The Convergence of HR and Finance: Leveraging HR’s Most Powerful Advantage to Impact the BusinessMark UbelhartOctober 2014

To Achieve Impact—Functions Transition*

• Professional Practice Decision Science• Accounting Finance• Sales Marketing• Human Resources Human Capital/Talent Management

• When made:– Possible by information systems– Essential by scarcity

Drivers of Future Business Value

Source: Mark Van Cleaf, Organizational Capital Partners

What can we learn from High Performing Companies?

A global study of more than 15,000 performance companies using 30 years of data identified companies which achieved superior CFROI, Growth and Total Shareholder Returns

“We found that employee engagement and retention was a critical factor in the ability of companies to achieve superior and sustainable ROI and Shareholder Value performance.” Dr. Mark L. Frigo, Director - The Center for Strategy, Execution and ValuationKellstadt Graduate School of Business, DePaul UniversityCo-author of the book DRIVEN: Business Strategy Human Action and the Creation of Wealth

A Strategy Map With Risk Management Embedded

1- OperationalExcellence

3-Grow High Value Customer Relationships

4-Organizational Alignment

FinancialStrategic Objectives

Profitable Growth from New Technologies and

Services

Increase Value from Existing and New

Customers

Organizational Efficiency and

Leverage

Customer Strategic Objectives

Cost & QualityLeadership

Develop Technologies to Improve Cost &

Performance

Deliver Highly Valued Solutions Customer Focused

Internal ProcessStrategic Objectives

Develop Balanced Scorecard and Strategy Maps

Retain and DevelopCritical Talent

Capabilities and Growth

Strategic Objectives

Improve Productivity

Enable and EncourageContinuous Learning

and Knowledge Sharing

Improve Pricing Discipline

Enable Rapid NewProduct introduction

Leverage an Open Collaboration Technology

Transfer Model

Risk Management:Protect Customer

Information

Reducecosts

Improve quality and costs

continuously

Eliminate non-valueadded processes

Risk Management:Liability for Failures

Disciplined Investmentin New Technologies

Drive Packaging Technology

LeverageTechnology

Licensing

Risk Management: Protect IP

Strategic Themes

Communication andTeaming

Information Sharing

Roles and Alignment

Risk Management:Strategic RiskAssessment

Risk Management:ERM Initiative

DevelopStrategic Risk Management

Skills and Culture

Develop Leadershipand Execution-Driven

Culture

Source: Frigo, Mark L. and Richard J. Anderson, Strategic Risk Management: A Primer for Directors and Management Teams (2011). Used with permission.

Create and Protect Shareholderand Stakeholder Value

Organizational Alignment “Create a High Performance Culture and Infrastructure”

2-Create Value with Technology

TQ/RRS TQ/RRS TQ/RRS TQ/RRS

Retention Risk Score

1. Identify and Target At-Risk Talent

Creates a common understanding of who is at risk and why…

Yes

No

No

Yes

Critical Talent

Pay history

Manager tenure, department diversity

New employee, geographic location

Pay history, 6 – 10 yrs tenure

Key Factors Increasing Risk

610Carol Yu

280Sarah Young

462Anand Gupta

726Jim Smith

Retention Risk ScoreEmployee

Yes

No

No

Yes

Critical Talent

Pay history

Manager tenure, department diversity

New employee, geographic location

Pay history, 6 – 10 yrs tenure

Key Factors Increasing Risk

610Carol Yu

280Sarah Young

462Anand Gupta

726Jim Smith

Retention Risk ScoreEmployee

Identify and Target At-Risk Talent

Managing Your Talent Risk

Predicting Risk—employee by employee, quarter by quarter—so that management can:

1. Identify and target at-risk talent2. Target clusters of risk for group interventions3. Measure retention performance across units,

across managers4. Reshape talent sourcing strategies5. Benchmark your company

Business Framework to Take Action

Target Clusters of Risk for Group Interventions

Sales engineers, <2 years experience in Austin, TX:

High risk but low attrition

Women managers, age 25-34, in Finance:Medium risk and high attrition

Actions

Combine Risk Analysis

withHR Solutions

Risk ClustersSegmentation Methods

Demographic Segments

• Diversity groups• Critical talent• Location

Organizational Segments

• Business Unit• Function• Division

Cluster Analysis• Model-generated

segments

EmployeeScores

Compensation Plan Changes

Manager Training

Alternative Work

Arrangements

Career Planning

Workshops

Measure Retention Performance Across Units, Across Managers

Conventional analysis looks at turnover alone, masking crucial information about “degree of difficulty”. Talent Guardian offers true performance assessment.

