The human-resources department is in survival mode. As outsourcing the function becomes a more-prevalent option for companies, HR managers know that if they are going to endure, they have to deliver strategic value, and that value has to be measurable.
With that in mind, many companies are forging ahead on efforts to create a new set of metrics that tie traditional HR functions like recruiting, training, and performance review to overall corporate goals — including fattening the bottom line. The old HR measures, such as head count, the cost of compensation and benefits, time to fill, and turnover, no longer cut it in this new world of accountability. They don’t go far enough to create shareholder value and align people decisions with corporate objectives.
The effort requires putting some hard science around issues that have traditionally been thought of as difficult to quantify, like why people leave the company or how engaged they are in their jobs. When realized, human-capital metrics can provide meaningful correlations that help predict behavior and human-capital investment demands well ahead of the annual budget. HR metrics might measure efficiency, or the time and cost of activities; human-capital metrics measure the effectiveness of such activities. Time to fill becomes time to productivity; turnover rate becomes turnover quality; training costs become training return on investment.
“If your goal is to increase your company’s people productivity through the effective use of human-resources tools and strategies, it’s time to change the DNA of human resources,” says John Sullivan, professor of management at San Francisco State University. “It’s time to change human resources so that it focuses on top performers and ensures that it spends most of its time and budget on high-ROI activities.” After all, he adds, “the only soft area left in a company is the largest expense item: people.”
While the mandate to measure has been around for some time, a Conference Board survey indicates that most companies aren’t there yet. Of the 104 human-resources executives at medium- to large-size companies surveyed, only 12 percent make use of people measures to meet their strategic targets or key performance indicators (KPIs). But the message is loud and clear: over the next three years, 84 percent of that same group expect to increase the application of HC measures.
It won’t be easy. Mastering human-capital metrics is a complex undertaking. Linking people measures to KPIs in a reliable way can require massive amounts of data, and most efforts are technology-heavy. They require a good bit of trial and error, and a heavy dose of patience. And more often than not, a human-capital metrics initiative requires a good partnership between HR and finance. According to the Conference Board survey, collaborating with colleagues from finance was ranked the best way to build support for people measures, with 54 percent of respondents indicating that such a partnership is vital.
The Labor Supply Chain
Overcoming these hurdles could require looking at traditional HR functions through a new lens. San Antonio–based Valero Energy Corp., for instance, is forging a new recruitment model out of human-capital metrics based on applying the supply-chain business process to labor. Dan Hilbert, manager of employment services at the $70 billion energy-refining and marketing company, came up with the concept two years ago in an attempt to take the guesswork out of the recruiting function. “We wanted to have the right people, in the right amount, in the right place, at the right time, with the right skills,” says Hilbert. While he admits that’s a tall order, the change in perspective opened the door to new possibilities. “Once you run talent acquisition as a supply chain, it allows you to use certain metrics that you couldn’t use in a staffing function,” he says. “We measure every single source of labor by speed, cost, and efficiency.”