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|Human Capital has been rated the #1 business challenge facing CEOs by the Conference Board for the last four years in a row. Unfortunately, being listed as “a challenge” means that HR is clearly not doing enough in most areas, including metrics. In fact, one AMA/i4cp study ranked HR dead last among all major business functions in expert analytics usage.
This lack of expertise has been allowed to continue despite the fact that recent HBR research showed that the use of advanced workforce analytics directly improves business results. It’s time to realize the metrics the HR function currently produces end up adding very little value to strategic business decision-making. Most HR metrics have been inconsequential. I call the ones that most HR leaders provide to their executives “so what” metrics because they fail to excite or to cause executives to act. In fact, one survey revealed that only 12% of CEOs trust human capital metrics.
Taken together, this lack of trust and strategic relevance often leads executives to pay less strategic attention to HR. And ignoring HR or its metrics can lead to major business problems, because in many organizations, people/labor costs are the highest variable budget expense … often reaching as high as 60% (at my university, for example, it covers 80%). But despite being such a huge expense, most HR functions don’t actually report a single metric that could actually be assessed as strategic.
Not being strategic means many HR functions don’t even report the #1 most important people management metric — the productivity of their firm’s workforce (i.e., the average dollar revenue produced per employee). And to make matters worse, literally every one of the metrics that HR reports are historical, in that they only tell you what happened last year. Instead, what is needed is real time metrics that show what is currently happening, what will happen in the immediate future, and the prescribed actions that are required to meet current and upcoming problems. And finally, further business damage occurs because HR results are not converted to dollars (i.e., turnover is shown as a figure such as 20% versus documenting the revenue impacts of turnover reached $6.5 million). Without this dollar conversion, executives often fail to grasp the full business impacts of current and upcoming HR problems and opportunities.
Powerful strategic metrics help both the firm and HR because effective metrics keep everyone focused on the most important things. Other benefits include:
Even the simplest of all strategic metrics (having your performance widely mentioned in the annual report) quickly reveals how strategic your executives consider HR’s contribution to be.
The majority of the HR metrics normally reported to executives can only be labeled as tactical, in that they focus on internal HR results that relate primarily to efficiency and administration. Typical tactical metrics are measures like:
None of these, when reported to executives, drive action. Instead, HR leadership must shift to providing only strategic metrics to executives. And executives must learn to accept only metrics that meet each one of the following four criteria to determine if a metric is, in fact, strategic.
The metrics cover HR areas with significant business impacts – I have found that if a metric problem or opportunity area doesn’t have the potential of impacting at least 1% of corporate revenue, it shouldn’t be considered as strategic. Fortunately, there are many areas within HR that have significant business impacts. However, in order to avoid reporting tactical HR metrics, talent management leaders need to identify the HR areas within their own firm that have been proven to have extremely high business impacts. If you lack internal data, you should know that one study by BCG found the following seven HR metrics, listed in descending order of importance, have the highest impact on corporate revenue and profit:
Strategic HR metric results must also be converted into dollars – if you expect to get the attention of senior executives, every metric must be reported in the language of business … dollars! If you report HR metrics strictly using numbers (e.g., your turnover rate went from 10 to 13%), you will garner little executive action. That is because percentages alone make it difficult for executives to understand the full business impacts. So, if you want to guarantee that you get everyone’s attention, you must make it a standard practice to convert all major talent management results into their dollar impact on organizational revenue (or on other corporate strategic goals). For example, if you instead reported that the above mentioned 3% increase in turnover turned out to cost the firm $2.3 million or 6.2% of revenue, everyone would instantly take notice. Converting metrics to revenue impacts also makes the impacts of HR easily comparable to business impacts of other business functions (i.e., inventory turnover only cost us $1.01 million). In order to make that conversion accurate, HR needs to work closely with the CFO’s office to develop a process for routinely converting each of your high business impact metrics into a language that every executive understands — dollars.
Strategic metrics are forward-looking and they add a trendline that projects into the future – few executives find much value in traditional HR metrics that only tell you what happened last year. Forward-looking predictive metrics are worth up to two times the value to managers and executives because they provide them with enough warning so that upcoming problems can be mitigated. It’s important to also include risk analysis with your forward-looking metrics, so that decision-makers can understand both the probability of the problem occurring and the likely costs that will result if the upcoming talent problem is not promptly addressed. In addition, it’s important to realize that reporting a numerical metric that reflects a single point in time generally won’t be enough to drive action. That is because many executives also need to see a trendline extending out from that initial point, in order to easily visualize a continuing trend. So, add a visual trend line (graph line) to each of your strategic metrics, so that everyone can instantly see the historical direction, the current direction and the degree that the metric will likely shift up or down in the future.
Your metrics might not result in the right action without a list of the prescriptive solutions – even strategic metrics that succeed in driving action can be problematic if the impacted managers take the wrong action to resolve the indicated problem. For example, in complicated problem areas, like having bad managers or low employee engagement, executives often will hesitate for long periods of time after viewing a revealing metric. That delay occurs because they don’t know which solution to implement. In addition, it’s also important to realize that some executives are curious about the causes of all major problems, so they sometimes won’t be willing to take any action until you also reveal the underlying root causes of the indicated problem. And after any delay is over, there is, unfortunately, a distinct chance that the affected manager will make matters even worse by implementing the wrong solution. You can increase the likelihood that executives and managers will act quickly and use the right solution if you provide these decision-makers with an array of effective solutions in a toolkit format. With each solution option, you should include its likely probability of success within your firm and its required investment in time and money.
“Whatever you measure gets a great deal of attention and that attention increases the likelihood of improvement in the area that’s measured.”
In Part 2 of this article, we’ll explore the seven recommended strategic metrics to report to your CEO.