HR Metrics andAtialytics: Use and Impact H - · PDF fileHR Metrics andAtialytics: Use and...

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HR Metrics andAtialytics: Use and Impact Edward E. Lawler III, Alec Levenson, John W, Boudreau, Center for Effective Organizations, University of Southern California H R functions often collect data on their efficiency, but not on the business impact of their programs and practices. This is a crucial point because HR organizations that collect effectiveness data are more likely to be strategic partners. If HR wants to play a strategic role in organizations it needs to develop its ability to measure how human capital decisions affect the business and how business decisions affect human capital. HUMAN RESOURCE PLANNING 27

Transcript of HR Metrics andAtialytics: Use and Impact H - · PDF fileHR Metrics andAtialytics: Use and...

HR Metrics andAtialytics:Use and ImpactEdward E. Lawler III, Alec Levenson, John W, Boudreau, Center for Effective Organizations,University of Southern California

HR functions often collect

data on their efficiency,

but not on the business

impact of their programs

and practices. This is a crucial point

because HR organizations that collect

effectiveness data are more likely to

be strategic partners. If HR wants to

play a strategic role in organizations

it needs to develop its ability to

measure how human capital decisions

affect the business and how business

decisions affect human capital.

HUMAN RESOURCE PLANNING 27

Many recent articles, books, and studies arguethat HR needs to become a strategic partner(e.g., Jamrog & Overholt. 2()()4). Recent researchsuggests, however, that HR is not making muchprogress toward becoming a strategic partnerdespite the belief by HR professionals that itshould (Lawler & Mohrman, 2003a; 2003b).

Because of the growing importance of humancapital in determining organizational effective-ness, HR can play a key role in developing andimplementing corporate strategy and become ahigh-value-added part of organizations (Lawler,2003). If HR can make a strong ca.se for being animportant part of strategy development andimplementation because of the importance ofhuman capital, why does HR often ^ ^ ^ ^ ^fall short of being a strategic partner?At least one possibility is becauseHR lacks the type of analytic anddata-based decision-making capabilityneeded to influence business strategy.One of the reasons for this may wellbe because it lacks the right metricsand analytic models. In comparisonto Finance and Marketing, for exam-ple. HR often falls short when itcomes to providing metrics thatassess HR processes and practicesfrimi a strategic perspective. It alsolacks analytic models that show therelationship between HR practices andthe effectiveness of the organization.

A strong ease can be made thatHR needs to develop belter metricsand analytics if it is ever to becomea taie strategic partner in most orga-nizations. Lawler and Mohrman(2003b) identify the use of metrics asone of four characteristics that leadHR to become a strategic partner. Boudreau andRamstad (2003) distinguish between providingmore HR measures (not a strategic contribution)and providing better logic and analytics for makingdecisions about talent (a strategic contribution).Organizations can collect three different kinds ofmetrics in order to better understand and evaluatethe impact of HR activities and to influence busi-ness strategy and business pertormance. They areefficiency, effectiveness, and impact (Boudreau &Ramsiad, 2003).

The first kind of metric and in many respectsthe easiest to collect concems the efficiency ofthe HR function—in particular, how well the HRfunction performs its basic administrative tasks.

The cost per

employee for HR

administration ...

is a large enough

cost so that it is

certainly worth

measuring not

just how much is

spent but how

well it is spent in

terms of the

quality and

impact of the ser-

vices provided.

The metrics that can be collected in order toassess HR efficiency include productivity andcost metrics for the HR luiiciion such as limeto fill open positions. HR headcount ratios, andadministrative cost per empk)yee. A comprehen-sive set of metrics can be prtxluced to evaluateHR's administrative activities tbat in effect evalu-ates it as a stand-alone business.

A key issue in evaluating the data gatheredwith respect to HR administration concerns nor-mative data. Multi-company databases now existthat make it possible for organizations to comparetheir metrics data with tho.se of other companies.Organizations with good tnetrics and normativedata can make a gotnl as.sessmcnt of the perfor-

mance of their HR function as luiad tiiini strative unit.

