HR's Ultimate Metric

June 9, 2016

HR's Ultimate Metric

The search for simple, powerful truths has always fascinated us. It would be wonderful and comforting to be able to reduce great complexity to one clarifying solution or action. In popular culture, this quest is perhaps best illustrated by Jack Palance in his award-winning role as Curly in the 1991 film City Slickers. As Curly bounces along on his horse through the haze of his chain smoking, he admonishes Billy Crystal that there is one key to life. When Crystal asks the obvious follow-on question, Palance utters the classic line, That’s for you to find out.”

The quest for a universal panacea is just as strong in business practices such as human resources. Marcus Buckingham not only wrote a book on the subject, he created an acronym—TOTYNTK (the one thing you need to know). In human capital analytics, the same phenomenon pertains: Everyone wants to know the secret—the one or two measures that will make everything better. While most would agree that this desire to find the ultimate metric is oversimplified and even ludicrous, I do think Curly may have been right.

Let’s take a quick look at the state of HR measures in general. As a relatively young profession (a little more than a century old), HR has not used analytics to the extent that, for example, marketing, operations, or finance have. HR has been late to the realization that better decisions can be made from data and evidence as opposed to intuition or bias. Historically, HR measures have often focused on what is easy to measure with an emphasis on internal practices and a generic list of external benchmarks. The problem with internal measures is that they concentrate on efficiency, not effectiveness or results; and the issue with benchmarks is that they are backward views of data that others think are important. If you show a typical list of traditional HR metrics to business leaders, you are just as likely to elicit a yawn as any measure of support.

The reason for this tepid response goes deeper than the numbers. It stems from the fact that HR has not yet fully embraced its fundamental purpose and reason for existence. It still thinks of itself as an internal group focusing on protecting the organization, not a group that drives business results and builds organizational capability (see previous blog on HR mindsets). When more of an external, business-centric perspective is embraced, there should be no real distinction between HR’s agenda and the businesses.  

Once you accept the proposition that HR’s purpose is to drive business results, it turns out that Curly was right: there really is one metric that is more important than any other. The ultimate metric for any business—profit or non-profit—is quite simply: money. While this may seem crass to those of us who are humanists, the final dollar box score, including the extent to which services continue to be provided, is the sole arbitrator.

The implication of this statement is that HR programs and initiatives should lead to business results that, immediately or eventually, save money or grow revenue (the ultimate measures). It is essential then to monetize the outcomes derived from HR programs. This is a skill that is in short supply but must become part of HR’s new toolkit. It is common practice in capital budgeting where competing projects are examined in terms of their relative value, ROI and payback period. It needs to be embraced and practiced by HR professionals.

HR is poor at marketing itself because it cannot articulate the monetary impact of its solutions. Leaders don’t understand the value of HR programs, nor see how they relate to business outcomes and results. There is a disconnect, but when dollars are attached, leaders start to pay attention. Perhaps a couple of examples will be useful.
 

  • Cost to hire. This is a recruiting efficiency metric that does not link to effectiveness or outcomes. It could lead to a situation in which an organization is very efficient bringing in all the wrong candidates. Better approach: Combine quality of hire with cost to hire and monetize the savings by more efficient hiring practices that bring in quality candidates.
  • Training provided. This is an example of an easy to gather metric that is unrelated to business outcomes. It is a virtually worthless measure for business leaders. Better approach: Show a relationship between training and an improved outcome such as customer loyalty. Most customer-facing businesses quantify the amount of business derived from a loyal customer, so it is possible to attach a dollar value to training that leads to greater customer retention.
  • Turnover. Industry benchmarks show that the cost of losing good people (unwanted turnover) is 1.5 times their fully burdened salary. While this measure does address outcomes, it still does not go far enough. Better approach: Put a dollar figure for the cost of replacing employees in valuable roles. Cisco, for example, knows that it loses $250,000 every time a valued junior engineer leaves the organization.  In leadership roles, this cost can easily get into seven figures.
     
  • Quality. Gallup data show that quality increases by 41 percent with top quartile engaged employees. While quality is a meaningful outcome measure, the percentage figure needs to be translated into money to be more impactful. Better approach: Work with operational and finance colleagues to quantify the amount of time taken to fix quality problems and then monetize this estimate.

The key ingredients in being able to monetize HR programs are time, incremental revenue and costs. Work with your finance buddy to gather these data and analyze trends. Calculate the labor cost per day for different roles, and then translate time savings from HR different initiatives into money savings. Another useful measure is the revenue-per-employee indicator of productivity. While this is not a perfect measure of productivity, it can be used to approximate improved outcomes. For example, if an on-boarding program enables new hires to become proficient two weeks faster, calculate the benefit of two weeks of full productivity from the reduced productivity during training.

Remember Curly. It is easier to remember one thing. The trick is that it needs to be the most important thing. HR must use the lingua franca of the business to accomplish its purpose and gain credibility with leaders. Take the extra step and convert human capital analytics to dollars. It is a good investment of your time.

The Authors: 

David Forman is president of Sage Learning Systems and former chief learning officer at the Human Capital Institute. The courses he has developed and taught for HCI have been taken by thousands of HR professionals around the world. Dave has spent more than 25 years in the training industry, working with large global organizations to improve the knowledge, skills, and performance of their people. Major clients include FedEx, IBM, DuPont, Microsoft, SAP, American Express, PwC, Ford, Prudential, Apple, Scripps Healthcare, and Allstate. He has written more than 40 articles on talent management, analytics, strategic human resources, learning systems, high-performance cultures, and leadership. He has also spoken at a variety of national and global tale and leadership conferences. David is the author of Fearless HR: Driving Business Results. He can be reached at dforman1@cox.net.

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