If HR Analytics Could Talk, This is What They Would Say

We have often found that HR tends to sit in the area of “qualitative” measure.  Meaning, we ask questions such as “what is the quality of hire?” or “what is the quality of the training we provide to our employees?”.  The challenge with these questions is that they are based on perception – have you heard the saying “perception is reality”?

So if perception equals reality and value is perception, then it seems to me that we can draw a straight line from perception through value to reality.  And what – you might logically ask – has all this to do with HR analytics?

The goal is to create value that is attached to HR analytics and when you achieve that connection, your organization will value HR and HR analytics and it will become their reality.

The Objectivity Test

So how do you begin?  Well – I’ll tell you – the first job of using analytics is to meet the objectivity test.  It is our experience from working both inside the HR trenches and as an HR partner and consultant, HR has a reputation of relying on perception only – perceptions of value that are not validated by objective measurements.  So to begin changing your senior management’s “perception” that your metrics are of value and subjective, analytics are needed and they need to pass the test of speaking in business language i.e. Finance’s language.

Relevance, Reliability, Replication

The first step is to establish a foundation of measurements that can be evaluated by financial standards, challenged, and meet the three “Rs” of metrics – relevance, reliability, and replication.  We have talked about the importance of the three “Rs” in HR analytics before and it is critical we revisit these key elements as we discuss the objectivity test.

If you consider the measurements used in the financial world, these three criteria are present in every statistic used to gauge financial strength.  Let’s consider the economic indicators that everyone hears every day.  Think of each measurement or indicator as a character in the story about the status of the economy…

The unemployment rate is the character that represents how many people of working age are actually working.  If the economy is doing well, this number is lower and this cause and effect relationship is reliable.  Why is it reliable?  Because it has been replicated over time and consistently produced the same cause and effect story.

So a metric that is used has to have credibility and using the three “Rs” as an evaluation tool helps ensure that metric is worth investing time and effort into creating.  Without meeting this test, the metric doesn’t have enough credibility to warrant maintenance and all metrics or analytics must be maintained over time to both build credibility and to build historical trends for decision making.

The HR Analytical Story of Sales

Let’s look at the components of the sales department within an organization and consider what HR has a direct impact on:

• Marketing Costs – Employees, Communications, Travel, Tools
• Sales Costs – Employees, Communications, Travel, Tools
• Signed Contracts – Repetitive Customers, New Customers, Size of Commitment, Timing of Deliverables

What is the single thing that stands out – the employees.  Labor is often one of the highest costs for an organization – and if that labor is in the form of “fixed costs” – it is a cost that does not fluctuate with the ebb and flow of cashflow but is similar to the mortgage payment you have to make every month regardless of how much money you brought in.

So the cost of labor as a fixed cost is a significant commitment for the company – what kind of questions can we ask to start to build objective HR metrics?

• What is the ROI on that employee?
• How much increased revenue are they bringing into the organization?
• How well are they trained?
• How well did the hiring and onboarding process work?
• What processes within HR – such as open enrollment – make selling more difficult?
• What can HR do to facilitate the success of the sales function?
• How can an Employee Gap Analysis accomplish this task of the value an employee brings to the organization?

Sales – whether it is in the form of customers, funding for non-profits, or government spending – if the lifeblood of an organization and connecting your value to sales always increases your credibility.  Look for metrics that can tell the story of HR’s support for the sales and revenue generation function.  To begin developing these measurements, consider these steps:

• Understand what the sales process is and how its cycle runs.  For example, is 4^th quarter the busiest period and getting salespeople to participate in open enrollment is difficult.  How can you make it easier for sales during this period?  Then what metric would reflect that customer service?
• How are salespeople on-boarded and how quickly is it done to ensure they are ready to participate in revenue generating activities as soon as possible?
• How are salespeople retained, engaged, and developed professionally to improve their ability to perform?  How does HR contribute to this and how can it be measured?

Where HR Can Make an Impact

Like that mortgage payment you are committed to every month, employees and their benefits are fixed costs that an organization is committed to every pay cycle.  While having employees that contribute to the health and success of the organization is important and ideal, having employees that create fixed costs while contributing at a sub-par level is reducing the health of the organization and depleting financial resources away from the ability to compete and succeed.