Organizations vary in terms of thecost per employee for HR administra-tion, but typically the cost rangesfrom $1,200 to $1,600 (Fitz-enz.2000). This is a large enough cost sothat it certainly is worth measuringnot just how much is spent but howwell it Is spent in terms of the qualityand impact of the services provided.Most efficiency-ftKused metrics arelimited in that they do not addressthe issues of service quality and theimpact of HR services on organiza-tional effectiveness.

The second kind of HR metricsfiKuses on effectiveness: whether HRjirogranis and practices have theintended effect on the people or talentpools toward which they are directed.In the case of training and develop-ment, for example, true effectivenessmetrics should offer information on

whether employees build needed skills not juston participation in training pmgrams but also onemployee and management satisfaction with thetraining provided. Measuring only participationin HR programs offers no insight into programeffectiveness. While satisfaction surveys can bea useful tool for gauging the alignment betweenHR services and the opinions of HR's customers,they fall short of providing the needed insightsinto the real impact of HR programs and practices.

A potentially meaningful set of effectivenessmetrics for the HR function concems talent andtalent management. In most corporations. HR hasthe lead responsibility for acquiring, developing,and helping to deploy talent. In order to assess

28 HUMAN RESOURCE PLANNING

how well organizations are carrying out thisresponsibility, measures of talent quality, talentdevelopment, and talent deployment are needed.Typical metrics in this area include measures ofthe strategic skills and core competences embodiedin the work force, as well as metrics that classifyhow well pivotal jobs are filled and the type ofdevelopment activities that are taking place forcritical talent. A strong case can be made that tal-ent metrics need to be updated regulariy so thatorganizations have ongoing data with respect tothe condition of their human capital.

Human capital metrics potentially can andoften should influence the development andimplementation of business strategies. Businessstrategies that make incorrect assumptions aboutthe ability of an organization to staff critical jobsand develop new areas of expertise that supportthe strategy are obviously doomed to fail.Similarly, organizations that are not staffed withthe right talent will have great difficulty imple-menting new strategies and organizational changes.

Finally, metrics having fo do with developingand optimizing the capabilities and the core com-petencies of the organization can be collected inorder to measure the impact of HR programs andpractices (Lawler. 2003). Impact in this casemeans demonstrating a link hetween what HRdoes and tangible effects on the organization'sability to gain and sustain competitive advantage.Operational effectiveness impact metrics mightfocus on changes in the pertormance of businessprocesses (e.g.. reduced defects, increased speed,more frequent innovations) that occur when thequality of talent is improved or when new HRpractices are introduced.

Although the development of organizationalcapabilities and core competencies is typicallynot the sole responsibility of HR, HR needs toand usually is expected to play a key role in shap-ing and developing them. Both are highly talent-dependent for their development and both involvethe development of organizational social capitaland individual skills and knowledge. These areclearly areas where HR has a potential role toplay and where it can actively influence howquickly and effectively an organization developsits capabilities and competences.

The use of analytics in order to understand theimpact of HR practices and policies on organiza-tional pertormance is a powerful way for HRfunctions to add value to their organizations.

Statistical techniques and experimental approachescan be used to tease out the causal relationshipbetween particular HR practices and such perfor-mance metrics as customer satisfaction, salesper employee, and. of course, the profitability ofparticular business activities. In many respectsthe "Holy Grail" for HR functions is the abilityto show the bottom-line impact of their activities.This is a powerful way to increase HR's inlluenceon company business decisions and future busi-ness strategies.

Several things are required in order to performthe kind of analytics that show a relationshipbetween HR practices and business outcomes.First., the right HR metrics are required. But met-rics by themselves are not enough: Good analyticmodels and valid measures of company perfor-mance are required. HR needs to be able to bringdata and data analysis to the strategy table thatshow how human capital management decisionsaffect organizational performance. It needs to gofar beyond simply showing that HR can reducethe cost of HR administration and improve thequality of service. Doing this is not a high-value-added function in most coiporations. Providingdata about the strategic readiness of an organiza-tion to execute a strategy is high-value-added, asis identifying what an organization needs to do toimplement a strategy.

A number of studies have investigated thepotential for HR practices to be strategicallyimportant. For example. Becker and Huselid(1998) found a relationship between HR practicesand firm performance. Lawler and Mohrman(2(X)3b) have shown how various features ofthe HR function relate to HR's role as a strategicpartner. An enormous amount of normativewritings concern the role HR should play. Thereis no question that HR executives feel HR shouldplay a key strategic role in organizations: how-ever, there is less clarity about how metrics arecurrently being used by HR functions and abouthow strong a relationship there is between theuse of metrics and the degree to which HR is astrategic partner.

