HR in an Organization Part- 3: HR and ROI

Introduction

Human Resources is a key enabling function for any organization. You may call it a support function or even a cost center. This means, that the function is not directly contributing towards the revenue or profit for the organization but surely adds to the overall running cost. Obviously, no organization will be foolish to incur a cost without any returns coming from it. Most of the times, HR in an organization is not valued as they are termed as very subjective function without any objective measure. Hence, HR needs to create a system where some of the key HR functions are able to show value addition to the entire organization. The return may be tangible or intangible but a definite measure will surely make the case stronger for HR to partner strategically with the business and demonstrate their value and interventions.  

Scorecard approach

Scorecard is best way to show the progress over a period of time if the parameters are correctly captured and measured. The scorecard for HR shall be strategically aligned to business strategy. This means, that HR shall be supporting the vision an organization has chartered for itself for the given period. However, we often make a mistake of not aligning the two. The non congruence of business and HR scorecard causes friction between the two functions and thus the required benefit of the scorecard implementation is not reaped.

Any HR scorecard at the time of development shall consider four major areas of impact

Financial impact: At the end of the day, any function shall be able to give a considerable value to the organization, either in terms of revenue or in terms of savings and it is going to be no different for HR. some of the measures can be

• Revenue per employee which also reflects the correct skill identified for the job and hired
• Cost or percentage cost of employees underutilized 
• Employee cost for pipeline projects

Value for customer: the HR processes shall be able to deliver value to internal as well as external customers. The HR interventions can mean some direct output for external customers if they see

• The organization has thought leaders who are respected in the competitive space 
• People engaged in their project are competent and skilled
• They see their job going as per schedule and skillfully done

Development of people and retention: The scorecard shall measure the association people are having with the organization. The association determines the productivity at the work. Frequent turnover of teams or disengaged employee always causes loss of productivity. Some of the measures can be 

• Intellectual property
• Proportion of people progressed internally
• Number of upward movement an employee sees during his tenure
• Average growth rate of an employee
• Tenure in organization

Efficiency of internal processes: The internal processes shall always improve and facilitate the desirable outcome. From a process standpoint, it can be considered effective if there is 

• Quality assurance at every process
•  The process is helping in reducing the number of transactions
• Reduction in turnaround time
• Compliance

Approach towards Scorecard: DMAIC and Pareto

While coming to scorecard and it’s implementation, it is important to have a systematic quality approach. DMAIC and Pareto principle put together can help in creating one scorecard for the organization. There could be N variables while we are creating the problem equation from an HR standpoint. We cannot approach all the problems simultaneously. Without understanding the impact, reasons and the measure of the problem area, any approach will be similar to shooting in the dark. To have a proper solution, we need to go for the most systematic process. Pareto principle gives us the most impactful problem area(s) and DMAIC gives a definite measure and steps to improve.

The first step is to make a complete laundry list of problem areas in purview of HR with their respective reasons and impacts. Problem can be in areas of talent acquisition, talent development, talent engagement or the process part. Within every area, there can be different sub areas to improve. For instance, talent acquisition may have problems in sourcing effectiveness, sourcing channel, turnaround time or candidate experience. Similarly, the talent development can have problems areas as identification of competency at each level, required training skills in organization, succession planning etc. Hence it is important to make complete list of areas that can be worked upon.

Define: Out of the laundry list, it is important to segregate the problem areas which are impactful. Not every step of process can be worked upon simultaneously as it may be biting more than that can be chewed. For instance, in talent management area, attrition, employee satisfaction, development of people and succession planning can be areas to consider. They all may be related but the source could be one or two. Defining of the problem statement accurately will help in bringing the correct focus while targeting the areas.

Measure: Performance measure for the parameter needs to be defined correctly to ensure the right tracking of data. The defining of measure also ensures consistency of measure over a period of time. For instance, an organization may select to target attrition and define it as voluntary attrition over an employee base. The other definition can be overall attrition over employee base. Both the definitions are accurate and organization can adapt one as per the need but they need to be consistent over a considerable period to track the changes.

Analyze: After defining the problem and how/ what to measure, it is important for HR to do industry benchmarking of the parameter and set the standard for itself. Setting the standard for self can be dependent on lot of other areas apart from industry benchmark. An organization having compensation bracket much higher to others in the market would like to see a better standard than industry benchmark for attrition. The organization is incurring extra salary cost and hence would like to see greater returns compared to peer organizations. Apart from setting up the performance goals, this step shall also identify sources of variation.

Improve: After identification of parameter, process, standard and measure, the job ahead of HR is to improve the score by taking certain measures around people and process practices. The intervention has to be definite, time bound and target driven. A vague improvement plan without target and timeline may not give us the required result. Accurate design of operating limits and interdependency of variables shall be considered while making any improvement plans.

