Chapter 1Introduction

Purpose of the StudyThe purpose of this study is to provide a broad overview of how can companies convert its HR from cost centre to profit centre

Human Resources as a Profit CenterHuman Resources (HR) has sought to elevate its status to that of strategic business partner. In this time, when employers are cutting HR budgets and outsourcing functions that don't directly contribute to the bottom line, the failure of HR to demonstrate its value could have serious consequences.

The perception that HR is not a strategic business unit has resulted in many critical initiatives becoming delayed or losing funding altogether. The perception that HR does not significantly affect bottom-line profitability has also resulted in a lack of momentum on initiatives that could provide competitive advantage and significant shareholder returns.

The HR organization is typically the most under-funded division within the corporate enterprise. Furthermore, when cost cutting initiatives begin, companies typically look first to HR as a source of budget cutting. Why? Because investing in HR is not perceived as having the same return on investment (ROI) as investments in R+D, new physical assets, or marketing and advertising.

In today's intelligence-based economy, where people, not products or equipment generate the lion's share of revenue, corporate leaders must examine the impact of HR on the bottom line. The ability of non-financial measures to drive business performance is significantly underrated. Additionally, there is a wealth of empirical evidence readily available to quantify the value in HR-based initiatives. Examples are:

Companies that invest in talent management initiatives yield 27% greater shareholder return. (Michaels, Handfield-Jones, & Axelrod)

Increasing employee engagement by 5 percent can add 2.4 percent to a business' operating margin. (Towers Perrin)

Over a 10 year period, an Index of Human Asset Focused Companies significantly out-performed the S&P 500. (Amit & Shoemaker)

Human capital practices account for as much as 43% of the difference between a company’s market-to-book value and its competitors'. (Amit & Shoemaker)

Shareholder returns are 3 times higher at companies with superior human-capital practices than at companies with weak human-capital practices. The positive impact holds whether the business cycle is in a boom period or a recession. (Pfau & Kay).

The examples above beg the question of why HR continues to be perceived as non-strategic when people-focused investments produce significant competitive advantages. The answer may be simpler than one would think….

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Historically, HR has been financially accounted for as a cost center and, therefore, a prominent target for cost reductions. Most HR budgets end up being curtailed because the ROI on initiatives, such as recruitment, selection, and training and development are not perceived as impacting sales and profitability. However, if the cost savings and increased revenues generated by HR initiatives were allocated back to HR financial reports, most CEO's and CFO's would be astounded by the ROI.

One need not look very hard for further evidence indicative of the ROI for people-focused initiatives. Witness the HR software market, including online recruiting, selection, and performance management tools and you will find significant cost reductions resulting from these implementations. Unfortunately, because of the failure to measure intangible assets using financial and accounting reporting systems, many of these benefits go unreported on P+L statements.

To show how effective HR practices can drive financial results, let's follow a simple example. Let's assume that 2,500 staff members or 25% of a 10,000- person company consists of sales professionals. Now, assume that 10% of the sales force outperforms its peers by 100% and that the annual per person sales quota is Rs. 5,00,000. This means that 250 sales people would be selling Rs. 1,000,000 per year and contributing Rs. 125 million more in sales than their peers (250 top performers X Rs. 500,000 = Rs.125 million).

Assume that HR has the ability to differentiate the competencies or unique behaviors of the 250 sales people considered to be top performers. With this competency profile in hand, tools can be developed and used to predict future sales performance. This profile can then be used to optimize recruiting, selection, performance management, and training and development systems

If the number of top performing sales people could be improved by 5%, or an additional 125 sales people contribute Rs 1,000,000 in annual sales, revenue would increase by Rs. 62.5 million (Rs. 500,000 X 125). Now, let's assume HR invests Rs. 2 million on interventions, such as software tools for improved performance evaluations to develop the next 5% of top performers. The ROI would be 31 times the Rs. 2 million investments! Is there a CEO or CFO anywhere in the world that wouldn't make this investment?

In most companies, however, returns on investment are not clearly visible because a baseline of revenues and expenses before an HR initiative is completed has not been established using project management accounting principles. Project management financial tracking is extremely important to track the costs and benefits of any capital investment, so why haven't the finance team and the HR team collaborated on capital investments for the Human Asset? ROI can be calculated on any investment using very simple analytical tools, but the most important place to begin the process is to develop a baseline for comparison.

The chart below is a hypothetical example of a distribution of employee performance over a three year period. If the organization tracked the initiatives and interventions that were implemented to improve performance in the company and correlated overall performance to the corporate P+L, the ROI would become obvious. These findings become more powerful when this same analysis is completed by functional area or down to the department or job-

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specific level.

The HR organization can become a primary driver of competitive advantage in any company if it can focus on increasing revenues and reducing expenses through initiatives that clearly impact the bottom line. The HR organization becomes strategic when it can prove to line management, through quantitative measures, that people-focused initiatives generate compelling ROI and competitive advantage.

Over the past several years, CIO's have had to meet this same challenge. CIO's have committed millions of dollars to technology for the enterprise to remain competitive, but in most cases each of these investments required an analysis of the ROI. The HR Executive must now step up to this same challenge.

Despite overwhelming evidence that effective human capital practices drive bottom line performance, people-focused initiatives are still not viewed as strategic priorities in most companies. The examples cited above make a compelling business case for the investment in people-focused initiatives. Still, it is incumbent upon HR to constantly demonstrate, using quantitative data, how it contributes to a company's financial performance and competitive advantage. HR must collaborate with both Finance and Line Management to deliver new and valuable information related to talent management and the impact on the bottom line. HR has

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never been better positioned to affect corporate performance. It is its responsibility to create the vision of the strategic value of the human asset and to assume a leadership position to link this value to the bottom line.

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Chapter-2

Making HR a Strategic Asset –Use of Balance Score Card

The story is a familiar one. Organizations increasingly rely on intangibles as the source of their competitive advantage. R&D, brands, customer relationships, not to mention more abstract “capabilities” like organizational flexibility, are recognized as sources of value creation. Yet, managing these intangibles as assets, in an environment where conventional accounting standards often measures them as costs, is particularly challenging. Nowhere is this challenge more obvious than for what most firms claim to be their most important asset, their people. Senior managers recognize they are in a “war for talent”, but they often manage their people assets like overhead (a cost to be minimized). The solution is to manage HR (Human Resources) as a strategic asset and measure HR performance in terms of its strategic impact. This requires a new perspective on what is meant by HR in the organization and a new understanding of how HR creates value in the organization. Both line managers and HR professionals need to think of HR, not in terms of a function, or set of practices, but rather as an “architecture” that must be properly structured and managed in order to create value.

Thinking in Terms of an HR Architecture

Conventional thinking about HR reflects the paradox facing line managers. If people “are our most important asset”, why is the HR function typically considered a cost center? Why do so many line managers think of HR as administrative overhead? In large part this perspective has been justified by the HR function’s traditional emphasis on administrative efficiency and compliance activities. With the increasing emphasis on innovation, speed and flexibilty, however, and the associated increase in the importance of intangibles, both line managers and HR professionals need to break out of their functional perspective and think about HR as a strategic asset. This doesn’t mean simply putting old wine in new bottles. It is not suggesting that the traditional administrative and compliance activities in HR have all of a sudden achieved strategic significance. Line managers and HR professionals both need to focus on the organizational logic required to make HR a strategic asset; namely the HR Architecture.

Simply put, when senior line managers describe “people” as a strategic asset, they are describing employee strategic behavior. Namely, they should be focusing on employee performance that implements the firm’s strategy. But just as organizational performance is a function of both people and systems, the appropriate HR system is required to select, develop and reward employees in way that produces those strategic behaviors. Finally, while line managers often play a key role in managing the high performance HR system, the HR function must still have the perspective and competencies to drive this process. Figure 1 describes the organizational logic behind the HR Architecture. In other words both line managers and HR professionals, when thinking strategically about HR, need to think in terms of a value creating

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process that combines the HR function and the HR system to produce strategically focused employee performance.

Why HR is a Strategic Asset

It is easy to understand why organizations talk about people as an asset, but tend to manage them largely as a cost to be minimized. Aside from accounting principles that encourage this perspective, HR costs are easy to observe, while HR value creation is not. Largely because of the traditional perspective on HR, organizations have no way to measure HR’s strategic performance. Nevertheless, one knows that intangibles in the aggregate are an increasingly important source of firm value, and that human capital ought to be a part of that asset value. For example, Baruch Lev and his colleagues at New York University have demonstrated that an increasing share of a firm’s market value can be attributed to the value of its intangible assets. Lev identifies several sources of intangibles including what he calls organizational assets and “sharp execution”. Similarly, then-CFO James Chestnut, after transferring the bulk of its tangible assets to its bottlers, observed that Coke’s $150 billion market value derived largely from its brand and management systems. The implication is that intangible assets are increasingly important as sources of value creation, and that both strategy implementation and management systems are key dimensions of these intangible assets. HR is a strategic asset because it can play a critical role in both strategy implementation and management systems. Namely, the ability to execute strategy well is a source of competitive advantage, and “people” are the lynchpin of effective strategy execution. Reports in the business press conclude that the inability to execute strategy is the number one source of CEO failure. A research provides a systematic demonstration of this same point. As part of a national survey of more than 400 firms, respondents were asked to rate the “suitability” of their strategy and how well it had been executed. The analysis found that the ability to execute well had a 10 times greater impact on firm financial performance than strategic choice. Does that mean that strategic choice is irrelevant? Of course not. It simply means that firms do a reasonably good job of choosing the right strategy, to the point where this is no longer a

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differentiator. What does differentiate firms, however, is their ability to execute strategy effectively.

Equally important we find that a key driver of effective strategy implementation is what we call employee strategic focus (ESF) – the extent to which employees understand how their job contributes to firm success. In a world where strategy is everyone’s job, it is critical that the entire organization, not just the top management team, be strategically focused. Figure 2 illustrates how the quality of strategy execution increases with the level of employee strategic focus among firms in our sample. It also examines the drivers of employee strategic focus. Once again, the conclusion is not surprising that what gets measured, get managed. Organizations with more balanced performance measurement systems (i.e. balanced scorecards) rated the strategic focus of their employees significantly higher than organizations that relied simply on financials to measure strategic performance. Finally, it was found that ESF was also driven by the strategic alignment of the firm’s HR system. When the organization’s rewards, development and appraisal systems (the HR system) effectively encouraged behaviors that implemented the firm’s strategy, ESF also improved.

Organizational assets rise to the level of a strategic asset when they become a source of competitive advantage. Talent, commitment, and flexibility are desirable characteristics in a firm’s human capital, but are not sufficient to make people a strategic asset. Strategic assets are “the set of difficult to trade and imitate, scarce, appropriable, and specialized resources and capabilities that bestow the firm’s competitive advantage”. The ability to align both management systems and employee behaviors in way that works to implement the firm’s strategy becomes an “invisible asset” that tends to be idiosyncratic to the individual firm and not easily imitated by competitors.

Most senior managers intuitively understand that human capital has the potential to be strategically important. There is little beyond anecdotal evidence, however, to demonstrate its

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impact on financial performance, much less the contribution of HR. A perspective is described for how HR could become a strategic asset, but is there any evidence that it really can have the impact that is suggested? Based on the research involving nearly 3000 firms over the last 10 years, the answer is very clearly yes. The pattern of those results is summarized in Figure 3. it was found that a very clear positive relationship between what we call a high performance HR system and various measures of firm financial performance (market value to book value and accounting profits). A high performance HR system is one that emphasizes employee performance in every aspect of the system, is internally consistent, and perhaps most importantly is aligned with the strategy of the organization. When it measure’s a firm’s HR system based on an index that captures these features, it estimates that a 35 percent improvement in a firm’s HR system index results in a10-15 percent increase in market value/book value.

Source Huselid and Becker (1995)

Managing and Measuring HR as a Strategic Asset

How do we make these ideas actionable? Where do you start? HR has always been challenged to make a persuasive business case for its strategic significance because the line of sight between HR and financial performance is rarely direct. In practice, if HR is to be managed and held accountable as a strategic asset, organizations must find a way to directly

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link HR to the strategy implementation process.

The solution to the missing link in the HR-firm performance relationship is the

concept of the strategy map developed by Kaplan and Norton. As an alternative to traditional accounting measures they have offered a more “balanced” set of performance measures (i.e. the Balanced Scorecard) that captures both the financial results of managerial decisions, but also the “leading” drivers of those results. The conceptual foundation of this “balance” is a set of cause and effect relationships that underpin the strategy implementation process in a particular firm. . The formalized result of this analysis, what Kaplan and Norton call a strategy map, is essentially the story of what it takes for the firm to implement its strategy. In effect it describes how value is created through the strategy implementation process. However, as Kaplan and Norton acknowledge (1996) organizations have made little progress in developing measures of how People (or HR) make a strategic contribution.

The reason that most organizations lack the kind of measures necessary to capture the strategic influence of HR is the fundamental perspective both line managers and HR professional bring to HR. The absence of strategically relevant measures of HR’s strategic performance is very likely an accurate reflection of the focus and energies of HR in most organizations. Just as form follows function in architecture, the available measures for HR performance no doubt reflect HR’s traditional emphasis on administrative efficiency and compliance. In Dave Ulrich’s terms, HR has focused on “doables” rather than “deliverables”

(HR outcomes that solve important business problems). As a result, HR performance measures capture “doables”, which have little or no strategic import.

In sum, senior line managers and senior HR professionals have a common problem. Senior line managers, who recognize the critical role of strategy implementation to their firm’s success, need to find a way to manage and measure the strategic role of “people” in their organization. Similarly, senior HR professionals with the responsibility of making “people” a strategic asset lack a framework that allows them to bridge the indirect line of sight between HR and firm performance. Linking the perspective of the HR Architecture with concept of the Strategy Map provides a solution to this problem.

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Focusing only on HR efficiency is largely a zero sum game between HR professionals and line managers. The strategic relationship in Figure 4, however, defines a common interest in value creation through HR’s role in strategy implementation. The firm’s HR Architecture and line managers are both focused, and held accountable, for their contribution to the same strategy drivers. HR deliverables become the foundation of the enterprise strategy map.

The HR Architecture now has several important features that differentiate it from the traditional HR focus. These include:

The motivation, competencies and structure of the HR Function are guided by a “top down” analysis of its strategic contribution.

