Measuring the impact of HR

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Human Resource Management (HRM) is the function within an organisation that focuses on recruitment of, management of, and providing direction for the people who work in the organisation.

Human Resource Management is the organisational function that deals with issues related to people such as compensation, hiring, performance management, organisation development, safety, wellness, benefits, employee motivation, communication, administration, and training. In other words, it is all about managing resources that are human.

Three fundamental metrics measuring HR impact

The main way to measure the impact of HR on businesses are through metrics. It provides a number of factors that can be measured to show how HR contributes to businesses. HR metrics provides a measurement and the analytic and data based on decision making capability to influence business strategy with an attempt to make Nalin Jayasuriya (seated centre, in red) facilitated the four-day launch of the Regional HR College for the HR Fraternity of Fonterra Brands – Asia & Middle East in Ho Chi Minh City, Vietnambusiness better decision and transform HR into strategic partners. There are three types of metrics which are efficiency of the HR functions, effectiveness of the HR functions and developing the company’s core competency.

Efficiency of the HR functions means how well the HR is doing their administrative work. Gathered data in the database and the multi-company database allows companies in comparing their own HR department with other HR departments in other companies. Some examples on efficiency of the RH functions are cost per hire, time to fill up the open position and HR expense factor.

Effectiveness of the HR functions shows whether the HR practices have a positive effect on the employees or the applicant pool. Some examples on effectiveness of the HR functions are training ROI and absent rate. Training ROI shows the total financial gain an organisation has for a particular training.

Developing company’s core competency helps to demonstrate the connection between HR practices and the tangible effects on organisation’s abilities to gain and sustain their competitive advantages. Revenue factor and defects rate are two examples of effectiveness of the HR functions.

Considerations in developing a total workforce strategy

  • Alignment with the business strategy.
  • Talent requirements of the organisation.
  • Feedback derived from surveying the employees.
  • Talent shortages and where the company must focus recruiting and retention efforts.
  • Demographic trends within the workforce.
  • Relative value of various talent groups to the business regardless of whether they are permanent or contingent.

The Balanced Scorecard

The Balanced Scorecard is intended to track and manage business impact across key stakeholder groups (investors, customers, employees), and when used correctly it is an excellent tool. Setting up a scorecard, but using ineffective metrics would not be useful — the scorecard is only powerful if the metrics are strategically linked to business outcomes.

Balanced Scorecard is a management tool that provides stakeholders with a comprehensive measure of how the organisation is progressing towards the achievement of its strategic goals.

Employee surveys can be an excellent way of demonstrating the impact of the workforce – management of which is a key role for HR. This will be true only if the surveys are strategically focused, looking at topics related to the business and the customer, rather than focusing on “satisfaction”.

Not many organisations can evaluate their performance accurately by averaging the performance of their employees. Most cases, the performance of an organisation is determined by the productivity and efficiency of such higher-level organisational entities as departments, retail outlets, plants or teams.

Strategic Human Resource Management (SHRM) is the process of linking the human resource function with the strategic objectives of the organisation in order to improve performance. SHRM enhances the productivity and the effectiveness of organisations. This also helps in enhancing employee productivity and the ability of agencies to achieve their mission.

Several studies have shown a positive association between effective Human Resource Management (HRM) practices and organisational performance (Becker & Huselid, 1998; Huselid, 1995).

BSC measuring criteria

Some areas under the financial aspect that can help measuring business progress are absolute profit, sales turnover, ROE, EBIT and working capital days. Some areas under customer are % sales from new customers, sales from new products, % increase in market share and customer retention.

Few areas under internal processes are fixed assets: Sales ratio, O/H costs as a % of sales, total emoluments as a % of sales. Under people and learning, we could have retention of star performers, training hours per executive per year.

HR Scorecard

To understand how HR can score involves recognising how the HR Scorecard is kept. Most discussions of organisational scorecards focus primarily on financial and operational measures. HR’s role in influencing work force behaviour to achieve operational and financial outcomes can add value by helping to ensure that the work force engages in the right behaviour, which produce the right operational outcomes, enabling the organisation to achieve its intended financial results.

One of the important and relatively new way in which HR score in this domain is through facilitating the care and feeding of the core competency workforce; that component of the work force that staffs the organisation’s core competencies. Research done on relationships between measures of HR practices and firm profitability demonstrates the potential value created through HR practices have revealed very little regarding the processes through which this value is created, this is referred to as ‘black box’ problem.

The HR Scorecard has five key elements:

1.Workforce success: Has the workforce accomplished the key strategic objectives for the business?

2.Right HR costs: Is our total investment in the workforce (not just the HR function) appropriate (not just minimised)?

3.Right types of HR alignment: Are our HR practices aligned with the business strategy and differentiated across positions, where appropriate?

4.Right HR practices: Have we designed and implemented world class HR management policies and practices throughout the business?

5.Right HR professionals: Do our HR professionals have the skills they need to design and implement a world-class HR management system?