Control: No race is won till finish line is crossed. A good start if not sustained, will never give organization the desired result. Most of the HR initiatives die as they are unable to give long term sustenance to their ideas.  HR shall do any course correction if required to ensure that defined end results and timeline remain unaltered.

Some of the metrics for different function can be as below,

Talent Acquisition

It is important for talent acquisition to show the return of their initiatives and team structure. Recruitment system, use of placement consultants or any other sourcing channel and resources are cost for recruitment. Some of the desirable outputs for recruitment to showcase can be 

• Turnaround time
• Cost per hire over a period of time
• Breakeven period for capital investments

Talent Management

Any step taken by talent management team can mean huge financial impact depending on the population of the business unit. Fairness and differentiation needs to be carefully balanced for the desired output which is engaged and efficient workforce.Some of the measures for talent management team can be 

• Attrition- critical and otherwise
• ESAT
• Average tenure
• Performance data
• Percentage of open position closed through internal movements (horizontal as well as vertical)

Leadership and Development

Leadership and development is important function of HR and is responsible for development and capability of employees in the organization. This function is not in visible action on a daily basis and hence for this function it might be difficult to prove it's worth. A permanent capability building team as well as external trainers, both are sizable cost. To give a proper return, the function can measure some of the below parameters

• People out of eligible population being promoted to next level
• People having concerns about training
• Number of vacancies at senior leadership filled internally

Compensation and Benefits

This team has lot of competitive benchmarking to do. The team while defining the compensation plan has to ensure that company gets the benefit of incurred cost. The success measure can be

• Attrition due to compensation and to competition
• Mix of long term and short term incentive
• Differentiating package or component introduced

Shared Services

Shared services have lot of supporting roles to all the other functions of HR. Any lapse from their end can impact the effectiveness of other areas and overall cost for the organization. 

• Lapse in background verification
• Lapse in salary processing like PF, gratuity, ESIC etc.

Sample Scorecard

Function	Parameter	Description	Industry standard	Target	Actual achieved	Score out of 10	Weightage %	Weighted Score	Trend / Change from last period
Talent Acquisition	Turn around time	Average time to close a position	45 days	30 days	39	7	10%	0.7	Up
Talent Acquisition	Cost per hire	Total expenses/ number of hires	INR 3000	INR 3000	INR 2000	10	15%	1.5	Up
Talent Acquisition	Percentage sourcing through referral	Profiles hred through internal reference/ Total no. of hires	40%	40%	33%	10	8%	0.8	Up
Talent Management	Infant attrition	No. of people leaving in first 90 days/ total no. of hires during the period	<5%	5%	9%	6	8%	0.48	Down
Talent Management	Critical Attrition	No. of people with ratings 1/ No. of employees in rating 1	<5%	<5%	7%	7	15%	1.05	Down
Talent Management	ESAT	Score as per survey	4	4.2	4	9	8%	0.72	Up
Leadership and development	Leadership position filled internally	Positions filled internally above a certain level	NA	4 No	2	5	10%	0.5	Down
Leadership and development	Number of training mandays per employee	No. of people attending the no. of days of training/ total no. of employees	4	6	3	5	10%	0.5	Up
Shared services	Payrolling	Errors in payroll	0	0	1	8	10%	0.8	Same
Shared services	Non compliance	Adherence to required norms	0 Non compliance	0	1	7	6%	0.42	Same
							100%	7.47

Problems vary with organization lifecycle

We cannot use same scorecard for every organization. As an organization grows and the competitive space changes for the organization, the parameters and measure of the scorecard has to change accordingly. A young organization may focus more on parameters like talent acquisition while a matured organization’s focus area can be development of individuals and creation of brand value for the organization. Change of competitive space can also lead to change in approach. A sudden spring up of competitors may force organization to have attrition as focus area. In an industry which highly research oriented, creation of intellectual property can be critical component of scorecard. The scorecard needs constant customization as the situation for organization changes, both internally and externally.

Conclusion

We need to understand that not every problem can be solved. We need to prioritize the problem areas and act. Some of the problems may be miniscule in impact but will require a lot of effort to bring in the required change. Hence, it is important to prioritize not only in terms of impact but also to segregate the low hanging fruits from far-fetched dreams. Hence scorecard should be impactful and precise instead of laundry list. Most of the times organizations make the mistake of putting lot of action items in the scorecard and thus as a result, the impact attached to any parameter has to be reduced to accommodate more line items. If the number of factors remain finite, realistic and impactful, due impact number can be accordingly attached.