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Creating a Business-FocusedHR Function with Analytics andIntegrated Talent Management

By Shane Douthitt and Scott Mondore

Using analytics in HR to show businessimpact and predict future performanceis the next trend in our profession. Atthe center of this increased focus on analyticsis the balanced scorecard. Many HR leadersare asking four important questions:

1. What HR metrics should be included in thebalanced scorecard?

2. Given all the HR data we have available,how can we use it to identify priorities andbuild an integrated talent strategy?

3. How can we show the impact of our invest-ments in talent (i.e., demonstrate an ROI)?

4. How do I execute a plan to improve ourHR analytics?

Many organizations want to achieve successby improving their HR analytics, but areunsure how to get there. This article willattempt to answer each of these key questionsand provide a blueprint for organizations tofollow as they improve their analytics throughan integrated talent scorecard that is focusedon business outcomes and return-on-invest-ment (ROI).

The Balanced ScorecardOrganization-wide balanced scorecards wereintroduced in the mid-1990s as a way of dem-onstrating the connection between long-termstrategy and short-term actions. They not onlyinclude financial metrics but also metrics forcustomers, internal business processes, andemployees; allowing senior team members totrack performance and monitor the effect ofbusiness initiatives in these key areas. All themetrics on the organization-wide balancedscorecard are typically business outcomes orconnected directly to business outcomes.

In addition to the organization-wide score-card, most HR departments have developedtheir own HR-focused metrics (i.e., the HRbalanced scorecard). The HR scorecard, pio-

neered by Mark Huselid, among others, seesHR management practices as a strategic assetand provides a road map to help organizationsintegrate HR systems with organizationalstrategy. HR scorecards typically include eachof the elements presented in Table 1.

Within each of these scorecard elements, it ispossible to measure both lagging and leadingindicators. Lagging indicators are those mea-sures that reflect only what has happened inthe past. For example, financial metrics mea-sure the impact of previous decisions. As thesources of such outcomes are not always clear,lagging indicators may often be inadequate inhelping assess decisions in today's dynamicwork environment. Leading indicators differfrom organization to organization, but theyassess the status of key drivers that lead to thesuccess of the organization's strategy. Leadingindicators stress the effect of future rather thanpast decisions and may include strategic,operations, and customer perspectives. WhileHR departments have been relatively success-ful at measuring some key efficiency metrics(e.g., cost of hire, time to fill, employee engage-ment scores), significant opportunity stillexists to identify those leading indicators thatare directly linked to critical businessoutcomes.

Our approach to measuring and demonstrat-ing the value and impact of HR investmentscenters on four basic principles:

1. HR processes and investments must be di-rectly linked to critical business outcomes(e.g., sales, productivity, customer satisfac-tion, safety) to understand how they drivethose outcomes.

2. By quantifying the relationship between HRprocesses and critical business outcomes inthe past (lagging indicators), organization-specific algorithms (not generic best prac-tices) can be created to predict future impactof HR investments (leading indicators).

3. Similar to other lines of business and/or

HR Scorecard Element

Deliverables

Processes

Alignment

Results

The key HR deliverables that will help to leverage HR's role in your company's overallbusiness strategy (e.g., pipeline of talent, succession plan)

The key HR processes (e.g., selection, performance managennent, compensation)

Clear alignment between the HR deliverables/processes and the overarchingbusiness strategy

Indicators of the effectiveness with which the deliverables are executed

functions, HR must look hoHstically at allHR processes and potential investments toidentify priorities and make strategic invest-ment decisions.

4. When the above principles have been fol-lowed, an expected ROI can be calculatedto help HR leaders make informed invest-ment decisions.

Case Study:Product ShrinkBefore we outline how to create an integratedscorecard linked to business outcomes, a shortcase study will highlight exactly how organiza-tions can link HR processes to businessoutcomes.

As a consequence of tough economic timesand global marketplace competition, a well-established retail organization was facing theprospect of substantially slowing their growthplans and possibly laying off numerousemployees. Reducing costs across their storeswas thus critical to maintaining their plans andsustaining their existing employment levels.