The measure of HR’s strategic value lies in its contribution to goals identified by line managers through the development of a strategy map

Both HR professionals and line managers will be able to measure HR’s contribution to financial performance beyond simply its effect on cost control.

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The Measurement Transition

Nevertheless, because what gets measured gets managed, organizations need to be sure that they measure HR performance in a way that reflects the organizational logic of HR’s contribution to firm performance. Once an organization begins to manage HR like a strategic asset, the measures of HR’s performance must reflect that transition. Unfortunately, organizations too often fail to make the systemic changes that structural link HR to the strategy implementation process, and simply attempt to raise the profile of “people” performance measures. Figure 5 illustrates the transition in measurement systems required of most organizations.

Level 1 measurement systems reflect the traditional HR focus on transactional and administrative efficiency. For these firms HR “performance” is often based on comparisons to external benchmarks. As more organizations have recognized the limits of these traditional HR measures there is an increasing effort to give “people” measures a more strategic significance as reflected in Level 2 in Figure 5. The problem with this approach is that, at best, there is a tenuous relationship between success on these “people” measures and subsequent business success. Neither line managers nor HR professionals can identify the direct relevance of these measures for the business problems facing the firm. There is no clear line of sight from achieving these “people” goals and implementing the firm’s strategy. As a result, line

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managers give little more than lip-service to “people” goals and the performance of HR professionals is still judged largely by efficiency metrics. Operating at Level 2 is frustrating for both line managers and HR professionals.

Level 3 measurement systems avoid the problems in Level 2 because the choice of measures is based on a systematic analysis of how intangibles, particular HR, can influence the successful implementation of strategy. HR measures are now tied directly to the development of a strategy map that outlines the causal logic of HR’s impact on firm performance. Both HR professionals and line managers understand the rationale for, and indeed have a common interest in, success on the HR measures. At this level, HR measures actually serve to guide management decisions that drive strategy, rather than simply reduce overhead.

Consider the example of a pipeline company that traditionally emphasized reactive maintenance policies for its pipeline workers. Following the development of a strategy map it was clear that pipeline reliability was an important driver of customer satisfaction, and ultimately financial performance. To increase pipeline reliability the firm reoriented its maintenance efforts toward preventive maintenance. This in turn required new employee behaviors emphasizing diagnosis and prediction of failures, life cycle cost analysis and knowledge-sharing. At Level 3 there is a clear line of sight between key strategic behaviors and financial success.

Finally, Level 4 is the most sophisticated measurement system because, it not only measures levels, it also measures relationships. This allows the organization to actually calculate the impact of HR in terms that are relevant to line managers. For several years, Sears has been a leader in estimating the impact of intangibles on financial performance. This allows the decisions of Sears’ managers to be guided by such specific relationships as “a 5-point improvement in employee attitudes will drive a 1.3-point improvement in

customer satisfaction, which in turn will drive a .5% improvement in revenue growth.” More recently GTE (now Verizon) has been measuring HR performance by its contribution to business and strategic goals (see inset), to the benefit of both HR professionals and line managers.

Estimating Causal Linkages at GTE

GTE (now Verizon) provides a very interesting illustration of how an organization can estimate linkages between HR Deliverables and performance drivers in a strategy map. Their Network Services unit (approximately 60,000 employees) “hypothesized” that market share was driven by customer valuation of their service, which in turn was driven by customer service quality, brand advertising and inflation. The driver (the leading indicator) for customer service was a set of strategic employee behaviors focusing on broadly on employee engagement. GTE HR created what they called the Employee Engagement Index based on a subset of 7 questions from the GTE employee survey as a measure of these strategic behaviors.

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The analysis supported their hypothesis and demonstrated the wisdom of their “balanced” approach to performance measurement and management. For example, GTE found that a 1 percent increase in the EEI resulted in nearly a ½ percent increase in customer satisfaction with service. In other words, GTE has examined a key section of their “strategy map” and explicitly tested their hypothesis that employee behaviors are indirect leading indicators of key strategic measures (market share). The measured the strategic impact of one element in the HR Architecture.

GTE was able to do this because they had a clear story in mind of how employee behaviors actual drive strategy in their organization. Second, they recognized the need to collect and merge information from multiple source and multiple time periods. Third, GTE HR had access to the technical expertise necessary to make these statistical estimates.

Source: Brian E. Becker, Mark A. Huselid, Dave Ulrich, The HR Scorecard: Linking People, Strategy and Performance, (Boston: Harvard Business School Press), 2001, pg. 122.

The HR Scorecard as the Solution

In order to successfully make the transition to managing and measuring HR as a strategic asset requires an entirely new perspective on the role of HR in the organization. There needs to be a new understanding on the part of both line managers and HR professionals about what it takes for HR to make a strategic contribution. In fact there needs to be a new appreciation for what HR represents. In our book, The HR Scorecard: Linking People, Strategy and Performance, we develop a 7-step model to guide organizations through this transition to the top of the pyramid in Figure 5.

Seven Steps to Making HR a Strategic Asset

(Excerpted from The HR Scorecard: Linking People, Strategy and Performance)

Step 1: Clearly Define Business Strategy. The focus on implementation assumes that a consensus strategy exists and that it can be clearly described and communicated to the entire organization.

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Step 2: Build a Business Case for Why and How HR Matters for Strategy Implementation. HR will only become a strategic asset when both line managers and HR professionals assume a shared responsibility for implementing strategy. For this to happen, both parties need to have a common understanding that HR’s strategic value is linked to the extent to which it directly contributes to better strategy execution.

Step 3: Build a Strategy Map Describing the Causal Flow of Strategy Implementation . A strategy map takes what tends to be an externally focused vision in Step 1 and links it to an internal roadmap that “show(s) how an organization plans to convert various assets into desired outcomes.” It is an essential part of managing HR as a strategic asset because it provides the basis of aligning the HR Architecture with the firm’s strategic drivers. It provides the organizational logic that transforms HR from a transaction and operationally oriented function to an organizational asset with strategic impact.

Step 4. Link HR Architecture to Strategy Map . This is the most important step in transforming HR to a strategic asset. The term HR Deliverable is just a short-hand term for the outcomes of the HR Architecture that directly drive successful strategy implementation. The question is where in the HR Architecture to locate the HR Deliverables? Should one focus on employee performance and behaviors, or the drivers of those behaviors? Those HR Deliverables should focus on employee performance behaviors because they most directly influence the strategic goals of line managers.

Step 5: Design HR System in Alignment with HR Deliverables The strategic behaviors in the organization (HR Deliverables) are driven by competencies, motivation, work structure, strategic focus, etc. Therefore, the HR system (recruiting, selection, compensation, rewards, career development, etc,) must be focused on those behavioral drivers. The result is an HR system that is both externally aligned with the requirements of the strategy map, and internally aligned among the various elements of the system.

Step 6: Design HR Strategic Measurement System (The HR Scorecard) Steps 1-5 lay the foundation for managing HR as a strategic asset. Next the organization will need a measurement system that will not only guide that management process, but also validate HR’s contribution to firm performance. The term HR Scorecard is used because it is designed to extend the concepts of the Balanced Scorecard to an organizational asset, in this case the HR Architecture. In other words, based on Steps 1-4 above, there is a very clear logic that links the strategic results for the HR Architecture with the ultimate financial success of the organization.

Step 7: Implement Management by Measurement . Managing HR as a strategic asset will be a significant change initiative for most organizations. It will require a new perspective on HR,

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as well as acceptance this new role, by both line managers and HR professionals. Senior line managers need to understand that if the organization is going to reap the benefits making people “our most important asset”, implementation of the HR Scorecard needs to be approached as a major change initiative. Ultimately the success of this initiative will turn on whether the people in the organization who are charged with implementing the firm’s strategy, understand the logic of the strategy’s execution, and their role in that logic.

The result is an HR Scorecard that will enable an organization to both measure HR’s strategic impact, as well as manage HR as a strategic asset.

Making People Your Most Important Asset

It really is true that, for most organizations, people are their most important asset. But translating that observation into practice means breaking with organizational systems premised on the assumption that people are largely a cost to be minimized. Senior line managers in organizations that require speed, flexibility and innovation understand that strategy is everybody’s job. Getting from here to there is the challenge. A new perspective on HR, one that thinks of the HR Architecture in terms of an organizational asset, is the foundation for

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meeting that challenge. It means that HR is more than a function, and has the potential to be more than a cost center. This new perspective on HR requires changes in the relationship between line management and HR professionals, and a new shared responsibility and accountability for strategic performance drivers. The potential benefits, however, are enormous. As a combination of organizational systems, routines and changes in the firm’s culture, the result is a new source of competitive advantage that is not easily imitated.

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Chapter-3Human Resource Performance Measures

As we know “What gets measured gets done”. Lets understand the reason why we need performance measurement Principles of Performance Measurement

The productivity and effectiveness of any function can be measured by some combination of cost, time, quality, quantity or human relation indices.

A measurement system promotes productivity by focusing attention on issues important to the organization.

Performance should be measured a both individual and group levels. Managers can be measured by the efficiency and effectiveness of the units they

manage. The ultimate measurement is not efficiency, but effectiveness. Effective measures help motivate people and make them feel better about what they

are doing and themselves.

Philosophy of Measuring Human Resources

Every organization has a purpose or mission that it is trying to achieve. The job of the Human Resources function is to lead the organization in the acquisition, maintenance, development, supervision and measurement of the human assets and the results of their work (quality, productivity and service).

Therefore, measurement must include a combination of strategic and operational measures that reflect the efficiency and effectiveness of internal processes, customer satisfaction, cost effectiveness and innovation in the organization. The strategic measures selected by an organization should reflect the strategic goals of the organization. For example, if a strategic goal of the organization is to provide a high level of customer service to clients or constituents, one may want to look at measures that reflect your recruiting, selection, compensation and development of customer contact personnel.

If the organization has a strategic plan, goals and objectives in the plan should either explicitly state, or at least imply, the strategic human resources objectives for the organization. In an ideal situation, the H.R Department will also have a business plan that outlines key performance objectives for the human resources function. If such a plan does not exist, one can still develop a measurement system based upon knowledge of the goals of the organization.

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Any measurement system should be balanced in terms of Financial, Customer Satisfaction, Process Effectiveness and Workforce Capacity measures to reflect the total impact of the human resources function. Figure 1 illustrates a Sample Balanced Scorecard of Measures for Human Resources:

Categories of Potential MeasuresWhether one plans to use just a few individual measures, or create a balanced scorecard for human resources department, they will want to measure several different areas.The measures are divided into three broad categories that cover the major HR functions:I. The Acquisition of Human Assets

Recruitment Selection

II. The Maintenance of Human Assets Compensation and Benefits Record Keeping Performance Management

III. The Support and Development of Human Assets Employee Relations Training and Development

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RECRUITMENT

Measure: Cost per Hire

Formula: [CPH = Ad + AF + ER + T + Relo + RC] / H x 1.10

Ad= Advertising fees, Relo= Relocation, AF= Organisation fees ,RC= Recruiter Costs ,ER= Employee referrals, H= Number of Hires, T= Travel ,10%= All other overhead

Issues to Consider:

1 How much recruitment do you do? For how many different types of positions? 2 What percentage of time is spent by your HR personnel in the recruitment function? 3 How detailed an analysis do you want to do of the costs of recruitment?

Cautions:

1 Allocation of costs for blanket or continuous ads. 2 Identify what you want to consider as cost of recruitment (e.g.) interviewing time in

departments

Value of Measure:

Can help you determine the costs of internal vs. external hires

Can help allocate recruitment costs by department or unit

Can help you identify opportunities for savings in the process

What it won’t do:

Provide source analysis

Tell you which other strategies will be more cost-effective

Measure: Source Cost per Hire

Formula: SCPH = AC + AF + RB + NC/ H

AC= Advertising Costs, AF= Organization Fees, RB= Referral

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Bonuses ,NC= No-cost hires*, H= Total hires *walk-ins, non-solicited applicants, usually equal $0.00 Issues to Consider:

Can use variations to isolate each individual costs such as: AC/H, AF/H, RB/H, NC/H

Can use other variables in the numerator of the equation such as Staff time (ST) or Management time (MT) or Travel (T) for special recruitment programs.

Can change the denominator to reflect just exempt hires (EH) or Non-Exempt Hires (NEH) if you want to analyze recruitment source costs for types of hires.

Cautions:

1. Decide what you NEED to measure about you costs first, otherwise you may find yourself doing many useless calculations.

Value of Measure:

Can determine best use of recruitment dollars

Allows you to dig deeper into recruitment costs than Cost per Hire

What it won’t do:

? Help you choose alternative approaches

Measure: Interviewing CostFormula: C/I = ST + MT/ I

C/I = Cost of Interviewing, ST= Staff Time Costs, MT= Management Time Costs, I= Number Interviewed

Issues to Consider:

1. Need to calculate standard labor costs for both staff and management groups first (average salary + benefits + % overhead = $ x.xx/hour)

Cautions:

1. If your organisation interviewing process varies from department to department, this calculation could be difficult calculation to reach reliably.

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Value of Measure:

Can help you determine the costs of interviewing and use that data to determine the interviewing cost component of a hire

What it won’t do:

Tell you if the interviewing process is a good one, just how much it costs

SELECTION

Measure: Time to fill and Time to StartFormulas:

TF = RR – OD

TS = RR – SD

TF= Time to have offer accepted, TS= Time until new hire starts work, RR= Date hire requisition received, OD= Date offer accepted, SD= Date new hire starts work

Issues to Consider:

1 What data is important for you to know? 2 Which calculation works best for your organization’s circumstances?

Cautions:

1 You have to have a good logging system for these measures to be accurate. 2 If you use the time to start measure, be sure that everyone understands that the measure

begins with the requisition to fill, not the date the job became vacant. Otherwise the perception is that the actual recruitment process takes longer than it actually does.

Value of Measure(s):

Can be the beginning of a process improvement effort, especially if you choose to break down the component steps of the recruitment process to further analyze the cycle time

Helps identify the value of lost time due to vacancy, especially if you know staff and management cost factors (TF x MT or ST where MT = Management time and ST =Staff time)

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What it won’t do:

Tell you why it takes the time it does to recruit Be helpful if your managers don’t care how long it takes to recruit

a new employee after a requisition is made to fill the position

Measures: Job-Posting Response Rate, Job Posting Response Factor and Job Posting Hire Rate

Note: One should not use all the three as it would be redundant , these measures should be chosen according to the nature of the organization.

