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0706 HR Magazine: Repurposing Metrics for HR

By Karen M. Kroll   7/1/2006
 

HR Magazine, July 2006

Vol. 51, No. 7

HR professionals are looking through a people-focused lens at the CFOs metrics on revenue and income per FTE.

 What if one or two metrics could help you plan future staffing needs, better motivate employees with compensation and provide support for various training initiatives? And what if the data were already being collected for you?

Most likely, in your CFO’s files or spreadsheets is a wealth of information that you can analyze and interpret with a “people” point of view—if you know how to apply the numbers.

That data—operations revenue per full-time employee (FTE) and income per FTE—can help human resource professionals gain an understanding of employees’ productivity and better manage compensation, training and staffing. ›

To be sure, these are not the only measurements that HR will want to use to gauge employees’ productivity or to make significant organizational changes. One or two calculations alone won’t provide definitive insight or an action plan.

When you analyze revenue and income per FTE, “generally what you get are not answers but better questions,” says Steve McElfresh, SPHR, principal and founder of HR Futures, an HR consultancy in Palo Alto, Calif. “They’ll point you a little closer to the truth.”

Further, you will need to look at these metrics with a careful eye, making sure you fully understand what these numbers represent.

Nonetheless, measures of revenue and income per FTE, especially when viewed over time or in comparison with similar firms, can provide a credible indication of employee productivity.

“From our standpoint, revenue per FTE is the best metric to assess worker productivity,” says Scott Pollak, director with PwC Saratoga, a human resource consulting firm headquartered in San Jose, Calif. The measure, calculated by dividing revenue by the number of FTEs, tells how effectively employees generate sales.

Income per FTE shows the portion of sales dollars left after expenses are paid, divided by the number of employees. It provides an indication of employees’ abilities both to bring in sales and to manage expenses.

While CFOs monitor these measures with a financial eye, HR professionals can use these same metrics to help guide and manage their people management processes.

Greater Focus on Metrics

Employee productivity metrics have increasingly captured the interest of more HR professionals, experts note. “The whole area of metrics [within HR] has been one of great focus over the last few years,” says Bill Mackenzie, a Boston-based principal in the human capital consulting practice group of Deloitte Consulting. He attributes it partly to HR departments’ attempts to link their efforts with their organizations’ overall business objectives. To do that, they need a way to determine the value employees are adding and the impact of human resource initiatives on employees’ performance.

In addition, Mackenzie says, a growing number of forward-thinking executives are recognizing that success depends on their management team’s ability—in concert with HR—to be competent stewards of their organization’s human capital. (For one firm’s example, see “Metrics in Practice.)

As a result, more HR and other executives are starting to pay greater attention to these metrics, yet many haven’t focused on them fully. McElfresh estimates that fewer than half of his clients have used these measures before he talks with them.

In part, this reflects a need for education, says Rainer Strack, who is based in Düsseldorf, Germany, and is a director and vice president with Boston Consulting Group. In short, many HR professionals need to better understand how to calculate and interpret such metrics.

Crunching the Numbers

While calculating these metrics isn’t overly complicated, getting data that is accurate and meaningful can be more involved than simply dividing the organization’s revenue or income by the number of FTEs. Often, several matters need to be addressed to ensure the reliability of your metrics:

  • Consider business types. Revenue and income per FTE are most helpful for businesses with knowledge and service workers, says Mackenzie. These metrics provide less insight in more capital-intensive industries, where the connection between employee productivity and revenue is not as direct. In manufacturing, for instance, the equipment used has a significant impact on revenue.
  • Even some knowledge workers dont have a direct tie to sales or income, notes Scott Testa, chief operating officer at Mindbridge Software, an intranet software developer in Norristown, Pa. At Mindbridge, for instance, management has tried basing some of the compensation earned by its software programmers on the revenue generated by the project on which theyre working. However, a number of other variables, such as the effectiveness of the marketing program supporting a project, also influence sales. "It's hard to wrap our arms around this," Testa says.
  • Tweak revenue calculations. For income, HR needs to ask if profits that arent directly tied to employee productivitysuch as investment earningsshould be excluded from revenue calculations. In some instances, McElfresh notes, HR may decide to look at whats referred to as EBITDA earnings before interest, taxes, depreciation and amortization. The reason: These expenses are extraneous to employee productivity and thus shouldnt be included in the calculation.
  • For similar reasons, Strack and Felix Barber, also with the Boston Consulting Group, subtract the return on debt or equity per employee demanded by holders of the companys debt or stock. Whats left will provide an indication of employees contribution to the organization, they say.
  • Revenue figures also can be skewed by regional differences in how an organizations products or services are priced, Pollak notes. For example, a store based in a city may show higher revenue numbers per FTE than one in the hinterlands because the urban store may sell the same goods at higher prices. Often, its difficult to gather the data needed to adjust the prices between regions, Pollak adds. However, HR professionals working on the calculation will want to note the differences so they can be taken into account by managers reviewing the analysis. 
     