The key business outcome identified by orga-nizational leaders was to increase profitabilityby reducing product shrink (i.e., employee andnonemployee theft of merchandise as well asloss of saleable product due to damage). Shrinkhad cost this organization nearly $100 millionannually and impacted their bottom-line prof-its. Senior leaders turned to human resourcesfor answers, providing HR leaders a chance tosignificantly impact a business outcome thatwas critical to the organization's survival.

Identifying Drivers of Product Shrink: Duringthis critical time, saying that HR processeswere "aligned" with the key business outcomewas not enough. Rather, HR leaders had todemonstrate that their efforts had a cause-effect impact on the business outcome. Weworked with HR leaders to statistically linkpeople data (e.g., employee opinion surveyresults, training participation rates, compe-tency ratings, and hiring criteria) to productshrink. The results of this analysis revealed thefollowing key drivers of shrink:

Performance ratings on the "Achieve Extra-ordinary Results" manager competency

Dishonesty terminations

Ethics course participation

Sales/shrink course participation

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Employees' perceptions of job-personmatch (as measured on the employeesurvey)

The methodology used to show the cause-effect relationship between HR processesand product shrink is called structural equa-tions modeling (SEM). Think of it as multipleregression on steroids. Technically speaking,it analyzes covariance matrices and controlsfor measurement error and allows you toexamine multiple business outcomes simul-taneously. Practically speaking, SEM allowsfor a much higher level of confidence in theanalyses above and beyond what a correla-tion can show. Remember, shark attacks andice cream sales are correlated but have noth-ing to do with each other and ice creamexecutives would make horrible strategicdecisions based on that correlation analysis.An argument for investment carries muchmore weight in the boardroom using SEMversus a correlation. The process involvesmerging the HR data that is collected (train-ing data, survey data, competency data) andlining it up with the critical business out-come data (product shrink). There are pro-fessors, students and firms that can do thistype of analysis, which is not cost prohibi-tive, so don't let that be a barrier to doingthis type of work. As a result of this type ofanalysis, the key drivers of product shrinkwere added to the HR scorecard and goalsfor improving performance on each of thekey drivers were established.

Calculating Return on Investment: At thetime of our intervention, the organizationwas losing $93 million to annualized shrink.Based on our analyses, they invested inimproving all of the five key drivers of prod-uct shrink. In calculating the ROI of one ofthose investments, only 65 percent ofemployees were participating in the organi-zation's ethics course. Based on these num-bers and the impact values provided inTable 2, we were able to calculate the ROIfor increasing ethics course participation asfollows:

Increasing ethics course participation to95 percent could result in additional sav-ings of $4.3 million.

The approximate cost of increasing ethicscourse participation (in terms of employeetime, communication, etc.) was equal to$1,100,000.

Expected ROI: 390 percent (potential sav-ings of $4.3 million divided by cost of $1.1million).

TABLE 2 . CALCULATING RETURN-ON-INVESTMENT

Intervention

Manager Competency

Ethics Course

Shrink Course

Dishonesty Terminations

Algorithm Impact Value (Beta)

0.14

0.10

0.09

-0.08

p8wifErafs35l1nk Impact

$13.0 miliion

$9.3 million

$8.4 million

$3.7 miilion

The organization used the same process tocalculate the potential shrink impact foreach of the other key drivers. The ability tocalculate an ROI for each of the key driversof product shrink helped HR leaders to dem-onstrate the bottom-line impact of theirefforts and secure buy-in from leaders acrossall levels of the organization. Ultimately, theorganization beat their product shrink goalby 33 percent in the first year by investingin all five of the key product shrink drivers.They expect to sustain this level of perfor-mance by reanalyzing people and productshrink data on an annual basis and adjustingtheir HR scorecard and corresponding strat-egies/initiatives accordingly.

This case study emphasizes a couple ofimportant points. First, ethics course compli-ance was a critical driver of shrink with alarge expected ROI. Most HR professionalswould never consider something as mundaneas participation rates in a single trainingcourse as part of their overall HR scorecard.However, the linkage analysis showed justhow important the course was to shrink ratesand its subsequent impact on the bottom line.The point being that for something to beimpactful it does not necessarily have to be"sophisticated" or "strategic" in nature.

