[I published a post addressing this topic right after I launched my blog 11/9/2009, and I never expected to address this topic again. Surely by now, I would have thought that we'd have broad agreement on how to measure the impact of HRM on business outcomes. But I had few readers in the beginning, and there's a ton of evidence that we still haven't solved this part of the HRM value puzzle. So, with many more readers now plus much wider reach via Twitter, I'm hoping that we can answer this question once and for all. If you really want me to retire, help me knock this item off the todo list ASAP.]
If the real purpose, the only purpose, of HRM is to achieve organizational outcomes, then we’d better be able to measure the effects of specific investments in HRM on those organizational outcomes. Otherwise, why would anyone trust us with a budget?
Revenues And Profits
The primary outcome measures for private sector organizations are revenues and profits, so clearly we must be able to explain how what we’re doing in HRM, to include investments in HR technology but also investments in everything from total compensation to workforce development, increases revenues and/or profitability in measurable and provable ways. Those are the metrics that matter and the only metrics that will capture and hold executive attention.
About now my colleagues are saying, and with good reason, that Naomi is off again on her quest for the holy grail of HRM, for those provable, measurable impacts of HRM on the real business outcomes of organizations. But if we really can’t do this, if we really can’t show a line of sight from improving the practice of HRM to improving those required business outcomes, we deserve to be relegated to the record-keeping, compliance and payroll responsibilities of our past. At least there we could winnow down the back office headcount with some judicious investments in outsourcing, workflow, and automation.
There’s a ton of respected research as well as my own experience to convince me that it’s possible to figure out this line of sight for a given organization. Imagine the possibilities if we could embed some of the relevant analytical methodologies, tools and intelligence in HRM software? Do you suppose that’s what at least some of the HRM software vendors mean by analytics? Trust but verify might apply here.
I still don’t know how to develop this line of sight in the abstract, but I do know how to make the linkage work once I know an organization’s very specific business outcomes and what drives those business outcomes, when I know which flavor of revenue and profit are linked in the most direct way to what the workforce does. This varies considerably by industry and even by company within industry, so I usually ask someone in the know, in addition to observing, what measure I should use of revenue and profitability as the numerator in the two metrics I’m about to describe. If the mere mention of metrics or analytics unleashes your personal demons or causes your eyes to glaze over, the intersection of HRM and IT is not your preferred neighborhood.
With those revenue and profit numbers for the numerators of two separate metrics, we must search very carefully for the appropriate denominators, which will be the same for both metrics. We’re looking for an accurate and fairly reliable measure of the workforce effort deployed to achieve those revenues and profits. Is it primarily a full-time, employed workforce? Then perhaps a count of the employees who are actually working at the end of the relevant measurement period would be a good denominator. Is it primarily a part-time, employed workforce? Then try FTEs of employees who are actually working at the end of the relevant measurement period. Are there lots of contract/contingent non-employee workers? Then broaden those active employee counts or FTEs to include those non-employee workers. Have all three types of workers, then create a meaninful composite. This isn’t about headcount but about the amount of workforce used to achieve the revenue and profit numbers.
We can now measure in actual dollars (or whatever the preferred currency) the revenue and profit contribution per employee/employee FTE/workforce member/workforce FTE/composite of same. These are the two ratios that we’re trying to improve by means of HRM. There may well be other useful metrics, much more finely tuned to particular groups within the organization or to particular lines of business, but business outcomes are always about “show me the money.”
Putting aside the baseline budget we must spend on HRM just to do the essential record-keeping, compliance and payroll (notice that I consider actual compensation and benefits outlays, as well as benefits administration, completely open for discussion), every other dollar invested, to include every total compensation dollar, should be focused on and justified by how it moves these ratios in a positive direction — and by how much.
What Drives Business Outcomes?