In this study, we first look at the kinds of HRmetrics that are used by organizations. Second,we examine the degree to which analytics areused to capture the impact of HR on tbe business.Finally, we assess whether those HR organizationsthat have more metrics and make greater use ofanalytics are more likely to be strategic partners.

HUMAN RESOURCE PLANNING 29

The StudySurveys were mailed to medium and large

corporations that are corporate sponsors ofthe Center for Effective Organizations at theUniversity of Southern California or were knownby the authors to have an interest in HR measure-ment. HR executives who have positions withcorporate-wide visibility of the HR functioncompleted the surveys. Of the surveys returned.37 were usable, for a response rate of 38 percent.Most survey responses came from large U.S.-based firms on the Fortune 500 list. The surveycovered six areas:

1. The company's current and future HRstrategy;

2. The HR data the organization collects inorder to inlluence decisions:

3. The overall effectiveness of themeasurement and analysis system of theorganization;

4. The type of metrics and analytics collectedby the organization:

5. How the organization uses the analytics andmetrics to assess and understand the impactof its HR programs:

6. The degree to which the HR function is astrategic partner.

develop business strategies, having integratedbusiness and HR .strategics, and providing analyticsupport for business decision making. Surprisingly,only 13 percent report extensive involvement in adata-based talent strategy.

Exhibit I al.so presents data on how these HRfunctions see their role in the future. It clearlyshows that these HR functions intend to be amajor player in business strategy. Two-thirds ormore report they plan to focus on providing ana-lytics and metrics that are relevant to businessperfonnance and strategy. For example, 66 percent.say that an important future focus for them is topartner with the line in developing business strat-egy. A similar percentage say they want metricsthat provide support for business decisions.Eighty-two percent say they plan to have anintegrated human capital and business strategy.Overall, the HR organizations studied, undoubtedlylike many others in large corporations, are clearlycommitted to becoming strategic business partners.

Presence of HR MeasuresA series of questiitns a.sked whether the orga-

nizations had particular HR measures. Exhibit 2presents the responses to these questions. Itshows a wide variation in the types of metrics.Most organizations have an HRIS system and

HR Operates

Great cxicnl un a 1 (not ai all) lo 3 (great extcni) sc^e.2Imponanl focus on a I (not in piansl m l (imporiani fofus) scale.

t'urri'ntPercentage'

KuturcPercenlage^

JjR Drives Change Management

Analytic Support for Bu.siness Deci.sions

integraled Human C;ipital and Business Stnitegy

HR Develops Business Strategy

DiUii-Based Talent Strategy

23

17

23

23

15

71

65

82

66

68

How HR OperatesThe key elements of how HR organizations

operate with respect to business strategy are pre-sented in Exhibit 1. It shows that a minorityreport they are already very involved in strategicissues. Less than 25 percent of them are veryinvolved in change management, partnering to

have benchmark data available on the operationsside of their HR function. Two-thirds have cost-efficiency data and over half have cost-of-.servicedata; however, the numbers are much lower whenit comes to analytic information and measureswith respect to the business impact of HR poli-cies and HR practices and a dashboard or scorecard for HR activities. Overall, the results suggest

30 HUMAN RESOURCE Pt^NNING

HR Measures Available in Organizations

HRfS

Business Impact

Cost of Services

Cost/Benefit

Dash Board/Scorecard

Cosl Efficiency

Track Outsourced Activities

Impact on Workforce of HR Programs

Benchmark Data

80

34

51

20

37

66

56

56

77

Yes nn a Yes-iir-No Scale.

that efficiency measures are most prevalent;effectiveness measures exist, but are far lessprevalent; and measures of impact are rare.

Effectiveness of HR Metrics andAnalytics

Exhibit 3 presents data on the effectiveness oforganizations in using metrics and analytics toaddress critical business and HR issues. Amongpossible impact areas is a wide range of effective-ness levels. The least effective are assessing newbusiness strategies and possible HR programs.The most effective is identifying high-impacttalent. When we interviewed several surveyrespondents, they said that while they did specifywhich talent might have a high impact on the

business (e.g., leaders, salespeople) they often didnot have a model or metrics to determine whysome talent pools are chosen as high-impact andothers are not.

