Key Metrics Every HR Leader Should Know
HR professionals often are not as respected as their colleagues in finance when it comes to data-based decision making, so let's take a look at the key metrics every HR leader should know to help business outcomes through people.
By Tony Ashton
Faced with ever-increasing hiring costs, rising turnover and increased competition for talent, companies now more than ever more feel the pressure to leverage workforce analytics to design strategies tailored for their company needs. But, no matter how you interpret the latest labor-market figures there is always competition for high-quality, high-performing talent. This leaves companies asking the questions: How many people can we afford to hire, and how do we put them in the right roles? Are employees fully engaged and motivated? Who are our critical employees, how can we retain them and help them meet their expectations?
The cost of turnover has been well-analyzed and depending on role can represent between half to one- and-a-half times an employee's annual salary. For those employees who do not jump ship, a Gallup Poll in 2011 found that 71 percent of American workers are "not engaged" or "actively disengaged" in their work, costing the economy up to $350 billion per year in lost productivity. Numbers such as these rightly keep all managers on edge. What must managers know in order to prevent these issues that hinder company success?
With workforce analytics, companies can improve decision making regarding workforce challenges through detailed data analysis. Many companies would label all this data as Big Data, but do not realize that they do not actually have a true Big Data problem. Most companies are simply overwhelmed by the volume and variety of data available, and the challenges maintaining data quality and making sense of it all. In reality, most companies don't suffer from a true Big Data problem when it comes to workforce metrics. Rather, it is mostly a lack of understanding with regard to the best metrics to track, and organizing the right data and setting up processes to communicate these metrics to managers and business leaders. The HR profession is not as respected as colleagues in finance when it comes to data-based decision making, so let's take a look at the key metrics every HR leader should know to help business outcomes through people.
1) Foundational Knowledge: The Shape and Dynamics of Your Workforce
Not one metric, but a set of metrics and analyses are the baseline for any effective HR leader to professionally lead the HR function in today's world. At its most basic, every HR leader should have a really solid understanding of the shape, composition, profile and major dynamic elements in their workforce. Key elements to this are the foundational metrics that are then used to build all other analysis. These include headcount, hires, terminations, transfers, promotions and the entire core demographics associated with these metrics, e.g. location, job family or role, salary grade, employment status, diversity, gender, tenure, age and so on. Essentially, the nature and shape of the workforce in terms of the number and proportion of people in different employment groups and the numbers entering/leaving and moving through the company. This information represents the starting point for decisions regarding employee deployment, understanding risk and effectively delivering talent to the business. HR leaders can then leverage this data to predict and anticipate future staffing needs, better understand employees' behavior and help create teams that fit well together.
Understanding the dynamics and makeup of the workforce has become increasingly critical as we move to a more globalized workplace. HR managers responsible for employees around the world must be familiar with this segmented and mobile workforce. Whether a company employs 30 or 30,000 people and is located in one country or 100 countries, understanding the core attributes and characteristics about the workforce is critical for delivering effectively targeted strategies.
2) Human Capital Risk
It is now somewhat trite to say that people are your greatest asset, but it is still amazing to me how many companies and managers don't act according to this maxim. Imagine the average cost of an employee in your company is $100,000 per year. (Determining the actual number for your company is really easy to do and you probably already have this for planning purposes.)
Now think about your best performing people and the contribution they make to drive your business forward through the development of new products or services and/or their leadership and influence within the business or broader industry. Shouldn't these people be considered an asset to the business instead of a cost? Add to this the likelihood that many of these people have more than three-to-five years' tenure, and your company has been investing in their learning and development over that time. Now you have people that represent half a million dollars' worth of investment to the company, so not caring for this important asset that you have been investing in sounds crazy, right? This is the level of risk all of us face every day.
Managing this risk has become increasingly important, as a study by the Economist Intelligence Unit found that human capital risks carry the largest possible weight to business outcomes, greater than any other risk facing a company. Workforce analytics provide HR managers with the tools to identify these risks and allow them to proactively respond to issues, aligning their human capital investments with the strategy and needs of the business. Assessing this risk can be done in a variety of ways. Let's look at one key set of metrics: retention -- or it's more often used counterpart -- turnover. These are somewhat lagging indicators, but critical nonetheless as analyzing the trend helps you make relevant future projections to understand potential risk. Importantly, this is really easy data to get a hold of in any company, and can then be used to perform a quick risk assessment.
