This discussion paper tapping on the following:
- How business performance can be evaluated using ‘traditional’ and ‘modern’ indicators.
- How different types of metrics, in particular HR metrics, can be used.
- Examples of how HR contributes to business planning and in a change management agenda e.g. HR as a change agent (modelling and communicating the change, engaging others and providing support).
- An analysis of different examples of sources of business and contextual data e.g. internal information within the organization (HR metrics such as HR costs, responsiveness, issue management, recruitment, productivity etc.)
- Also, industry information e.g. trends in HR, competitive information, government information.
- An explanation of how both sets of information can be used for business and HR Planning.
The Traditional Indicators of Business Performance
The main reason behind each business is to increase profit, decrees costs, and ensure sustainability over time. Financial reports were mainly the best presentation of organization outlook and it’s the situation. Old school businesses relied on the income statements, balance sheet as well as cash flow statement to examine the organization’s versatile, ability to grow, and face challenges in tough times. A bit of development built on during the industrial era leads to measure employee’s productivity and later on customer and staff satisfaction. The balanced scorecard was followed.
The Modern Indicators of Business Performance
Having said that, human resources practice has evolved during the last decade from support and service nature to insight-driven. This paradigm shift allowed HR professionals to have an alignment approach with organizational strategy, thus introducing different ways to manage recourses for better business results. The financial results are still important, however. The people factor has become much important and would affect bottom-line results! “Human Capital terminology is the best presentation of this shift”. Employee engagement is the trending way to evaluate the business performance, as far as the staff is engaged, they become more attached to the organization and its mission, happier, operate in a healthier environment, and deliver improved business results. A higher engagement rate is an indicator to how less likely the brand and reputation will be at risk. Moreover, staff will promote the organization among their social network, which may lead to “employer of choice” (CIPD employee engagement factsheet)
Another way to look at business performance is the Employee Value Proposition “EVP”. When employees feel valued by the organization and consider themselves part of the brand, they become more committed, performing at their utmost and are less likely to leave. EVP is the core element of today’s business style, it doesn’t only support and drive business strategy forward, but it also drives engagement and gives recruitment a clear message of the attributes of people to be attracted.
Using different types of Metrics
While shareholders keep their eyes open on bottom-line numbers as well as the expenses, HR professionals nowadays contribute to the organization’s success and provide sound useful metrics to both measure business efficiency and effectiveness. However, before HR produces the numbers and measures their effects, they need to be heavily involved in the business in order to pinpoint issues or problems. Accordingly, they can be creative and put figures and graphs together to report to Executive Management with recommendations. Some of the wide use metrics are the followings:
Revenue per labor costs: Revenue ÷ Total Full-Time Employees Cost. When an organization focuses on revenue per FTE, line managers are motivated by HR professionals to use other leeways like “overtime” to meet the “project” deadline rather than increases the number of FTEs.
Cost per Hire: (External Cost + Internal Cost) ÷ Number of Hires. The external cost includes all recruiting costs (3rd party agency fees, advertising, job fair and travel cost). The internal cost includes the salary and benefit of the recruiting team plus other expenses. The number of hires includes both temporary and full-time employees for a given time period. This metric measures the new replacement cost of hiring and used to examine changes in recruitment and retention policies.
Absence Rate: [(Number of days absent in the month) ÷ (Average number of employees during the month) X (Number of workdays)] X 100. This metric measures the absenteeism rate and can be monitored on a monthly bases among organization divisions. This metric would indicate if the organization has a serious absenteeism problem, and track later on the effectiveness of policy changing accompanied by productivity rates or along with another metric i.e.: revenue per labor cost. There are many more metrics but the common reality is that good HR practice can always have a significant effect on the organization’s financial performance across industries.
HR’s Contribution to Business Planning
As we mentioned earlier, HR professionals should be aware and highly alerted of external, as well as the internal, factors that may affect the organization. Thinking of the PESTEL module (CIPD factsheet, PESTLE analysis), a downturn economy may cause a loose labor market and visa versa. Laws and government regulations have a big impact on the business either negatively or positively. SWOT analysis can provide different kinds of information and flag internal and external strengths and weaknesses (CIPD Factsheet, SWOT analysis). New competitor entrances in the market should be a threat to consider; losing talented experienced staff to competitors is a risk that shouldn’t be denied. To overcome those challenges, HR needs to be involved in the first place in the business-planning phase to understand the business objectives and take proactive steps to eliminate obstacles. Furthermore, HR can provide solutions if involved, due to the ample amount of information they have. One of HR’s main responsibilities is to assure the readiness of human capital at the right time and in the right position to achieve target; accordingly, HR can align organizational strategies with the business.
On another hand, HR can contribute to business planning when introducing new programs or initiatives e.g.: Employee performance management System by applying change management methods. Kurt Lwine’s theory is a successful change management module “Unfreeze – Change – Refreeze” (Useful article explaining Lewin’s change theory). The 3 phases illustrated below take us through how HR contributes to business proactively and participating in strategies that help the organization:
Unfreeze: Get people to accept that change will occur i.e.: employee performance management system “EPMS” program is going to be implemented. HR should reduce factors that work against change. Accordingly, breakdown the existing status quo.
Change: HR now shall get people to understand the “EPMS” and alter their behavior; however, people take time to embrace change.
Refreeze: Once the “EPMS” program is carried out, reinforce and maintain. “EPMS” is used all the time and incorporated in everyday business. Having said that, HR is a major player in the organization and can always be part of the success story.
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