HC Metrics and Decision-Making
Although the need to effectively measure human capital (HC) is a high priority for executives all over the world, such metrics continue to bedevil them. It’s true that technology is allowing organizations to move beyond traditional HR measures to more sophisticated ones (Schneider, 2006), but it’s hard to know which of those measures are worthy of leaders’ trust when it’s time to make important decisions.
There are many approaches to HC measurement, and each may serve a different purpose. Among the best measures for strategic decision-making purposes, according to data from The Conference Board, are those related to employee satisfaction/engagement, remuneration, leadership, productivity and recruitment (BNA, Inc., 2005).
Then there are metrics that can be used to support daily decision-making. So-called scorecards are one way to give employees access to key feedback data; they act as a “compass” to direct daily decision-making. Some organizations use the Balanced Scorecard methodology introduced by Kaplan and Norton, which focuses on four key measurement areas: financials, customers, internal processes and learning/growth. But any scorecard that reflects the firm’s needs and is integrated into its culture can help guide employee performance (“Applying,” 2006).
Benchmarking is a third approach to metrics. When used appropriately, it helps organizations compare their human capital performance against the performance of other firms. Such data can justify the continuance of well-managed programs or sound the need for change (Dooney & Smith, 2005). Benchmark data can also be used to set targets and translate those targets into action plans. Or it can be used to compare company divisions with one another (Dijk, Filipkowski, & Chung, 2005).
Although benchmarking is relatively easy to do, it can be dangerous to rely on benchmarks too heavily. External benchmarks are often reported in the aggregate, making organizational comparisons of questionable merit. And they often reflect simple measures of efficiency, a lens through which HR activities tend to be viewed as a cost rather than a value (Dijk, Filipkowski, & Chung, 2005). Using benchmark data strictly as a basis for cost-cutting decisions is rarely a good idea because such reactionary moves may be short-sighted (Dooney & Smith, 2005).
A focus on cost-cutting is, however, not unusual. Most firms using human capital measures collect the data for budget and cost-management purposes (93%) rather than for strategic decision-making, according to a 2005 PricewaterhouseCoopers survey of 58 financial services firms in seven countries. Although 77% of those firms in the Asia Pacific region agreed that calculating the ROI of human capital was important, only 18% actually measured it (PricewaterhouseCoopers, 2005).
Measuring ROI does, in fact, seem to make a difference in the quality of decision-making. According to a study by consulting firm The Benchmark Partners, five factors were found to differentiate between effective and less-effective HR functions – and one of those factors that contributed most to financial performance was when decision-making was driven more by HR ROI than by cost. In the best-performing companies, cost drove investment decisions less than 23% of the time (Lowenthal, 2006).
Such studies highlight the fact that companies are sometimes measuring the wrong things. HR tends to rely too heavily on efficiency measures simply because they are easily available. Yet, such metrics are lag measures, providing only historical data rather than the more valuable predictive data that executives need for strategic planning and decision-making (Dijk, Filipkowski, & Chung, 2005).
Organizations can also get the numbers wrong, and faulty measures can send them in the wrong strategic direction. So companies need to ensure that processes are in place to determine if the measures adequately represent reality (Stodder, 2006).
Even if they measure all the right things, human capital metrics may not be greeted with open arms. For example, metrics can point to a misalignment between practice and strategy or provide data that doesn’t back up projections. Unexpected data may lead to a “bottom-up questioning of corporate strategy,” according to David Stodder, editor-in-chief of Intelligent Enterprise. Such data might be welcomed or it might be met with a “shoot the messenger” attitude, leading to a call for new measures.
To rise to the challenges presented by this increased emphasis on HC measures, managers and others should be trained in how to use metrics well. No metric should be looked at in isolation. Leaders need to understand how one measure relates to another, and they should be willing to take action based on what the metrics are showing them (Dijk, Filipkowski, & Chung, 2005). The experts hope that by improving human capital metrics and employees’ ability to utilize them, the quality and ease of corporate decision-making will also improve in coming years.
Documents used in the preparation of this TrendWatcher include the following:
“Applying the Balanced Scorecard.” Strategic HR Review, January/February 2006, p. 7.
BNA, Inc. Workforce Strategies: Quantifying Human Resources: How to Convert HR Metrics into Dollars & Cents, September 2005.
Dijk, Jorien, Monica Filipkowski and Susan Chung. HR Metrics: Lifting HR, 2005.
Dooney, John and Noël Smith. SHRM Human Capital Benchmarking Study: 2005 Executive Summary. Society for Human Resource Management, 2005.
Lowenthal, Brian. “Corporate Performance Depends on the Effectiveness of a Company’s Human Resource Function.” The Benchmark Partners, LLC [www.thebenchmarkpartners.com]. February 16, 2006.
PricewaterhouseCoopers. “Poll Finds Majority of Asia’s Financial Institutions Not Crunching Human Capital Numbers.” Press release [www.pwc.com]. September 22, 2005.
Schneider, Craig. “The New Human-Capital Metrics.” CFO Magazine. LexisNexis. February 2006.