Exhibit 4 shows the degree to which organiza-tions have the skills and data needed to addressimportant operational and strategic issues.Interestingly, in the case of both skills and data,organizations are much more optimistic that theyhave the skills than that they have tbe data—providing more evidence that HR often lacks thedata necessary to become a business partner. Theinteresting paradox is that the survey respondentswe interviewed often said that the necessary datadid exist, but was not connected to the HR data.They noted that the right logic and analytics for

Effectiveness of HR Metrics and Analytics

HR Practices to Peribrmance

fdenlify High-Impact Tatent

.Assess Possibte HR Programs

Idenlily Poor HR Programs

New Bu.siness Strategies

Evaluating HR Practices

Support Change Efforts

23

44

17

18

17

31

37

FJffclivc (II verv cITcflivt- (in LI I (elTcclivif l to 5 (ven effctlivi^) scnle.

HUMAN RESOURCE PLANNING 31

HR Organization: Skills and Data

Skills: BusincNS Operalions

Data; Business Operations

Skills: Business Strategy

Data: Business Straicgy

76

52

69

4ft

Slightly agree tti sirojigly iijirc'c on u I[srrongly disagree) lo 7 (^([rongly agree) scale.

connecting HR data and business or strategymea.sures are an essential element of success butgenerally did not have them.

Impact of MetricsHxhibit 3 presents data showing the relation-

ship between HR as a strategic partner and thepresence of a variety of metrics. The presence oftwo metrics shows a clear relationship to the roleof HR as strategic partner:

1. Organizations with data that shows the busi-ness impact of HR practices report they aremuch more likely to be a strategic piirtner thanthose organiziitions that do not have such data,

2. Organizations with measures of the effective-ness of HR practices iargeted toward theworkforce show a significant difference incomparison to tho.se who do not. Those organi-zations that can measure the impact and effec-tiveness of their HR practices on the workforce

are more likely to be strategic partners than arethose that cannot.

A number of items in Exhibit 5 show differ-ences in the strategic role of HR in companiesthat have measures and those that do not. but thedifferences do not have statistical significance.For example, the companies that use efficiencymetrics such as benchmarks, cost-of-servicesmeasures, and outsourced services tend to bemore of a strategic partner than those ihat do not.but the differences are not statistically significant.Apparently, strategic partners have HR data thataddress key business issues such us the conditionof the workforce and the business impact of HRpractices and policies. The ability to run aneffective HR organization and having efficiencymeasures for the HR organization, althoughperhaps helpful in making HK a credible strategicpartner, do not make the difference that businessimpact data do, despite the fact that such efficiency

EXHIBIT 5

HR Is Strategic Partner'

HRIS

Business Impact

Cost of Services

Cost Benefit Analyses

Balance Scorecard

Financial FitTiciency

Impact of Workforce

Outsourced Sen'ices

Benchmarks

HaveYes

5,0

5,9

5.4

5.3

5.4

5,1

5.5

5.3

5.1

MeasuresNo

5.0

4.5*

4.6

4.9

4.8

4.8

4.4*

4.6

4.6

Mean: Ba»cd on a I (sirongly disagree) lo 7 (sirongly a&xe) scale; *' P ^ .I).*)

32 HUMAN RESOURCE PtJ^NNING

Relationship to Status as Strategic PartnerCorrelations

HRIS - Accurate

Outsourced Tninsaclioiis

Low-Cosl Services

Customer Service Satisfaction

Management Satisfaction with Vahie-Added

DaUi-Ba.sed Talent Strategy

.Analytic Support lor Business Decisions

Data for Driving Change

.39

-.04

.23

.57*

.75*

.51*

.73*

.74*

- !• 1 .(15

measures are the most prevalent metrics used byHR today.