By applying the techniques of workforce segmentation, you can readily identify which groups are most at- risk and formulate appropriately targeted strategies. For example, are you losing key talent in specific roles, locations and/or functions? Are you losing high-potential future leaders who are sitting in a succession pool, but not getting opportunities for promotion or other stretch projects? More advanced companies are developing a segmentation analysis that suits their business, e.g. retail store managers represent a key role that have a major influence on financial performance through effective people-management practices.
3) Productivity and Performance
One of the most challenging topics for the HR discipline is the issue of workforce productivity. What's worse than an unproductive worker not completing their own tasks? According to a Gallup Poll, 16 percent of the workforce is actively disengaged and these people actively work to undermine their own co-workers' success. Moving beyond any one individual and scaling this across an entire company increases the complexity exponentially. Arguably the whole modern discipline of HR has been formed to help companies effectively harness, utilize, organize and focus the contribution of people to deliver business goals.
There are a wide range of metrics that provide critical insight into productivity and performance. Often these will vary based on job role and expectations of deliverables. Sometimes this is fairly straightforward, e.g. revenue as a measure of performance in a sales role, but sometimes this is more difficult where the role has an indirect link to business performance. There are also macro financial metrics that provide good indicators and these are mentioned later on in this article. Thinking about the topic of productivity and performance holistically, though, the most impactful metric to track is employee engagement. Employee engagement tells you what people think and feel about working in your company, and when combined with other traditional metrics gives you a really solid view on the intrinsic strength of your workforce and ability to execute on strategy.
4) Talent Management
Imagine that a senior manager has been with a company for more than 30 years, and is critical for managing the day-to-day business operations. Without warning, he or she announces he or she will be retiring, leaving the company scrambling to find a suitable replacement to prevent any hiccups in business continuity. Unfortunately, no current employees were being trained to take over for that position and the company is left spinning its wheels trying to recover. This is a very familiar scenario, and over the last couple of decades, company boards have put a lot of energy into executive retention. Beyond the top level management team, how well are you managing talent across your entire company?
Metrics such as successor pool coverage are great to identify the average number of people identified as successors for positions requiring a successor, but it is this last piece, requiring a successor, that suggests the most important aspect of talent management metrics - segmentation and differentiation. Not all positions in the company require successors, because not every position is critical from a risk-management perspective. Some roles and people disproportionately impact business performance compared to others. Focusing strategies on critical roles helps you prioritize scarce HR resources. A lot has been written on this topic in recent years -- for example, The Differentiated Workforce and Beyond HR. The principles of segmentation and differentiation are key to contemporary workforce analytics and need to apply to the application of metrics in the talent domain.
5) Financial Workforce Metrics
At the end of the day, all businesses must answer to their bottom line, and every employee plays a critical role in helping the company generate a profit. Linking people to business performance through metrics such as profit-per-employee is a great way to analyze this relationship and also track corporate performance and workforce productivity. There is debate as to whether or not revenue-per-employee is the more important metric, but the specific financials of your company will influence this decision. These metrics need to be used thoughtfully as you can quickly fall into the trap of using headcount as a blunt instrument, the major lever to change company financials. Of course, you want to have a highly productive workforce and achieving better business results with the same or less people is a great way to demonstrate that. But as mentioned above, people are an asset you are investing in not just a cost.
A metric I really like is return-on-human-investment ratio. This measures the amount of profit returned for every dollar invested in employee compensation/remuneration and benefits. There are many variations on these and other financial metrics that take into account the investment in people and business performance, but all too often HR isn't involved in this really important analysis. Thinking in these terms is critical for HR leaders to be effectively aligned to the business context in which they are working to influence. Monetizing issues like turnover and modeling the impact of initiatives like improved retention, or engagement strategies can have a huge business impact.
For small businesses to multinational conglomerates, the approach to using metrics for every HR leader remains the same. Develop a solid understanding of your workforce profile and dynamic factors; understand areas of risk; the relationship between people, productivity and performance; talent segmentation; and connect everything to the business fundamentals. Don't forget though, that analytics need to focus on usability and drive for simplicity to strengthen a company's ability to make clear, informed decisions in critical moments. A solid understanding and application of analytics empowers HR leaders and can enable a focus and alignment to business outcomes. With 2013 bringing dynamic workforce changes, tapping into a company's data will be the key to engaging employees and ultimately improving the bottom line.
Tony Ashton is a San Mateo, Calif.-based senior director of product management for workforce planning and analytics at SuccessFactors, an SAP company.