The Value of HR?

August 09, 2012

Many people including even some HR folks, doubt that HR always adds value and for some companies that's probably true. So how can you tell if your HR initiatives are adding value and how do you measure it?  

There is no doubt that an engaged workforce is more productive, generates higher profit  and incurs less associated cost to maintain. There are many ways to measure engagement and as many organizations to help you spend money doing it.

However, most leadership teams other than those of the very largest organizations, will know intuitively when something needs fixing, when employees are distracted or when too many are leaving. 

There are six or seven key areas (the "HR dashboard") in most organizations that can be used as lead indicators for when things are coming adrift. The most common is probably "Turnover" and the metric would be how many people leave the organization voluntarily vs. involuntarily; How many of these are in key roles or have critical skills, how many are on you succession or high potential list. Other indicators will be dependent upon the needs of your organization and industry but could include:  

  • Absenteeism
  • culpable vs. non-culpable
  •  Recruitment
    • Time to Fill
    • Internal Mobility

If you are not currently keeping track of any employee metrics then you may want to start with these as lead indicators of a broken employment model or a less than fully engaged workforce. Now, when you change or introduce new programs you will have a benchmark against which to measure their success.

Much of what is done in the human resource portfolio is intangible in the traditional sense. Organizations struggle to measure the return on investment such as they might with new plant or equipment. There is much talk about the return on investment in people - which led to the notion of Human Capital - but how you calculate the payback from a development program over a career and what is the value destroyed if an employee leaves your organization prematurely proved to be too esoteric for top leadership.

So don't get too wrapped up in the math. Much of what is done in the name of HR is sometimes faddish and will date, and is too often misguidedly deemed necessary for "competitiveness". Generally such programs will not fit all organizations or industries and tinkering with employee engagement without good reason is done at your peril. When faced with a new HR program without an underlying challenge that it seeks to address, proceed with caution.

When however, the dashboard of HR metrics (and your gut!) is indicating that something is wrong consider whether potential solutions fit with your company's values and culture, do they address the issues that you believe are causing the problem? If you are not certain, try a pilot program with a test group of employees. Monitor the dashboard and check to see how the metrics react.

With project that have enterprise wide impact most departments are expected to monitor the impact within their own jurisdiction or area of expertise. Do not exclude HR (or whoever manages employee issues) from this process. Articulate what you expect employee reaction to be and enumerate where and what you expect the impact on productivity to be. Monitor what reaction and impact you actually get - what do you need to do to get it back to where you had planned - how did that intervention affect the metric? 

For example as a result of a large capital investment you might monitor productivity through one of the following before, during and after the investment:

  • Overall profit per headcount (net profit/headcount)
  • Sales per headcount (sales/headcount)
  • Number of customers per headcount (customers/headcount)

The return on human capital doesn't always have to be expressed as a number. There will too many times, intangibles in the formula that detract from its credibility. 

Another way to assess the value of an HR initiative where the above holistic measures don't work, is to benchmark. You can easily envision what complete success looks like if the initiative succeeds and what abject failure would be. These are the two bookends that flank degrees of failure or success. Identify what 75% success looks like and then 25% and so on and measure the outcome against these benchmarks. Yes they are directional rather than precise but probably good enough to assess whether the initiative or the tool was an appropriate solution.

Such metrics can be further broken down by department to demonstrate for example whether additional headcount led to an overall increase in profit? sales? customers? productivity?

When metrics are tracked and recorded, a picture of employee productivity emerges.  Work with your leadership team to identify the human resource productivity statistics that are relevant to your business and in line with competitors to determine if headcount is being used efficiently and that they are located in the right parts of the business. 

Once collected and analyzed, employee productivity information can be used to make better informed decisions in numerous ways. For example, in identifying areas where leadership development is required and where poorly performing areas can be paired with more efficient departments to transfer best practices etc.

HR should not be thought any different from other functions; new initiatives or the effectiveness of new tools should be justified by appropriate improvements in output and measured, enterprise wide initiatives can be tracked through holistic per head indicators and individual investments such as an expatriate or high potential appointment, might be better measured by bookending and bench marking. 

HR should not be exempted from meeting internal investment criteria or process because its activities are perceived intangible. After all we're talking about increasing visibility on how line managers use their human capital and perseverance with this discipline will have a sizeable impact on company performance.

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