  • Adjust FTE counts. Another possibly dicey issue is determining just who counts as an FTE. For example, companies may be inclined to exclude contractors from their FTE calculations. But, if the revenue that contractors produce is included in the total while the contractors themselves are excluded from the FTE count, revenue or income per employee will be artificially boosted.
  • To prevent such distortions, Strack and Barber propose a variation of the sales-per-employee calculation. They start with sales per employee, and then subtract supplier and outsourcing costs. This eliminates the inflation of revenue per FTE that occurs when a company beefs up its use of contractors.
  • Account for differences when benchmarking. HR should be careful when using these metrics to benchmark against other organizations. One issue: Different industries can have widely varying numbers. For example, retail firms tend to have much lower figures for revenue per FTE than utility companies, where the costs of some expenses that are “passed through” to consumers are included in revenue. For instance, the cost of fuel often is included in the revenue number; this cost is then charged to customers. Including these pass-through costs increases the revenue number, which makes it difficult to accurately compare a utility firm to businesses in other industries.

And in the building industry, revenue per head can change as the market tightens and loosens and home prices adjust, says Diane Zile, vice-president of ecology at McStain Neighborhoods, a home builder in Louisville, Colo. Basing decisions solely on this metric wouldnt account for these types of market changes.

 

Given the different ways that these metrics can be calculated, comparing the numbers from one organization with those from another is rarely straightforward. For example, it’s important to find out how other companies classify full-time employees. (Some count as FTEs anyone who works at least 30 hours per week, while others use 40.)

But HR professionals do have several options, McElfresh notes. When analyzing public companies, they can obtain information on sales, income and the number of employees from financial reports the company has filed with the Securities and Exchange Commission, as well as online resources such as YahooFinance.

“The trick there is to understand, as best one can, confounding issues like outsourcing and part-time employees,” McElfresh notes.

HR professionals also can work with formal benchmarking services or consultants, who often obtain these figures through surveys of their clients, usually on a confidential basis and using standard calculations. Some industry associations also may collect such information from clients, again, confidentially.

In the Denver area, for instance, several HR professionals in the building industry have formed a consortium partly for the purpose of gathering this sort of information. “Many of these companies are privately held, so we need an avenue to share information,” says Zile.

And large companies can compare figures on revenue and income per FTE among their own business units and from one location to the other; doing so has the added benefit of helping HR professionals identify high-performing units and share best practices throughout the company.

Chart: How Does Your Firm Measure Up

Using the Metrics

Many HR professionals typically use these metrics to benchmark their firms’ performance against others in their industry and then to better manage their training, compensation and staffing needs.

Such an analysis began at Allianz Life Insurance Company of North America in Minneapolis in September 2005. To try to ensure that comparisons would be apples-to-apples, Allianz was compared with firms in the same industry, of the same size and located in the same region of the country, says Julie Letner, vice president of employee support services. “We wanted to compare ourselves using consistent external data.”

While it’s too early for Allianz management to have implemented new programs based on the measurements, the results are providing an indication of how the company compares with others in its industry, says spokesman Brett Weinberg. He notes that the numbers may result in changes to several programs, such as training and hiring, but so far Allianz hasn’t made any changes and is still determining whether to make any.

These metrics also can show how an organization is changing over time. For example, a rule of thumb in the construction industry is that 20 employees will generate $20 million in revenue, says Zile of McStain.

She adds that McStain is at this benchmark and that revenue per employee is heading up. “We are becoming more productive and efficient,” Zile says. In part, this is a result of the firm’s growth, which makes it possible to spread some relatively fixed staffing costs over a larger revenue base.

Reviewing the metrics for a particular company or division over time may indicate ongoing trends in productivity that can be tied to an HR program. For instance, if customer service employees who receive in-depth training consistently outperform those who receive less training, the connection is fairly clear.

At McStain, Zile notes that employees are becoming more proficient in their use of technology. For instance, all employees are taking classes to increase the effectiveness of their use of software applications such as Microsoft Project and Microsoft Outlook. Using the revenue-per-FTE and income-per-FTE numbers, “we are taking the company through priority management training to learn to use the tools completely,” she says. Zile adds that the reasons go beyond improving productivity, to include enhancing customer service as well as work/life balance.