Exhibit 6 supports the argument that HR orga-nizations tTiust provide strategic analysis in orderto be a strategic partner. It shows the correlationsbetween the degree to which an organization is astrategic partner and the current condition of HRmetrics and analytics. There are a number of sig-nificant relationships in the exhibit. As expected.HR strategic partners have measures related tobusiness decisions. Perhaps the most interestingrelatit)nships aie the ones that are not significant.Specifically, having metrics that relate to out-sourced HR transactions and having a low costof HR services are not related to being a strategicpartner. What are related are items concernedwith the impact of HR on business decisions.

HR as a Strategic PartnerThe results of the study support the model

developed by Lawler and Mohrman (2003b)determining when HR will be a strategic partner.That model hypothesizes that an important con-tributor to a strategic partnership relationship forHR is having the right metrics and data. Theresuhs of the study strongly support that hypothe-sis. HR organizations able to perform strategicanalytics are the ones most likely to be positionedas strategic partners.

The results suggest that not all data are equallypowerful when it comes to making HR a strategicpartner. Having analytic data about strategy is apowerful way to gain a seat at the strategy table.while having data about the operation of the HRfunction is not. Thus it appears that "aH" HR hasto do to become a strategic partner like Finance

and Marketing is to develop better HR metricsand analytics with respect to organizational effec-tiveness and strategy. This of course raises thequestion of what the results indicate about thedegree to which HR currently has the right metrics.

The results suggest that, in the firms studied,there is considerable room for improvement whenit comes to their ability to gather and analyze thetypes of metrics data needed in order for HR tobe a strategic partner. They seem to have goodefficiency data about HR operations so that theyure in a strong position when it comes to improv-ing HR administration and to controlling its cost.But efficiency data about HR operations is not thekind of data that is associated with HR being astrategic partner.

What is needed are measures that itidicatewhether HR programs and practices actuallymake a difference in the organizational effective-ness areas towards which they are directed. Inaddition it is important to measure whether andhow improving talent areas actually affects busi-ness processes, resources, and, ultimately, strategicsuccess. These two elements clearly tire the weak-est in the companies studied. Many of them needto develop better metrics with respect to talent,organizational capabilities, and core competencies.They also need to develop analytic capabilitiesin order to a.ssess the degree to which such HRpractices as talent management have an impacton organizational performance, and the degree towhich organizational capabilities have an impacton organizational pertbrmance.

Because the companies studied do not repre-sent a random sample of all companies, there is agood chance our re.sults do not accurately reflect

HUMAN RESOURCE PLANNING 33

the condition of most companies when it comesto metrics and analytics. Indeed, there is a goodchance that the companies in our sample are wellabove average when it comes to using metricsand anatylics. They are in the sample becausethey were already active or wanted to be activein these areas. Thus, a study covering a randomsample ot companies is likely to find a muchlower average level of activity and effectivenesswith respect to metrics and analytics.

HR in the FutureWill HR develop its metrics and analytics

capability? There are a number of reasons tobelieve it will despite tbe belief HR's currentcapabilities in those areas are low.HR managers clearly want to addresskey -Strategic business issues. Tbeyalso arc awiire that ihcir HR metricsand analytics capabilities fall sbort ofwbat is needed to address most keybusiness decisions and business strat-egy issues. Tbus they meet the firstcondition for change: There is a feltneed.

The growing use of informationtechnology is a clear positive witbrespect to the ability lo change.Because most organizations nowbave an HRIS system, enormous datawarehouses are being created. Havingdata warehouses containing validmeasures of important HR practicesand outcomes creates a great opportu-nity for organizations to answer keybusiness issues with quantitative data.Eigbty-percent of the organizationsresponding to our survey have anenterprise-wide HR information sys-tem that could be linked to businessdata, yei far fewer reported using metrics andanalytics to connect HR investments to businessoutcomes.

ln general, the results are encouraging withrespect to the future ability of these organizationsto relate HR metrics to operational outcomes.Most of these organizations are developing thekind of skills and dala needed to assess effective-ly tbe link between HR policies and practices andorganizational performance; however, it remainsto be seen whether these organizations wil! ulti-mately develop the needed skills and data.

