Measurement of HR performance and alignment with corporate strategy

1
Measurement of HR performance and alignment with
corporate strategy
National College of IrelandApril 2006Kevin
EmpeyWatson Wyatt
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Proposed Agenda

• Background Challenges
• What should HR be measuring
• How do we measure HR contribution
• Discussion

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The books have been written...
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The management tools exist
ABC, MBO, TQM, JIT, OVA, SVA, CPR, SPC, Kanban,
Reengineering, Mass Customization, System
Dynamics, Workout, Concurrent Engineering,
Zero-Based Budgets, PIMS Analysis, Quality
Circles, DCF, Portfolio Analysis, Experience
Curves, Mission Statements, Cycle Time
Reduction, Pay for Performance, Customer
Surveys, Visioning, Core Competencies, Baldrige
Award, Micro-Marketing, MRPI MRPII, Technology
S-Curves, Delphi Technique, Gap Analysis, ISO
9000, 7-Ss, 6-Sigma, 5-Forces, 4-Ps, 3-Cs, 2x2
Matrices, 1-Minute Managing, 0-Defects,
Empowerment, Strategy Alliances, Service
Guarantees, Self-Directed Teams, Strategic
Planning, SWOT, KSFs, Benchmarking, Life
Cycle Analysis, Excellence, Scenario Planning,
SPIRE, Kaizen, Learning organizations,
Environmental Scanning, Metagame Analysis,
Horizontal Organizations, Value Chain Analysis,
Nominal Group Technique,
Conjoint, Competitor Profiling,
Customer Retention, Groupware,
Psychographics, Loyalty Management
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How are we doing ? - Perceived HR Effect on
Business Outcomes
How much effect do you believe human capital has
on each of the following business outcomes?
SourceHuman Capital Management The CFO's
Perspective, CFO Research Services February 2003
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Leadership Viewpoint on Human Capital Investments?
How does your company's leadership tend to view
human capital investments?
SourceHuman Capital Management The CFO's
Perspective, CFO Research Services February 2003
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What organisations say they are measuring and how
Formal estimation
Subjective estimate
Do not determine
A survey of 968 firms All figures represent
percentages
13.1
43.1
43.7
Turnover costs
13.0
48.8
38.2
Employee replacement costs
6.0
26.6
67.4
Economic value of employees to the organisation
13.5
38.2
48.3
Costs of various employee behaviours (e.g.
absenteeism, smoking etc)
3.5
17.1
79.4
Economic benefits of developing a superior
selection test
6.3
46.5
47.2
Economic benefits of various training levels
7.3
35.4
57.3
Economic benefits of additional recruiting
2.8
42.3
54.9
Economic benefits of increasing job satisfaction,
organisational commitment
6.1
39.7
54.2
Economic benefits of high/medium/low performance
on a particular job
Source The HR Scorecard - Linking People,
Strategy and Performance, Becker, Huselid, Ulrich
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Effectiveness of HR Measurement Approaches

• Reasons why organisations do not currently use
  measurement approaches
• Lack of time/resources (52)
• Not seen as a priority for the business (41)
• Lack of clarity as to what the benefits for the
  business would be (37)
• Lack of clarity as to what exactly should be
  measured (31)

SourceMeasuring Human Capital Value 2002 survey
Personnel Today/Deloitte Touche September 2002
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Client X human capital values
The human capital value calculated was
approximately 1.2B - at the time the data was
taken, the value of Client X was 4.4B.
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Why some organisations do not use measurement
approaches

• Lack of time/resources (52)
• Not seen as a priority for the business (41)
• Lack of clarity as to what the benefits for the
  business would be (37)
• Lack of clarity as to what exactly should be
  measured (31)

SourceMeasuring Human Capital Value 2002 survey
Personnel Today September 2002
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Revenue
Net Investment Income
Expense
Financial Assets
Cash/other
Investment Portfolio
Financial Assets
LT/ST investments
Revenue
Operating profit
CFROC
Costs
Economic Spread
Operating assets
Economic Profit
WACC
Operating Assets
Physical Assets
Shareholder Value
Tangible Assets
Customer base
Customer Capital
Brand Equity - Advertising Spend
Customer service/quality/ capability
Distribution channels
Market position
Employer brand
Human Capital
Technical expertise
Training Development
Intangible Assets
Performance-Rewards
Intellectual property based e.g.
patents/trademarks, brands
Organisational (hard) Capital
Contract based e.g. Contracts. Agreements
in-force, Rights
Technology (innovation) based e.g. Secret
formulas, software, databases, IS, RD
Organisational (soft) Capital
Corporate based e.g. Management, reputation,
culture, governance
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What is intangible value for you ?
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The Watson Wyatt Human Capital Index
Making the link between HR effectiveness
business performance
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The HCI Methodology
Employee Retention
Revenue Growth
External Service Value
Customer Satisfaction
Customer Loyalty
Human Capital Practices
Employee Satisfaction
Employee Productivity
Profitability
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Overall HCI database