These metrics also can help HR better manage compensation to more fully motivate employees. In early 2005, executives at Mindbridge Software learned in exit interviews with several salespeople that the departing employees generally enjoyed their jobs but felt that the compensation plan failed to reward top producers adequately. Nor did it give a nudge to employees whose performance needed improvement, says COO Testa.

Armed with this information, Testa and his colleagues restructured Mindbridge’s sales compensation plan so that it took account of the sales each employee generated and the profits that resulted—as well as client feedback about the employee, which was obtained through customer surveys.

The compensation plan was changed to reflect differences in the metrics, and thus the difference in performance among the 25 salespeople.

Since implementing the new compensation plan in mid-2005, sales are up 25 percent, and profits have increased as well. Customers responding to the surveys also are indicating a greater degree of satisfaction with their treatment by the salespeople. “The theory is that if you know you’re being measured on something, you work on it,” Testa says. By making these changes, Mindbridge aligned employees’ desire to see their work rewarded with the company’s goals for growing sales and profits and satisfying customers, he adds.

Workforce management is where using these numbers really gets interesting for HR. These metrics can indicate when an organization might want to adjust its staffing levels—and as a tool to show that adding staff actually may increase revenue per FTE. For instance, research by the Medical Group Management Association (MGMA), a national association based in Englewood, Colo., shows that doctors’ productivity and revenue go up to some extent when support staff is added. MGMA focuses on practice management for doctors’ groups and has studied numerous physicians’ practices.

However, many organizations—in an effort to shave personnel costs—reduce their support staff to the point where doctors’ productivity declines, says David Gans, director of practice management resources with the group. The cost of the support staff is a distinct expense line on the financial statements. What’s less noticeable, although just as important, is the revenue that these employees help bring in.

A recent survey of 1,200 medical group practices by MGMA revealed that multi-specialty doctors’ groups with administrative costs per full-time physician of less than $50,000 brought in total medical revenue per doctor of $515,000. However, medical groups with administrative costs per full-time physician of $100,000 to $125,000 generated medical revenue of $886,000 per doctor. The jump of $371,000 in revenue clearly outweighs the cost of the additional staff.

Of course, at some point the costs of adding staff exceed the benefits. According to MGMA’s research, this occurs when administrative costs per full-time physician top $125,000. Above that point, the median total medical revenue less operating costs is actually lower than it is for practices that have smaller support staffs.

Metrics Support HR

Employee productivity measures also can be used to show the impact of HR initiatives on the productivity of an employee population. Admittedly, untangling the causes and effects of a change in performance can be difficult. For instance, if revenue per FTE has increased, it could be the result of a new sales training program or a large customer order.

Executives and HR professionals need to look at a range of information before taking action, Mackenzie says. “Any one or two metrics won’t give the whole picture.”

Although these metrics can be used in evaluating the performance of groups of employees, experts say little usually is gained by sharing the final calculations with all rank-and-file employees. “These are very high-level metrics that are not conclusive of anything,” McElfresh notes. Their value, he says, lies in their ability to help HR professionals and other executives better analyze operations.

As the human capital at many firms becomes increasingly important to companies’ success, HR professionals will find that their ability to understand and communicate these and similar measures is key to their own effectiveness and performance.

“Financial and business acumen is critically important to a successful human resource executive,” Zile says. “Our ability as human resource executives to quantify the issues we’re facing will help us focus on the issues that are important and meaningful.”

Karen M. Kroll is a Minneapolis-based freelance business and financial writer. Her work has appeared in AARP: The Magazine , American Way, CFO, Continental, Inc., and other publications.

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At Level 3 Communications Inc., a communications technology company in Broomfield, Colo., people costs account for about half of all operating expenses, says Scott Baker, director of human resources. He and his colleagues review not only revenue and income per full-time employee (FTE) but also other measures such as average FTE's over time, the level of turnover and its associated costs, and overall expenses.

They use this information to more effectively plan their staffing needs and manage employees various talents. Analyzing a range of metrics enables Baker and his colleagues to create the right workforce, in the right place, in the right structure, at the right cost.

For instance, an analysis of these metrics indicated that one department within the company was consistently recruiting employees with more experience than was needed for the positions it was filling, which increased turnover. By adjusting its workforce strategy, the department lowered turnover and boosted employee satisfaction.

Level 3 is unusual because it captures people metrics to drive business strategy. Companies still control their businesses with capital-focused metrics, says Rainer Strack, a director and vice president with Boston Consulting Group.

In todays business environment, executives and HR professionals need rigorous metrics that quantify the productivity of people, as well as capital. When companies take this seriously, theres the potential to uncover productivity opportunities, says Steve McElfresh, SPHR, principal and founder of HR Futures.