This case study also illustrates the impor-tance of looking holistically at all the poten-tial HR processes. By considering training,selection, performance on key competencies,and employee attitudes, the organizationwas able to make fact-based decisionsregarding potential investments in its peopleand calculate an expected ROI (based on thealgorithm produced using real data). Con-sidering these programs/processes individu-ally would not have provided as much insightand direction regarding the core HR pro-cesses. For example, employee engagementdid have a statistically significant impact onshrink, but when considered among theother significant drivers of shrink, it wasapparent that additional investments inengagement were not warranted.

Building an IntegratedHR Scorecard Linkedto Business OutcomesThe case study clearly shows how an organi-zation can and should link its HR data to keybusiness outcomes. These analytics provide anorganization with the facts and data to makestrategic decisions about prioritization andinvestments in its employees. Furthermore,the process clearly defines which metricsshould be included on the HR scorecard. Thekey steps to achieving a business-focused HRscorecard are as follows:

Step 1: Identify Critical Business Outcomes.Most organizations conduct some sort ofannual goal-setting or strategic planning pro-cess which produces a set of organizationalgoals and priorities. Often times, these goalswill provide HR with the set of business pri-orities and metrics. In the goal-setting pro-cess, we typically utilize five strategic domains People, Service, Quality, Finance, andGrowth as a framework to help organiza-tional leaders establish objective performancemeasures that can then be cascaded to leadersand front-line employees. For HR profession-als, our task is to identify the key metrics toinclude in the People domain. Instead of usingthe typical HR metrics (e.g., turnover, overallemployee engagement), we need to identifythe most critical metrics from the other stra-tegic domains (i.e., business outcomes) tounderstand how HR processes can drivethose business outcomes. Essentially, HRanalytics will show the direct impact onactual business outcomes not simply mea-sure surrogate metrics that we assume havean impact (e.g., engagement). It is importantto identify the 2-3 most critical business out-comes (e.g., sales, customer satisfaction,safety) to narrow the focus. If this is not clearbased on the organizational strategy and/orscorecard metrics, a series of stakeholderinterviews with business leaders are helpfulin this process.

18 PEOPLE & STRATEGY

Step 2: Align HR Data with Business Out-comes. Next, we need to align all the peopledata with the business outcome metrics. Thiscan be done at an individual employee level orat a work unit level. We used a retail organiza-tion as an example. Retail organizations withbrick-and-mortar stores typically measuresales and operational metrics at the store level.This means we will have all the business out-come data we need at the store level. From anHR perspective, we need to align our peopledata with the business outcome metrics. Forexample, we will likely have employee surveys,training participation, competency assess-ments from performance management, and360 data for the store leaders that has beencollected in the past 12 months. We simplycreate one integrated data file that lines up thepeople metrics with the business outcomedata. This will provide the foundation for ourHR analytics. The figure below depicts typicalHR data and business metrics.

Step 3: Conduct the Analytics to Identify Driv-ers of Business Outcomes and ROI. This stepwill require advanced statistical knowledge toconduct the linkage analysis. If internalresources don't exist in your organization,then hiring a consultant, graduate student, orstatistician for this role will be necessary. Werecommend using structural equations model-ing for the analytics, as opposed to regressionor correlation. Structural equations modelinghas several methodological advantages that

BusinessOutcome

HRProcess

EXAMPLES OFBUSINESS OUTCOMES

Service

Customer satisfaction Wait times

> Quaitty

Clinical outcomes Product Defects

f Financei,

% to budget

Cost reduction

Growth

Sales grovrth Margin growth

People

TurnoverEmployee engagement

BusinessDrivers

Leadership

impact Measurement

Eo

IICI >

EmployeeOpinionSurvey Safety

CareerDevelopment

360 Commitment toFeedback Service(CompetencyAssessment) Team Oriented

Selection

SuccessionPlanning

Commitment toService

Communication

Performance

Breadth ofExperience

PeopleDeveloper

0.19

0.10

0.22

0.15

0.32

0.15

0.25

allows an organization to control for measure-ment error and make cause-and-effect infer-ences from the resulting model. The resultingmodel will define the impact of each employeemeasure (e.g., competency/behavior, attitudes)on the business outcomes (for a practical intro-duction to SEM see Mondore & Douthitt,2009). This will allow HR to prioritize inter-ventions and calculate an expected return-on-investment for initiatives. Finally, the modelwill provide the basis for determining whichkey HR metrics will be included in the HRscorecard.

