To be or to be obsolete...the future of HR?

To be or to be obsolete…the future of HR?
January 2004
by Rob Mason of FutureSense, Inc.

With the dawn of any new year, reappraisals of the past and forecasts for the future become something of a cottage industry for us business pundits. We like to think big, and the beginning of a new year always seems ripe for bold proclamations and new mandates. At the risk of falling prey to this institutional norm, I am going discuss the current state of affairs in the human resource business. 

WARNING: my message is not new. In fact, it is the same message FutureSense has put forth from its beginning: we will empower HR, or destroy it in the process.

While this FutureSense-ism may be bold, we know that we are not alone in our sentiments. Leaders of the field, such as Dave Ulrich and Jac Fitz-enz, have written extensively for years on the need for HR to think more strategically; to stand shoulder to shoulder with senior management and provide organizational expertise in order to maximize intellectual capital. Yet, in many firms throughout many industries, the status quo remains. Efficiency and cost reduction continue to be the primary measure of HR performance, which “ultimately results in HR being managed like a commodity – rather than a strategic asset.”1 Enlightened executive teams have come to recognize HR’s potential, but few have actually realized that potential.

Given this reality, this article will explore HR Metrics and the “Return on Investment” (ROI) of Human Capital as a means to empower the field. The time has come for HR to stand on its own two feet or face being obsolete.

HR Metrics

Having used metrics since the 1970s, most HR professionals have gotten a handle on the basics such as vacancy and turnover rates. These quantitative measures provide a benchmark so HR knows where it stands in terms of its own historical record as well as how it compares externally to its peers. 

These common functional metrics do have their place in the arsenal of HR tools. For example, if management claims HR is taking too long to recruit key positions, HR’s defense will be severely limited without a “time to fill” metric demonstrating that its record is above the mean. Better data fosters increased credibility within any organization since “metrics are a tangible way of demonstrating the value of HR to non-HR people.” 2

However, efficiency metrics and benchmarking are not enough to truly demonstrate HR’s value. Ultimately, the future of HR will depend on its ability to become accountable for delivering results that are integrated with the overall business strategy. The key word is integrated for if HR is to survive as an integral part of business, the industry must develop strategies and design systems – directly linked to the strategic direction of the business – that allow the organization to realize the value of its people.3

People are an organization’s greatest asset, providing the intellectual capital that drives differentiation and value-added services. Put more simply, an organization’s success largely depends on human application to transform inert buildings and equipment into value.4 Given the nature of HR as the “people department,” the field is in a position to rise above its current administrative existence and make better use of its resources. While the operational basics (i.e. benefits administration, entry level hiring, basic skills training, etc.) are a necessity not to be overlooked, HR ought to focus on creating winning strategies so that “intellectual capital grows, stays and is accessible.”5 These factors should be the measures of success, and the ROI of human capital is the means to that end.

Return on Investment of Human Capital

The ROI of human capital is a developing science with the goal of measuring and evaluating an organization’s entire portfolio of human capital investment. In terms of HR, ROI can be defined as “any economic returns, monetary and non-monetary, that are accrued through investing.”6 Human Capital ROI can be measured in two ways:

1. Quantitative Data: Accession rates, turnover rates, employees per HR staff, etc. 

2. Qualitative Data: Customer satisfaction surveys, 360-degree review, focus groups, etc.

A quantitative approach tells us what happened, while a qualitative assessment explains why something happened. Together these two types of data offer insights into the drivers or causes of a particular outcome. Yet, it is important to bear in mind that success in this kind of analysis greatly depends on a balanced approach and grounding in commonsense. Focusing on hard data alone often can get HR into more trouble than if metrics were avoided all together. For example, reducing turnover is not intrinsically good or bad since an HR specialist can reduce the metric by hiring people that never leave – failing to take into account if the new hires actually add value to the organization. Numbers do not always tell the whole story, and all should be wary of “measures myopia.”7 Moreover, it is not always possible to pinpoint causation. High voluntary turnover and low morale are likely to be directly related, but their relationship can also be coincidental.8 Greater in-depth analysis should always follow the discovery of parallel movement among various metrics.

Below is a sample scorecard, or matrix, that integrates various ROI metrics in order to gain a comprehensive view of an organization’s ability to utilize its human capital. This scorecard focuses on recent or current events; so future planning is not included – albeit, once finished, the scorecard should serve as a guide for planning. The scorecard comprises of four quadrants of the human capital supply chain within an organization. 

Human Capital Scorecard Example 

Acquire
Time to Hire
Accession Rate
New Hires per Recruiting FTE
# of “Call Me” Resumes on File 


Maintain
Avg. Pay per FTE
Avg. Benefits per FTE
Total Injuries per 1,000 Employees
Performance Reviews Tied to Salary Increases 

Develop
Training as % of Operating Cost
Leadership/Professional Development Initiatives
Skills Attained and Used within 6 months
360-degree reviews 

Retain
Turnover Rate
Avg. Retention of New Hires
Avg. Length of Service for Those Terminated
Succession of New Hires 

Acquire: Why are people applying to your organization? What do applicants experience in the job selection process? Why do they walk away from your offers? Organizations often fail to ask themselves these fundamental questions as they focus on putting warm bodies in their seats. The hiring process has two components: attraction and acquisition. Attraction focuses on the more intangible and human aspects. Attraction has everything to do with an organization’s culture, and the pipeline of talent waiting to be tapped. Does your organization have “call me” resumes on file of people just waiting for a position to become available? Or, would one of your employees refer a friend to an open position? These are two quantifiable metrics that reflect your ability to attract new talent.