Formulas: JPR = A /PJ JPRF = PJR / PJ JPH = H /PJ

JPR= Job Posting response rate, A= # of applications received, JPRF= ratio of jobs posted to those responded to, PJ= # of posted jobs, PJR= # of posted jobs responded to, JPH= % of jobs filled through posting, H= # of hires made

Issues to Consider:

1 The response rate yields a simple measure off applications per job posted, but it can easily be broken down into categories of jobs or levels of jobs.

2 The job posting response factor gives you a picture of the spread of responses. From this you can learn, for example, “what % of jobs receive at least 10 applicants”?

3 The job posting hire rate can tell you what percentage of jobs posted end up in a hiring. You can also add a time factor, such as “within 60 days” to this for further analysis.

Cautions:

1. Count applications, not applicants for best results.

Value of Measure:

Can be an advance indicator of organizational problems if applications drop, especially if internal applications drop

Gives you information on the effectiveness of your posting system

What it won’t do:

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Tell which jobs get the most applications, which is a logging task that must be done independently.

Measure: Quality of Hire

Formula: QH = [PR + HP + HS*] / N

* Additional indicators specific to your organization can be added here to customize the measure

QH= Quality of Hire, PR= Average job performance rating of new hires, HP= % of new hires promoted within X period of time, HS= number of indicators used

Issues to Consider:

1 Once the figure is calculated, it will be up to the interpretation of the evaluator to determine if the figure represents high, medium or low quality. Comparisons can be made over time (trends), or against preset standards or management targets.

2 Another way is to interview managers about the quality of the hire on some scale. It is less objective, but may still be valid. A simpler approach may be to evaluate the quality of hire by the percentage of preferred qualifications the hire possesses.

Cautions:

1 Requires a good bit of data gathering and analysis on the part of the H.R department.

2 It is subject to rater variation on performance appraisals when comparisons are made across work units.

3 This is a lagging measure of quality.

Value of Measure:

Gives the organization a sense of the quality of the recruitment and selection process

This provides a good measure of the effect of the recruitment and selection process on the organization

What it won’t do:

Tell you why the employee was or was not a good hire. Many factors after selection can influence that assessment.

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COMPENSATION AND BENEFITS

Measures: Job Description Factor Job Evaluation Factor

Formula(s): JDF=JD/J JEF=JE /J

JDF= % of jobs that have formal, current job descriptions, JD= number of jobs with current descriptions, JEF= % of jobs that have been evaluated and leveled*, JE= number of jobs evaluated and leveled ,J= total number of jobs

* “Leveled” includes verification of both the classification and pay range for an evaluated job.

Issues to Consider:

1 With team structures and other job trends, job descriptions are changing constantly. It is very important to keep them up-to-date. These measures help track progress to that end.

2 Auditing job descriptions is just the first step in keeping the compensation system current (leveled). Periodically, the new descriptions should be reviewed and evaluated.

3 Standards can be established for currency of the descriptions and evaluations.

Cautions:

1. This is a very time consuming process. However, if neglected, it can cause serious retention and recruitment problems for the organization.

Value of Measures:

Illustrates the currency of the job and salary structure in the organization

Is a proactive measure, a leading indicator of other potential problems, such as retention or recruitment

What it won’t do:

Highlight exceptions or anomalies in the salary structure. Only looking for exceptions can do this (for example: # at maximum of the grade).

Measure: Cost per compensation action

Formula: CCA = [ST + OH + MT]/TA

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CCA= Cost per compensation action, ST= Staff time, salary and benefits spent on compensation actions, OH= Overhead costs, MT= Management review time, TA= Total actions

Issues to Consider:

1. The appropriate percentage of HR staff time spent on compensation actions must be calculated from observation, time sheet or interviewing estimates.

2. Management review time should include all approval stages in your organisation.

Cautions:

1. Overhead includes cost related to rent, telephones, and other fixed costs that the staff uses to do their jobs. Further it is explained under overhead section

Value of Measure:

Helps determine the cost of managing the compensation function in the organisation.

What it won’t do:

Tell you anything about appropriateness of actions or the error rate of compensation actions. Delegation audit findings can help with both of these measures.

Measure: Ratio of Human Resources Staff to Employee Population

Formula: RHRS= HRS /TS

RHRS= Ratio of human resources staff, HRS= Number of human resources staff, including administrative staff, TS= Total number of organization personnel

Issues to Consider:

1. A simple measure that can be used for comparative purposes, especially in conjunction with transaction cost figures.

Cautions:

1. Can be a deceptive measure in some agencies because not all agencies provide the same internal services and others split positions between HR and other duties.

2. Should be compared to a range of acceptable ratios rather than the average ratio in other similar sized organizations.

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Value of Measure:

Provides you a sense of the efficiency of the human resources function.

What it won’t do:

Tell you what the ratio should be for your organisation and the services delivered.

Measure: Cost to supervise

Formula: SC = TSS /TS

SC= Supervision Costs, TSS= Total salaries paid to supervisors, TS= Total wages and salaries paid

Issues to Consider:

1. A decision needs to be made about who falls into the supervisory category. Reviewing an organization chart, or doing an analysis of the positions in the organization can do this for you.

2. You also need to decide if you want to include benefit costs in the equation. 3. Flatter organizations typically have lower supervisory costs than more hierarchical

organizations.

Cautions:

1. You cannot simply use all “Band 6 or Band 7” or above positions for calculation purposes. However, you may be able to use an HRIS analysis report generated according to job code.

2. Keep your organization’s size and location factors in mind when analyzing the data, especially when performing comparisons with other organizations.

Value of Measure:

Provides you a sense of the cost associated with various levels of management within the organization

What it won’t do:

Tell you what the optimum level of supervisory cost is for your organization

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Measure: Pay and Benefits as a Percent of Total Operating Costs

Formula: PBCF = [P + BC]/TOC

PBCF= Pay and Benefits Cost Factor, P= Total wages and salaries paid , BC= Benefits cost to the organization, TOC= Total operating cost of the organization (expenditures)

Issues to Consider:

1 This measure should be the focus of attention of top management. 2. You may want to consider variations such as:

Compensation and benefits as a percent of revenue Percentage of compensation that is “non-recurring” or “at risk” Cost of overtime as a percentage of pay

3. These cost trends should be compared to other similar organizations.

Cautions:

1. Analysis should be done carefully. For example, agencies with a great deal of “pass through” money may want to control for those funds and not list them as an expense to the organization.

2. Comparisons should also be made carefully. Make sure you are comparing apples to apples before conclusions are reached about your data.

Value of the Measure:

This measure is strategic, not operational. It reflects organizational costs and trends rather than transaction efficiency or effectiveness. Careful analysis can help raise the visibility of the HR function.

What it won’t do:

Tell you anything about the contribution that the HR office made to the figure derived, unless you can point to specific actions taken at the suggestion of the office to control or reduce costs while not damaging organizational service quality

Measure: Benefit Costs per Employee

Formula: BC/E = TBC/E

BC/E= Benefit costs per employeeTBC= Total benefits costs* E= Average number of employees-monthly average for a running 12 month period

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(E.g. March 2001-February 2002)

* Formula for TBC is as follows: TBC = ST + OH + PC + PP + Misc.

ST= Staff time spent on benefit administration multiplied by hourly rate OH= Overhead expenses associated with benefit planning and administration (I.e. rent, telephone etc.) PC= Processing costs associated with benefits program PP= Plan payments (retirement, insurance, government mandates, external administrative payments etc.) Miscellaneous= vacation pays, sick leave, holidays, tuition assistance….

Issues to Consider:

1. Most information will be available from Insurance Services, but organization specific calculations may vary based on the age or experience of the workforce. 2. Most benefit costs are outside the control of individual agencies, but may be useful for budget analysis purposes.

Cautions:

1. This can only give you cost data, not help determine the right mix of benefits

Value of Measure:

Good information for trend purposes to monitor a key component of organizational costs

What it won’t do:

Tell you the correct mix of benefits or employee satisfaction with them Tell you what should be done to contain costs

Measures: Workers Compensation and Employee Assistance Program Costs

Formulas: WCC= (PP + CP + AC)/100

EAPC= (PP + CP + AC)/E/100

WCC= Workers compensation costs

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EAPC= Employee assistance program costs

PP= Premiums paid

CP= Claims paid

AC= Administrative costs

E/100= Number of employees divided by 100

Issues to Consider:

1. Both can help you keep track of key components of your benefits programs. 2. The formula can be used with other benefit programs as well.

Cautions:

1. Administrative costs need to be calculated using a percentage of staff time (salary and benefits) allocated to the programs and an appropriate amount of overhead costs.

Value of Measure:

By calculating the costs per 100 employees (or 1000) you can reasonably compare costs with other organizations for these programs.

What it won’t do:

1. Reveal if benchmarked EAP plans are similar without further research.

RECORD KEEPING

Measure: Transaction Processing Rate (Cycle Time)

Formula: TPR = DC/DR

TPR = Transaction processing rateDC= Date completed (e.g. October 1, 2001)DR= Date received (e.g. September 20, 2001)

Issues to Consider:

1. Can work with any type of transaction processed in the office, from benefits changes to pay actions to claims.

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2. You have to decide if you are going to calculate your cycle time based on working days or calendar days.

Cautions:

1. The measure can be manipulated by the date logging procedures used. 2. If you choose the “working days” measures, you have to adjust for holidays and weekends. 3. Some regulatory or statutory provisions may mandate the use of either working days or calendar days for a particular process (e.g. grievance response).

Value of Measure:

Helps to identify the turnaround of documents through the office

Allows for comparisons with other offices and over time

Helps in the identification of reasonable standards for turnaround of transactions

What it won’t do:

Analyze the error rate of transactions

Tell you if your transaction processing approach is a good one.

Measure: Transaction Processing Error Rate

Formula: ER = RT/TT

ER = Error rate

RT= Rejected transactions

TT= Total transactions

Issues to Consider:

1. Error rates can be done both collectively and by employee.

Cautions:

1. The complexity of the transaction needs to be considered as well as the source of the data. 2. If there is a mixture of transaction types, you may want to determine error rates for the

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various types to identify the source of problems.

Value of Measure:

Helps to point out where rework is occurring in a process.

When done in conjunction with cycle time measures gives a good picture of efficiency in transaction processing.

What it won’t do:

Tell you anything about the pace of transaction processing.

Measure: Cost per Transaction

Formula: PC/T= (ST + OH + MP + MT)/PR

PC/T = Processing Cost per transaction

ST= Staff time, salary and benefits

OH= Overhead

MP= Materials and postage

MT= Management time (Cost of Supervision)

PR= Process Rate (number of items processed per hour)

Issues to Consider:

1. A time logging system is necessary if the processing is just one part of an employee’s job. 2. You need to know the average volume of transactions processed per hour. 3. If transactions vary widely in complexity and occur at predictable times, you must take transaction processing time measurements at several different times to normalize fluctuations.

Cautions:

1. Overhead includes costs related to rent, telephones and other fixed costs that the employees use to do their job.

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2. This can be a very complex measure because you have to know several other measures first (supervisory costs, transaction volume, benefits costs and overhead).

Value of Measure:

Can determine the true cost of processing transactions Allows you to compare costs with other organizations Helps determine if the process can be more effectively done elsewhere

What it won’t do:

Analyze the error rate of transactionsTell you if your processing rate is efficient.

Supporting Human Assets in the Organization

Measure: Orientation Costs per Employee

Formula: OC/E = ([T x (R/h x E)] + DC) /E

OC/E= Average cost to orient an employee

T= Time spent in orientation

R/h= average hourly pay rate of attending employees*

DC= HR Department cost per employee conducting orientation*

E= total number of employee oriented

* including benefits

Issues to Consider:

1. You can also substitute or add costs of others involved in orientation as part of DC. 2. This measure can be extended to get an organizational cost by multiplying by the number of employees by (T x R/h) and adding the direct cost of those conducting the orientation.

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Cautions:

1. Requires significant calculations if many types of employees are involved with many different hourly wage levels.

Value of Measure:

Calculates the investment in orienting new employees

Serves as a building block number for calculating the true cost of turnover

What it won’t do:

Tell you if the orientation was effective for the employees

PERFORMANCE MEASUREMENT

Measure: Meets by Default Rate

Formula: MBDR = EMBD/TE

MBDR= Meets by default rate

EMBD= Number of employees with meets by default ratings on EPMS

TE= Total number of employees in organization

Issues to Consider:

1. EPMS ratings should be up-to-date on HRIS system.

Cautions:

1. Meets by default ratings might be overstated if records are not entered in HRIS in a timely manner.

Value of Measure:

Provides you a sense of the commitment the organization demonstrates to the

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performance management system.

What it won’t do:

Tell you how well the EPMS documents are being completed or how effective the process is in your organization.

Measure: Absence Rate

Formula: AR= [WDL]/ E x WD

AR= Absence rate (monthly)

WDL= Worker days lost through absence

E= Average employee population-12 running months average (e.g. March 2001-February 2002)

WD= number of work days available

Issues to Consider:

1. Need to define “absence” to suit your needs. It may include all forms of absence, including annual leave, or just sick leave. 2. Can be tracked by department, types of employees or broken down for analysis in other ways.

Cautions:

1. is most helpful when used in conjunction with Absenteeism costs measures2. Without adequate definition of “absence,” it is useless for analysis.

Value of Measure:

Good starting point for calculating the cost of lost work-days.

What it won’t do:

Tell you why people are absent, unless you break down the component parts into the various types of leave used by employees.

Measure: Absenteeism Costs

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Formula: AC/E = (ML (Wh + EBC) + S(R/h=SBC) + Misc.)/E

AC/E= Absence cost per employee

ML= Total work hours lost for all reasons

Wh= Weighted average hourly pay level for groups*

EBC= Cost of employee benefits

S= Supervisory hours lost due to absence**

R/h= Average hourly rate for supervisors

SBC= Cost of supervisor’s benefits

Misc. = other costs (temporary help, overtime, etc.)

E= Total employees

*Weighted average (e.g., 20% hourly workers at $8.25/hr.; 50% non-exempt at $11.00/hr; 30% exempt at $16.50/hr.)

**Based on interviews to estimate cost dealing with problems resulting from absences (rescheduling, instructing replacement, doing work for absent employees)

Issues to Consider:

1. Highlights the hidden cost of absenteeism, including peripheral costs such as supervisory time lost. 2. You may want to back out holidays and annual leave to get a better picture of unscheduled absences when calculating ML. 3. Is absenteeism a problem in your organization? If not, this calculation may not be worth the effort.

