When J. Randall MacDonald joined GTE as executive vice president of HR and administration in mid-1998, the Irving, Texas-based telecommunications giant was up to its ears in cutthroat competition, fighting tenaciously for customers.
MacDonald realized that the company's carefully crafted HR strategy was critical to its success. But he also knew that the best plans are meaningless if they're not executed properly. "I need to know whether we're delivering on our strategies," he said at the time. "I need measures and metrics to make the business case that we're effective."
But the metrics weren't there, at least not ones that MacDonald could rely on. "HR would record 250,000 hours of training and conclude they must have been doing a good job," says Garrett Walker, director of human resources planning, measurement and analysis. "In fact, it indicates you were busy, not whether your [employees] were satisfied and more effective in their jobs."
MacDonald's desire to make the business case for HR led to GTE's adoption of its Balanced Scorecard, a comprehensive metrics or measurement program that assesses and quantifies HR's company-wide performance quarterly.
Today, as GTE fine-tunes the Scorecard after its first year in action, the company is among the trailblazers making HR metrics a priority. The writing is on the wall. Senior management lives or dies by the numbers and increasingly is figuring that if HR really wants to be a business partner, it must be judged by the same standards as everyone else in the organization.
Overcoming Metrics Phobia
Yet even with mounting evidence that metrics are essential to demonstrate the value of an organization's human capital and HR practices to internal and external stakeholders, some HR practitioners are reluctant to weigh in.
"Fewer than 50 percent of HR departments measure anything quantitatively," says Jac Fitz-enz, founder and chairman of the Saratoga Institute in Santa Clara, Calif.
Adds Jack J. Phillips, CEO of the Performance Resources Organization in Birmingham, Ala.: "Most Fortune 100 organizations and their equivalents in other countries are developing metrics programs, but even they are only allocating about 1 percent of the HR budget to the task."
Medium-size and small companies, Phillips says, are out in the cold—ignoring metrics except for statistics they are required to produce for government agencies.
Why the reluctance? For many, the idea of quantifying what's in the hearts and minds of people runs counter to their basic values. Intuitively, they feel measuring people as if they were widgets is distasteful. And unlike pure financial metrics, HR data tends to derive from softer, qualitative sources—like surveys and interviews—making it less exacting than number-crunchers would like.
"Historically, the people who migrated to HR are there for the wrong reason, or they got there for reasons that are no longer important," says Phillips. "They like people, but they aren't interested in adding value and knowing how the business operates. Part of the education process is to show them that it's a good tool that can help them, not hurt them."
HR's hesitance also can be attributed to fear of the unknown. Faced with the possibility of learning unpleasant things about their operations, HR opts for avoidance. "HR managers are worried what they'll find if their programs are measured accurately, so they claim it's too hard to do," Fitz-enz says. "I recognize it's hard, but if you set up a simple collection system, it becomes part of your routine."
If you don't, prepare to pay the price, he warns. "You can't define yourself if you don't have any data. If someone says you're taking too long to recruit key personnel, you can produce the data that shows you're in the 90th percentile."
And knowledge of measurements, basic formulas and ratios—even if they are home-grown statistics that you have developed yourself—gives you increased credibility with line managers. "It gets you to talk like a businessperson," Fitz-enz adds. "You ought to spend time talking to people in the finance department. If necessary, take a course in finance for non-financial managers so you understand basic accounting and finance. How can you talk to people if you don't understand their language?"
Forget the big picture arguments for a moment and permit a selfish thought to sneak in. A big justification for being able to trade figures with the finance folks is simple survival.
"Companies are outsourcing HR left and right, so it would seem prudent on the part of HR practitioners to become conversant in this form of analysis," says William Brown, professor of management at Marist College in Poughkeepsie, N.Y. "Metrics is a tangible way of demonstrating the value of HR to non-HR people."
But too often, line managers are wary of the numbers HR trots out in self-defense. The data may look good on the surface, but lose credibility when examined with an outsider's critical eye.
