Human Resources once considered a field focused on soft skills, has undergone an unprecedented change. HR now deals with complex data that can be analyzed to provide valuable information and insight and is swiftly becoming an essential means to add strategic value. The HR world is buzzing with the transformative potential of HR analytics. This field has developed at the intersection of computer science, engineering, decision making, and statistics and assists in organizing, analyzing, and making sense of uncertain situations. It has become evident that integrated and strategic HR practices considerably improve bottom-line performances. Therefore, appropriate Human Resource Metrics must be developed and applied in order to specifically illustrate the value of HR practices and activities, particularly relative to accounting profits and market valuation of the organization. This task has proven to be far more complex than anticipated, given the difficulties of measuring human assets/capital. Because HR largely deals with intangibles, its activities have in the past been considered outside the purview of measurement. However, with changing times, organizations have realized the importance of quantifying qualitative HR practices. In order to be able to do this, it requires a common understanding of modification of measurement from preciseness to approximation so that things earlier considered immeasurable, could also be brought within the realm of measurement.
About HR Metrics
Human Resource Metrics fit broadly into three main categories. They are HR process efficiency, operational effectiveness, and strategic realignment. Each represents a separate domain in which organizations can and do conduct workforce analytics.
The HR process efficiency metrics focus on how well the HR department (and/or the broader organization) accomplishes critical HRM processes that support organizational effectiveness. Metrics in this area might include cost per hire, days to fill positions, percentage of performance reviews completed on time, and HR department costs as a percentage of total costs or as a percentage of sales. These metrics create credibility for the HR department. Although they may not directly affect the organizational effectiveness as a whole, they are important to ensure that the HR department is running at its optimal level.
Operational effectiveness metrics focus on organizational process improvement by identifying opportunities to improve outcomes by improving human capital investments. These outcomes are outside HR, they are business units’ operational metrics like percentage of on-time deliveries, operational downtime, lost time accidents, units sold, or cost per unit, etc.
Strategic realignment involves the set of activities most commonly known today as human resource planning. Determining the labor needs of an organization, specifically, the type of talent required for executing critical business initiatives and the number of people required for such critical business initiatives proves to be of the greatest importance in determining what will most impact the success of the business strategy.
While all three categories of metrics are important, the focus is shifting from HR efficiency to operational effectiveness. Thus HR managers should not only be well versed in running the HR department smoothly, they must now demonstrate their capacity to work closely with managers in various business units to help achieve the desired outcomes through useful human capital interventions. The need for metrics to align to strategic business objectives is increasing. With the continuous changes in business dynamics, it has become imperative for organizations to rationalize their cost elements and return on investments. HR Metrics is thus becoming an essential tool in analyzing and further justifying every dollar spent on every HR initiative. HR metrics are essential to expel the myth that HR is a “cost center”. When metrics report the cost and also the benefits of a managerial decision, a more accurate ROI can be calculated for every HR decision.
Usually, when people think about quantifying HR work they look at the total function, which may encompass nearly a hundred seemingly discrete tasks, and wonder how they can ever measure it. The way to do that is to break the function down into those individual tasks that are in themselves quantifiable. Quantifying HR work is important to prove its value addition to the organization and to the company’s bottom line. When HR metrics provide quantifiable data about worker satisfaction, productivity, performance, retention, and turnover, they are seldom in the realm of subjectivity. These data can clearly show the relationships between HR initiatives and their cost-effective management. Of course, there are some intangibles that cannot be quantified like social interactions or employee moods which also affect productivity but quantifying most HR practices can help top management understand the value added by HR departments.
Suggested Metrics for a Mid-Sized Company
The mere reporting of metrics is futile if these metrics are not turned into analytics and further that information is turned into insight. It is arguable a waste of time to report metrics for the sake of it. The primary purpose of analytics is to support and improve decision-making. Any metric that does not lead to action is not worth the time and effort to calculate and report. Therefore some metrics should be considered based on the current business environment, and others should be found on the factors most important to the business, not on trends or on those adopted by others. And therefore, identifying the handful of analytics that connect Human Capital Management to organization strategy and key goals and objectives is the most important step in making metrics meaningful to the organization. Organizations should collect HR metrics in all HR functional areas such as talent acquisition, training and development, performance management, organization effectiveness, and benefits and compensation. This is because key metrics from these functional areas will provide valuable insight to help make better human capital decisions and process improvements to realize the full potential of an organization’s most prized asset; its people. The following metrics are suggested as must-haves for a mid-sized company.
