THE IMPORTANCE OF MEASUREMENT

By Ali Kursun

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"Sustainable growth" – that is growing, while keeping a lid on costs – has become the new mantra in the post-recession business world. In practical terms it means "doing more with less – another current catchphrase. And to do more with less, organisations must redouble their efforts to engage their employees at a time when they are asking them to work harder, longer and smarter than they ever have before.

But they will know whether they have succeeded in boosting productivity only if they measure the return on investment in their people initiatives. Yet, to date, many organisations have had only the haziest notion of what their key performance indicators (KPIs) are when it comes to their employees – who, after all, are not just their biggest asset, as they are fond of saying, but also their biggest cost.

No wonder, then, that boards, including chief executives, are subjecting HR professionals to closer scrutiny when it comes to understanding which people practices are most effective in driving the required performance.

If HR is to step up to the mark, it needs to adopt the kind of robust measures that have long been at the heart of business management practice. It would be an unprofessional organisation that didn't know its overall return on investment, the amount of annual revenue it generates, the number of people it needs in order to produce a given amount of output, and so on. But HR has remained largely immune to such discipline.

That's all changing. Human Capital Metrics are rapidly becoming an important management tool in HR – in small and medium-sized organisations as well as large ones. Not only is it much easier to measure things these days, but knowing which practices drive the best results provides a powerful boost to competitive advantage too. Also, of course, robust metrics help inform the kind of transparent decision-making and practices around people management that legislation is increasingly demanding. The more transparent an organisation's decision-making, the better managed the organisation is likely to be, and so on. It's a virtuous circle.

There is no shortage of metrics to choose from, but choosing the most appropriate metrics for your organisation is no easy feat. As Elliot Eisner, emeritus professor of Art and Education at Stanford University, says: 'Not everything that matters can be measured, and not everything that can be measured matters'.

Indeed, you could measure just about anything you want. A few of the most common metrics are employee commitment, retention, attraction, promotion rates, "buy" versus "build" ratios, total training costs, career paths, rewards, workforce demographics and so on. The trick is to select those measures that are appropriate and relevant for your organisation at its particular stage of development. Measurement for its own sake is not only a waste of time and money, but it also adds to the very confusion, complexity and opacity that you should be trying to dispel.

In fact, before you even ask yourself what you should be measuring, you should first ask why you should be measuring. What is your objective for measurement? What outcome are you looking for? This initial step helps you determine the nature of the measures you should be looking to select.

Any company that wants to remain competitive in today's business environment has to compete on its own strengths. As such, you need to identify and agree what you want to compete on, and this is likely to be very specific to the context of your own business. Again, it could be one of a whole range of things, from something unique to your business, to a set of human skills, management competencies, production techniques, sales or marketing processes, product attributes, service levels, your market presence or exposure, and so on.

Working out your source of competitive advantage will help you determine the most relevant key indicators for success. You need the right measures – those that are demonstrably connected to your unique workforce and business outcomes. And, as the saying goes, "less is more": select as few measures as possible, or you risk being overwhelmed, distracted and waylaid by the irrelevant. Arriving at the right number of right measures usually comes after an open and deep discussion between business line managers and HR about business issues and how measurement can support better performance with a purposeful set of objectives.

A few well-chosen measures will help you collect highly relevant facts on which you can make sound people-related decisions. But as well as "why" and "what", organisations clearly also need to know "how" best to use metrics to manage human capital as effectively as possible.

Combining different kinds of data – including non-HR data – makes for the most meaningful information on which to make robust decisions designed to improve the productivity of the workforce.

Four main types of data come into play here:

demographic data such as age, gender, number of employees, tenure and turnover
compensation data, including base pay, bonuses, allowances, long-term incentives and benefits
HR practice data, such as training and recruitment costs and the HR function budget; and
corporate financial data, including sales revenue, pre-tax profit and operating costs

External data may be important too. You need to be aware of market conditions and how your competitors are performing in order to provide a context for your own performance.

Good data is the foundation of good analysis, but before you can use the data, you have to get it, and obtaining the right data at the right time, consistently, depends on your organisation's data management capabilities, which is usually based on a thorough understanding of organisational information flows. This can be easier to achieve in smaller organisations than in larger, more complex firms.

If management believes in the power of using data across the organisation, then HR should have good data sources available to it. But a lot comes down to culture: you can have a state-of-the-art technology and information infrastructure, but if you don't have a culture that embraces the value of data, you won't get anything out of it.

The importance of organisational culture in being able to collect and use good data can't be over-estimated. Management has to believe in the value of metrics to support robust people-oriented decision-making, because HR needs to partner with other parts of the organisation, not least finance and line management. On its own, HR won't be able to produce anything more than a few interesting reports or measurement tools. It makes sense to engage finance in the process as early as possible given they have the most experience with metrics.

Getting universal agreement and buy-in to the importance of measurement as a management tool that everyone will benefit from is no easy task – although, again, it's easier in smaller organisations. One of the biggest barriers is the lack of synchronisation among different organisational functions and units – and this is something that needs to be resolved at the outset of any metrics "project". Another sticking point may be lack of capabilities and skills to manage the data – but these can easily be brought in.

But, increasingly, organisations will have no choice, and will have to adapt their cultures to the mounting regulatory requirements for transparent data-driven decision-making. This can be a big shift for many organisations, which have so far resisted the notion of transparency in management practice. If HR embraces the need for metrics to drive fact-based decision-making around critical people management issues in the new era of austerity, it could prove a powerful catalyst for change.

About the author:

Ali Kursun is a principal at Mercer and is the Global Workforce Information and Insights leader for the Information Products and Solutions (IPS) business. Ali can be reached at ali.kursun@mercer.com