In order for HR metrics to drive change, the

Eighty percent of

the organizations

responding to our

survey have an

enterprise-wide

HR information

system that could

be linked to busi-

ness data, yet far

fewer reported

using metrics and

analytics to con-

nect HR invest-

ments to business

outcomes.

right analyses need to be performed. The wronganalyses can mislead, such as when leadersassume that just because one thing is associatedwilh another (such a.s satisfaction is correlatedwith performance), it means that one thing causesthe other. Many organizations do not have skillsin analysis, research design, and data interpretationwithin the HR function. Even when these skillsexist, they are applied only to specific areas suchas attitude surveys or test validatioti. Where canHR go for sucb skills if not within its own func-tion? Organizational areas that depend on dataanalysis {such as R&D. market analysis, opera-tions management, financial audit) often haveskilled analysts whose expertise can be brought

to bear on tbe data and logic of howpeople and tbeir talents connect lobusiness success. HR organizationscan forge partnerships with theseareas in order to obtain analyticskills. In the long run, analytic skillsneed to reside within the HR orgatii-zation itself, and should become aniiTiportant HR competency.

There is a good possibility that aspart of the overall changes takingplace in the HR function tbere willbe considerably more analytic andmetrics work done and it will belpHR take on a more strategic role incorporations. It may be an overstate-inenl to say that metrics represent akind of boly grail tbat will help HRbecome a true strategic partner. Butii is not an overstatement to suggestIhat a growing focus on metrics andiiiialytics can help HR functionsIx'come more of a player in thegame of corporate business decisionsand strategies.

Biographical SketchesEdward E. iMwler IU is Distinguished Professorof Business and Director of the Center forEffective Orf^anizations in the Marshall School ofBusiness at the University of Southern California.He has been honored as a top contril^utor to thefields oforficinizational development, humanresources management, orf'anizational behavior,and compensation. He has authored over 300articles and 35 hooks, the most recent of whichinclude: Rewarding Excellence (Jossey-Bas.'i,2000). Corporate Boards: New Strategies for

34 HUMAN RESOURCE PLANNING

Adding Value at the Top (Jo.s.sey-Bass. 2001).Organizing for High Pertbrmance (Jo.K.sey-Bass,2001). Treat People Rigbt iJo.s.sey-Ba.ss. 2003).Creating a Strategic Human ResourcesOrganization (Stanford Pre.ss. 2003). and HumanResources Business Process Outsourcing (Jossey-Bass, 2004).

Alec R, Levenson is a research scientist at theCenter for Effective Organizations in theMarshall School of Business at the Universityof Southern California. His research focuses onthe economics ofHR and organization design;metrics, analytics and return on investment: and.strategy. Topics include aligning competency.systems with strategic and bottom-line objectives:measuring and nuLximizJng the economic valueof leadership development, including e.xecutivecoaching: measuring the retum on inve.stmentto globally distributed software development:management for success in times of adversity:and contingent work. Dr. Levenson works toimprove the quality of human capital analyticsand increase the efficacy ofHR programs andpractices with companies such as Booz-Allen &Hamilton, Capital One, Cisco Systems, Frito-Lay,Motorola, Pfizer. PricewaterliouseCoopers. andSun Microsystems. His research has been pub-lished in numerous academic outlets and hasbeen featured in Tbe Wall Street Journal. TheEconomist. CNN, U.S. News and World Report,National Public Radio, Los Angeles Times, andMarketplace.

John W. Boudreau, Ph.D.. is a professor ofmanagement and organization, and researchdirector of the Center for Effective Organizations,at the Marshall School of Business, University ofSouthern California. He is recognized worldwidefor breakthrough re.search on the bridge betweensuperior hutnan capital, talent, and .mstainable

competitive advantage. Dr. Bottdreau consultswith cotnpanies that .seek to maximize theiremployees' effectiveness by qmmtifying the strate-gic bottom-line impact of superior people andhuman capital strategies, including Bristol-MyersSquibb. Capital Oue. Citigtmip, Corning. Dell.GE. Hartford Insurance Group. Mattel.Microsoft. Shell International, the UnitedNations, and Williams-Sonoma. He was a profes-sor at Cornell University for over 20 years, anddirector of Cornell's Center for Advanced HumanResource Studies fnmi 1996 to 2003. A Eellow ofthe National Academy of Human Resource.'*, hehas published more than 50 books and articles,translated into Chinese. Czech, and Spanish.His work has been featured in The Wall StreetJournal. Fortune. Business Week, and HumanResources Management.

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