• Our database now includes over 1,600 participants
• European Database
• over 600 responses from 21 countries
• 55 Global, 12 European multi-national 33
  European domestic
• North American Database
• over 500 companies
• 61 companies 10,000 employees and 5 billion in
  sales
• 34 companies 50,000 employees
• Asia Pacific Database
• over 500 responses from 12 countries

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High HCI companies deliver better returns...
Return on equity over two year periods
80
70
60
50
40
30
20
10
0
-10
Low (0 to 25)
Medium (26 to 75)
High (76 to 100)
Company 2000 HCI scores
2 years to June 2000
2 years since June 2000
and HCI can be a leading indicator of financial
performance
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European HCI Results
Overall HCI (89.6 value added)
21.5
21.0
14.6
14.5
11.0
Clear Rewards and Accountability
HR Function Effectiveness
Recruiting and Retention Excellence
Prudent Use of Resources
7.0
Collegial, Flexible Workplace
Communications Integrity
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HR function effectiveness
HR function
effectiveness
21.0
Cost
Focused use of HR
Business
effectiveness
service technologies
alignment
4.2
7.2
9.6
HR function
Strategic
Improving
cost control
service/accuracy
business focus
HR function
Business cost
Reducing
cost
risk management
ROI
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HR function effectiveness
HR function cost control
Strategic business focus
Business cost and risk management
Technology to improve service
HR function ROI
Technology to reduce cost
Technology to improve accuracy
0
1
2
3
4
5
6
7
8
9
Change in market value associated with an
immediate one standard deviation increase in the
practice
20
Clear rewards and accountability
Clear rewards
and accountability
21.5
Effective total
reward design
5.8
Competitive, co-ordinated
Creating an ownership
Aligned performance
membership rewards
interest
management
7.2
3.1
5.4
Wider stock
Focused group
Pay and benefits
ownership
incentives
Increased stock
Effective performance
ownership 'stake'
management
Wider stock
Focused individual
option coverage
incentives
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Clear rewards and accountability
Effective total reward design
Co-ordinated, flexible pay and benefits
Focused group incentives
Effective performance management
Wider stock ownership
Focused individual incentives
Increased stock ownership 'stake'
Attractive pension plans
Wider stock option coverage
Other attractive benefits
Competitive base pay
0
1
2
3
4
5
6
Change in market value associated with an
immediate one standard deviation increase in the
practice
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Real Example - Total HCI Score of 46

• HR function effectiveness
• Clear rewards accountability
• Recruiting retaining excellence
• Collegial and flexible workplace
• Communications integrity
• Prudent use of resources

Based on scale of 1-100 where 50 is the survey
average and 100 is the best in the survey
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HR function effectiveness
Sub dimensions
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Clear rewards accountability
Sub dimensions
25
Recruiting retaining excellence
Sub dimensions
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Applications of the HCI

• Providing a baseline benchmark for HR
  activities/effectiveness
• Assessing the degree of consensus throughout the
  business on HR practices and priorities
• Assisting in the establishing of business cases
  for HR intervention/investment
• Alignment of HR strategy and construction of HR
  scorecard measurement
• Identifying HR priorities and focus of resource
• Follow-on assessment and value of individual HR
  activity and redesign where required

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Aligning Business HR Performance
Establishing what to measure for you
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What is intangible value for your business and
your customers?
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The Link Between HR activities, Value Drivers and
Business Objectives Example
Value Drivers
HR Activities
Key Intermediate Measures
Key Performance Measures
Effectively manage people and conduct efficient
work force planning to keep plants running at
high capacity
High Plant Utilisation
Cost of Sales
Manufacturing Costs
EBITDA Margin
Gross Profit
Train employees in quality control to improve
efficiency and reduce manufacturing costs
Operational Efficiency
Cost of Sales
Distribution
Gross
Conduct intercultural training with managers to
ensure success in expanding networks in different
cultures
Profit
Size of Network
Working
Capital
RNOI
Inventories
NOI
EBITDA
Gross
Revenues
Profit
Brand Recognition
Hire marketing specialists with the skills to
develop effective brand strategies
Operating
Marketing
Expenses
Expenses
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Business is Changing - Every Change in Business
Direction Requires a People Response for it to be
Successful

• External Environment
• Pressure on competitiveness, costs and
  productivity
• Financial Environment
• Customer / Investor concerns
• Technology

• People Organisation Imperatives (example)
• Clear lines of accountability and clarity around
  role definition.
• Focus on cost including revised criteria for
  remuneration recognition
• New focus on performance management to create a
  'results driven' service
• Relevant training development objectives,
  including developing managerial skills
• HR planning directly relating to the current and
  future service provision
• Revised recruitment selection criteria

• Company Specific Strategies
• New Products / Services
• Increased Competition
• Industry consolidation,
• rationalisation, MA etc.
• Consumer and regulatory
• demands

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Localising The HR value trail
Contribute to value
VALUE
Maximise the human capital
Minimise HR costs
Improve service levels
Provide customised and llow-cost services
DEMONSTRATED IMPROVEMENT
Provide quick and detailed information
Improve Technical and Managerial skills
Provide Mgrs with all Key KPIs
Develop alternative delivery services (ERM)
Assess and monitor Key People
Review the Corporate-Line relationship
Create development paths
ACTIONS
Develop Management and KM Information Systems
Create a Performance Management system
HR STRATEGIES
Improve HR Management Effectiveness
Manage Talent
Create strategic skills
Create a performance-oriented culture
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HR Metrics Hierarchy
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HR/HC Scorecard Design
Financial Value

