in Human Resources A Link Consulting White Paper March 2014
Many, if not all, business leaders readily agree that it is their employees who give them a competitive edge in the marketplace through strong customer relationships, innovating new products and services, or ensuring quality and commitment in their daily work. Few, however, are able to quantify the impact of better employees on business performance. The recent advent of the big data movement has helped business leaders understand how to deploy human capital analytics to demonstrate the competitive edge gained by highquality human capital practices. Likewise, human resources professionals struggle with how to measure employee business impact value to the organization. We are often frustrated when asked to quantify what is seemingly unmeasurable. It can be very threatening when asked quantify an employee s value to the organization or the business impact of the work we do. However, HR is a datarich environment and we have many ways to measure employees. Demonstrating the business impact of human capital can actually be relatively straightforward. In this article, I describe different ways to demonstrate the impact of employees on the business. In addition, we provide guidance on how to put these methods into practice. Ways to Demonstrate Business Impact From a purely financial point of view, business impact can be demonstrated in terms of cost savings or increased revenue to the organization. Hiring better employees who are a better fit with the organization can produce cost savings and help the company capture additional revenue. Alternatively, business impact may be quantified by non-financial which can be tied back to organizational strategy or financial performance. Finally, business impact may be quantified at the individual or team level. The table below provides some examples. Types of Performance Metrics Financial Individual Sales per hour Average sales per week Add on sales Manufacturing productivity Waste Shrinkage/Theft Non-Financial Quantitative Customer Service Turnover Engagement On the Job Accidents Error rates Quality Scores Client retention Qualitative Willingness to rehire Manager performance ratings Training performance Team Team sales Year over Year Store Sales Unit Shrinkage / Theft Material Waste Engagement Scores of direct reports Unit/Team Turnover Team awards, accomplishments or rankings Team bench strength 2
Financial Metrics Financial impact is almost always of primary importance to leaders who must report business financial growth to stockholders, analysts or boards on a quarterly basis. Unfortunately, financial impact is often the metric that HR has the most difficulty demonstrating. To demonstrate financial impact, HR must have access to key financial data. If the organization s leaders must review and report on financial business metrics, these data must be available within the organization within the finance, sales or operations function. Sometimes these data are readily available in organizations with a data driven culture but that s often not the case. HR must partner with their colleagues within the organization to gather the data needed to conduct analyses to demonstrate financial impact. Most retailers can track sales per hour for cashiers and salespeople by noting which employee is logged into the point of sale system for each sale. The company was able to pull sales per hour metrics by employee $240 $235 $230 $225 $220 $215 $210 $205 $200 Sales per Hour Highly Qualified Marginally Qualified for all current employees and match that up with their hiring records. Just using a simple comparison, the company was able to see that highly qualified applicants sold US$24 more per hour than marginally qualified candidates. Given the large number of employees at this retailer, they were able to demonstrate a multimillion dollar increase in revenues based on an emphasis on hiring better candidates over marginal ones. Team or business unit metrics can be another great source of financial data to evaluate the impact of human capital. Team analyses are not quite as specific as when evaluating impact at the individual level but are as defensible as most other analyses conducted on customer or other market data. Two conditions must be met for business unit analyses to be reliable and valid: 1) Data must be available for a vast majority of the individuals within the business unit, and 2) Data must be able to indicate high performing and low performing teams. The analyst must use the data to make a judgment call in categorizing the teams. If enough data exists for the individuals within each business unit (e.g., location, team, job title), companies can easily evaluate the financial impact of the unit. 3
Another organization wanted to evaluate the effectiveness of its manager promotion process but only tracked revenue and expense metrics at the store level. We were able to evaluate the effectiveness of developing strong 14% 12% 10% 8% 6% 4% 2% 0% Year over Year Same Store Sales Increase Strong Management Teams Weak Management Teams management teams by evaluating the entire team and categorizing them as either Strong or Weak teams. Based on this categorization, the organization was able to show that units with Strong management teams had year over year same store sales increases that were nearly double that of the Weak management teams. Non-Financial Quantitative Metrics Some of the most interesting and informative results come from non-financial quantitative metrics. These analyses can tell the organization exactly how employees are impacting the business. That is, what do better employees actually do that gives value to the business? These metrics are often leading indicators of financial returns like sales and profitability. In addition, these metrics can usually be translated into financial impact with some understanding of how the business works. For