"To prove to senior management that the amount of money spent on training and development is worthwhile, HR offers 'flavor of the month' training or the HR trainer's favorite programs," explains Annie McKee, director of management development service for the Hay Group in Philadelphia.
"There's no integration, no alignment with strategy—just scrambling to get things out there. At the end, when you evaluate the program, people say they liked it. When asked if they learned something positive they can apply to their job, they say yes. HR aggregates the data and, invariably, it's positive. It's a formula for high ratings and has absolutely nothing to do with whether the learning is in the right area, whether people are actually learning something related to improving the organization's effectiveness."
McKee recalls the misleading metric generated from a Fortune 100 company's one-day diversity program for 12,000 workers. "At the end of the year, when they assessed their effectiveness in diversity training, they checked-off 'mission accomplished.' Wrong. It's virtually impossible to deliver meaningful diversity training in one day."
In contrast, when used prudently and interpreted by an HR professional who understands the sometimes-tenuous relationship between human capital and pure finance, metrics can lead to an exploration of deeper issues.
"As an HR executive, you need to be able to justify the business case for focusing on the people in the organization—for developing their capabilities, for developing the culture," McKee says. "And for the organization's leadership to feel good about that, there has to be a bottom-line benefit."
Metrics for Dummies?
Let's assume that you're persuaded to put more effort into measurements. Is there a magic formula that you can follow that will provide all the information and ammunition you'll need-an Idiot's Guide that will explain how to use metrics to bolster your business case, how to enhance the value of your organization's human capital? Probably not. A sound metrics strategy requires a three-pronged approach.
Begin with efficiency measures. Build in generally accepted HR metrics as tools for quantifying how you're actually using your resources and implementing your responsibilities. (See "10 Key Human Capital Metrics," p. 30.) Benchmark, at least annually, against your prior performance and others in your industry or profession.
"If your turnover rate is 10 percent higher than your competitors', it causes you to look deeper into the cause," McKee says. "You can go to senior management and say 'we need to find out why this is happening. Is it something about our culture and climate, our reward structure or some other management practice?' "
Arrange to collect and track routine data, like absenteeism, monthly or quarterly. Ideally, when inefficiencies are revealed, careful analysis of the problem should follow before expenditures are slashed.
Second, select and develop metrics geared directly to your company's mission and strategies. Metrics that are most useful need to be specially designed for each organization. HR can do this alone or with outside assistance or training.
Third, establish metrics to monitor key HR practices proven to grow human capital in a broad spectrum of businesses. Identify the keys, go to work on them and keep close tabs.
Efficiency—The Basic Building Block
HR has been using metrics since the 1970s and, through the years, the arsenal of tools has grown substantially. In implementing a manageable metrics program, experts advise variety—consider all the possibilities and select the ones that will work best for you. Here are some suggestions from Phillips, author of The Handbook of Training Evaluation and Measurement Methods and Return on Investment in Training and Performance Improvement Programs (both from Gulf Publishing, 1997).
First, to determine how things are going in an organization, conduct an annual feedback survey of employees, administered internally or by a third party. Next, benchmark performance by cost and function either through the Saratoga Institute or industry groups or by establishing partnerships with other HR practitioners.
Critical measures include: turnover, quits and discharges as a percent of total employees, average tenure of employees in various jobs, absenteeism, employee productivity and intellectual capital.
Although you will always track and measure against your own historical record, outside benchmarking is critical. It enables you to compare apples to apples. "One hundred percent turnover annually at McDonald's is great," Phillips says. "One hundred percent at Intel would probably kill them. At McDonald's the cost of turnover is around $2,000; at Intel it would probably average $75,000."
The Saratoga Institute is the worldwide leader in HR benchmarking, conducting a national survey of 25 industries benchmarking between 60 and 70 metrics. Results are sorted by industry, company size and geographic region. In the United States, 891 companies participate and pay about $2,000 for the annual report.