• TSR/Market value per employee
• Economic profit per employee

HR Process Effectiveness
Customer
HR/HC Strategy Objectives

• Leadership index
• Recruitment
• effectiveness
• PM effectiveness
• Reward Effectiveness

• Employee service index
• Management service index
• External Customer Alignment

12 0 -10
Up no mvmt Down
4.5 -2k pe - 10
12 yoy 5 yoy decline
HC Management

• Staff engagement
• index
• Staff Turnover
• Staff competency index
• Absenteeism

14.3 -8.0 -3.3 5
improving improving declining increasing
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Working out how to measure
Comprehensive measurement of people management
value process
Employee engagement
Business KPIs
Shareholder value
People management Processes
HR Metrics
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HR Effectiveness Measurement - Evaluation
Model for the HSE
Case Study
Adapted from Phillips, J (2003)
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2. Develop Evaluation Plans and Baseline Data -
Levels of evaluation
Case Study
Business Evaluation Questions
What are the levels of employee engagement? How
has the initiative impacted patient care ? How
has the initiative impacted operational metrics
? Did the monetary value of the results exceed
the cost of the programme?
Behavioural Evaluation Questions
What behaviour has changed as a result of the
initiative and by how much? How do participants
view the behaviour change? How do others view it?
How sustainable are new skills? What are the
common themes identifiable across the group?
Operational Evaluation Questions
Did the participants find the course useful? Was
it a logistical success? Are there improvements
to make to the initiative?
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3. Collect Data On Initiative Implementation
Case Study
Business Evaluation Tools
Financial Data Turnover Absence Statistics
Patient Satisfaction Data Health Outcomes
Behavioural Evaluation Tools
360-degree evaluation Employee Survey Data
Manager feedback
Operational Evaluation Tools
Evaluation Forms Informal Feedback from
participants and from trainers/ initiative leads
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Some Practical Applications

• Recruitment Effectiveness Index
• Measuring Engagement
• Leadership Index
• Total Rewards Measurement
• Communications

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Case Study
Example metrics Recruitment
REI
Quality of recruits to meet business need
Cost per recruit Time to fill (adjusted by level)
Number/source of recruits Number of vacancies as
percentage of team
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Recruitment Effectiveness Index
Case Study

• Time Target weeks to hire is 1 week per 5k
  comp, eg 1 month for 20k and 3 months for 65k
• Cost Variable costs allocated to allow for
  recruitment approach (eg share of advertising
  costs, agency fee, colleague referral bonus,
  possibly recruiting staff time allocation for eg
  interviewing). Target for variable spend is 30
  of comp. Fixed costs (ie recruiting staff costs
  less any allocated to variable, office space,
  etc) are treated as overhead, with cost
  controlled accordingly
• Quality Based on a 1-5 scale, line managers
  quality assessment of the hire - can be based on
  normal performance assessment or specific rating
  for this purpose. Target is 3.5 out of 5 (ie
  satisfactory to good rating)
• REI The overall score is the weighted average
  of the individual scores. If variable cost, time
  to hire, and quality measures are all in line
  with targets, recruiting effectiveness is 100
  for individuals.

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REI output
Case Study
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Why Study Employee Attitudes Engagement ?
Our Global Research shows that Commitment, and
Line of Sight have a very real impact on the
bottom line
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Employee clusters andcorrelation with business
performance
Three year Total Return to Shareholders from
companies that come into each group
Top 25
27.6
14.1
n/a
Alignment Index
Middle 50
15.8
21.0
14.6
n/a - insufficient companies are in each of these
categories to draw firm conclusions - evidence
suggests negative TRS
Bottom 25 of companies
6.7
2.4
n/a
Middle 50
Top 25 of companies
Bottom 25
Commitment Index
Source Watson Wyatt's WorkUSA 2002 database
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Commitment Alignment Indices- Organisation
Overall
Case Study
Need convincing
5
79.6 Value Creators
High
4.2
13.4 Fence Sitters
Alignment Index
3
Lost sheep
0.7
Low
1
Low
High
1
3
5
Commitment Index
45
Case Study
Engagement vs CuSat
CuSat
Employee Engagement Index
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Engagement as lead indicator of contribution
growth
Case Study
BU profit growth 2004 to 2005
BU engagement level 2004
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Key drivers of commitment
Case Study
56 of the variation in the Commitment Index is
explained by two of the key commitment drivers
Negative
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Linking HR Business Performance- The
opportunity and future for HR ?

• Unscramble the link between HR and Business
  performance. Need to raise our business
  knowledge to establish what are the most
  important people drivers
• Articulate the needs of the external customer
  from and organisational people perspective
• Demonstrate why organisational capability is
  critical to the business
• Demonstrate the business case for HR
  interventions.
• Engage with the business to agree on what is
  important and a basis for measurement. Focus on
  outcomes not just metrics