Cautions:

1. Will require interviewing to create some cost estimates. 2. Will require considerable calculation time up front to get a baseline.

Value of Measure:

Provides a comprehensive look at the cost of lost work hours

What it won’t do: Tell you why people are missing work.

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Measure: Effect of Absenteeism on Labor Utilization

Formula: U = Nh/H

U= Labor utilization percentageNh= non-productive hours: absence, breaks, downtime, rework, etc.H= work hours available for all employees (e.g., 40 employees x 37.5 hrs)

Issues to Consider:

1. Demonstrates the effects of lost work time. 2. Nh is an estimate based on known variables (absence and downtime) and those that must be calculated after observations and interviews (rework)

Cautions:

1. If you want to show the effect of just absence, substitute Ah (absent hours) for Nh. 2. Works best in a production environment, but can also be useful with any large group of employees that perform similar work.

Value of Measure:

Can help determine needed staffing levels if standards for work production are available.

What it won’t do:

Tell you how effectively the “productive” hours are used, unless you assume that all workers produce approximately the same amount of useful work.

Measures: Accession Rate and Separation Rate

Formulas: AR = H/e SR = NT/e

AR= Accession rate

SR= Separation rate

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H= Number hired during period of time

NT= Number terminated during period

e= Average employee population during period

Issues to Consider:

1. Very easy to calculate and readily available figures for most organizations2. Use “accessions” to indicate new hires, not promotions or transfers3. Use “separations” to indicate quits, RIFs, and discharges-this can be broken down even further into voluntary and involuntary separations

Cautions:

1. These measures only track movement into and out of your organization, not the value of those that move in and out.

Value of Measure:

These measures are the basis for all good descriptive measures of turnover.

What it won’t do:

Tell you why people separate voluntarily.

Break out other factors such as length of service of those separated, separation by work area or demographic group.

EMPLOYEE RELATIONS

Measures: Workforce Stability and Workforce Instability Factors

Formulas: SF = OS/E IF = OL/E

SF= Stability Factor

IF= Instability Factor

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OS= Original employees who remain for the period (e.g., 1 year)

OL= Original employees who left during the period (e.g., 1 year)

E= Employee population at the beginning of the period

Issues to Consider:

1. Extremely helpful for workforce planning purposes. Can also help you determine the experience lost resulting from separations. 2. Can be adjusted to create SR (Survivor Rate) and LR (Loss Rate) when new hires are substituted for original employees in the equation. 3. Easy to measure from HRIS data.

Cautions:

1. The period analyzed should reflect a meaningful time frame for your organization. For example, if it takes three years to train someone, a one year analysis might not be that helpful.

Value of Measure:

A measure essential to understanding the stability of the workforce Can be broken down into sub-categories to look at different types of jobs as well

What it won’t do:

Reveal the reasons for stability or instability.

Measure: Turnover/Performance Relationships

Formula: PT = R/L PT = R/TR

PT= Percent terminating at each performance level

R= Number rated at each level

L= Total number terminating

TR=Total rated at a given level (e.g., meets requirements)

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Issues to Consider:

1. Can be done for the organization as a whole or by job type. 2. Multi-dimensional analysis allows for comparing two variables, performance ratings and turnover. This can be very helpful with analysis of voluntary turnover.

Cautions:

1. Subject to vagaries of EPMS evaluations and rater differences. 2. Best used in combination with other analytical measures of turnover.

Value of Measure:

Allows for comparative analysis of the employees who leave and those who remain in terms of performance

Can be graphed easily and compared to other variables

What it won’t do:

Tell you the reasons for voluntary terminations

Measure: Turnover Costs

Formula: TC = DHC + IHC + DIRC + IIRC

TC= Turnover costs

DHC= Direct hiring costs

IHC= Indirect hiring costs

DIRC= Direct internal replacement costs

IIRC= Indirect internal replacement costs

Issues to Consider:

1. Can be used as a standard cost or by level or type of job. 2. All of the factors must be analyzed separately to determine what should be included in the calculation. Some suggestions include:

DHC= (advertising costs, search fees, applicant expenses, relocation expenses, salary and benefits of recruitment staff, recruitment function overhead*)IHC= (management time per hire, supervisor time per hire, orientation and training

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per hire, productivity loss per hire)DIRC= (applicant expenses, relocation expenses, salaries and benefits of recruitment staff, recruitment function overhead*)IIRC= (management time per hire, supervisor time per hire, orientation and training per hire, productivity loss per hire)

*For more information on “overhead”, see page 40.

Cautions:

1. Can be a time consuming process to develop a formula, but should be well worth it. 2. Can be difficult to get a good estimate of productivity loss. Ask supervisors or employees who were hired within the last year, to help estimate.

Value of Measure:

Helps determine the true cost of turnover to the organization.

What it won’t do:

Give you a precise measure of all the effects of turnover and lost knowledge

Measure: Incidence of Complaints and Grievances by GroupFormula: None- Cost Data should be kept in matrix format

Cost/ /Issue Question Problem Grievance Mediation/ Arbitration

Total

Direct Expenses

ER Staff Time

Employee/ Supervisor Time

Materials/ Equipment

Other Total

Issues to Consider:

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1. Calculating the cost can best be done by evaluating the actual costs of each incident. Since each situation is likely to be somewhat unique, the real value is in the lessons learned from each incident. 2. Prevention costs can be calculated by getting a baseline for each grouping and plotting costs over time. Cost-savings are the incidents avoided.

Cautions:

1. Internal definitions of “question” and “problem” should be created and you should probably track them by topic. 2. Most of the costs encountered are time related, but the settlement of a problem may include buying a new piece of equipment, so all factors should be considered.

Value of Measure:

Creates a cost-avoidance measure for the HR function

What it won’t do:

Provide a simple mechanism for evaluating the ER function.

Measure: Employee Satisfaction

Formula: Employee Survey Results

Issues to Consider:

1. Is your organization generally stable in terms of leadership and structure? If you are not going through major organizational change, you may want to do a survey. 2. Approaches other than surveys are also available to gauge satisfaction. Measures of absenteeism, turnover and complaints provide some insight as well. 3. Surveys can be risky, if the organization is not prepared to respond to issues revealed by the staff.

Cautions:

1. Do not do an employee satisfaction survey unless your organization has already developed a process for responding to the survey results, including but not limited to, the sharing of the survey results with employees. 2. The survey design and administration should be done with professional assistance to ensure that the best results are achieved.

Value of Measure:

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Provides you a sense of the state of mind of organization employees about issues influencing satisfaction and retention

What it won’t do:

Tell you how to remedy the problems encountered.

Measures: Employee Suggestions for Improvement

Formulas: ES = TS/ (E/100) SS = TSS/TS

ES= Employee suggestions per 100 employees

TS= Total number suggestions

E/100= Total number of employees divided by 100

SS= Savings per suggestion

TSS= Total savings resulting from suggestions

Issues to Consider:

1. If your organization has a formal employee involvement or suggestion program, these measures are absolutely essential. 2. These measures can indicate the impact of employee involvement in the organization.

Cautions:

1. If your organization does not have a formal suggestion program, these measures should be used reluctantly, especially for comparative purposes.

Value of Measure:

Provides an indication of the impact of employee involvement in the organization

What it won’t do:

Tell you if your process for evaluating or implementing suggestions is effective. You may also want to measure the cycle time of suggestion evaluation from the point of submission to action determination.

Measure: Employee Recognition Rate

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Formula: ERR = IERR/TE

ERR= Employee recognition rate

IERR= Individual employees receiving recognition

TE= Total number of employees

Issues to Consider:

1. The formality of your organization’s employee recognition system will determine your ability to use this measure. 2. You may choose to break this measure down into the various types of recognition provided by your organization.

Cautions:

1. The best approach to using this measure is to count the number of employees who have received any given level of recognition over a period of time. Alternately, you may choose to count the incidences of recognition given, regardless of how many employees actually received them.

Value of Measure:

Provides information on the depth (or breadth) of the issuance of formal recognition to employees in the organization.

What it won’t do:

Tell you if the recognition program is effective at reinforcing desired behaviorsTell you if employees find the recognition system satisfying

TRAINING AND DEVELOPMENT

Measure: Cost per Trainee

Formula: C/T = (CC + TR + S + RC + T&L + TS + PS + OH)/PT

C/T= Cost per trainee

CC= Consultant costs (if used to develop or customize training)

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TR= Training room rental

S= Supplies and materials, including participant workbooks

RC= Refreshments

T&L= Travel and lodging

TS= Trainers’ salary and benefits

PS= Participants salary and benefits

OH= Overhead allocated from training department

PT= People trained

Issues to Consider:

1. Not all costs are applicable to all types of training, so while the formula is long, your organization may not incur some of the costs. 2. Spreadsheets are probably the best method for keeping this type of data.

Cautions:

1. This model was designed to capture data from classroom-type training. If other learning experiences (e.g., on-line training or self-paced study) are used, different formulas may be required.

Value of Measure:

Gives an accurate representation of the true costs of providing training

Can easily be converted to an hourly cost by using the following formula:

C/Th = __TC__ C/Th= Cost per training hour PT x Th TC= Total cost (numbers from top line of formula above)

PT= Number trained

Th= Hours of training

What it won’t do:

Tell you if the training was effective or if the participants learned anything.

Measure: Training Expenditures as a Percentage of Personal Service

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Expenditures

Formula: TEPS = [DTC + ST + T + L + M + ST + OH]/ TS

TEPS= Training expenses as a percentage of personal services expenditures, DTC= Direct training costs (registration/course fees, materials, room rental), ST= Salaries and benefits of trainers (or instructor fees), T= Travel, L= Lodging ,M= Meals, ST= Staff time (salary and benefits), OH= Overhead of training department (usually allocated by time), TS= Total salaries and benefits paid to all employees

Issues to Consider:

1. Not all values will apply to each training session. This formula can be calculated on a per class basis or done for a period of time for all classes.

2. This formula works best for training conducted in a classroom-type setting, other formulas would need to be developed for other developmental opportunities. However, most would be similar in construction to the one above.

Cautions:

1. This formula does not include the time spent on course design, development and revision. If your organization has an in-house training function, those costs should be added to the numerator of the equation.

2. Tuition assistance paid to employees should be considered a direct training cost.

Value of Measure:

Provides a strategic picture of the investment made in the development of your organization’s workforce.

Allows for comparison with other agencies and organizations.

What it won’t do:

Tell you what the optimum level of training expenditure is for your organization

Measure: Training and Development Plan Factor

Formula: TDPF = ETDP/ TE

TDPF= Training and Development Plan Factor, ETDP= Employees with up-to-date training and development plans, TE= Total number of employees

Issues to Consider:

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1. The goal should be that each employee has a current training and development plan. 2. Standards need to be developed to establish the definition of “up-to-date” and what

elements each plan should include.

Cautions:

1.Having a current plan is only an indicator of intent by the organization to develop the individual. Other measures are needed to evaluate how well the development is progressing.

Value of Measure:

Provides a process measure that is a leading indicator of future costs of training and development when used in conjunction with other measures.

What it won’t do:

Tell you how well the plan indicates the developmental needs of the individuals.

Measure: Skill Change resulting from Training

Formula: SC= SA/ SB

SC= Observable change in skills as a result of training, SA= Skills demonstrated after training, SB= Skills demonstrated before training

Issues to Consider:

1. Prior to training, a baseline of skill proficiency needs to be established for a participant, based upon work output, critical incidents of interpersonal relations, or other observable phenomena.

2. Data can be gathered in many ways including questionnaires, interviews, demonstrations or observations.

Cautions:

1. Skills need to be specifically enough to allow for measurement. Vague explanations are insufficient.

2. Do not confuse a skill change with “Knowledge Change.”

Value of Measure:

1. Helps organizations pinpoint training that does the best job of improving skills.

2. Can be converted to measure “Knowledge Change” by substituting “knowledge” for “skill” in the formula. Remember, skill changes reflect the ability of an individual to

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translate the knowledge of how to do something into action.

What it won’t do:

Tell you if the method you are using is the most efficient way of producing skill change. Cost data is required to do that analysis. 1. Study the business problem or opportunity by looking for its source and the factors

influencing it. 2. Decide if training might contribute to the resolution of the problem. 3. If training is deemed to be part of the solution, design and deliver it in a skill-based

format that is visibly linked to the business problem. 4. Monitor performance on the job after the training. Identify other variables that may

have influenced the outcomes. 5. Measure the impact of using before and after skill measures for comparison. 6. Discuss with appropriate individuals to determine if the impact measured could be

attributed to other variables. 7. Calculate the value of the impact in monetary, or human terms, or both.

Issues to Consider:

1. The relationship between change and impact is one of value. They are sequential measures along a continuum. For example, if someone demonstrates improved skill, and they apply the skill appropriately on the job, you should be able to measure the impact it had on the desired outcome you were trying to achieve. Greater impact indicates greater value created.

2. Doing a good job of analysis of the business problem can be difficult. Many people do not do an adequate job of that analysis, and, as a result, design ineffective training or apply a training solution to a problem better solved using other approaches.

3. The value of the impact can only be calculated in terms of what outcomes you were trying to achieve, so no formula is available.

Cautions:

1. Be sure to appropriately diagnose the problem initially and make sure that training is the best way of solving the problem.

2. These measures can be used over time with large scale training efforts, but sufficient time needs to be given to establishing baseline skill data.

Value of Measure:

To evaluate the impact of training on the organization’s ability to achieve desired outcomes.

What it won’t do:

Provide return on investment figures, but it comes close.

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OVERHEAD

One of the most frequently overlooked factors when attempts are made to determine the actual cost of a function is overhead. Overhead refers to the hidden costs of providing a service or performing a task. For example, a staff dedicated to recruiting new employees would likely consume office space (rent), telephones, computers, furniture, copier rental and other tangible goods during the course of their work. These costs need to be considered as part of investment made in doing business.

Many of these fixed costs can be allocated across the entire organization, by head count, function or some other means. For example, you may want to determine the square footage of the space allocated to the compensation function in your organization and multiply it by your rental fee to determine the cost of the office space that adds to the cost of running the compensation function.

If the staff members are generalists, performing many HR functions, one may wish to calculate your overhead by combining all of the costs (rent, telephones, copier rental, equipment, etc.) and dividing that by the number of staff members. After that one can determine what percentage of time the staff spends on various functions and allocate the costs based upon those percentages. For example, Rs. 10,000 in costs multiplied by 25% recruitment, 35% compensation, 30% employee relations and 10% HRIS to determine where the overhead allocation belongs.

