Updated: Mar 25
This article originally appeared in the July/Aug edition of Human Resources, the official journal of the Hong Kong Institute of Human Resource Management, and is reproduced with permission from HKIHRM and Classified Post.
While not always recognised as having a measurable impact on a company’s profitability in the same way as sales or finance, the human resources function is responsible for the talent that drives performance and generates profits across an entire organisation.
Even though in many cases HR receives only a small portion of the total corporate budget, with the right tools and strategies it is possible to measure HR effectiveness as a positive influence on a business, including a measurable contributor to the bottom line.
In most organisations, the HR department is the classic example of a cost centre. Its raison d’être is based on running people operations smoothly while containing cost on a limited budget, often dictated by a rival finance department. With the outcome of most of its initiatives being challenging to measure, HR representatives traditionally struggle to explain their impact on the most important metric senior executives care for: the company bottom line.
Run HR like a profit-centre
It is also accepted by the majority of organisations that training programmes are an essential cornerstone for the development of their staff. Senior management also understand that there are significant costs to losing top talent – not only the cost involved in finding suitable replacements, but also for training them and getting them up to speed. At the same time, it is believed that an increase in employee engagement will somewhat positively influence the company’s overall performance. Yet, by nature, the effect of all of these HR-driven activities is hard to calculate and their deployment is often subject to the goodwill of the senior management team or CEO. Therefore, traditionally, HR representatives must put their hopes on the good judgment of their people-minded leadership team to launch programmes essential for any company to thrive. Being stuck in this dilemma, HR mainly operates within its given budget and has to pass on bigger assignments with a potentially much larger impact on the company’s bottom line.
Making the business case
To become truly relevant and effective, HR needs to throw off the shackles of being a cost centre and adopt, develop and declare a strategic profit-centre mindset and prove that it can fund itself. This would strengthen its relevancy for the business and ensure a stronger, more permanent influence on the company’s overall decision-making. To be relevant in the boardroom, HR executives need to do their homework. Firstly, they need to know the company numbers as well as they know the policies set out in the employee handbook. It is not enough to understand every aspect of people management and the related policies; HR also needs to “speak business” fluently. Secondly, and equally important, HR needs to make a crystal-clear case of how HR initiatives have a positive impact on those numbers. While this sounds like an insurmountable challenge for many, the advent of big data, in conjunction with advanced statistical analysis, enables groundbreaking insights into the effectiveness of HR-driven initiatives. In the battle for budgets, human-capital experts are well advised to use an accurately calculated HR-ROI as its main weapon by creating watertight business cases for all of their activities.
Using accurately calculated HR-ROI, traditional HR initiatives can be measured for their impact and effect on relevant metrics and the company’s bottom line:
When designing or adopting a training programme for staff, for example, it needs a clear focus on the business outcome it is supposed to drive. Possible outcomes of training initiatives are, for instance, an increase in service quality of front line staff (and hence a measurable rise in customer satisfaction) or a reduction in safety incidents, clearly linked to cost savings in the production line (while nurturing employee morale).
With a solid competency model in place, HR can identify people characteristics to optimise certain processes and realise efficiency gains. For instance, in a call-centre environment, HR can evaluate the competencies required for successful call handling and thereby positively influence the average call handling time and caller satisfaction rates.
Happy employees equal happy customers. To make this a reality, HR can create linkages between employee engagement levels (e.g, an employee engagement index derived from an annual survey) and customer satisfaction metrics (e.g. Net Promoter Score). Adopting this approach, investments into areas that drive employee engagement can ultimately be linked to an increase in customer satisfaction with an inherent, positive effect on the bottom line.
Most larger organisations have implemented or are considering launching a high potential programme. The main objective of these programmes is to pay extra attention to the top talent in the organisation by providing them with high-potential development opportunities and incentivising them to prolong their tenure with the company. Even though it involves a considerable effort, companies can calculate the ROI of these types of programmes. The evaluation needs to quantify the retention rates and costs per lost employee and compare it to the costs of their high potential development programme.
While diversity and inclusion have been at top of the agenda for many organisations in recent years, measuring the impact of such strategies remains demanding. Still, it is possible to quantify insights on diversity and inclusion effectiveness when you incorporate relevant data sets of employee perceptions on diversity and inclusion (from an annual survey) and link them with metrics of employment numbers by gender and/or cultural background and pay differential, retention rates after maternity leave, collaboration, productivity, and innovation and/or retention.
Even in the traditional field of benefits policies there are insights to be gained for optimising the mix of perks and, at the same time, minimising costs. Ingenious research techniques such as conjoint analysis enable companies to identify the combination of benefits with maximum perceived value for employees while optimising dollars spent. This reduces an emotional discussion about a myriad of benefit choices to a pure numbers game – leaving both staff and budget planners satisfied.
Setting a clear vision
The best-practice advice for designing those “value-driven” programmes is to always keep the desired outcome in mind. It is imperative to define the relevant metrics directly when developing the original initiative. Based on solid design, hypotheses can be tested. For instance, does customer service training increase customer satisfaction, customer return rates and bottom line? Is the high-potential programme successful in driving retention rates up and reducing recruitment and training cost? Is increased diversity driving innovation, ie. are there more innovative ideas for new products or solutions?
To ensure HR’s relevance in the boardroom, it is crucial that HR takes ownership of these initiatives. They need to build business cases around them and be on top of the measurement processes. The required information needs to come from multiple sources: HR itself, finance, marketing and other departments. Therefore, it is important for HR to work hand-in-hand with those departments to orchestrate a collaborative approach to collecting data. One proof of this happening in sophisticated industries and markets is the recent advent of HR data analyst roles.
Data speaks volumes
Success will only be achieved if a coherent data strategy has been established – clear guidelines for the organisation about analysis and deployment of the company’s data. This requires CEO, CIO, CFO and CHRO to come together and agree on a business strategy while ensuring that data is collected with a common goal in mind. Using this repository, HR can use advanced analytics to confirm or refine the hypothesis established earlier and articulate the impact on relevant key metrics.
The last task for HR is to change the mindset of senior management towards their department. Only by drawing attention to the potential impact for core business metrics, will the newly defined HR approach get the attention it deserves. HR needs to educate senior management about its profit-centre approach and clearly articulate its influence on the organisation’s business. Once this message has been accepted, HR has successfully moved from being a support function to a truly valuable business partner and contributor to the bottom line.
About the author: I'm a human resources consultant, speaker & learner with 10+ years of experience working in Germany, Singapore and Hong Kong. You can find me discussing people topics in client meetings, HR conferences or my favourite coffee shops in Hong Kong and Singapore.