HR Metrics and Strategic Human Resources Planning

Human Capital — Truly Your Company’s Greatest Asset

In this economy, measuring your bottom line or your company’s success on Wall Street isn’t enough.

Instead, says Denise Kingsmill, deputy chair of the United Kingdom’s Monopolies and Mergers Commission, “Directors need to transform the airy cliche about people being their greatest asset into a guiding principle of business strategy.”

Yes, hiring and retaining employees costs money — and money may be in short supply in your company right now.

But do you know:

  • How much it costs you to lose an employee?
  • If your compensation structure helps you keep the people you want to keep?
  • How engaged your employees are with their work, with each other and with the company — and thus how well employees who survive any layoffs will be able to cope with the associated changes and new demands?
  • How long you need to retain an employee before she or he becomes a net asset?

Give them the tools and set the right metrics, and your Human Resources Department can tell you all of the above — and much more. Such information can then be used in human resource planning — for setting goals and objectives and then measuring progress towards them.

It’s All About Human Capital — How Much Are Your Employees Worth?

You have an IT department to manage your servers and workstations. You have a finance department to manage the flow of your company’s financial assets. But no matter what you do, computer equipment depreciates and profits can come and go due to external events you have no way to control.

Fortunately, such hard assets and cash are not the sole measure of the value of a business. To have a better idea of the true value of your company, you need to go beyond the conventional bottom line.

In fact, Peter Cheese, managing director of talent and organizational performance at Accenture, says in this article that “70% of a company’s market value cannot be explained by traditional measures. [and that] ‘A huge proportion of this is around human capital — quality of the workforce, leadership and so on.’”

Measure, Measure, Measure

Human capital issues might seem too vague to measure in ways that will make sense to a CFO.

After all, employees don’t stop being fully human when they walk in at 9 a.m. All that human stuff is just so subjective, and not anything that “bean counters” can be shown in nice graphs and pie charts, right?

Wrong.

There are human resources metrics for everything from how your company is doing at recruiting the right employees to the actual cost of losing and replacing an employee.

And being able to make an objective, dollars-and-cents case for your human resource planning objectives and proposals is essential to what is becoming known as strategic human resources management.

Some common HR metrics include:

  • Overall Workforce Productivity:

    Productivity metrics include the dollar value of your workforce’s productivity this year vs. last year and how this difference compares to amounts spent to enhance productivity (e.g., training, technology).

  • Employee Engagement:

    How well are your managers doing in keeping employees satisfied and motivated? Survey your employees and find out.

  • Recruiting:
    • How much does it cost your company for every day a position is vacant?
    • How well do this year’s new hires perform as opposed to the people you hired for the same positions last year?
    • How many employees do you turn over during their first year?
  • Payroll:
    • What is your payroll department’s error rate?
    • How long does it take to resolve payroll problems?
    • How long does it take to process new hires and get them working?

Don’t Overdo The HR Metrics, or You’ll Over-Complicate Your Strategic Human Resources Planning

While the urge to compile measurable information is as driving as doing so is important, it is possible to set up so many metrics that you drown in information overload.

While using metrics to manage your human capital is vital, don’t set up so many that you’ll never be able to manage the information you’re compiling. Experts in the field recommend using roughly 10-12 HR metrics. And, of course, you’ll want to choose your metrics carefully to fit the your company’s needs, perhaps changing them over time as goals and objectives change.

Just How Effective Are HR Metrics?

One good example of the effectiveness of HR metrics in strategic human resources comes from the Royal Bank of Scotland (“RBS”).

After designing an in-depth set of measurements, RBS was able to define a break-even point for new employees: the point at which the new employees became a net value instead of a net cost to the organization. That point was after about one year.

How long does it take before your new hires are a net value? HR metrics designed around your company’s specific costs, HR processes, and revenue stream can tell you.

Metrics for Entrepreneurs

You don’t have to be a large company with an HR department to use HR metrics to help define your strengths and weaknesses. Nor are HR metrics the only measurements you’ll want to use, whether your company is in the Fortune 500 or a storefront restaurant just starting out.

If you’re looking for a good basic guide to business metrics for entrepreneurs, Forbes.com published an excellent articleon useful evaluation metrics that go far deeper than conventional bottom-line measures.

Metrics for Every Kind of Business

Each business has its own unique metrics, and the Forbes.com article provides useful tips for every kind of business from law firms to manufacturers. For example, manufacturers will want to track the quality of their process by evaluating how many units are being made correctly the first time, while restaurateurs will want to track not only the number of customers and average spending per customer, but also how often their tables turn over.

The Common Bottom Line

Of course, all businesses have at least some metrics in common. According to the Forbes article, “The importance of things like capacity utilization, process control, sales cycles and repeat customers apply no matter what business you’re in.”

More HR Metrics Resources Useful for Human Resource Planning

Get a discount on Lorman Education Service’s January 14, 2009, teleseminar, Developing A Sound HR Metrics System. (If you missed it or can’t make it, click the “Training — 10% Off” tab above and purchase the recording and materials.)

For more in-depth information on the vital role that human capital management and HR metrics can play in your business, visit our bookstore, where you will find several helpful books like these:

Photo courtesy of suratech via flickr.

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