In some cost accounting methodologies, the salaries, benefits and overhead associated with management of the organization is also allocated down to the functions where services are delivered. One probably don’t need to go to that level of detail for your measurement purposes unless the entire organization is determining the costs of all services.

Chapter-4How to calculate return on Intangibles

The search for the Holy Grail of HR continues. We want indisputable proof that HR departments, practices, and professionals matter. Just as with the Holy Grail, there is evidence everywhere that we can only “see” if we know how to look. There is evidence of HR’s value

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all around us. One knows that investments in HR practices will increase employee commitment and that increased employee commitment is a lead indicator of customer commitment, which is a lead indicator of profitability.Also that firms that invest in some HR practices are more likely to have financial returns than firms that do not invest in these HR practices. Also that HR practices shape an organization’s culture, identity, reputation, and brand and that investments in HR deliver more than they cost through break-even analyses. Each of these paths to HR’s Grail offers insights. But a new human resource ROI can be identified— HR’s return on intangibles. Intangibles represent the hidden value of a firm, shareholder value not determined by financial results. Intangibles are not new to a firm’s overall market value but they are becoming an increasingly important portion of a firm’s total market capitalization. Intangibles affect firms as diverse as Wal-Mart and Microsoft, each having captured intangible value in their industry. Intangibles can be positive or negative, and without being grounded, they can disappear as easily as hot air in a balloon. Intangibles also affect government and not-for-profit agencies in the form of goodwill and contributions to these agencies’ success. Following are the six actions HR professionals can take to create sustainable intangible value.

Become Investor LiterateFor HR professionals to deliver intangible value, they first must learn who the investors are and why they are investing in their organization. This investor literacy test can be taken up by managers:1. Who are your five major shareholders? And how much of you do they each own?2. Why do they own you? What are their investing criteria (e.g., dividend stock, growth stock, etc.)?3. What is your price/earnings (P/E) ratio for the last decade? How does it compare to your industry average and to the firm with the highest P/E ratio in your industry?4. Who are the top analysts who follow your industry? How do they view your company versus your competitor(s)?5. How are you including key investors and analysts in the design and delivery of your HR practices (e.g., succession planning, leadership development, reward and recognition)?6. How well does your board govern itself, not just on the Institutional Shareholder Service criteria, but on the process for good board governance?

Till date, it was found few senior HR executives who can answer all these questions. Yet, these questions form the base of knowledge that enables HR professionals to link their work to investors.

Understanding the Importance of IntangiblesRecent research by accounting professors Baruch Lev and Paul Zarowin at the Stern School of Business, New York University, shows that the regression between earnings and shareholder value has traditionally (1960 through 1990) been between 75% and 90%.8 This means that 75–90% of the market value of a firm (stock price × shares outstanding) could be predicted by the financial performance of the firm. However, since 1990, this percentage has dropped to about 50% in both up and down markets. This means that an increasingly large portion of the market value of a firm is not directly tied to present earnings; it is tied to what the financial

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community calls “intangibles.” Intangibles represent the value of an organization not directly derived from physical assets.Many leadership actions lead to intangible value. Often, leaders focus on what is easy to measure, such as investments in research and development (R&D), technology, or brand, more than on investments in organization and people. Leadership also can erode intangible value when investors lose confidence in leaders. Ethical violations are among the most visible and immediate ways to destroy value. Organization and people become an intangible asset when they give investors confidence in future earnings and when they can be made tangible.

Create a Framework for Organization and People Practices That Increases Intangible ValueA pattern has been proposed in the techniques leaders use to increase their organizations intangibles, beginning with the basic essentials at Level 1 and proceeding upward to more complex concepts. It is called the Architecture for Intangibles (Table I). This architecture is progressive. Keeping promises is what builds trust and delivers credibility, so it has to come first. With credibility, trusted leaders can envision a future state that captures imagination and generates enthusiasm, which means they can hope to bring it into existence. A compelling strategy builds confidence in the future. This vision of the future must turn into today’s action, or the hope will prove false.Leaders must invest in aligning core competencies to fold their future into their present.Yet core competencies are not enough either. Ultimately, an organization must be sustained by enduring capabilities embedded in its people and organization.

This process is sequential. Without trust, visions lack authority; without core competencies, visions will be unrealized; and without capabilities, core competencies and visions lie dormant. In contrast, kept promises allow credible visions to be crafted; credible visions lead to informed investments that ensure core competencies; and core competencies enable capabilities to be realized. An organization’s capabilities are the deliverables from HR work. These capabilities give investor confidence (or lack thereof) in future earnings and increase (or decrease) market capitalization. HR professionals who link their work to capabilities and who

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then find ways to communicate those capabilities to investors deliver shareholder value. A typical list of capabilities includes: talent, speed of change, shared mind-set, accountability, collaboration, learning, and leadership. Clearly, these are not the only capabilities that may be required of an organization.But they are indicative of the types of capabilities that make intangibles tangible. They delight customers, they engage employees, they establish reputations among investors, and they provide long-term sustainable value. HR professionals should be architects and thought leaders in defining and creating capabilities.

Highlight the Importance of Intangible Value to Total Shareholder Return

At times, HR professionals have trouble talking about HR issues in financial terms that directly connect to the thinking patterns of business leaders. With a spotlight on shareholder value and intangibles, HR professionals may create charts that highlight the importance of intangibles.

Earnings and Shareholder Value

Go through the last 10 or 15 years of your firm and plot earnings and stock price (or total market capitalization) by quarter. This chart will show whether market value is above or below the earnings line, whether the firm has a net positive or negative intangible reputation.

Price/Earnings Ratio of Your Firm vs. Largest Competitor

Plot, for the last 10 or 15 years, your firm’s price/earnings ratio with that of your most successful competitor. This trend line offers an overall report card on how investors perceive your firm’s leadership versus its leading competitor. Such a research in one firm was done and it was found that the firm had a P/E ratio consistently 20% below the largest competitor. Investors were less confident in the firm’s management team than the competitors, and the gap existed over time. This firm’s market value was about $20 billion at the time; the researcher made the bold argument that the top management team’s reputation cost the firm about $4 billion. Although the management team did not like the data, they could not run away from it.

Conduct an Intangibles Audit That Assesses Where Leaders Should Focus Value CreationHR professionals can be the architects of intangible audits that define, assess, invest, and improve on each of the four levels of intangibles. These intangibles give investors confidence in future earnings and increase the market value of similar earnings. Just as financial audits allow leaders to monitor cash flow, intangible audits allow leaders to turn intangibles into tangibles. In the June 2004 Harvard Business Review article “Capitalizing on Capabilities,” described how an intangibles audit assesses what leaders must do to deliver investor value given the organization’s history and strategy, measures how well each level of intangibles is being delivered, and leads to an action plan for improving them. An intangibles audit serves leaders at all levels of the organization. It helps the board of directors assess overall firm intangibles, senior leadership define strategy, midlevel managers execute strategy, and frontline leaders make things happen.

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Align HR Practices and InvestorsTraditionally, HR practices focus on what is done inside the organization. However, by focusing on the investors, these traditional practices take on a different focus. When investors are included in HR, a new set of questions and actions follows.

Investors and StaffingWhat if investors could vote on individuals hired and/or promoted in the firm? In some limited cases, investors do so through the surrogate voice of the board. But what if some of the large institutional investors participated in the interviews for senior officers? What questions would they ask? What leadership and management qualities would they look for? What types of individuals would give them confidence the management team possessed the capacity to make correct decisions? Or, alternatively, what if institutional investors reviewed competence models used as candidate screens in the hiring process? Would the institutional investor focus on the same attributes as the traditional hiring manager? Would their interview questions be different? These questions suggest that HR professionals find ways to engage targeted investors for hiring and promotion decisions. Using investor criteria and participation in the staffing process brings a rigor and discipline often overlooked. In addition, if investors participate in the selection of the management team, they may be more committed to this team’s decisions and choices. Involving investors in management practices may seem awkward at first, but over time, investor insights may become an increasing part of HR decision-making processes.

Investors and Training and DevelopmentIn a seminar to chief learning officers, the researcher posed the following scenario: Assume a representative of the largest single investor in your firm sat through the last five-day leadership program you offered. What would be his or her investment response (buy, hold, sell) at the end of the week? This question forces a new filter on what is taught, how it is taught, and what participants in training leave with at the end of the week. It was predicted that most investors would be more positive if participants devoted their training time to focusing on real business issues within their firm rather than case studies of other firms; facing their competitive realities in candid conversation with thoughtful responses laid out; and leaving with clear and specific actions that would be taken as a result of the training experience. The ultimate impact of such training is to show investors the leadership team knows what must be done, understands strategic choices, and is willing to make and implement bold decisions.

Investors and Appraisal and RewardsMany firms already tie management behaviors to investor-focused rewards. Putting a larger percentage of total compensation into stock-based incentives (grants, options, etc.) links management actions to investors. Many claim that CEO pay is excessive relative to average employee pay. Such arguments are less tenable when the CEO pay is linked to stock. The boundary between managers and investors is removed when managers become investors. In addition, the wider and deeper the investment mind-set throughout a firm, the more managers act and think like investors.

Investors and Governance and Communication

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Investors of publicly traded firms have traditionally been hands-off. They do not participate in teams, help develop processes, or work to set and accomplish strategy. However, when investors realize the “intangibles” predict shareholder value as much as the financial performance, they will begin to explore these intangibles. This means investors may help diagnose how well the organization makes decisions, allocates responsibilities, and meets commitments. Peter Lynch has suggested smart investors recognize firms that provide customers with what they want(e.g., Toys R Us).As these and other HR practices are applied through an investor filter, investors gain confidence in the organization’s ability to deliver future earnings.

Chapter-5

HR and IT

FLOWERS, RICE, MENDELSSOHN, cake. It's a shotgun wedding between the information technology and human resources functions. Neither party is sure it wants to tie the knot with

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the other, but they have no choice. In this case, they are being brought together by a powerful weapon called learning technologies.

Let's review the lineage of these two families. HR is the home of the people —those helpful individuals whose job it is to assist in recruiting, compensating, evaluating, retaining and eventually removing people from organizations. IT, on the other hand, is focused on machines—procuring, installing, programming, maintaining and eventually unplugging them. On the surface, you couldn't find a less likely set of partners.

In some ways, however, HR and IT have a lot in common. HR uses machines to manage people and IT uses people to manage machines, and both have to deal with a mixture of the two worlds. Both are staff functions and enjoy relatively low regard within the organization; when they get together, they can console each other. Perhaps their reputation problems are based on the fact that both are responsible for something (people and technology/information) that is really too big, too pervasive and too important for a single business function to address.

There have also long been similarities between these two groups on the information transaction side. Now, you know what interest the IT organization has in information transactions, but you may not realize that HR is hardly a stranger to transaction processing. The first IT application in business was, after all, payroll (way back in 1953). Some pretty large companies, including PeopleSoft Inc., made their mark in HR transaction systems. A very large group of people work on HR transactions systems; they even have their own association, the International Association for Human Resource Information Management, with tens of thousands of members. Dave Ulrich, a University of Michigan professor and HR expert, argues that HR functions don't win the right to address higher-order issues unless they have first gotten the transactions correct. Of course, the same might be said about IT. Why should HR embrace Information Technology?

Companies are realizing that they must reduce costs and increase the contributions HR makes to the bottom line. As HR searches for business practices that benefit the bottom line, it is likely to reach far beyond back-office automation systems towards the cutting-edge technology in Human Capital Management. HR needs IT’s help-not only to automate recurring processes but also to speed recruitment, to improve employee development, performance management and succession planning.

IT systems are what will drive the HR function forward. In effect, the following changes need to occur if HR is going to make the transition to a strategic role within the organization:

Reengineer all employment processes using IT automation wherever practical, ensuring that the end result provides added customer value without mounting the workload for line managers.

Reengineer the role of HR, shifting away from the routine of running employment processes, and toward employment process design and audit.

Recognize the effect on the role of the line manager, and successfully deploy the line manager's use of HR information in planning and managing people.

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IT helps in improving employee access to HR information. It also delivers value in areas such as applicant tracking, recruiting, competency management, training administration and performance management.

But companies fail to integrate this in proper manner; the model below given by Satyam throws an insight as to how a company can go for this integration

A SYSTEMATIC APPROACH TO HR SYSTEMS - THE SATYAM JOURNE

THE JOURNEY

All great journeys begin with small steps; Satyam's journey also began the same way in the late 80's. Today, Satyam is a public company listed on big board on NYSE and BSE with presence in more than 50 countries across six continents with over 31,000 employees and revenues crossing One Billion USD. Some of the challenges we faced as a result of our tremendous growth included Managing Scale, Conformity and Compliance, Standardization, Transparency, and Responsiveness.

The old processes were not equipped to manage our rapid growth and as a result our efficiency level and response time started feeling the strain. With this realization and in response to the same, our journey towards Automation and Visualization began. This journey wasn't an easy one and had many phases - Putting up uniform processes in place, followed by decentralizing HR Function - empowering our associates for quicker response, and finally integration and aligning of all automated processes. Automation ensured management of SLA (Service Level Agreement) on one hand and increased Associate Delight on the other.

METHODOLOGY

One of the biggest challenges we faced initially was to identify what to automate and to prioritize the processes identified for automation. In the beginning, Identification of processes for automation and the extent of the same was a subjective decision taken by the process owners. Later on, a group named Process Reengineering Group was formed. At present, we have the "Hi Tech for Hi Touch" model to address this.

High R2A BC2A

Leave Application Appraisals Career Planning

Tech AnO A2A

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Frequently Asked Questions Grievance HandlingTransactional HR Counseling

Low Touch High

The Hi Tech for Hi Touch model has two dimensions, on X-axis we map 'Extent' and 'Quality' of Touch (Human Intervention) required and on Y-axis we map 'Extent' of Technology/ Automation required. Resultant is a 2 by 2 matrix generating four possible scenarios (which are highlighted in Fig.l.):

HIGH TECH AND LOW TOUCH: These processes are routine transactions where Human intervention is minimal or not required. For e.g. Processes like Leave Management Applications, Time Sheet Management Applications etc. We view such processes as ones, which are R2A: Ready to Automate. These processes were automated first.