Measuring What Counts—Strategic Metrics
Efficiency metrics serve only as a starting point. If you're not careful they can be turned against you by financial types who believe that less is always better.
"If you're driven solely by numbers that quantify, you'll get yourself in more trouble than not measuring at all," says John Boudreau, director of the Center for Advanced Human Resource Studies at Cornell University's School of Industrial and Labor Relations in Ithaca, N.Y. "Cost ratios, costs per hire, turnover rates are linked to dollar values and carry the fundamental implication that you make them better by cutting expenditures. You get at the efficiency side of things, but it's out of context without looking at the value-creation side.
"For example, you can't really tell if a turnover rate is good or bad. Everyone knows examples go both ways. I can get my turnover rate down by hiring people who will never leave. But that's not necessarily good; you get into the efficiency mind-set and forget the value side."
Organizations into benchmarking want to prove they're in the ballpark in their industry, but it doesn't always work out. "When the benchmark numbers don't measure up, they have to start telling stories around them to explain their standing," Boudreau says. "Your cost-per-hire numbers may be high, but often you find there's a good reason. But line managers won't listen. Instead, they react out of context and push to cut your costs—precluding a discussion about what HR is actually doing that may, in fact, be beneficial."
Metrics is about making things happen. Except for the relatively few measures that you're required to report, you compile most of them voluntarily. It's a waste of time, Boudreau suggests, to measure just because the data is interesting. "We want metrics that will help change happen, help us make better decisions about human capital."
It's important to focus on strategy before you settle on your measures or set out blindly to beat the benchmarks for your industry, Boudreau advises. "The business case is to think about the logic of where the organization is going, rather than the measurement."
The key is to devise unique metrics that assess strategic value and effectiveness, not just efficiency. As an example, Boudreau describes the Walt Disney Co.'s effort to design metrics to assess sweepers at Disney World. The company had to determine what they really valued in their sweepers. Along with cleaning duties, the sweepers perform valuable customer service functions that enhance Disney's strategic goal to maximize "customer delight." Had HR not taken these competencies into account when crafting the measurement criteria, sweepers would have been benchmarked against cleaners in general, neglecting an important and strategically sensitive function.
"There probably are some general benchmarks that an organization can improve on that have an across-the-board impact," Boudreau says. "But the research we have says if you're going to sustain a competitive advantage, you have to do unique things. It's important to have a general direction, but in the end, for many organizations, the real keys to value lie within the organization."
How do you do this? Saratoga's Fitz-enz says sound measurement centers around quality, efficiency and service. He suggests using a template constructed around five factors that can be applied to anything you choose to measure—the cost, the time to do it, the quantity involved, the quality involved and the human reaction. Take staffing: You can measure the costs, the time it takes to fill a position, the number of requisitions, the quality of the new hires, and the satisfaction of the hiring manager with the process.
ROI—On the Cutting Edge
Increasingly, HR departments are turning to a variation of an established financial metric—return on investment or ROI—to demonstrate the financial vitality of their most critical and highly visible initiatives. The HR-tailored ROI ratio is calculated by assigning monetary values to an HR program and dividing the value by the program's costs. (Total program benefit divided by program costs).
There are two challenges in calculating ROI, according to Phillips. One is to determine what it is that you value about the program you're measuring. The other is to assign a monetary equivalent to the value.
To illustrate, he describes a case study involving a sexual harassment prevention program. HR wanted to show that the program added value, and so decided to study the impact the training would have on the number of sexual harassment complaints that employees filed as well as its impact on turnover.
First, looking back a year before the program was implemented, HR determined the costs the company incurred in processing and defending complaints and the turnover costs absorbed in replacing workers who, in exit interviews, gave harassment as the reason they were departing. Once the monetary values were set, HR compared the "befores" and "afters," determining the dollar amount saved. Finally, total costs of the program were divided into the savings, yielding the ROI.