example, a warehouse and distribution company was able to demonstrate that employees who were more conscientious and had a better attention to detail were more productive and made fewer mistakes in their work. Another company was able to track workers compensation claims on newly hired employees and show that those who personal responsibility for safety were much less twice as likely to have a workplace accident. Finally, a retailer was able to track customer satisfaction survey data back to the actual cashier and found that highly qualified employees were rated by customers as friendlier and more efficient leading to overall higher customer satisfaction scores. Just as with financial metrics, companies can evaluate business impact for non-financial quantitative metrics at the business unit level. It s important to have enough data for each business unit to reliably classify each into highly qualified and marginally qualified groupings. 4
A restaurant company was able to compare restaurants run by highly qualified managers verses marginally qualified managers. The results of the comparison showed that the team members working for highly qualified managers responded 5% more favourably to an employee engagement survey and 7% more managers had teams with greater tenure by six months. Many organizations have done extensive market research looking at the linkages among employee engagement, customer satisfaction and sales or profitability. Similarly, many articles have been written supporting the service-profit chain showing that more committed and better engaged employees take better care of customers, resulting in more loyal customers who spend more, more often. Thus, HR may be able to place a financial value on non-financial metrics by partnering with the organization s marketing analytics team. Qualitative Metrics Organizations will often turn to qualitative metrics when they don t believe they will be able to access objective data. (Although it is our hope that this article will help HR professionals take a broader look at new quantitative metrics as well as analyses that allow them to be used to show the impact of employee selection systems.) Qualitative metrics can help organizations understand early indicators of employee behaviours that support business strategy and financial results (e.g., suggestive selling, following procedures, turnover intentions). It is important to understand the organization s strategy and the specific behaviours employee exhibit that are in support of the strategy. An IT consulting company identified a need to raise the level of consulting skills among its senior project leaders and business development staff. Short- and long- term metrics were very important to the organization. After the initial culture change intervention, the company measured change in participants self-assessed abilities relevant to the objectives of the 10 8 6 4 2 0 Consulting Skill Improvement Ability to engage with current and new clients as a consultant Ability to influence client decisions culture change. Based on these positive results, the company made the decision to move forward with additional phases and continue to collect data on client satisfaction, client retention and sales growth. Before After 5
Recommendations This article has intentionally focused on how companies can demonstrate improvement on operational business results, rather than decreasing the costs of the talent acquisition function. HR is frequently asked to find savings within HR and look for other ways to reduce staff costs. My strong recommendation is never to focus only on cost cutting. Organizations cannot cut their way to greatness. Cost savings efforts much also take revenue generation into account. As demonstrated, there are strong returns realized by investing in your talent. These returns can be quantified with relative ease when you access the right data. Hiring training, directing with proper goals, giving performance feedback, and coaching employees to higher levels of performance are all integral to proper human capital management. These and other talent strategies, when aligned with the organization s business strategy, will ensure results that are equal to or even better than those examples presented here. About Us Link Consulting helps companies translate business strategy into people strategy by ensuring individuals understand their role within the strategy and maximise their ability to contribute to shared success. We employ leading tools and methodologies proven in research and practice to improve employee and business performance. Our interventions are strategic, yet practical, and our support delivered in a spirit of humility and partnership. While global leading practices help to foster inspiration, we know that these must be customized for local geographic and organizational culture as well as situational constraints. Link Consulting specializes in human resources consulting focusing on providing talent management strategies and solutions to clients. The services that we offer range from developing talent strategies to implementation of initiatives for leadership, talent, and development. Our focus is on understanding our clients unique needs as individuals and as organizations, and to use the highest quality products and services to address their needs. We aim to develop and implement strategies that raise the capabilities of individuals, help them understand their unique contribution to the company s strategy, and align their individual objectives to the organization s vision and goals. We measure our performance most fundamentally by the improved performance of our client organizations, which is profoundly influenced by the improved satisfaction and performance of the individual employees of the client organization. Link Consulting is a business unit of Link Coordination Sdn. BhD. registered in Petaling Jaya, Malaysia. 6