Now that we know what we’re trying to do, to improve revenues and profits, we’ve got to explore, getting down and dirty, what drives financial results in a specific organization. Do newer products garner the greatest increases in sales and profits? Does more effective exploration/leases/development garner better raw material costs? Does our future growth depend on opening up new geographies, improving product quality, delivering 1st rate customer service? Until you really understand what drives business results, it’s not possible to figure out how HRM can help. That alone requires that HR leaders be up to their eyeballs in the business of their business.
But let’s assume that we really do know those drivers of business results. Now we need to figure out which HRM-related actions, processes, plan designs, etc. affect those drivers in a positive way, and by how much. I could go on, but I think that the process of working backwards from the desired business outcomes to the needed HRM results is already clear. And it’s clearly different from the typical HR department’s so-called strategic plans, which are littered with “we’ll implement self service” or “we’ll improve bench strength” or “we’ll implement a new performance management process and ensure that everyone is reviewed twice a year.”
With a real HRM strategy, one that explains what specific HRM actions, processes, plan designs, etc. are intended to have what impacts on the business drivers of organizational outcomes, we can track our progress using revenues and profits per measure of workforce effort. We can also introduce one of my favorite HRM-related metrics: the total HRM (including the HRM delivery system) cost of delivering agreed business outcomes, otherwise known as TCBO. Our goal is to drive up revenue and profit per measure of workforce effort while driving down TCBO. What could be simpler?
Total Cost Of Achieving Business Outcomes
TCBO is by far the most useful, purely HRM-related metric, but it can also be quite difficult to measure and track. As a whole, it can be used to measure the total HRM-related costs of achieving the macro measures of revenue and profitability per appropriate workforce measure, but subsets also can be used measure smaller but very important intermediate HRM outcomes, e.g. the total HRM-related costs of delivering one highly qualified, good fit new hire. The new idea here is that, to the business owner, what matters are the business outcomes rather than the process activities or even the process outcomes on which HR leadership has traditionally focused.
When you work toward this view of HRM and the HRM delivery system, many of the investments needed to achieve truly world class HRM practices as well as a world class HRM delivery system, e.g. proactive, intelligent self service, can be justified on the basis of the expected improvement in needed business outcomes. But you can’t begin to develop this view of HRM and the HRMDS, nor to use these business outcome metrics in your investment business cases, unless HR leaders take a strategic view of HRM and HRMDS planning which aligns their organizations’ overall business outcomes with everything about HRM. Without this approach, HR may well address the costs of benefits administration without tackling the cost or value of those benefits, of reducing the time and cost to hire without reducing the elapsed time to productivity or increasing the quality of hire, etc.
The Bottom Line
If you don’t know where you’re going, it’s of little importance how, at what cost, or when you get there. Measurable, provable improvement in business outcomes is where we’re going, so pinning those down first provides enormous guidance to HRM in how best to unleash its own actions, practices, plans designs, etc. toward getting there.
[If you'd like to learn a lot more about how your can "Follow The Yellow Brick Road" to linking investments in HRM (and the HRM delivery system) to needed business outcomes, have I got some posts for you -- but remember to read them in reverse order:
If you feel like you’ve been stranded along the way or that we’ve (or you’ve) been off on various scenic detours, my apologies for not providing the final installment of our Yellow Brick Road travelogue as quickly as I had hoped. Life just keeps happening; we keep up as best we can. And if you’re just [...]
My apologies for the long detour from the Yellow Brick Road while I attended to heavy business travel, client deliverables, more shoulder rehab, and the final business details for closing on M/V SmartyPants. More on SmartyPants in a later next post, complete with pictures. For now, we’ve got a lot more work to do along [...]
In Part I of our journey down the yellow brick road to great HRM and HRM delivery systems, I set the stage in terms of the environment in which our organizations must operate and what they must do to be successful. By now you should have decided for your own organization – or will do this shortly [...]
In my 2/9/2010 post, I announced that I would be publishing my strategic HRM delivery systems planning methodology on this blog, so I thought I’d better get started. Although there’s a very geeky set of materials to guide me on these projects, I call the version of my methodology intended for clients, “follow the yellow [...]
(Cross-posted @ In Full Bloom)