Group 1Predicted Turnover 40%

Actual Turnover 24%

+16%

High Retention Performance

Group 2Predicted Turnover 22%

Actual Turnover 22%

0%

Average Retention Performance

Group 3Predicted Turnover 10%

Actual Turnover 23%

-13%

Low Retention Performance

The Message: All three locations had roughly the same turnover. But, Group 1 had the best performance compared to predicted turnover. And Group 3 the worst.

The Action: Investigate Group 1 for best practices, and Group 3 for root causes.

Talent Guardian™—Actual Client, Prominent Risk Clusters

“Builders”1% of population

1% of compensation investment

• Young, perhaps first job• Modest pay• Skewed toward Business Unit A• Tend to live in suburban-like

areas

“Hired Young Guns”3% of population

4% of compensation investment• Young, though likely not first job• High performing, relatively high pay• Tend to live in suburban-like areas

(educated, mid-to-high income, homeowners, married with children)

“Reaching for More”3% of population

3% of compensation investment• Average performers• Recently changed roles/ promoted,

but with relatively small pay increase• Tend to live in economically

depressed areas

“Solid Opportunists”2.5% of population

3% of compensation investment

• Average performing• Tend to move between roles• Have relatively high pay• Tend to live in suburban-like areas

“Mid-Career Misfires”3.5% of population

3% of compensation investment

• Not first job• Low performers, slow pay

progression• Tend to live in low income, relatively

uneducated areas

“Struggling Starters”2.5% of population

2% of compensation investment• Young, likely first job out of school• Average to modest performers• Likely living in relatively low income

areas

Most ConcernPivotal/Key Talent Concentration

Secondary Concern Modest Concern

RRS480

RRS500

RRS450

RRS470

RRS490

RRS460

Number of People

Low Risk57%

High Risk22%

In Between

21%

Retention Risk Complexion Benchmarks

Investment in People

Low Risk47%

High Risk24%

In Between

29%

The Link Between…

All EmployeesPivotal Employees

All Others

Predicted TQ

CFROI

RRS

Retention Risk Scores (RRS)Talent Quotient and

Business Results

Talent Quotient Definition

The people getting the highest total pay increases…

…are they leaving or staying?

The GAAP Equivalent for Human Capital Reporting

– The relevant information is available– Standardization within and across companies has

been accomplished

– Use within a framework of long-term shareholder value creation is now possible

Hewitt research demonstrates that a 10% increase in attracting and retaining pivotal employees for a company

with $10 billion in capital investment adds an estimated $70 million to $160 million to its bottom line.

Linkage to Business Results and CFROI1

• Quantifying what has typically been considered fuzzy—the shareholder value upside of investing in talent

• Utilizing "apples-to-apples" financial results, adjusting for industry (e.g. financial services)

• Correcting for “reverse causality" issues—are pivotal employees staying (i.e. high TQ) because of good financial results or does TQ drive future financial results?

CFROI and Total Business Return1997 – 2007, N = 115 companies

Incremental Cost of Talent versus

Measurable Business Impact

TQ Uncovers Critical Pipeline Gaps• Example of Talent Quotient by pay level, highlighting critical future leadership gap for this

company. • Bench strength issue highlighted; TQ not being reported to the Board

TQ

TQ RETAIN

BROAD($50K–$125K)

MGMT*($125K–$200K)

EXEC* ($200K+)

TOTAL($50K+)

160

130

70

100

40

120

59

118

108

TQ>100 RETAINING

PIVOTAL EMPLOYEES

TQ<100 LOSINGPIVOTAL

EMPLOYEES

19

Identifying “Stall Points” in Corporate Performance

➤ Largest data set

assembled on long-

term corporate

performance

➤ Deep analysis of

“stalled companies”

➤ Nearly 500 executive interviews

ceburl.com/economist-talent

 8

© 2014 CEB. All rights reserved. CEB142868PRINT

Talent is a Major Factor in Organizational Revenue Stalls

Strategic Factors70%

External Factors13%

Organizational Factors17%

Premium Position Captivity

23%

Regulatory Actions

7%

Talent Bench

Shortfall9%

Innovation Management Breakdown13%

Economic Downturn

4%

Board Inaction

4%

Premature Core

Abandonment10%

National Labor Market Inflexibility1%

Organization Design

2%

Failed Acquisition

7%

Geopolitical Context

1%

Incorrect Performance Metrics2%

Key Customer Dependency6%

Strategic/ Diffusion Conglomeration

5%

Adjacency Failures

4%

Voluntary Growth Slowdown2%

Over 80% of the time, the key controllable factors of revenue stalls in an organization are either entirely about talent or disproportionately about talent.