HIGH TECH AND HIGH TOUCH: These set of processes are complex and require in-depth study before we consider it for automation. These processes typically require high level of Human intervention, for e.g. Appraisals, Career Planning etc. Such processes fall under the BC2A: Be Careful to Automate category. Automation for these processes tends to have long gestation period and complex reengineering activity.

LOW TECH AND HIGH TOUCH: These set of processes require High Human Intervention and Technological interventions do not add much value to the process. Few examples are processes like Grievance Handling, Counseling etc. Such processes fall under the A2A : Avoid to Automate category.

• LOW TECH AND LOW TOUCH: Processes which do not require enormous amounts of automation and can be done with minimal Human interventions or routine intervention can be classified into this category, termed as AnO : Automate and Outsource. For. e.g. Frequently Asked Questions, HR Helpdesk etc. are automated and outsourced.

The two distinct advantages of this model are:

• This model helps us prioritize & identify HR processes that should be automated and those that shouldn't be. It is our ambition to automate 80 % of our processes for an enhanced delivery of HR Service offerings to all our Stakeholders, both Internal and External, spread across 6 continents.

• This Model enables efficient & effective delivery of our HR processes without compromising the basic grounds of Human Compassion and Touch.

HR Processes automated using the 'Hi Tech' for "High Touch' Model:

A snapshot of some of the HR Processes and their fitment into the "Hi Tech' for 'High Touch' Model quadrants is exhibited below (This is a sample list of the existing processes in HR and their classifications).

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We visit the list of HR Processes on a regular basis and based on business demands and technological advancements, we change the categorization of the processes. For e.g. Mentoring was earlier classified under Avoid to Automate category earlier as it involved Human Intervention, but with the advent of new technologies that work on the parlance of Video Conferencing at your desktop. An illustration of Categorization of HR processes for Automation is given below, and detailed case studied :-

High Leave ApplicationAssociate ReferralVisa ProcessingAssociate transfer - Onsite/ OffshoreProject Closure AppraisalKRA PlanningMentoringReward & Recognition

R2A Appraisals Career Planning 360 degree feedback Salary Structure Exit Process

BC2A

Tech Joining Process Associate Reference Check Background Check eBuddy - FAQs ID Generation Personal Files Long Service Awards Certificates

AnO Selection Process Compensation Review Grievance Handling Counseling

A2A

Low Touch High

CASE STUDY (for each Category)

CASE STUDY I:

R2A: Ready to Automate -Leave Management System

Background: LMS is our Online Leave Management System for Applying for leaves, Leave Cancellation, Leave Encashment, Viewing Leave History, Maintaining Leave Records, and generating Leave Reports etc. for 30000 associates across the Globe.

Efficiency Increase Due to Automation: Prior to automation, leave process was manual one with associates filling leave forms, obtaining RM's approval and handing over the forms to concerned Unit HR etc. This would on an average take 15 min. per associate per leave application, On an average an associate would apply for 8 leaves in year resulting in 60000 man hours per year (30000 * 8 * 15). Also, this process was very cumbersome given associates, RMs & UHRs were located at different Satyam locations. Leave tracking, cancellation and encashment was also difficult. Automation of LMS application helped address this problem. Applying, cancellation, encashment has become easy and cycle time for approval of leaves next to negligible now approx. takes 2 minutes resulting into savings of 52000 manhours.

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The System is robust enough to cater to the local laws present in each country. Improvements and updations are constantly being made to the application with the aim of enhancing associate delight.

CASE STUDY IV:

AnO : Automate and Outsource - eBuddy

Background: "eBuddy" is our 24x7 Online Associate query & concern management tool. Any queries / concerns related to HR and Payroll can be resolved on our eBuddy tool. Additionally, we have outsourced HR FAQs to our 24*7 HR Helpdesk accessible to all Satyam associates from all Satyam Locations.

Efficiency Increase Due to Automation: Resolution of queries happens through the network of Level 1, Level 2 and Level 3 buddies. Query / concerns are raised by associates online and depending on the type of query; it is resolved within few hours to a maximum SLA of 5 days. The response to the query / concern is communicated through the tool to the associate by the eBuddy. From a state of delayed query resolution now we have reached 100 % resolution within SLAs of 5 working days.

Below is a case of how the Human Resource function in Satyam Computer Services Ltd. employs Information Technologyand got benefited.

In Satyam all the sub-functions of HR like Recruitment, Training, Associate Relations, Compensation and Benefits make use of Information Technology (E-mail, Intranet, Software tools etc.) in their everyday operations.

E-mail, the most common and ubiquitous embodiment of IT, needs very little explanation. E-mail has forever supplanted the hard-copy internal memo and taken over external communications as well. For example, the recruitment team now receives applications via e-mail. Email is also one of the best ways to keep in touch with associates, and it overcomes constraints of space, time and organizational hierarchies. "Administrivia" in all of its paper-oriented glory is replaced by direct access to information and direct input of data The associates get their payroll information, Tax computations and Annual salary statements through e-mail. In situations of emergency, for example in an emergency e-mail accesses all the associates in a short period of time, which otherwise would not have been possible.

Satyam has been able to effectively integrate HR content into a company-wide Intranet—rather than a stand-alone HR site- to provide a seamless and intuitive medium for employees to interact with the company and amongst themselves in a comfortable, relevant and logical way. The benefits can be seen as increased information sharing and improved morale.

Moving HR function onto the company Intranet has improved service to internal customers, and helped it interact with associates more effectively, and has reduced many routine administrative costs. Associates with a HR question use the Intranet to access the information they want, when and where they need it. And their questions are answered without requiring

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personal service, which is costly and often unnecessary. Satyam has eliminated a major part of printing and distribution costs for employee manuals by replacing them with electronic versions on the Intranet. In addition to the cost savings, many employees appreciate the ability to quickly and privately find out about changes that affect their lives.

Satyam Intranet is used for training and communicating with associates. The Intranet has enabled information and learning for use in conjunction with existing training process. It has also enabled disseminating information organisation-wide and provides a forum which supports communication and discussions and collaborative activities directly amongst teams and individuals. The Intranet is searchable and associates can quickly find matters on the subjects they are looking for. The Intranet has moved training from the classroom and the learning centre to the workstation, empowering learners to take control of their personal development and navigate their own paths through information and learning. In Satyam, one of the ways of measuring effectiveness of training is through an online survey on the Intranet. Associates can access course materials, monthly and annual training calendars, calendars of external training institutions through the Intranet.

Browser-based Library information has offered immediate savings in administration and distribution. Only one copy needs to be prepared and updates can be implemented universally and instantaneously. Indexes and cross-references within and between documents have become 'live' and meaningful with the use of web-technology. Books can be searched across locations, abstracts can be read and books can be reserved online. One can even find out the associate who has borrowed the book. The medium also gives opportunities to make information much more compelling to use. Unlike printed media, colour comes at no extra cost, and the ability to include features such as animations or short video clips make instructive diagrams not just more appealing, but more informative. Information about the CBTs available with the library and procedures for accessing is mentioned on the Intranet.

Organizational Climate surveys are conducted in Satyam via the Intranet which ensures that it is not geographically constrained and a large number of associates are covered in a short period of time. There is an online feedback mechanism wherein an associate either anonymously or if he/she so wishes, by his/her name send a grievance or feedback to a particular department. New associates are encouraged to browse through the Intranet and familiarize themselves with policies, procedures and other departments on the Intranet.

The recruitment team posts new job openings on the Intranet letting associates know what opportunities are available. This site details information including job title and the various skill sets required. Associates can access this site and offer their candidature if the vacancies are of their interests, or post resumes of friends online. This is an easy way to advertise vacant positions and all associates have an equal opportunity to apply for job opportunities. There is also a common e-mail id where external candidates can post their resumes.

The performance appraisal process was automated in a case where associates from a Strategic Business Unit along with two assessors for each associate filled the appraisal form online. The data was processed and transferred to HR at the headquarters electronically.

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One of the main features of the Satyam Intranet, which many associates find useful is the Knowledge Repository. The Knowledge Repository on the Intranet has the following:

The Knowledge Base is a database of experiences and collection of knowledge captured within functions and projects. It contains information that helps avoid re-inventing the wheel and repeat mistakes, tools methods etc. The Knowledge Base also contains the project information base and a closed project base. In the Knowledge Repository there is an online discussion base where participants can record their own experiences and viewpoints on an issue and react to others queries and comments. Discussions are organised around questions and the posts are archived monthly.

The electronic in-house magazine run by the associates connects associates across the organization. User-friendly applications like ‘Classifieds’ on the Intranet helps associates in locating people, houses, things etc.

In Satyam associates use an online Performance Management System that draws upon a concept called Numeric Management. This concept uses a framework that objectively captures and manages business concerns. At a very fundamental level all business concerns can be expressed in numbers, and the manager’s role is one of manipulating "reality" to achieve the "desired" state on the specified number. This method enables managers to capture various business phenomena objectively to arrive at decisions. Assigning a number is done by the measurement system. Numeric management uses nominal, ordinal interval and ratio scales of measurement to capture the state of the concern objectively.

Vision Compass, a software product developed and marketed by Satyam Computers Limited draws upon the philosophy of Numeric Management and provides a framework for operationalising Numeric Management within an organization. The flexibility and versatility of numeric management framework enables Vision Compass to handle the specific management framework with equal ease, may it be Management By Objectives, Economic Value Add, Balance Scorecard, Six Sigma or Business Process Reengineering. Vision Compass helps managers analyze trends for any aspect and compute efficiency score. Also, using data from the aspects various types of graphs can be plotted. Performance can be captured through performance dashboards. Vision Compass allows the user to generate variety of predefined reports. It can also be used as a planning and communication instrument. A manager can access his subordinates’ performance sheets and get instant feel of the work and major concerns that they are facing. It helps managers to clarify the job expectations and roles to their subordinates and avoids ambiguity on that front.

Vision Compass enables associates to manage their performance with facts and data. It enables one to capture complex information at a glance on day to day basis. The day to day feedback on performance or efforts of people throughout the organization, aims towards achieving the objectives laid down by the organization allows one to make necessary interventions by the manager to change the course of performance in the desirable direction. This system allows to convert the organization’s vision, a mission and strategy into a comprehensive set of performance and action measures. The product also measures performance at all levels: business unit, team and individual. It helps aligning the individual and team goals with those of organization and provides a framework for enabling objective communication across the

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organization. In this system concerns are captured and tuned with an objectively stated intent, hence there is no room for misinterpretations.

Thus at Satyam the HR professionals have come to rely on IT to hire and retain good knowledge workers, to automate the administrative function, to share knowledge, experiences and to bring in a feeling of oneness. As the above trends indicate, technology has changed the way HR conducts its business just as it has changed the way businesses conduct theirs.

IT helps in bringing new tools, while HR brings in a strong orientation to improving job performance and a focus on knowledge use. Many IT people will talk about web sites, Intranets, and access to information and knowledge. Most HR people will prefer terms like performance support, human performance and organizational learning. In future the Human Resource function will draw from the best features of organizational learning, IT infrastructures, performance support and knowledge management, and this hybrid vigor will dramatically improve organizational and individual performance. While all the technologies act as facilitators to make HR’s work and responsibilities simple and easy to carry out, there are a loose ends that need to be tied up. The Human Resources function using IT is a recent phenomenon and a learning experience. As stated earlier, this is inducing a change in HR’s own nature of work and only time will tell as to where this process stabilizes. 

Chapter-6Business Process Outsourcing

Making the decision to outsource human resource processes is a major step for many organizations. Once a company has decided to outsource one or more human resource processes and has selected a vendor, the next major task is to implement an effective outsourcing arrangement. Transitioning to an outsourcing arrangement can pose a unique set of risks that must be proactively managed, given the complexities associated with transferring

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significant operational processes to a vendor while maintaining ongoing service to internal customers.IBM believes that clients and vendors need to work together to establish strategies that reduce or limit potential risks in the management of what is call HR Business Transformation Outsourcing (HR BTO). Rather than simply handing over a process to an outside firm to operate, HR BTO focuses on transforming HR activities to improve efficiency and effectiveness, and create business value. Based on secondary research and interviews with outsourcing providers, consultants, academics and individuals responsible for outsourcing arrangements, they have identified four basic sets of activities that can be used to mitigate the risks inherent in outsourcing important human resources processes.

Understanding outsourcing riskJeanne Ross and George Westerman from the MIT Sloan School of Management describe a framework for understanding the risks inherent in entering outsourcing relationships. These risks can be broken down into four major categories:

Strategic risks• By outsourcing a particular HR process, the organization may be losing knowledge and capabilities that may gain additional importance in the future.• Changes in the strategic direction of the organization must now be coordinated with one or several outside firms that may or may not be able to react with the same level of responsiveness.• Outsourcing can limit the opportunities to attract/develop future human resource leaders in the organization.

Relationship risks• Vendor and client are making long-term arrangements based on events that cannot be definitively predicted in the future, such as vendor viability, market conditions and legal/regulatory changes.

Transition risks• Disruptions in service levels are possible due to a failure to adhere to, or adopt, new processes, tools and other work arrangements.• Potential attrition or planned job loss can impact morale and organizational effectiveness, particularly with key staff.

Operational/technical risks• New technologies, the introduction of third-party subcontractors and the financial health of a vendor can all impact the ability to deliver a particular service.• Outsourcing can also increase the perception that sensitive employee information might be misused or misappropriated.

Mitigating HR BTO riskBased on IBM research, IBM see four major sets of activities that can help reduce these risks:

1. Identify the leadership capabilities required to oversee the overall outsourcing effort

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2. Create an overall transition management plan that identifies all the activities required to transfer responsibility to the vendor3. Develop an ongoing governance and relationship management structure to address conflicts and build an effective working relationship between the client and the vendor4. Build a measurement and reporting framework that communicates how well the outsourcing arrangement is operating.As illustrated by Figure 1, it is believed that each of the different risk mitigation techniques addresses multiple risk factors.

1. Leadership capabilitiesWhen talking to both HR BTO clients and vendors, one issue that becomes very clear is that leading an outsourcing arrangement is notably different from running a functional organization. In an outsourcing arrangement, the client does not necessarily have to worry about traditional issues associated with managing a large organization, such as hiring new employees, purchasing equipment or planning for additional office space. Instead, an entirely new set of responsibilities emerge, demanding skills that are not typically part of the traditional HR professional’s skill set. As the VP of Service Delivery at a financial services company suggested, “You need a different [set of] skills to lead in an outsourcing environment – more focus on project management and metrics…fact-based outcomes, and less on people development and coaching.”In an article published in the Sloan Management Review in 2000, Michael Useem from the Wharton School of Business and Joseph Harder from the Darden School at the University of Virginia identified six key leadership capabilities that are valuable in outsourcing arrangements.Though the context in which they were writing focused primarily on IT outsourcing, the six capabilities provide a relevant framework for the types of leadership skills needed by HR professionals as they take on outsourcing responsibilities.

