Linking people to Profits:HR Metrics that Drive Strategic Decision Making

Bonalyn Nelsen, Ph.DGlobal Crossings Workforce Solutions

Programs of Human Resource Development & Service Leadership

Rochester Institute of Technologybjnism@rit.edu

The Problem of Performance Measurement

“What gets measured gets managed.”Peter Drucker, author and management guru

“What gets measured gets done.”Paul R. Niven, author and consutant

The Problem: Firms in today’s fast-paced, change-filled global economy MUST measure their performance in achieving goals. Yet many are dissatisfied with their performance measurement systems, and less than 10 percent* execute their strategies successfully. Why?

Problem is rooted in an over-reliance on lagging, financial measures of performance.

While financial metrics are useful, they are ill-suited for measuring the attitudes, behaviors, and processes that drive strategic implementation and workforce success in today’s economy.

Source: Niven, P.R. (2006) Balanced Scorecard Step-By-Step (2nd Ed.), Hoboken, NJ: John Wiley & sons, Inc.

Pros & Cons of Financial Performance Measurement

Advantages: Provide historically accurate measurements of overall firm

performance. Provide an excellent view of past performance and events in the

organization. Definitions and use are understood and widely shared by firms

worldwide.Disadvantages:

Not consistent with today’s business reality--Do not focus on intangible, value-creating activities that create competitive advantage and economic success in today’s economy.

Financial performance measures have no predictive power— “Driving by rearview mirror” overlooks developing opportunities, threats, problems, promising discoveries and inventions.

Are not relevant to or understood by all levels of the organization. Promotes short-term rather than long-term thinking and investment.

The Solution: Strategy Maps & Balanced ScorecardsStrategy maps and Balanced Scorecards* provide a method of

balancing (1) the accuracy and integrity of financial measures with (2) the drivers of future financial performance of the organization.

Today’s Program: HR’s contribution to strategy maps and Balanced Scorecards—

proactive performance measurement tools for decision making and resource allocation.

Key areas in which HR contributes to strategic decision making. Developing a balanced mix of leading and lagging indicators. Characteristics of good and not-so-good performance

measurements. Getting started in your organization.

Source: Kaplan, R.S. and Norton, D.P. (1996) The Balanced Scorecard, Boston: Harvard Business School Press.

A New Approach to Performance Measurement:The Balanced Scorecard The Balanced Scorecard is a carefully selected set of quantifiable

performance measures derived from an organization’s strategy. Groups performance measures and reports by four perspectives: financial, customer, key internal processes, and employees.

The four perspectives offer a balance between short- and long-term perspectives, between desired outcomes and performance drivers of those outcomes, between financial and intangible assets, and leading and

lagging indicators.

Image Source: Balanced Scorecard Review,Retrieved on January 7, 2011 from http://www.balancedscorecardreview.com

Sample Balanced ScorecardHuman resources works with line management to develop performance measures on employee learning and growth and, to a lesser extent, internal process and customer metrics.

The actual measures developed will vary by company because each employs different competitive strategies, value propositions, and core competencies.

Customer Management Global Citizen

Operational Excellence

Product Innovation

Revenue Growth Improve revenues by understanding customer

needs and differentiating ourselves.

ProductivityMaximize asset utilization and integrate the

business to reduce total delivered cost.

Shareholder Value $22.79 billion Market Cap2,000 Share Appreciation

Profitability$391.8 million (2003)20% Growth (2003)

Revenue Growth $5.29 billion (2003) (30% growth)

Customer ExpansionMarket penetration

New Channels (Grocery, etc.)

Extend Brand New Product DevelopPartnerships/Alliances

SCM/Distr.Test 200 million lbs.Agronomy Center

Retail Workforce

Talent Acquisition 250+ per day

Internal vs. External

Store Develop8900 to 30,000 stores

1,500 new stores (2005)

Fill Orders < 3 minutes

Accuracy (99.4%)

Reduce Admin Expenses GA as a % of sales & income

Improve Productivity Sales per employee, etc.

Roast/Blend Scalability

Roasting curves

Store Operations Resource utilization

% automation (36 sec.)

CSR/Env./Reg. Percent fair trade

Community building

PR

OC

ES

SC

US

TF

INA

NC

IAL

THEMES:• Build the franchise (new)• Increase customer value (now)

THEMES:• Improve cost structure• Improve asset utilization

Satisfaction/LoyaltySame store sales (13% increase)

Repeat business (15% 2/day)

Development$70+ million

Emersion (40 hrs)

Engagement82% Satis. SurveySuggestion System

Retention Managers (20%) Partners (80%)

6.1%

5.9%

5.3%

5.9%

5.7%

5.1%

5%

5%

5%

5%

5%

6%

6%

6%

6%

1997 1998 1999 2000 2001 2002

63.4%66.8%

57.1%

70.7%

53.7%

52.3%

0%

10%

20%

30%

40%

50%

60%

70%

80%

1997 1998 1999 2000 2001 2002

G&A as % of Sales G&A as % of Operating Income

The Employee Learning and Growth Perspective: What is it?

The employee learning and growth perspective measures an organization’s ability to innovate, improve, and learn in ways that drive performance and achieve strategic goals.