Drucker’s objective for organisations

Peter Drucker has suggested that the principle objective of any organisation is survival and that from this, all other objectives flow. The objective of a good HR function should be supportive of the profitable growth of the enterprise, of which it is a part.

The traditional concept of man-management was centralised direction and control. The authoritarian pattern has deep roots from organisations such as the church and the military although there have been changes in these organisations too in recent times.

HR planning and measures

For the HR manager, planning means the determination in advance, of a HR programme. Planning involves the determining of objectives that are to be achieved and the processes that must be performed to ensure their achievement.

Effective planning should stimulate and utilise the creative talents of people from all levels within an enterprise, through brain-storming as well as other participating techniques. HR planning provides the foundation for organisation, direction, staffing and controlling the activities of employees in order to achieve organisational and divisional objectives.

HR plans can make employees more aware of what to expect from management and what management expects from them. It contributes to the development of a more favourable human relations climate. Organisations have increasingly come to realise that people identify themselves with organisational objectives only to the extent that their own objectives are also achieved.

HR planning which is linked to corporate planning of the entire enterprise will become more important in the years ahead, with continuing advancement in science and technology, increased use of automation, etc.

How do we measure success of HR planning? Well, primarily the acceptance of HR by line management or rather, the degree of HR acceptance by line management is a good indicator of the type of value that HR brings to the business.

It is common to see HR managers in several organisations struggling to gain credibility and acceptance by line functions. One can also note that line managements, in certain instances see HR as a burdensome function pushing a lot of paper work, delighting in form filling and setting deadlines to line management on processes perceived to hold little ‘value’. Where then, is the credibility of HR? What value will HR planning then bring to the table?

Value becomes the bellwether for HR. When others receive value from HR work, HR will be credible, respected, and influential. But HR value for customers will require that HR professionals to answer the question “why should I listen to you?” This is a great question for all HR professionals. How do customers and other key stakeholders – investors, managers, and employees – benefit if they spend time with HR professionals or adapt innovative HR practices?

HR transformation

Many attempts at HR effectiveness start without defining value. For example, some companies invest in e-HR services such as portals and online employee services and believe that they have transformed HR, but they have not. While e-HR may be a part of an overall transformation, it is merely a way to deliver HR administrative services. HR transformation must change the way to think about HR’s role in delivering value to customers, shareholders, managers, and employees and not just about how HR services are delivered and administered.

Moving toward service centres, centres of expertise, or outsourcing does not mean that HR has been transformed. If new delivery mechanisms provide basically the same old HR services, the function has changed but not transformed itself. HR transformation changes both behaviour and outputs. The changes must improve life for key stakeholders in ways that they are willing to pay for.

Changing any single HR practice (staffing, training, appraisal, teamwork, up-ward communication) does not create a transformation. Unless the entire array of HR practices collectively adds value for key stakeholders, transformation has not occurred. Transformation requires integrating the various HR practices and focusing them jointly on value-added agendas such as intangibles, customer connection, organisation capabilities and individual abilities.

First, human resources work does not begin with HR-it begins with the business. For the last decade, HR professionals have aspired to be more complete players relative to the core issues of the business, as described in a number of phrases: business partners, strategic players, full contributors, players in the business, and so forth. These aspirations are appropriate and desirable, but the fact that HR professionals continue to frame aspirations in these terms communicates a continuing concern.

The ‘key result areas’ of the HR function may be summarised as follows:

1.Manpower planning – organisational requirements. Supply availability, projections.

2.Recruiting

3.Selection

4.Induction, orientation

5.Training – level, type

6.Development – developments plans, team development, organisational development.

7.Compensation – direct – salary and bonus programmes, incentive payments , appraisal, indirect – profit sharing, pension, vacation/holidays

8.Labour relations – grievances, discipline, negotiation

9.Employee – services, medical, counselling, financial, recreation, canteen

10.Communications

11.Public relations

12.Safety programmes

13.Staff research


Integration

One of the significant but difficult tasks of HR management has been to attempt to effect a reasonable reconciliation of individual and organisational interests. Feelings and attitudes of people need to be blended with the principles and policies of organisations. This opens a whole gamut of thought pertaining to expectations management which I am tempted to write about in one of my future features.

(The writer is the Managing Director & CEO, McQuire Rens & Jones (Pvt) Ltd. He has held Regional Responsibilities of two Multinational Companies of which one, Smithkline Beecham International, was a Fortune 500 company before merging to become GSK. He carries out consultancy assignments and management training in Dubai, India, Maldives, Singapore, Malaysia, Indonesia and Bangladesh. Nalin has been consultant to assignments in the CEB, Airport & Aviation Services and setting up the PUCSL. He is a much sought-after business consultant and corporate management trainer in Sri Lanka. He has won special commendation from the UN Headquarters in New York for his record speed in re-profiling and re-structuring the UNDP. He has lead consultancy assignments for the World Bank and the ADB. Nalin is an executive coach to top teams of several multinational and blue chip companies. He is a Director on the Board of Entrust Securities Plc.)

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