After an organization has attracted an applicant pool, the next step in the hiring process is to acquire the best candidates. Overall, the focus in this area should be factors such as cost, time, quantity and quality. Once you have developed a pipeline of talent, you need to efficiently select and process those who will truly add value to the organization. While the interviews and paperwork take time to carry out, the acquisition process should not months to complete. 

Maintain: This quadrant focuses on a broad range of activities focused primarily on paying salaries and providing benefits, while also rewarding the most deserving. Any asset needs to be maintained in order to retain its value, and human capital is no different. There are numerous administrative and tactical tasks associated with maintaining your human capital; some metrics include “pay in terms of average pay of employees, distribution across levels, cost as a percentage of operating expense, or other macro measures.”10 As for rewarding employees, consider creating a direct relationship with performance reviews and salary increases. The key here is to avoid “gaming” by managers, who are attempting to be “fair” to all of their staff. If you truly want to reward the stars, the processes need to be separated with reviews occurring prior to any budget announcement. Once reviews are taken seriously within the organization, then they can be used to manage employee development initiatives.

Develop: Development is perhaps the most difficult to gauge in the human supply chain, yet far too important to ignore. The challenge with comprehensive training and development is in converting all initiatives, from executive coaching to formal training seminars, into measurable performance results. While a seminar may be easy to track in terms of costs and results, coaching is often intangible unless translated into clear performance objectives. Moreover, the distinction between training and rewards can often fade when “training trips” act as thinly veiled rewards for performance. Regardless, personal development and learning initiatives are crucial in realizing the full potential of people and translating talent into value. Some metrics include the skills attained and used within a set time period, as well as the cost of development initiatives as a percentage of the total operating costs.

Retain: Keeping talent within an organization will always be an important activity. After an organization has spent a considerable amount of time and resources attracting, acquiring, rewarding and developing a workforce, the cost of losing people is high. Yet, at the same time, retention is not about merely keeping positions filled. Rather, the focus should be cultivating and challenging those who truly make a difference in the workplace. For example, voluntary turnover often correlates with the maintenance and development quadrants, while involuntary turnover is typically an outcome of poor hiring practices. Through a combination of quantitative and qualitative approaches, HR may be able to minimize or maximize these factors in order to build a human capital supply chain that outperforms the field.

…Or Destroyed in the Process

If HR cannot – or will not – step to the plate and become a strategic partner with finance, marketing, etc., then perhaps an entirely new organizational framework is eminent. Consider this hypothetical: I am a CEO who realizes that people are the greatest asset to my company. HR, as a department, is not getting the job done managing the human supply chain so that human capital grows, stays and is accessible. Instead of tinkering with the old system, I decide to create an entirely new strategically-oriented position, Chief People Officer (CPO), and divide the remaining managerial HR duties among other departments. 

Compensation and benefits would be handled by accounting and finance. The legal department could takeover workers’ compensation and risk management. And each department could handle its own acquisition and recruiting under the leadership of the new CPO. Then the CPO, with a broad mandate, would be able to focus on the bigger human capital issues such as succession planning, leadership initiatives and other organizational design issues. 

In fact, the winds of change may already be here. Recent data shows HR outsourcing to be an increasingly growing industry. At the end of 2000, the HR outsourcing industry had revenues of $21.7 billion, accounting for more than 8% of total HR spending.11 These numbers have only increased in the last three years.

At present, BP and Exult maintain the largest HR outsourcing relationship – a $600 million, 7-year contract starting in 2000 – in which Exult assumed all administrative duties related to compensation, benefits, pay roll, organizational development, performance management, employee development, training, recruitment and relocation. That left BP responsible for HR policy and strategy. While BP’s financials remain undisclosed, Exult claims to save its clients between 10% and 20% per year.12 

Time will tell as to whether large-scale outsourcing is effective in the long run, but HR professionals better take note. If the status quo remains, HR departments may wake up one day to find that they are obsolete.

Footnotes

1 Becker, Brian and Mark Huselid. “Measuring HR?” HR Magazine, (December 2003), p. 58.
2 Grossman, Robert J. “Measuring Up: HR Prove Its Worth,” HR Magazine, (January 2000), p. 31.
3 Wintermantel, Richard E. and Karen L. Mattimore. “In the Changing World of Human Resources: Matching Measures to Mission,” Human Resource Management, vol. 36, no. 3, (Fall 1997), p. 340.
4 Fitz-enz, Jac. The ROI of Human Capital: Measuring the Economic Value of Employee Performance. New York: AMACOM, 2000, p. 26.
Wintermantel, 338-9.
5 Wang, Greg C., Zhengxia Dou and Ning Li. “A Systems Approach to Measuring Return on Investment for HRD Interventions,” Human Resource Development Quarterly, vol. 13, no. 2, (Summer 2002), pp. 212-14.
6 Grossman, 32.
7 Fitz-enz, 47.
8 Based on Fitz-enz, 109.
9 Fitz-enz, 112.
10 Adler, Paul S. “Making the HR Outsourcing Decision,” MIT Sloan Management Review, vol. 45, no. 1, (Fall 2003), pp. 53-61.
Ibid.