- Time to fill: Time to Fill an Open Position tracks the time that passes between publishing a job opening and actually getting a job offer accepted. These metrics may provide crucial information about ineffective advertising or recruitment strategies or inaccurate business planning if the time taken to fill a position is more than anticipated. It is also a function of productivity. The sooner a position is filled, the faster the business need is met and that implies more sales, more productivity, and better service.
- Turnover rates: Turnover rates report the number of employees who leave in a period of time with roles that the company intends to replace. Measuring turnover rates provide clarity about whether retention strategies adopted by the company are working. It can also be a useful indicator of organizational culture and also a way to measure employees’ perception of the organization as an employer of choice.
- Employee engagement and Job Satisfaction rates: These metrics determine how happy employees are at an organization. The happier an employee is, the more productive, creative, and more dedicated he is to his workplace. Granted this is harder to measure objectively, but regular surveys to determine employee satisfaction and engagement will help companies improve their practices. It must be communicated to the employees that measures to enhance engagement and job satisfaction will be taken based on survey results.
- Absence: Tracking absence gives a good indication of how productive your existing workforce is. While it doesn’t tell you how productive your employees are during their active hours, it certainly tells you how many hours they are putting into the business.
- Average performance rating: Tracking this metric allows companies to know how effectively their performance management programs are working.
In addition to the above, the following metrics can also be tracked by organizations. They can be considered wants rather than musts.
- Cost per hire: This metric helps understand how effective the recruitment process is. If the cost of hiring a new employee is high, then it may indicate the need to invest in internal training or examine methodologies used to post job listings. It could also help find the techniques that bring the best candidates to the business.
- Revenue per employee: This metric can be used to determine how over or understaffed an organization might be by examining the growth of its revenue over time.
- Time to productivity: This metric tracks the average number of days it takes for a new hire to reach satisfactory productivity rates. This is a measure of the effectiveness of the HR onboarding program.
Comparative Data on Human Resource Metrics
Benchmarking is the structured process to assess one organization’s performance against a group of other organizations, in order to establish a reference point or best practice. The goal of benchmarking is to identify potential areas of improvement to implement within the organization and to identify trends. Organizations use HR benchmarking data to measure and compare their HR capital expenditures against other companies in the same industry. They can then strategize to surpass industry standards by using HR metrics in the right context.
There are several organizations that offer HR metrics comparative data. These benchmarking data are quite robust and built by using information from several businesses across varying industries. The pioneers in benchmarking HR metrics were the Saratoga institute founded by Dr. Jac Fitz-Enz who is considered the “father” of human capital performance benchmarking. They developed the first set of HR metrics comparative data nearly 40 years ago. The Saratoga Institute is now a part of Price Waterhouse Cooper. Several other organizations such as ADP, The Hackett Group, Mercer.com, and McLean and company offer HR metrics benchmarking data for purchase. Albeit the pricing information is not easily available, it wouldn’t be inaccurate to assume that prices would be comparable and within the same range for each of these companies.
For an organization to have sustained success, it must measure, assess and evaluate its processes on an ongoing basis. Given that employees and their collective skills, knowledge, and abilities represent a significant asset for organizations, a critical issue for organizations becomes measuring this value as well as its contribution to the organization’s bottom line. As imperative as it is for companies to measure operational metrics, they must not neglect to gather Human Capital Metrics. Quantifying HR metrics helps organizations justify their HR capital expenditure. They must recognize the metrics that count and align with business results. Businesses must pay special attention to metrics that solidify HR’s position as a credible strategic partner. Last but not least, metrics without analytics and desired outcomes are purposeless. Only when metrics turn into insights, do they help organizations make useful data-driven decisions.