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The traditional view of HR has always been one with soft focus lenses on, where HR is seen as a “people function” or an “employee relations function” – all adjectives falling in the soft skills category. While this is still an important expectation from HR departments, certain fortuitous occurrences in the last few years such as the exponentially increasing usage of information technology, growth of the globalised knowledge economy, the emergence of ‘intelligence’ from information and the maturing of technologies such as data warehousing and business intelligence have created opportunities and also pressures on HR departments to mine gold out of stock information.
Business strategy cannot be an isolationist strategy. So while the finance, sales, marketing and production departments have well developed measurement systems over the years, expectations from HR to follow suit have been relatively recent and this measurement science continues to evolve.
Three levels of HR measurement systems
Typically HR measurement systems have evolved at three broad levels. At the first level, which is typically a company’s entry point into human capital measurement, operational or transactional efficiency is measured, focusing mainly on quantifying the administrative efficiency. Today, most successful companies have achieved a level of proficiency in measuring human capital efficiency. Examples of some measures are cost per hire, average time to fill vacancy, number of hires per recruiting source, training hours per employee, training operating cost per employee, total labour cost revenue percent, average employee tenure, workforce cost per unit of production and voluntary/involuntary turnover rate. These measures help HR organisations manage budgets and improve process efficiency but are mostly lagging indicators.
At the second level, effectiveness measures quantify the impact of HR practices and the condition of the workforce. They evaluate both the HR function and employee performance, specifically looking at how human capital decisions effect human capital. Most organisations which have effectiveness measures also employ efficiency measures. Some examples of effectiveness measures are offer acceptance ratio, internal hire ratio, quality of hires, competency or skill levels, internal talent bench strength, leadership bench strength, percent of workforce that is promotable , ratings of training effectiveness satisfaction, percent of top performers in top pay quartile, average merit increase per performance level and employee engagement scores. Effectiveness measures help HR take a step forward in being a business partner and a value creator. This moves beyond cost and resource optimisation with clearly establishing effectiveness of HR practices.
At the third level, the business level HR measures move beyond narrowly tracking and assessing HR operations and talent performance, towards looking more broadly at how these factors influence a company’s achievement of its goals and strategy and drive financial results. Impact measures answer questions regarding how specific HR and human capital behaviours related to staffing, development, compensation and benefits, workforce demographics, etc., influence corporate profits and shareholder value. Those measures which are causal and predictive in nature will also demonstrate how specific human capital investments influence intermediary factors such as customer satisfaction or employee turnover, and show how these in turn impact corporate profits and shareholder value. Most organisations have perfected the use of efficiency and effective measures but have not attributed customer and shareholder value to HR practices.
In today’s connected world, no function is an island, and HR holds one of the keys to unravel business intelligence. With rapid globalisation and a connected world, companies are under more pressure than ever to ensure that their strategies for the next few years are built on valuable predictable metrics. Following this imperative, the HR department of the future needs to focus on advanced data mining and predictive modelling of human capital processes to identify new business insights. Moving beyond traditional scorecards or dashboards that provide a static snapshot of progress, these HR functions must take a true R&D approach through systematic, fact-based and scientific methods – to uncover new relationships and opportunities for human capital to drive organisational performance.
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