Company Specific Results—Big Box Retail Organization

Relative Sales/ Sq Ft

Growth in Sales/Sq Ft

Controllable Margin

Econometric Methods to Normalize Store

Performance for External Factors

Regression Model: Store Performance vs. TQ

Future Sales Sq Ft or Controllable Margin = Function of Human Capital Metrics, e.g. TQ

(adjusted for reverse causality)

For each 10 point improvement in TQ…

1.5 – 2.0% improvement in sales per square foot

Can we trust this data?

Momentum Building For Human Capital Accountability ReportingMany organizations are pursuing such disclosure

• Society for Human Resources Management (SHRM) and its Metrics & Measures Task Force—suspended

• Sustainable Accounting Standards Board (SASB)• American National Standards (ANSI) and U.S. Technical Advisory Group

(TAG)

Momentum Building For Human Capital Accountability ReportingMany organizations are pursuing such disclosure• International Standards Organization (ISO) with 42 Nations

participating or observing the development of HR standards• In the UK, Chartered Institute of Personnel Development (cipd) with

the results becoming law in two years• CalPERS to engage companies and their external managers on

Governance, Risk Management, Human Capital and Environmental practices

Human resources measures… …management and investment

informationWhen will standardized Human Capital metrics become a visible practice for leading companies? -- 2007 Human Capital Institute Poll:

Accountability Reporting

28%

3% 2%

22%

45%

0%

10%

20%

30%

40%

50%

This Year Next 2–3 Years Five Years Beyond 5 Years Never

IIRC Guidelines

SASB Approach to Human Capital• Michael Bloomberg and Mary Shapiro are serving as the Chair and Vice Chair of

SASB– People of this caliber have the power to change the world

• Focus on ESG issues that are material per the SEC • Industry specific approach to human capital metrics

– SASB covers 80+ industries across 10 sectors • Human capital manifests in different ways

– As “Employee Recruitment, Development, and Retention” topics – As “Fair Labor, Labor Rights, and Human Rights” topics – As “Employee/Workforce Health & Safety” topics– As “Employee Inclusion & Diversity” topics

• Standards for 5 Sectors available for download at www.sasb.org

© Human Capital Management Institute 27

• What is our workforce productivity? What is the marginal return of $1.00 invested in the workforce?

• What is the ROI of our investment in workforce?

• Is our productivity improving? How do we rank?

• Compared to the competition, are we leading or lagging?

Defining Workforce Productivity

Wherefore Human Capital Standardization

• 8/2014 hrfuture.net, by Wilson Wong, the Chair, the Human Capital Standards Committee at the British Standards Institute; Head of Insights and Futures at the Chartered Institute of Personnel and Development (CIPD)

• An aim is to provide a human capital management framework for any organization where the bulk of the value creation is located in its human capital

• To enable traditional professional silos of HR, Finance… and so forth to work instead to best (sustainable) advantage, lower systematic risk to business continuity and raise professional accountability

Smarter Annual Report

• Descriptive and Prescriptive• “A Smarter Annual Report—How Companies are Integrating Financial

and Human Capital Reporting” by Laurie Bassi, David Creelman, Andrew Lambert

• The IIRC has already had a sizable number of large international companies following its guidelines for integrated reporting on a trial basis for several years

• The Association of Chartered Certified Accountants survey of 200 CFOs indicates that half of the firms surveyed anticipate adopting integrated reporting within three years

BSI’s Human Capital Standards

• A diagnostic framework for organizations that are ready to develop more mature and transparent systems of governance

• 100-day public consultations between Oct 1, 2014 and Jan 11, 2015

The Center for Talent Reporting

• Home of Talent Development Reporting principles (TDRp)• Featuring: Securing upfront agreement on expected impact and goal

alignment• Over 600 measures and 60 sample reports available

A BTS Perspective• Integrated financial, strategic and human resource planning and decision

making– model the business—from current state to future state– capture financial dashboards, employee and customer metrics and

their major interdependencies– simulate decision making and weighing the risks and returns through

intensive internal training

Source: Dan Parisi, BTS