internal focus implies using a lens that is directed inside the organizational system. An external focus, on the other hand, takes into consideration factors outside the organization that have a direct or indirect impact on both short-term and long-term business results.
Based on these dimensions, HR metrics can be categorized into four general domains: efficiency, effectiveness, employee-customer value chain, and emerging trends. For effective measurement of HR, functional leaders need to develop a strong understanding of how human capital contributes to the success of their organization and ensure that metrics answer key business questions. The framework applies to all HR functions, but the metrics within each domain are unique to the organization rather than being generic.
A few examples of metrics that fall under each domain include:
Efficiency (internal, core): This domain includes the operational reporting of HR. Information on the number of active full-time employees, voluntary and involuntary turnover rates, training hours, employees by diversity category, or salaries as a percentage of budget are important data points that can ensure legal, financial, and regulatory compliance.
Effectiveness (internal, strategic): The primary objective of this domain is to ensure the strategic human capital talent initiatives deployed within the organization are effective. The retention of high potentials, the time to fill for difficult-to-fill roles, quality of leadership development programs, successors identified for critical roles, and employee engagement scores are examples of metrics that fall under this domain. These metrics measure an organization’s progress against current strategies.
Employee-customer value chain (external, core): It is important for HR to ensure its activities enhance the business value chain as well as positively impact the customer satisfaction. This domain represents measurements such as competence acquisition for greater customer experience, performance dashboards for outward facing positions such as sales or customer service, employment value proposition, and brand awareness. Establishing the correlation between employee engagement and customer satisfaction for an organization is foundational to value creation through human capital.
External trends (external, strategic): This domain allows organizations to ask and answer big questions about how HR is operating within the context of the external trends and people challenges. Some of these strategic trends are the availability of critical talent segments in the labor market, staffing projections based on anticipated business growth rate, current salary to competitor salary ratio, retirement projections, and facilities and infrastructure planning. This domain links the future orientation of HR to the broader organization.
Application of framework
Having a measurement framework is a good starting place that can help leaders understand HR metric. Configuring the suggested dimensions on a simple two-by-two matrix can start to structure the broad groupings/domains of metrics into meaningful clusters (See Figure 1). This framework and these suggested metrics are a good starting point, but measurements based on the specific needs of an organization or industry should also be considered. Be sure to ask the right business questions—they will lead to the right metrics and framework. There are four key concepts about the measurement framework that need to be considered:
1. All domains are relevant and interrelated. This HR measurement framework does not suggest that one domain is more important than the rest. Instead, it requires the use of an HR scorecard that incorporates all four domains. Each domain reflects an area of impact, and all are necessary for effective human capital decision-making. For instance, the number of active employees (domain 1) can be interrelated with employee engagement (domain 2). Customer satisfaction (domain 3) can impact future state organization design as well as projected staffing needs (domain 4).
2. Domains are progressive. The arrows pointing from domain 1 to domain 2 and subsequently to domain 3 and domain 4 (See Figure 1) reflect the progression when applying this methodology. It is always best to start with the foundational domains and build from there. For example, focusing on domain 4 metrics without building the fundamentals first is not the right approach—the more advanced metrics will not be anchored to existing human capital baselines.
3. Domains 1 and 2 have high HR value. These two domains show the impact within the HR function. Together they measure how well HR is performing and show its effectiveness and efficiency. It is easy for HR to stay focused in these areas because this is typically the organizational expectation. However, remaining in these domains ultimately limits HR to being a support function rather than a strategic partner.
4. Domains 3 and 4 have greater business value. This is what business leaders want from HR. These are the cutting-edge, high-business-value domains that contain leading indicators that drive the business and capture the interest of leaders instantaneously. This critical information aligns the HR strategy with the business strategy, making it an integral part of the business planning process.
There is a lot of great discussion in the marketplace today about big data, HR analytics, and technology. However, without a strategic measurement framework, all of this data will become overwhelming instead of enlightening. The key to making measurement effective begins with understanding and anticipating business challenges, framing them into thoughtful questions, and identifying meaningful metrics that guide decisions.
Sandhya Johnson (@IngeniumGlobal) is founder and managing director of consulting firm Ingenium Global.