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Strategic people vision – HR professionals that lead outsourcing arrangements need to view the Human Resources function as a business contributor, not simply as a business support area. They must understand how strategic human capital management can provide competitive advantage to an organization, and how human capital can be managed through innovative and unique value propositions, programs and approaches. This will help determine how to best use the vendor to support their strategic activities and manage administrative, commodity-like work.

Analytic approach to problem solving – One of the major differences between an outsourcing arrangement and internal HR management is the significant emphasis placed on metrics to measure whether the vendor is providing the appropriate level of client service. Prior to an outsourcing effort, many companies spend little time developing the appropriate metrics necessary to gauge the effectiveness of their HR processes and their impact on internal customers. Outsourcing efforts, because of their contractual nature, require a greater focus on these metrics. As such, leading an outsourcing relationship requires a strong “client service” perspective. Therefore, an individual leading an outsourcing effort needs to determine key effectiveness indicators early on in the contracting process and continue to evaluate these metrics for validity throughout the life of the relationship. After the contract is established, they need to be able to monitor and evaluate the results of service level agreements and determine the root cause of poor performance, adjusting measures as appropriate.

Deal making – Part of leading an outsourcing effort is being able to evaluate and select vendors. This includes understanding the vendor marketplace to identify potential partners, evaluating multiple vendors and balancing the current and future needs of the client organization with the vendor’s cost and capabilities. While several of the individuals that IBM spoke with indicated that it was the responsibility of the client organizations’ legal and procurement teams to negotiate the terms of the final arrangement, the outsourcing leader

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needs to provide guidance to the negotiating team during the initial contracting process and throughout the life span of the contract.

Partnership governing – Once the deal is negotiated, perhaps the biggest challenge facing the leader is the responsibility for managing a multi-million dollar business relationship. The leader needs the expertise to establish a series of formal governance procedures to identify issues, escalate problems to the appropriate level of the organization and recognize opportunities for mutual gain.Also, it is critically important that the leader has the ability to identify and cultivate key relationships in the partner organizations. Trusting relationships are more amenable to problem solving and issue resolution, and can reduce the need to go through the formal process. Several of those interviewed talked about the importance of being able to manage “one step above the contract” and to settle small differences without having to go through additional legal changes and qualifications.

Change management – The leader of an outsourcing arrangement needs to be integrally involved in change management to successfully manage stakeholder expectations and perception. The outsourcing leader needs to be able to develop and articulate the rationale for the outsourcing decision, understand the drivers of resistance from various stakeholder groups and assure those key stakeholders that their concerns are understood and are being addressed. This is particularly true in situations where unions and works councils are being impacted by outsourcing changes. In addition, the outsourcing leader must be able to identify and leverage a host of internal champions and construct a communications infrastructure that not only sends and receives formal messages, but also is linked into the informal “grapevine.” Finally, the outsourcing leader must be willing to make decisions about the reduction and redeployment of existing staff – often a difficult task since outsourcing decisions can have a direct impact on employees’ jobs and careers.

Program management – An outsourcing leader often needs to oversee a large and complex set of interrelated projects involving retained employees and vendors. The skills necessary for this task include the ability to track individual project progress, coordinate among different programs and projects, understand overlaps and synergies, monitor budgets and financial systems, and recognize when particular efforts face difficulties. Further, the outsourcing leader needs to serve as a liaison to the senior management of the company, communicating progress and anticipating and addressing areas of concern. Finally, the outsourcing leader should serve as an outsourcing champion, sharing good practices from these projects with other outsourcing efforts throughout the company, whether they are related to HR or another function.In their research, Useem and Harder found that over two-thirds of hiring executives would pay at least a 6 percent premium for each of the above skills, while 40 percent would be willing to pay an 11 percent premium.3 Though many companies would like to find one individual with all of these capabilities, often times, it is simply not possible. In many instances, outsourcing leaders will need to be supported by other individuals who are stronger in specific skill areas where the leader is less experienced Compounding this challenge, many of the capabilities required to lead an outsourcing effort are often not found in the traditional skill sets of HR managers. While developing a strategic people vision and change management strategy might be skills that HR managers develop as part of their normal work experience, several of the other skills

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are more likely to be cultivated in other parts of the organization (see Figure 3). For example, an analytic approach to problem solving might be a skill developed as part of working in a call center environment, where large volumes of data are collected and analyzed on a daily basis. Similarly, deal making and partnership development skills may be more readily found in a business development or alliance management function. And program and project management capabilities might be more common in an IT department or central project office function. Because existing HR managers may not possess the full complement of skills required, companies should be open to supplementing with capabilities from outside HR when managing a large-scale outsourcing effort.

2. Transition managementPerhaps there is no time during the outsourcing process that a client feels as vulnerable as during the transition of processes from the client to the vendor. Not only is the organization literally “handing over” its processes (and in some cases, its people and systems), but, at the same time, its success depends on everything working properly when the vendor begins operations. A mistake made during that time has the potential to interrupt service levels, destroy credibility and bring out legions of outsourcing critics. A well-orchestrated transition management process can play an important role in facilitating the exchange of resources (both physical and know-how) and improving the odds that operations will run smoothly once the transition is complete.In developing an effective transition management process, organizations need to consider two major work streams: building a new work environment (i.e., defining the resources needed to make the processes work under the vendor’s control) and making the transition more effective (i.e., improving the odds that the new environment will work properly once it is operational).

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When building the new work environment, three primary issues need to be tackled prior to the vendor taking control of the process:• Employee management – In their planning, companies must consider three particular groups of employees directly affected by the outsourcing. First, there are employees that will be displaced when the vendor assumes full-scale operations. While eliminating employee positions is never an easy task, both the company and the vendor should work together, striving to treat displaced employees fairly throughout the process. This includes providing a comprehensive suite of severance packages, outplacement counseling, job-search assistance and retraining opportunities.Second, for those that are being offered employment by the vendor organization, it is critical that the company advise those individuals of the terms and conditions of their job offers well in advance of their transition dates. As vendors prepare these offers, they need to work closely with clients to develop attractive compensation and benefits plans for these transitioning employees and address unique issues, such as expatriate benefits plans. In some situations, this will involve careful coordination with unions and works councils throughout the planning and execution of these new employment offers. It is especially important to retain key resources through the initial years of the arrangement to avoid loss of tacit knowledge and facilitate a smoother transition. Therefore, the parties should agree on a retention strategy, including bonuses and other incentives, before the commencement of services.Lastly, the company will retain a certain number of employees within their HR organization. However, in many situations, those employees’ jobs will change significantly.For many in the HR function, their roles will be more focused on strategic and design activities, or will entail entirely new responsibilities managing the vendor relationship. These employees will most likely need training and coaching, not only in their new roles, but also in overall vendor relationship management techniques. Whereas, before the outsourcing arrangement, retained and transitioned employees worked together for the same organization, once outsourced, the relationship with service providers becomes more formal, and must be managed within agreed upon parameters. For some organizations, this may represent a significant change effort. Similar to retention efforts associated with those being offered employment in the vendor organization, it is important to develop a retention strategy and commensurate compensation

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packages for retained resources.

Delivery operations – Key components of the delivery model should be clearly fleshed out prior to the launch of the new arrangement. In particular, the company should determine the appropriate operational service level metrics that will be used to evaluate vendor performance and develop a management reporting system to track key measures and issues. When the outsourcing arrangement involves the use of an employee contact center, the standard operational plan for the center should be shared and understood by the entire organization.Finally, the vend or should procure, install and test any client systems that have been outsourced, as well as any newly acquired third-party systems during this transition period. After all the key elements of the delivery operation have been transitioned, the ongoing operations of the newly transitioned tools should be tested to validate that the handoffs between the vendor and client were complete and no relevant activities were omitted.

Workplace infrastructure – Experience has shown us that even the smallest technological details can quickly snarl the transition process. If the vendor is taking infrastructure previously owned by the client, both parties need to identify and provide the necessary computer equipment and network infrastructure to sustain day-to-day operations. They also need to build a plan to manage the transition of communications systems, such as phones, PBXs and e-mail systems from the client to the vendor. The two parties need to establish the appropriate connectivity between the vendor and client networks, and provide employees with appropriate passwords and application access on both sides. During the transition period, both client and vendor personnel will need to have access to both old and new applications and infrastructure to validate that the cut-over from one system to another is complete. Finally, the vendor and client need to construct a business continuity plan to deliver services in the event of a large-scale business or technological failure.Each of the previously outlined steps focuses on creating the new work environment for employees. Simultaneously, companies should address three key issues that will dictate the effectiveness of the overall transition process. These include:

Knowledge transfer – One of the most important steps in the outsourcing process is the exchange of both explicit and experiential knowledge between client and vendor. As a VP of one technology company indicated, “A lot of people avoid this step because it brings ‘mortality’ closer and closer.” However, knowledge transfer is especially important to validate that formal documentation associated with contact center, processes and applications is accurate and up-to-date. Further, the knowledge of how to address various exception circumstances may be absolutely critical in maintaining the continuity of service delivery when the vendor becomes responsible for operations. Yet, the knowledge transfer process during an outsourcing transition is fraught with potential challenges.For example, staff reductions can allow knowledge to “walk out the door” and result in a number of knowledge gaps. Working across large vendor and client organizations can make it difficult to identify and locate key experts, especially early in the outsourcing process when individuals are just learning about each other’s capabilities. Finally, as operations commence, a number of good practices and lessons learned will likely emerge that need to be shared, both across locations, and between client and vendor. These types of transfers can be hampered by differences in time zones, location, local culture and the amount of time and effort invested in

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identifying, capturing and sharing key lessons. Figure 5 provides an overview of the types of knowledge that need to be transferred during an HR BTO arrangement.

Companies can use a number of techniques to facilitate knowledge exchange. Work shadowing, where an incumbent works side-by-side with an individual who will be taking over his activities, has been a traditional way for knowledge to be shared between client and vendor organizations. It can be a useful technique, as it enables the newcomer to ask questions and allows the incumbent to pass along experiential knowledge in the context of the actual work being performed. However, incumbents who are subject to job loss may be resistant to this approach if their resulting job loss is not compensated. Further, if this type of knowledge transfer is not done in conjunction with some form of explicit documentation, the company may be exposed if the newcomer leaves shortly after the transfer. There are a number of other ways that knowledge can be shared, ranging from documented subject matter expert interviews to simulations to collaborative environments designed to capture and organize relevant documents. Figure 6 provides a description of various knowledge transfer techniques.

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Often, knowledge transfer is most valuable when techniques for capturing explicit knowledge are combined with methods for sharing and applying more experiential types of knowledge. This can help ensure that knowledge, in whatever form it takes, is preserved and available to others in the future.

Portfolio management – While transitioning HR processes to the vendor, a company may have a number of improvement efforts that are either ongoing, or need to be accomplished in the near future. For example, a company that has decided to outsource its HR contact center to a third-party vendor might also be reengineering its recruiting and staffing processes. Similarly, a vendor might spot an opportunity for joint cost savings in the learning management process

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that would involve a commitment of resources from both the client and the vendor organizations.To facilitate close coordination between the client and vendor, the companies should create a joint portfolio management process to oversee all client HR improvement efforts. During the transition management phase, the client and the vendor should first rationalize the existing pipeline of improvement projects. This includes cataloging all relevant projects, reviewing them against intended business cases and determining which ones are in or out of scope for the outsourcing arrangement. Then, both parties should build a master plan which incorporates both transformation and transition activities, milestones and deliverables. This overall blueprint defines and allocates resources and funding from the vendor and client, identifies relevant skills for the projects, sequences the projects in order to increase their overall impact and spells out a series of timelines and milestones. Finally, both parties should manage and review these projects to prevent duplication of effort and enable value realization by both sides. Figure 7 highlights the key steps for undertaking this type of portfolio management.

Change management – “We did not have an adequate change management plan, nor did we dedicate enough resources to executing the plan.” This quote from one of the companies that IBM interviewed summarizes what many of our interviewees strongly believe: that despite all the best intentions, change management activities during an outsourcing arrangement launch are often not given the time, budget, attention and resources they need to be successful.At the very least, two types of change management issues must be addressed within the client organization: those directly impacting individuals within the HR function itself, and those affecting employees in the larger organization. Earlier in the paper, it was discussed the importance of providing transition support for individuals who are leaving the organization and for those who are moving on to work for the vendor organization. In addition to these two groups, a strong change management plan also needs to address those who remain in the client organization.

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For those individuals, the organization needs to address issues associated with “survivor guilt” and provide support as they adjust to their new roles and responsibilities.At the organizational level, companies need to consider the change management implications that will affect the larger group of employees that use HR services. For example, individuals ranging from line of business leaders to front-line employees will likely have questions about why the company decided to outsource these HR services, how the new processes will operate, how the transition process is likely to occur and what types of new self-service tools will be introduced. Both the client and the vendor need to coordinate closely on identifying key stakeholders impacted by those changes and developing content that will both address their direct questions and provide them with a level of comfort that their service will not be significantly disrupted. An important change management tool is a clear internal marketing and communication strategy. The marketing and communication approach should be developed jointly by the vendor and client, as illustrated by this quote, from one consultant IBM interviewed: “Communicating the change process is absolutely critical…the vendor can provide advice and support but ultimately the client has to drive it, working closely with the affected business units.”Figure 8 highlights some of the key components of a successful communicationstrategy.

3. Governance and relationship managementAn outsourcing relationship represents a long-term partnership between two parties.Like any relationship, both formal and informal guidelines influence how and when the parties interact, who takes responsibility for various items and how differences are settled. By setting up a formal relationship management structure that begins at contract signing and evolves during transition and commencement of delivery operations, both sides can clearly identify who has responsibility for making certain decisions, how those decisions will be made and how the results will be communicated to others. This helps reduce overall uncertainty and

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clarifies the accountability that individuals from both parties have in the relationship. In our research, it was found that organizations typically have relationship management issues at three levels – strategic, program and operational.