Objectives and measures in this perspective are the enablers of the other three perspectives—the foundation on which the Balanced Scorecard is built!

Consists of three types of assets and/or core competencies:1. Human Capital: The skills, knowledge and abilities possessed by

employees, particularly those employees in Key Talent Pools (KTPs).2. Informational Capital: Access to information via information

systems, the quality of information in information systems, social networks and relationships inside and outside the organization.

3. Organizational Capital: The work environment required to maintain competitive success—culture, work climate, employee engagement, tolerance of risk taking, open communication, employee empowerment, etc.

Identifying Key Talent Pools

From a strategic standpoint, all jobs are not created equal— some are more important than others. Employees in jobs or positions that play a critical role in executing your organization’s strategy are key talent pools. KPTs are in those jobs that (1) create the most value for customers and (2) contribute most to product/service differentiation.

CUSTOMER VALUELow High

UN

IQU

EN

ES

S L

ow

H

igh

A

BC

D

Sample Human capital Worksheet for RIT

Strategic positions contribute most to university performance and competitiveness.Support positions perform work that supports those in strategic positions.Non-strategic positions can be outsourced (or not). BC

D ALow VALUE

high

Low

U

NIQ

UE

hig

h

Collaborative/Support

Collaborative/Support

Strategic

IR

AcademicPrograms

Engage

-ment

Busines

s Partners

Re-searchEnr

ollment

Endowment

Dining

HR

GroundsNon-strategic

Leading and Lagging Indicators Ideally, your metrics on human, informational, and organizational

capital will include both leading and lagging indicators (preferably leading).

LAG LEADDEFINITION • Measures focusing on

results at the end of a time period.•Normally describes historical performance.

• Measures that “drive” or lead to the performance of lag measures.• normally measures intermediate processes and activities.

ADVANTAGES • Easy to identify and capture.

• Predictive in nature, and allows the firm to make adjustments based on results.

EXAMPLES •Employee satisfaction• Training hours/employee•Cost per hire

• Performance on cultural audit.•Results of stay interviews among KTPs.

ISSUES Historical, lacks predictive power.

May be difficult to formulate, unique to firm.The Balanced Scorecard should contain a mix of lag and lead measures

of performance.

Sample Employee Learning and Growth Measures Employee participation in professional or trade

associations (especially in strategic jobs) Training investment per customer Percentage of employees with advanced degrees Number of cross-trained employees Average years of service Absenteeism (especially in strategic jobs) Turnover rate (especially in strategic jobs) Employee suggestions Employee satisfaction (especially in strategic

jobs) Motivation/engagement index Value added per employee Quality of hire metrics (especially in strategic

jobs) Empowerment index (# of managers, policy,

etc.) Diversity rates Number of outstanding applicants for

employment. Number of new employees hired from rival firms Index of alignment of personal employee goals

with strategic goals Grievances, # of lost work-time accidents

Strategic job coverage Strategic job “bench strength” Turnover in strategic jobs Skill gaps in strategic jobs Employee turnover by manager Competency coverage ratio (especially in

strategic jobs) Performance on cultural audits. Number of cultural audits completed by

department/business unit. Results of upward appraisals Participation rate in health-promoting

initiatives Number of new employees obtained from

referrals Quality of work environment audits Results of stay interviews (especially in

strategic jobs) Behavior/attitude change produced by training Internal and external awards, publications,

patents received by employees (especially in strategic jobs)

Ethics violations

Criteria for Selecting Good Performance Measures Linked to Strategic Goals: This is obvious, but can’t be overstated—

choosing performance objectives and measures that don’t have an impact on your strategy leads to confusion and lack of clarity.

Quantitative: Virtually all performance measures can be calculated mathematically and expressed numerically—non-quantifiable measures are clear and unambiguous (no “average, fair, poor,” etc.).

More Is Not Better: Use only the critical few key performance objectives and measures that really drive strategy execution—simplicity is elegance.

Easily Understood: If your audience doesn’t understand objectives and measures, they will not motivate action.

Measure Results Should Be Actionable: Should be able to recognize a problem and fix it.

Common Definition: Measures should not be loosely defined (e.g., what is “on-time delivery”? “Adequate bench strength”? “Employee engagement”?

Devising Strategic Performance Measures for Your Organization1. Understand your organization’s competitive strategy.2. Understand and document the current skills and capabilities within key

departments and functions, and within your market and industry.3. Understand your organization’s growth and development goals.4. Perform a gap analysis—can we get to where we want to go with the human,

informational and organizational capital we currently have? Forms the basis of your learning roadmap—determines focus, sequence of actions,

systems and resources needed, and level of firm support required.

5. Set performance objectives that will drive strategy execution (aligned with strategic goals)

6. Plan actions, timelines and performance targets for filling gaps.7. Communicate effectively with relevant stakeholders:

Those who will be involved Those necessary to support and advocate for these actions Outside support groups needed to implement and evaluate the plan, and make

changes as necessary.

8. Develop and use Balanced Scorecard metrics that will drive strategic goals, performance indexes, and dashboards to monitor and evaluate progress against goals.