All-Industry Indicators—The Magic Bullets
Here's the closest you'll get to the magic bullet. Consulting heavyweight Watson Wyatt recently completed a research project that found a correlation between human capital and shareholder value. The year-long study was based on an analysis of HR practices at 405 publicly traded companies with a minimum of $100 million in revenue or market value.
Survey data was matched to objective financial measures of a company's market value, total return to shareholders and Tobin's Q, the market value of a firm's assets divided by replacement value of the firm's assets. That ratio measures a company's ability to create economic value beyond its physical assets.
Based on the findings, Watson Wyatt researchers created a "Human Capital Index," which rates a company's effectiveness at key human resource practices that affect the bottom line. "We've identified the key human practices that make a difference vis-a-vis the bottom line," says Bruce Phau, head of Watson Wyatt's organization measurement division in New York. "If you improve in these five areas, it gives you a 30 percent increase in shareholder value."
Watson Wyatt has a measurement system and offers consulting services to help you assess and monitor yourself. If you know the five areas, you can develop your own tools. Not surprisingly, Phau cautions against it. "It's like trading your own stock portfolio. You can be your own mutual fund, but 95 percent of all investors don't do as well as a mutual fund. It's not impossible, but most can't do it." Still, if you'd like to try, here are the five areas:
- Recruiting excellence. Do you have recruiting practices that result in new hires that hit the ground running versus new hires that require a significant amount of training? Companies that minimized the time it took to get employees up to speed scored higher in human capital.
- Collegial flexible workplace. Do you have a flexible, high satisfaction workplace with a minimum of status or distinction, or one that focuses on hierarchy and control- Egalitarian, flatter-structured organizations build human capital.
- Communications integrity. Do you have a communications environment where information is widely shared both upward and downward versus one where information is tightly controlled? Human capital is boosted when communications are open and two-way.
- Clear rewards and accountability. Do you have stock-based programs that reward good performance and do you have policies and practices that provide remediation for poor performers? Companies with stock-based reward systems accrue human capital, as do those who weed out poor performers quickly and unambiguously.
- Prudent use of resources. Do you invest in practices that conventional wisdom applauds such as 360-degree feedback and general training programs? Surprisingly, these practices did not correlate with added value and, unless administered with exceptional skill and commitment, produced a decrease in human capital valuation.
The downside of metrics is that it can lead to financial measures myopia. You may become so fixated on trying to measure financial aspects of human management that you forget to deal with the people aspects of the business. "If you become too focused on the financial measures, you may drive out creativity and innovation," says Brown, the Marist professor. "You want to maintain a balanced perspective—think of what it is you're trying to do. Will an overemphasis on financial measures change the organization's culture so as to have a negative effect?"
To make his point, Brown cites a recent study by the Saratoga Institute on personal Internet and e-mail use while at work. "Saratoga reported that a worker who spends one hour a day on personal e-mail and Internet surfing costs the company $35,000 to $45,000 per year. As a result, companies are selling software to monitor on-the-job e-mail and Internet usage. One program called Little Brother identifies web site visits deemed unproductive and other products monitor e-mail. The question is whether the one-hour-a-day figure is real or a red herring. Is monitoring or censoring e-mail via software an intangible thing that can damage culture and loyalty of employees? By measuring one thing and reacting to it, you may destroy an intangible that's of greater value."
Meanwhile, the drive for fiscal accountability and quantitative assessments continues to be a hot item for senior management teams and company boards. And the message is clear for HR. "Wherever I've gone, business leaders say the only sustainable competitive advantage will be people," says GTE's Garrett Walker, who has been describing GTE's program to executives around the country. "From the HR perspective we need to be the experts in valuing human capital. If you're not doing it, you need to get there soon."
For links to resources on the World Wide Web concerning HR metrics, see the HR Magazine section of SHRM Online at www.shrm.org.
Robert J. Grossman, a contributing editor of HR Magazine, is a lawyer and a professor of management studies at Marist College in Poughkeepsie, N.Y.