Demonstrating the ROI of HR is impossible without the right information.
By Scott Staples
Someday the term “Human Resources Department” should change. It is the wrong nomenclature to describe what HR departments are asked to do in today’s world. Yes, people management will always be the core responsibility of any HR department. But a significant transformation is underway.
Most HR departments operate with a cost center mentality—an enabling function within a company. This is outdated. CEOs, executive management teams, and even boards of directors are all asking HR departments to be strategic business enablers. This transformation requires new means of thinking within HR, and in some cases, even changes in leadership as more and more business people are finding new careers in HR.
The new concept in HR is return on investment (ROI). The term ROI is typically used at the business-line level only, but now we are hearing CEOs question the ROI on HR. This should scare many HR departments out there.
This transformation is spurring the rise of HR analytics. HR departments cannot be strategic business partners without good data and analytics to enable better and faster decision making. The only way to measure the ROI of an HR department is with HR analytics. To be more specific, HR analytics can help executives glean more information in places such as: performance management, compensation, attrition and retention, succession planning, recruitment, and training.
While digging into the data of any one of these areas will derive meaningful insights, the true power of HR analytics is harnessed when you correlate data from various areas. For example, correlating data points from multiple areas allows companies to answer multiple questions:
• How does the performance of an individual or group relate to the compensation of that individual or group?
• How does compensation affect attrition?
• Do we know who our top performers are, and do we have succession plans in place?
• What recruitment channel(s) have our top performers come from?
• If we increase or decrease compensation by a certain percentage, what will be the effect on attrition?
• Are we getting ROI on our training?
In addition to the transformational change within HR, there are other trends driving the rise of HR analytics: the multigenerational workforce, the rise of social media, virtual working, mobile technology, a global and distributed workforce, viral recruiting, and outsourcing.
HR departments must connect their strategy to the business strategy. The only way to do this is to collect the right data, analyze it regularly, and produce compelling reports that people will read and understand. Let’s take a real-life example of why this is important:
One of our clients is a U.S.-based manufacturer. They have a global workforce and sell their products all around the world. The company’s top two strategic initiatives are increasing sales and opening up emerging markets in the Asia-Pacific region.
MindTree was hired by the HR department to analyze data on a number of factors to see what the people gaps would be in realizing the business strategy. The good news was the company had great data. The bad news was what we found:
• Performance data revealed the lowest performing organization in this company was the sales team as compared to other functions (R&D, operations, service, finance, etc.).
• Tenure data revealed that many in the sales organization were older and nearing retirement age.
• Performance data revealed the highest performers in the company were based in Singapore, which was the hub for their Asia-Pac sales, but attrition data and succession planning data revealed that the highest employee turnover was happening in Singapore and that no successors were in the system.
So, how could this company achieve its two main goals of increasing sales and penetrating emerging markets in Asia-Pac if it has a sub-performing sales team and was losing all the talent in its most critical office? The biggest revelation was that no one knew that this was happening.
This is the power of HR analytics. This company now can move to rectify things and get growth back on track. This is also a great example of proving the ROI on HR.
Capturing the right data and analyzing it for business insights has to be a core responsibility of the HR department if it wants to be a strategic partner and prove the ROI on HR. When this happens, the term “Human Resources Department” should die. How about the “Enabling Everything to Happen Department” instead? Well, someday a new nomenclature will emerge.
Scott Staples is a co-founder and president, Americas at MindTree.