Step 4: Deliver HR Priorities and ExpectedROI to all Leaders in a Simple Format. Thefinal step (and most important) is making thedata available to senior leaders, front-line man-agers, and front-line employees in an easilyconsumable, actionable manner. An integratedHR scorecard should readily identify and pri-oritize HR processes for all leaders andemployees. This allows leaders and employeesto focus on improving the HR opportunitiesthat have the greatest impact on the bottom-line. The scorecard/report should also provideleaders with an action planning tool thatincludes best practices that they can implement(and customize) so that aaion can be taken onthe front lines. If these analyses only result incorporate scorecards and pretty PowerPointslides, then the chances of impacting actualbusiness results is limited. An example of theintegrated HR scorecard is provided above.

0.24 % %op Box

0.15 % %op Box

0.26 % Top Box

CurrentPerformance

75%

1%

85%

ROi

$1.5 miilion

$1.10 million

$1.5 miiiion

Average Rating(1 -7 )

Average Rating(1 -7 )

Average Rating(1 -7 )

Average Rating(1 -7 )

AveragePerformanceRating (1 - 6)

Average Rating(1-5)

Average Rating(1 -5 )

$1 0 miiiion

$1.10 millionI

5.04

5.85

3.90

4.45

$2.0 million

$1.0 million

$1.5 million

Step 5: Track Progress on Critical Drivers andCalculate the Actual ROI. The final step is tomeasure improvement on the key businessdrivers and identify the actual ROI. This willinform goal setting for the next fiscal year,validate the impact of HR on the bottom-line,and keep leaders and employees focused on alldrivers of performance.. .including the organi-zation's employees and people investments.

Making HR Analytics aReality: Five ProvenPaths to SuccessWe often hear from organizations that a keychallenge in adopting an analytics-basedapproach to HR is "getting all of our systems(i.e., HRIS) in one place so that they can talkto each other." Although system integration isan important undertaking, it is not in and ofitself the key to successfully implementing andutilizing analytics as part of your HR/talentmanagement strategy and building the HRscorecard. HR/talent management vendorsmay tell you that you have to integrate yourtalent management systems to have an impact,but remember that they do have a vested inter-est in this process.The truth is that most vendorplatforms don't do any real analytics work thatshow the cause-effect relationship betweenHR/talent management and business out-comes. What they provide is a way to run the

VOLUME 36/ISSUE 4 2014 19

Analytics are a hot topic right now so it is important toclearly define how to do analytics effectively (cause-effect, using structural equation modeling) and makeanalytics practical and usable for frontline managers.

same old reports based on the same old data and HR is stuck having the same old impact.This old-thinking approach to "integration" islike having four storage units filled with yourold household items, and then transferring allof those items to one large storage unit so thateverything is contained in a single place stillthe same "stuff."The people-hours that it takesto simply put all of your HR/talent manage-ment data in one place will far exceed the valueof achieving integration if no real analytics arebeing conducted. It is important to note that inthe retail case study above, the organizationhad their data in multiple platforms and mul-tiple places and it did not negatively impacttheir ability to conduct a strong analysis andhave a very large business impact.

Below are five practical paths that organiza-tions can take to achieve the goal of establish-ing an integrated talent management platformthat not only warehouses data, but serves asthe foundation from which meaningful analyt-ics can be conducted and utilized to drivestrategic action. Remember, the analytics arewhere the real opportunities exist for HR/Tal-ent Management to show an impact.

