How HR metrics correlate to business outcomes.
By Elliot H. Clark, CEO
Huh? Do we even know this?
Actually, we do. We just completed a study showing a correlation. This study was presented last week at the HRO Today Forum Europe in London and pleasantly surprised the audience. The study originally grew out of a conversation with the leadership of Alexander Mann Solutions, the top-rated provider on the HRO Today Magazine’s Baker’s Dozen RPO Customer Satisfaction Ratings. They have been developing a pricing strategy that would tie recruiting department or RPO performance into business outcome such as sales, customer satisfaction, employee productivity or profit. The issues HRO Today raised: how many HR departments collected recruiting and operational data, and how many of them actually used it. In addition, would we find that using the data improved a company’s business outcomes and was it measurable? AMS agreed to sponsor a significant research study to examine this issue.
We surveyed 381 companies. It was a global survey and the company headquarters were distributed throughout North America, EMEA and APAC (where RPO has a broader definition, but recruiting metrics are kept in a pretty similar fashion). The results was analyzed and we found a number of interesting things. First of all, most companies are collecting data. In fact, 89 percent of companies collect talent acquisition data (time to fill, cost per hire, funnel metrics), but only 38 percent of companies believe they use it effectively to improve operations. Most of the reason is lack of time or resources to analyze the data if they have it.
We found the same reasoning and trends on employee performance data. Of the companies surveyed, 91 percent collect the employee performance data to track quality of hiring, but only 51 percent feel they use it effectively. The same reasons emerged as the cause: lack of time and lack of dedicated resource. This group also complained about disparate systems that do not integrate, which is another thorn in the paw of most HR departments.
Now, if you had asked a group of HR people in a bar at happy hour what they would have predicted as an outcome of these questions, I believe most would have said we collect a lot of data, but only get to use it as often as we get time to look at it. And then they would have, morosely, ordered another drink. So no “shockers” here. But we did quantify the problem.
Then it got REALLY INTERESTING. In a brainstorming session after the data was collected, our research team became curious. A subset of the group of 381 companies answered this curious question: “Do you analyze and use your recruiting data to improve business operations?” We took a harder look at that question. Did companies that were analyzing and using their data outperform their peer group? If so, this would be the “smoke and fire” story demonstrating HR’s impact on business that we have all been looking for. We can all explain it intuitively, but could we actually find a connection? We took the companies that (1) answered yes, (2) were traded on public stock exchanges and (3) published their financial information. And we pulled their data from the Morningstar three-year total return index. This is more stable than analyzing one-year data and includes many different aspects of financial performance, such as EBITDA, dividend, and stock performance. We used Morningstar or Yahoo Finance to identify a comparison group of three competitors (who we did not know how or if they used HR data to improve business operations—w e only know the control group said they did) for each company in our survey.
After taking our survey respondents and comparing them each to a control group of three competitors we found a surprising outcome. Our survey respondents outperformed the control group 58 percent of the time. This suggests a competitive advantage at 58 percent but not a “knock your socks off” outcome. It was not until we examined the difference that it became DRAMATIC. The survey respondents who outperformed (the 58 percent group) outperformed the competition by an AVERAGE of 200 percent.
This exceeded our expectations in terms of a definable relationship. Companies that used their data experienced significant and measurable results. Thirty percent of the total group reporting they use data (not just public companies) said they experienced more than an 80 percent improvement in time to performance. Twenty nine percent measured a greater than 80 percent increase in customer satisfaction and 14 percent experienced a greater than 80 percent increase in employee productivity. We all know measurement improves everything, but these statistics all lead to higher sales, profitability, and customer satisfaction.
What does this mean? We have to stop short of arguing causation. We cannot say definitely that keeping HR operational and employee performance data causes companies to be more successful. There are many drivers that may lead a company to be or not to be successful. We can absolutely say there is a CORRELATION that companies that keep HR operational data and employee performance data outperform their peers. Maybe these companies are just more disciplined. It does not matter—w hat is clear is that the only bad choice is not keeping and using your data. Then you have no potential impact on the business.
Impact is what it is all about. I keep hearing that world- class HR is about how “small” HR is as a percentage of general and administrative (G&A) spend. That is not the best measure of HR. The best measure is how “big” is the impact of HR. Would any CEO turn down a 100 percent improvement in employee productivity (half the staff and compensation expense) if the tradeoff was a 50 percent increase in the HR budget? Of course not. This study shows the true impact of three key metrics and a correlation to company financial performance. Find a copy of the full study at www.hrotoday.com/content/5300/counting-success. We would like to thank Alexander Mann Solutions for its thought leadership and sponsorship of this research, and allowing us to explore and show an important perspective about the connection between HR and business success.