To address these critical issues, the client and vendor must align their governance roles and activities at each level.

Strategic levelAt the strategic level, individuals from the highest levels of the alliance are primarily focused on three important issues: how well the overall relationship is operating, the extent to which the right people from each company are interacting with one another and whether there are future opportunities to enhance the relationship.Typically, at this level, a small group of individuals meet several times during the year to review the overall contract performance, delivery areas where measures are not consistently meeting targets, turnover or attrition issues that might impact service delivery and strategic changes which will have a visible impact on the outsourcing arrangement. In addition to these regular reviews, individuals involved at the strategic level meet every six months to review the overall outsourcing relationship. As part of these reviews, the key individuals responsible for the overall relationship focus on current performance against established and new objectives and how the two organizations could improve going forward.

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Program levelAt the program level, individuals from both the client and vendor organizations come together to identify changes in the client’s business strategy that will require vendor support, and determine which new projects the client and vendor should include in their portfolio of projects. Different HR BTO scenarios will involve a variety of transformation and program management needs depending on the level of redesign done prior to the outsourcing arrangement. At this level, team members from both parties review the progress of ongoing transformation efforts, develop business cases for new improvement opportunities and identify how changes to ongoing business processes might impact existing service level agreements. Typically, a review of all transformational projects occurs quarterly, with specific project boards meeting more frequently as needed.

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Operational levelThe operational level is primarily focused on day-to-day interactions between client and vendor. These discussions center on managing (and potentially escalating) change requests, identifying root causes for problems and providing tactical communications to end users about potential changes in outsourced delivery.Usually, operational level discussions happen relatively frequently (every one to two weeks or as needed) with larger monthly or quarterly reviews as required.Operational counterparts from both organizations participate regularly in these discussions, but will occasionally involve specialists from contracts, finance, risk and audit functions to assist them in coming to agreement on necessary changes.

4. Measurement and reportingWhen it comes to the topic of measurements and outsourcing, most attention is turned to service level agreements (SLAs). SLAs represent a contractual obligation related to the level of service the vendor provides to a client. Service level agreements are used to quantify objectively the performance to be provided to a client, report performance data to both the client and vendor in a consistent format, facilitate analysis of data across sites and regions and identify areas where improvements to service are necessary or possible. In many situations, the agreements outline financial implications for achieving or not achieving these service levels. In outsourcing arrangements, vendors are generally responsible for meeting SLAs even when they are dependent on other vendors or subcontractors. When developed and implemented effectively, SLAs can be a valuable tool to gauge vendor performance and communicate the effectiveness of the outsourcing arrangement back to the larger organization.

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Companies can run into several challenges when developing service level agreements. Often, companies do not have adequate baseline measurements prior to entering into an outsourcing arrangement. While third-party providers can provide benchmarks and experiences from other client situations, companies should conduct an in-house analysis to identify accurate baselines before committing to a certain level of service. Also, before finalizing SLA standards, both the company and the vendor should agree on a “grace period” during the first several months of operations, where baseline measurements are validated and fine-tuned without the vendor being penalized for missing invalid or inappropriate targets. Even companies that are experienced in measuring HR process performance inhouse may run into challenges in developing SLAs. Many of these organizations try to simply transfer their internal measurements over to the vendor. This can cause a number of problems. For instance, many measures traditionally developed by HR departments focus on measuring processes, rather than outcomes. Using the recruiting process as an example, an HR function might track how many resumes were processed per day, or how many days it takes for a candidate to be contacted once they are selected for a potential job. What companies should focus on in developing service level agreements are outcome measures, since it is the vendor who is now responsible for delivering outcomes. For the recruiting process, this might mean measuring the number of days it takes the vendor to provide a list of suitable candidates once a job requisition is posted. Once the SLAs have been decided on, both the client and vendor need to develop a process for reporting these measurements on a regular basis. Experience has shown

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that it is helpful to develop a common reporting template and collection infrastructure to reduce the amount of time it takes to produce the measurement. The report should use visual indicators, such as plus or minus symbols or colors (Red/Green/Yellow), so that individuals can quickly identify areas that need attention.Finally, a standard review and action process should be developed around these measurements, to allow the involved individuals the appropriate amount of time to obtain, review and provide feedback on the report.While SLAs are often the primary focus for measuring the effectiveness of an HR BTO effort, another category of measures needs to be addressed. Organizations should consider the use of operating measures, or workforce analytics, to highlight the current “health” of the workforce across the organization. While these measures do not necessarily evaluate vendor performance, they do indicate the extent to which the HR organization is providing value to the larger organization. In many cases, the data needed to measure these types of outcome measures, such as voluntary turnover, promotion rates and performance ratings, is found in a combination of both vendor and client systems. Outsourcing vendors may be able to capture data and produce analysis that may have been previously unattainable.However, clients and vendors must work together closely to identify which outcome measures are critical to track and how to integrate their systems to make sure that the necessary data is captured and reported in a timely and accurate manner.

SummaryTo lower the risk associated with outsourcing HR activities, companies should consider the following questions:

Leadership capabilities

• Have you identified individuals who have demonstrated the key leadership characteristics needed to support an ongoing outsourcing relationship?• If one individual does not have all of these skills, are there other members of the ongoing outsourcing leadership team with complementary skill sets?• To what extent have you identified potential individuals in other areas of the organization whose skill sets could benefit the overall outsourcing relationship?

Transition management

• Are adequate resources available to develop plans for building the new environment?− Employee transition and redeployment management− Delivery operations− Workplace and infrastructure management• What level of emphasis has been placed on developing a knowledge transfer strategy and are the appropriate resources in place?• Has a structure been established to oversee the larger HR transformation effort that incorporates both client- and vendor-led projects?• How comprehensive is the change management strategy for this transition? And has the organization committed sufficient resources to execute it?

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Governance and relationship management

• Has the organization identified the key roles and responsibilities for governance at all three levels – strategic, program and operational?• How collaboratively has the client worked with the vendor to assign clear governance roles and expectations?• What mechanisms have been put in place to encourage the development of trust among the governance teams of the outsourcing arrangement?

Measurement and reporting

• What process is the organization using to develop service level agreements and how are they reported to the various governing boards?• How is the organization validating that the measurements will be useful in making decisions throughout the lifetime of the arrangement?• How is the organization planning to collect the appropriate operating measures or workforce analytics that will allow it to make decisions about its workforce?

ConclusionLike many complex interactions between two companies, human resource outsourcing is not without risk. However, our research and experience have shown that identifying the right leadership skills, managing the transition effectively, developing governance and relationship management processes and creating a measurement system that provides useful insights to both the client and vendor can help improve the success of the outsourcing partnership and mitigate these risks. While these techniques involve some up-front investment in planning and design, they typically save resources and prevent conflict throughout the life of the relationship.

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Chapter – 7

HR Audit

The first step in getting a company's HR house in order is to conduct an HR audit. This relatively inexpensive and short-term process enables organizations to evaluate their human resource practices and identify areas for growth. Through an audit, companies can assess where they are, uncover any issues they may have, and determine how they can best align HR operations with business goals.

Two main components

An audit consists of two main components: a thorough compliance review and a strategic assessment of HR practices. Compliance has become a very hot issue for companies. State and Federal laws govern fair practices in the areas of compensation, employment, harassment, workplace safety, termination, corrective action, policies and procedures, benefits administration, records maintenance, and overtime for wage and hourly employees. While the complex employment laws are constantly changing and difficult to track, the penalties for non-compliance are stiff. Failure to comply with regulations can result in costly fines, retroactive penalties, and in the most extreme cases, imprisonment for employers.

The second component, which is equally as important as compliance, is determining how a company's HR practices can be strategically aligned with the goals of the organization. Hiring the right employees and motivating them and providing key training and development opportunities are of strategic importance. Through interviews with senior management and outstanding employees, along with an analysis of current HR practices, an audit will help companies identify how they can best leverage the value of their employees and position their company for growth.

While an audit can be conducted in-house, many companies prefer to turn to outside consultants because they are objective and can fully concentrate their efforts on this project for the timeframe that is needed. Also, many companies find that managers and employees are more open and frank when speaking with someone outside an organization.

A local nonprofit

An audit can also help growing organizations reassess and change HR structures and procedures to accommodate their expansion. For example, the Colonel Daniel Marr Boys and Girls Club of Dorchester, an organization that provides important youth development services, has undergone explosive growth over the past five years. Meeting a critical need in the community, it grew from a small organization in one location in 1974, to three facilities that service 3,700 children annually. The forward-thinking Board of Directors, under the

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leadership of Club President Bob Scannell, recognized that HR was going to play a key role in supporting the organization's continued growth, and they created a new senior level HR position. Under the direction of Kirsten DiChiappari, the new Director of Human Resources, the Club worked with an outside firm to conduct an HR audit and assist with strategic HR planning.

"The audit helped crystallize what the HR department needs to do to support the Club's growth today and into the future," said DiChiappari. "For example, because our staff is spread over three facilities, one had to very clearly and carefully define HR procedures and benefits. We also identified the specific manpower needs and skill sets to support our multiple facilities.

"The outside audit also helped establish organization-wide consensus and support for the goals of the HR department," DiChiappari added. "Now with our priorities in order and our direction set, HR can most effectively support the Club in our key mission - helping each child to realize his or her full potential."

A global company

Coley Pharmaceutical, a global company that develops immunoregulatory drugs, turned to an HR outsourcing firm when it needed to conduct an audit. "An outside firm offered an objectivity that forced us to re-examine our HR practices at the deepest levels," said Frank Miklavic, Coley's Vice President of Global HR. "They brought a rigor to the process that helped us assess where we were, where our gaps were, and how to most effectively move the organization forward."

As Coley grew, it began competing for talent with large pharmaceutical companies. Coley President and CEO Bob Bratzler believed in the importance of the company's employees and recognized the need to establish competitive global HR practices. Coley worked with an outside HR firm on an audit that addressed several key areas, including compliance, competitive hiring and retention programs, and HR support for the growing, global organization.

"The company's primary assets walk in and out of the door every day," said Miklavic. "It is our people, and the leading edge work they perform, that are the cornerstones of our company's success. The audit helped us shape a new global HR organization that offers highly competitive hiring and retention policies to attract and keep outstanding talent. We also developed an affirmative action program, upgraded pay and benefits, and focused on creating a strong, positive corporate culture."

There are many reasons for companies to conduct HR audits. Sometimes a company will initiate an audit for one reason but in the process uncover other areas that need to be addressed. Regardless of the motivation, the benefits of this cost-effective, short-term process are tremendous. An audit provides peace of mind on critical compliance issues as well as a road map on how HR can strategically support the growth and future of an organization.

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Chapter 8

AVIVA Story

Founded in 1897, RAC has been consistently at the forefront in developing motoring services. Acquired in May 2005 by leading insurance conglomerate Aviva, RAC Group is part of the Norwich Union Insurance division.

Anecdotal evidence, but no hard facts

Anecdotal evidence existed that employee absenteeism and turnover were both high, but managers had little reporting data to substantiate that view.

In response, the company introduced the 'People P&L'. A human capital management strategy, the People P&L outlined key performance indicators that could be applied to staff across RAC. For the next few years, HR data was manually collated from the disparate HR systems.

In 2002, the HR and payroll systems were merged, at which point, according to RAC data warehouse manager Graham Pritchard, the People P&L strategy really developed. "With the ability to access one data source we were able to report on the key performance indicators that we had created – absenteeism, sickness, turnover, stability, and internal colleague satisfaction."

By the end of 2003, the company was running more than 3,000 reports each month. While the reports provided the slices of data that were fundamental to the People P&L, RAC needed deeper analysis. The HR board asked the data team to find a way to both automate the process and to take the workload away from the HR administrators.

"We were really looking for an analytical application that could deliver not only these high-level trends, but also one that would enable us to really see what was happening behind the information," says Pritchard. "In early 2004, we started looking at what was available on the market."

A flexible, cost-effective solution

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RAC looked at Strata HR Analyser – an offering from Strata Systems based on Cognos ReportNet, PowerPlay, and Metrics Manager applications. "We needed a tool that we could implement quickly and produce valuable data for all our People KPIs. The reason we chose the Strata/Cognos solution was because it met and exceeded all our human capital and system requirements. We wanted something that would give us the flexibility to look at data exactly how we wanted, was cost effective and quick to implement."

Flexibility is key to RAC taking its HR strategy forward. With the ability to add in data from areas of company information such as sales, operation, time and attendance, training and recruitment, the system provides the data warehouse team with the power to begin analysing the information gleaned from its People metrics.

In addition to freeing RAC from the constraints of a high-budget, bespoke system with ongoing consultancy fees, Strata also provided a system that was supports the Government's Accounting for People task force human capital management initiative.

Increased confidence, lower costs

Staff satisfaction has increased from 68 per cent to 73 per cent. RAC is looking to develop its People strategy to continue to make significant savings across the business by making HR and line management more effective. "In 2002, absenteeism was running at around 10 sick days per person per year. The goal to reduce that number to 8.5", says Pritchard.

Across 11,500 staff, saving 1.5 days actually equates to a £1.5 million saving on the bottom-line," he adds. "The Cognos system gives us the ability to look at our HR data and focus in on where the problems are. We don't need to become involved in expensive group-wide approaches to deal with an issue, which might only be local. We can be far more focused and aggressive in how we address HR ssues because we have accurate intelligent data at our fingertips."

"People KPI plays a vital role in our company. It has helped transform our business, significantly improving our understanding of people-based issues & values," said Debbie Hewitt, Director, RAC Rescue Services. "The use of Cognos business intelligence helps ensure that we will continue to meet all people management challenges with confidence and understanding."

HR now seen as a profit center

Pritchard believes that the ability to analyze HR information will push the cost savings well beyond the original targets set by his team. "When we put together the business case for the CEO we said that we would get absenteeism down by one day per person per year," he says. But our actual longer-term target for sickness is to get it down to 6 days per person per year."

In addition to the cost-cutting, RAC is using the powerful reporting capabilities of the Cognos/Strata system to change the dynamic between HR and line management staff and bringing about changes to operational procedures within the business. With HR spearheading

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a tool that enables them to raise issues quickly and effectively with the board, operational management is beginning to think of HR as a strategic business unit and not just a centre for administration.

"Through the implementation of business intelligence, HR is adding real value to the company, and helping to make RAC a more efficient enterprise," Pritchard comments. "HR is now seen as a profit centre – it really gives HR the authority and opportunity to influence the strategic process."

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