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How Do We Know With Certainty the Value Our HR Department Provides?

How do we methodically measure the true value of our human resources function? —Method Actor, general manager, human resources, automotive, Lahore, Pakistan

Dear Method Actor:

The first critical step is to determine what executives consider valuable. Don’t assume: Ask them directly. Using a 3-by-5 index card, list an individual metric for measuring value, with one sentence explaining why it’s important. Let your executives select the few measures they want reported to them.

Having done this for more than 20 years, I find the following metrics have the most impact (in descending order of importance):

Workforce productivity: The single, most powerful measure is return on investment. Employee ROI is the total dollar amount spent on labor costs divided by total revenue. The premise is that if you hire, train and place employees effectively, the average revenue per employee will increase as a result. An easier-to-benchmark alternative is revenue per employee (total revenue/the number of employees).

Dollar-impact metrics: HR can show the direct dollar impact of specific actions. For example, measure the revenue increase as a result of reducing “position vacancy days” for revenue-generating jobs. Also assume that actions to reduce turnover among top performers increases revenue by three times their salary. Ask your chief financial officer for approval to calculate the impact of other actions.

Top problem metric: You need a current “hot issue” metric. Ask executives to select the biggest workforce issue and select a metric for it. If it’s recruiting, measure the quality of hire. For retention, measure the turnover rate of top-rated employees. If it’s leadership, survey the executive team on their satisfaction with leadership bench strength.

HR’s impact on manager business results: The relative ranking of HR compared to other overhead functions can be powerful. This survey has managers rank each overhead function, based on its relative contribution to helping them meet their own performance goals.

Manager/employee satisfaction with HR: Managers and employees are important constituencies of HR, so they should be satisfied with HR service, programs and results. A yearly survey should be given to a random sample of both groups.

Know what HR does: You can’t be successful if your constituents don’t clearly understand your role. A yearly survey can determine the percentage that completely understand HR’s role (as many as 80 percent can be unsure).

HR costs: For cost-conscious executives, measure HR costs as a percentage of revenue or as a percentage of general and administrative expenditures.

Individual program effectiveness: You can demonstrate individual HR program effectiveness by year-to-year improvement rates, with before-and-after results and by using a split-sample approach.

My final word of advice: Be careful when trying to build a balanced score card—executives and CFOs place lopsided emphasis on money. A better measure of success is whether an individual reaches the expected percentage of improvement (pre-set by executives) each year. Executives may also expect comparisons to industry averages or direct competitors. Work with the CFO to revise and improve your metrics each year.

SOURCE: John Sullivan, management professor, San Francisco State University, San Francisco

LEARN MORE: Here are five mathematical formulas for figuring out HR’s impact on business results.

The information contained in this article is intended to provide useful information on the topic covered, but should not be construed as legal advice or a legal opinion. Also remember that state laws may differ from the federal law.