1. Big Analytics Behind-the-ScenesData collected at organizations are typicallyhoused in different places (i.e., on differentservers/platforms) and are pulled and usedseparately by various functions. When data arehoused in this manner, analytics can be con-ducted behind-the-scenes by gathering therelevant data including business outcomedata from the disparate platforms andreformatting as necessary to allow for "applesto apples" comparisons. The process is notsexy, but executives don't need to know howthe sausage gets made.

The previous case study outlined a project tofind the causes of a $93 million problem at alarge grocery chain that had multiple datawarehouses across the organization. The datagathering process was conducted over thecourse of a few weeks, and included collectingand compiling data from an employee opinionsurvey, 360 assessments, performance assess-ments, training/LMS system, and HRIS demo-

graphics. Using analytics, we identified keycause-and-effect people drivers of their busi-ness issues and immediately put initiatives inplace that are continuing to have a significantpositive financial impact. Had this organiza-tion initially focused on pulling all of their dataonto one platform, the actual analysis of thedata would have taken over 18 months just toget started. Can your organization afford towait 18 months before analytics can begin?

Key questions for taking this path:

Are you relying heavily on separate HR sys-tems to run the HR function?

Does your organization lack the time and/or resources to begin pulling all of your HRsystems together?

Does your organization have an appetite forconducting cause-effect analytics rightnow?

2. Big Analytics and Big IntegrationThe integration of multiple HR platforms canbe a huge undertaking for big companies.Indeed, some companies may never be able tocompletely sunset existing HR platform(s).Organizations in this position can put togethera comprehensive approach in which the ana-lytics (and impact!) begin immediately whilean IT transition plan is executed in tandem.This approach allows the benefits of the analyt-ics to be realized quickly without delaying thelonger-term process of system integration. Thekey here is to do the real cause-effect analyticswork behind the scenes and expose the leadersto the outputs of the analytics make themwant more. This is an approach that is quiteeffective because getting executives excitedabout analytics now, but spending multiplemonths/years to integrate data, will reduce thatexcitement very quickly. Strong analytics anddata integration can happen simultaneously.

Key questions for taking this path:

Is your organization currently workingtoward the integration of all of your HRsystems?

Does your organization have an appetitefor conducting cause-effect analytics rightnow?

3. Start Small Generate Interest

Many organizations think that they have toexamine all of their HR/talent managementdata at the same time to conduct rigorousanalyses and have a meaningful impact. Nottrue. One thing we have learned in doingcause-effect analytics over the past 15 yearsis that there will be many skeptics of the pro-cess. Rather than view the skeptics as anobstacle make them an opportunity. Startwith one HR process or piece of talent man-agement data and show how it impacts animportant business outcome. A great one tostart with is your employee opinion survey.Surveys have become ubiquitous in organiza-tions, but their value is extremely limitedwithout analytics. Using cause-effect analyt-ics, you can show which specific attitudeshave a direct impact on important businessoutcomes (e.g., profit, productivity, safety,turnover). Use this initial analysis to get lead-ers bought into the process of HR/talentmanagement analytics. Doing so will help tobuild momentum and allow you to create abusiness case not only for investing in improv-ing attitudes, but also for conducting addi-tional analyses in other areas. Once youdemonstrate the business value of anemployee survey, leaders will want more. Bystarting small, you will create demand fromthe lines of business that you support foradditional data-driven insight into how theycan enhance business performance, and prof-itability through their people.

The table on the next page provides some spe-cific questions that analytics can help youanswer for several specific HR processes:

Key questions for taking this path:

Is your organization currently collectingvarious types of HR data (e.g., employeeopinion surveys, 360 assessments)?

If the organization isn't fully sold on analyt-ics, is there an opportunity to get your or-ganization interested in the power ofunderstanding how HR impacts businessoutcomes?

4. For Small Business Start Strong

Small businesses often have a distinct advan-tage when it comes to integrating their HR/talent management data and conducting ana-lytics they don't have old legacy technol-

20 PEOPLE & STRATEGY

Recruiting Which recruiting sources produce the best future employees?, Which labor pools should I focus more time?" What is the profile of the employee who performs the best?

Hiring Which assessed competencies yieid the best hires? Which assessments yieid the best hires? Did HR mai

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