Stodder, David. “Metrics Through the Looking Glass.” Intelligent Enterprise. ProQuest. February 2006, p. 5.
There are many approaches to HC measurement, and each may serve a different purpose. Among the best measures for strategic decision-making purposes, according to data from The Conference Board, are those related to employee satisfaction/engagement, remuneration, leadership, productivity and recruitment (BNA, Inc., 2005).
Then there are metrics that can be used to support daily decision-making. So-called scorecards are one way to give employees access to key feedback data; they act as a “compass” to direct daily decision-making. Some organizations use the Balanced Scorecard methodology introduced by Kaplan and Norton, which focuses on four key measurement areas: financials, customers, internal processes and learning/growth. But any scorecard that reflects the firm’s needs and is integrated into its culture can help guide employee performance (“Applying,” 2006).
Benchmarking is a third approach to metrics. When used appropriately, it helps organizations compare their human capital performance against the performance of other firms. Such data can justify the continuance of well-managed programs or sound the need for change (Dooney & Smith, 2005). Benchmark data can also be used to set targets and translate those targets into action plans. Or it can be used to compare company divisions with one another (Dijk, Filipkowski, & Chung, 2005).
Although benchmarking is relatively easy to do, it can be dangerous to rely on benchmarks too heavily. External benchmarks are often reported in the aggregate, making organizational comparisons of questionable merit. And they often reflect simple measures of efficiency, a lens through which HR activities tend to be viewed as a cost rather than a value (Dijk, Filipkowski, & Chung, 2005). Using benchmark data strictly as a basis for cost-cutting decisions is rarely a good idea because such reactionary moves may be short-sighted (Dooney & Smith, 2005).
A focus on cost-cutting is, however, not unusual. Most firms using human capital measures collect the data for budget and cost-management purposes (93%) rather than for strategic decision-making, according to a 2005 PricewaterhouseCoopers survey of 58 financial services firms in seven countries. Although 77% of those firms in the Asia Pacific region agreed that calculating the ROI of human capital was important, only 18% actually measured it (PricewaterhouseCoopers, 2005).
Measuring ROI does, in fact, seem to make a difference in the quality of decision-making. According to a study by consulting firm The Benchmark Partners, five factors were found to differentiate between effective and less-effective HR functions – and one of those factors that contributed most to financial performance was when decision-making was driven more by HR ROI than by cost. In the best-performing companies, cost drove investment decisions less than 23% of the time (Lowenthal, 2006).
Such studies highlight the fact that companies are sometimes measuring the wrong things. HR tends to rely too heavily on efficiency measures simply because they are easily available. Yet, such metrics are lag measures, providing only historical data rather than the more valuable predictive data that executives need for strategic planning and decision-making (Dijk, Filipkowski, & Chung, 2005).
Organizations can also get the numbers wrong, and faulty measures can send them in the wrong strategic direction. So companies need to ensure that processes are in place to determine if the measures adequately represent reality (Stodder, 2006).
Even if they measure all the right things, human capital metrics may not be greeted with open arms. For example, metrics can point to a misalignment between practice and strategy or provide data that doesn’t back up projections. Unexpected data may lead to a “bottom-up questioning of corporate strategy,” according to David Stodder, editor-in-chief of Intelligent Enterprise. Such data might be welcomed or it might be met with a “shoot the messenger” attitude, leading to a call for new measures.
To rise to the challenges presented by this increased emphasis on HC measures, managers and others should be trained in how to use metrics well. No metric should be looked at in isolation. Leaders need to understand how one measure relates to another, and they should be willing to take action based on what the metrics are showing them (Dijk, Filipkowski, & Chung, 2005). The experts hope that by improving human capital metrics and employees’ ability to utilize them, the quality and ease of corporate decision-making will also improve in coming years.
Documents used in the preparation of this TrendWatcher include the following:
“Applying the Balanced Scorecard.” Strategic HR Review, January/February 2006, p. 7.
BNA, Inc. Workforce Strategies: Quantifying Human Resources: How to Convert HR Metrics into Dollars & Cents, September 2005.
Dijk, Jorien, Monica Filipkowski and Susan Chung. HR Metrics: Lifting HR, 2005.
Dooney, John and Noël Smith. SHRM Human Capital Benchmarking Study: 2005 Executive Summary. Society for Human Resource Management, 2005.
Lowenthal, Brian. “Corporate Performance Depends on the Effectiveness of a Company’s Human Resource Function.” The Benchmark Partners, LLC [www.thebenchmarkpartners.com]. February 16, 2006.
PricewaterhouseCoopers. “Poll Finds Majority of Asia’s Financial Institutions Not Crunching Human Capital Numbers.” Press release [www.pwc.com]. September 22, 2005.
Schneider, Craig. “The New Human-Capital Metrics.” CFO Magazine. LexisNexis. February 2006.
Stodder, David. “Metrics Through the Looking Glass.” Intelligent Enterprise. ProQuest. February 2006, p. 5.