This is an area where HR can have tremendous impact by reducing and managing the impact of fixed costs.  Here’s how:

• Ensure performance evaluations are sensible and produce tangible measurements of the value of the employee, not just routine paperwork.
• Work with management to evaluate and manage the workforce to produce value for the organization and create metrics that validate the professional development and improved performance.
• Reduce or maintain the costs of benefits at the organization’s chosen bench mark.
• Consider where contract labor might be more practical because of its ability to fluctuate based on supply and demand.
• Consider remote opportunities where the configuration of the workforce might improve quality of hire and reduce fixed costs.

And in evaluating these opportunities to impact fixed costs, each of them has a set of metrics that can be used to evaluate the ROI.  For example, when considering performance evaluations:

• How many were performed?
• At what employment intervals? (90 days, 6 months, 1 years)

Variable Costs & the Example of Home Depot

Variable costs are the other component of expenses that make up the calculation for net profit.  Since variable costs change based on business activity, HR can consider metrics that correlate to business activity.

Consider the example of Home Depot.  Today they announced that for the Spring, 2012 home improvement season they will be adding 70,000 jobs.  It you create a metric that is a cost/hire, this is a variable cost that is going to impact the business.  In addition, that variable cost is going to impact the earning of Home Depot before the sales are realized – you have to hire the staff and get them through the onboarding process and into the field before the season hits.  So the variable costs are going to be incurred in the winter.

Take the analysis a step further and HR could be expressing this to management by considering how fixed costs might be reduced during the ramp up, or how alternative recruiting methods could be used, or if outsourcing to a recruitment firm might equalize the impact of the costs of ramping up over several months rather than hitting earnings so hard during the first quarter.

HR’s Opportunity to Impact Net Profit

Whether your organization uses a simple net profit calculation or the EBITA calculation, after our earlier consideration of sales and expenses you can see where HR can impact the bottom line or net profit.  Many things in HR are positioned in a way that reflects intangible ROI.  Leadership training, professional development, “best place to work” designations.  But there are metrics that can be designed that correlate to business indicators and can then be used to tell the story of cause and effect.

As an operational department that is heavily overhead, HR’s opportunity is in creating metrics that reflect Human Risk Management – managing the risk of poor performance and high expenses that impact net profit.  By creating metrics that are relevant and correlated to business indicators, HR begins to improve credibility and establish a reputation as relevant to organizational health.

But correlation – or proving cause equals effect – takes time.  Reliability is the reflection of proving that relationship over and over again.  So of course, you can’t prove that correlation if you can’t replicate the measurement consistently.

To ensure that the reputation of your metrics is credible, you need to evaluate each metric for its maintenance factor.  How easily can you maintain and mine the raw data and replicate the calculation.  If the raw data is manual, you’ve lost credibility because of the room for error and you’ve lost resources because of the time it will require to re-create the calculation each cycle.  If the data is digital and housed within the IT systems, how many systems are involved, i.e. does it cross departments, do you get it automatically or do you have to request it, is it automatically generated on a cycle that you can gain access to, is any of it confidential and unavailable and if so, how do you gain access if it is necessary?  These questions are part of your analytical development process.

Connecting the Dots to Strategic HR Value

So, now you have real metrics based on real data.  You can show correlation with business indicators and consistent cause and effect.  Let’s consider how you can impact perception.  You can draw conclusions from the data that are based on evidence.  But expect the unexpected!  Your data may not validate what your current “perception” is and as a result – you have to be open minded about adjusting your own perception first.

If you think HR does a great job of onboarding and your HR business intelligence indicates otherwise, you need to hold yourself accountable.  This is one of the main tests because HR is “perceived” as being accountable to nebulous standards.  If you want to walk down the metrics path, you have to commit to being accountable for the results and addressing problems.  If you take this path and don’t hold yourself accountable, your credibility will suffer greatly and reinforce the perception that HR is not strategic or business oriented.

So now, let’s assume you have “perceptions” of cause and effect that are supported by data.  What is the “value” to the organization?  I would suggest this is a wonderful opportunity to start with a theory on value and then validate that value with key stakeholders and influencers in your organization.  What is valuable to them?  It will differ.  How can you create an organizational view of value and a specific view of value that is more customized to a stakeholder?  For example, how can you demonstrate value to Sales, Finance, R & D, etc.

This path eventually replaces your current reality with a reality that is based on “perceived value”.  Over time and consistent performance, this perception becomes reality and translates into “strategic value” for HR.

Our next HRL Lunch Break is Thursday, January 26th, 2012 – same time – 1:15 – 1:45 ET and our topic is “Project Management for HR Projects – the Executing Process”.

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Thanks for reading!