Key Performance Indicators in Alliances After

CORPORATE GOVERNANCE

Human Resources and Recruiting Management By William Laurent

A sk any employer, and he or she most likely agrees with the ancient axiom "Good people are difficult to find." More than ever, global en- terprises face an unprecedented degree of competition in recruiting and hiring the best candidates and talent at all levels of seniority.

Ironically, while the hiring and retention of quality person- nel is critical to the growth and survival of 2 1 " century companies, the business processes and IT systems that sup- port procurement and development of employees are often ill conceived, poorly managed and devoid of value.

All too often, corporate HR offices lose control of the hir- ing process without being aware of it. Despite the establishment of an entrenched vendor list, senior and junior managers from all business segments will have their own preferred ven- dors, creating unlimited potential for conflicts of interest and complicating the candidate search, recruitment and inter- view processes for the organization. In large labor markets such as London, New York, Hong Kong and Tokyo – where thou- sands of recruitment and executive search agencies exist – the problem can be compounded exponentially. And while many large organizations have robust customer relationship man- agement implementations that address and streamhne various vendor management processes, there is inevitably a lack of ac- tionable data captured and maintained by these systems that will help recruitment firms and retained search firms add maximum value to the hiring process lifecycle and become bet- ter business partners.

In order to effectively manage vendors and have them be- come true partners in the business, they must be held accountable. This can only be accomplished by using per- formance metrics that help both parties actively track and comrhunicate issues in a timely manner. Without vendor key performance indicators (KPIs), there can be no measurement and thus no improvement. Businesses need to remember that vendor lists are dynamic and subject to change. Data should be accessible and help managers understand what vendors have filled which requisitions, what the vendor's commission fee was and more. The value of having this sort of actionable knowl- edge is rousing; in fact, the ROI on this data can be immediately realized by using it to great advantage in the vendor-fee ne- gotiating process. Just as sales and marketing departments are always held accountable for their achievement via standard qualitative and quantitative KPIs, so should an organization's vendors. According to Jason de Luca, senior managing partner of Smart Partners, a Tokyo-based boutique consultancy, "Or- ganizations are realizing that initial enterprise resource planning projects have fallen short in terms of what is offered in the HR space. Some of the more common performance metrics that have been used internally need to be extended to vendors if they

are to add requisite value to the business." Many recruiters talk about how they add value, but few companies know if they really are adding value because they don't know how to measure value externally; in fact, they are probably having quite a few problems measuring it internally.

In addition to performance metrics for better vendor accountability, another common problem is the monumen- tal proliferation of candidates' personal information, usually in the form of resumes. Resumes contain a virtual treasure trove of confidential information – a combination of personal and professional facts that expose both the potential employee and the corporation to unlimited risks. Far too often, a central- ized repository or application to securely store and manage this sort of information does not exist. Resumes freely get sent in email attachments all around the organization and be- tween the organization and its recruiting firms. Such practices could spell disaster for all parties, and regulatory mandates that aim to protect their citizens' personal information are start- ing to get tougher. Institutions across the world must now balance the wealth of opportunities afforded to them by their data assets with the risk that these data assets may be compromised by numerous threats both internally and exter- nally. Loosely structured data that resides on candidate resumes is no exception.

Getting a handle on how the hiring function of the or- ganization is running will always be a critical component of fully understanding how the business is running as a whole. However, employee hiring processes don't usually get the same amount of attention that is given to more strategic customer-facing tasks or operational and sales processes. Vendor management issues are commonly not transparent and thus do not surface as obvious candidates for business process reengineering, governance, best practices or system enhance- ment. However, modern times necessitate that HR offices adopt and foster a more proactive agenda in order to leapfrog competitors in retaining and hiring staff. Likewise, executive search firms, headhunters and recruiters of all stripes will find themselves having to add measurable value to the recruiting functions of their clients. Enterprises must do a better job work- ing with their vendors to iteratively re-engineer recruiting processes while mutually managing any associated risks.

A company's most valuable assets are its people. For- tune 500 companies allocate more than one-third of their operating revenue – in remuneration, health care, retirement/pension funds, training and additional programs – on human capital. Prudent corporations don't neglect to extend governance and technology best practices to the procurement of human capital. ®

William Laurent is a renoumed independent consultant in data, governance and IT strategy. Please contact him at [email protected]

www.dmreview.com DM Review I June 2008 15

Maximizing Human Capital: Demonstrating HR Value With Key Performance Indicators Lockwood, Nancy R . HRMagazine ; Alexandria  Vol. 51, Iss. 9,  (Sep 2006): S1-S11.

ProQuest document link

ABSTRACT To drive value and optimize company performance, human capital-the collective knowledge, skills and abilities of

people that contribute to organizational success-is an asset to be leveraged. Based on corporate culture,

organizational values and strategic business goals and objectives, human capital measures indicate the health of

the organization. The effective use of key performance indicators (KPIs) that measure human capital outcomes,

such as talent management, employee engagement and high performance, illustrates the firm's business, financial

and strategic goals, promotes partnership with senior management for organizational success and demonstrates

HR value to the C-suite. [PUBLICATION ABSTRACT] FULL TEXT  

Headnote

Abstract

To drive value and optimize company performance, human capital-the collective knowledge, skills and abilities of

people that contribute to organizational success-is an asset to be leveraged. Based on corporate culture,

organizational values and strategic business goals and objectives, human capital measures indicate the health of

the organization. The effective use of key performance indicators (KPIs) that measure human capital outcomes,

such as talent management, employee engagement and high performance, illustrates the firm's business, financial

and strategic goals, promotes partnership with senior management for organizational success and demonstrates

HR value to the C-suite.

Introduction

"In order to fully value human capital, we must go beyond the view of human effort as purely individual. We,

humans, affect each other profoundly, and it is the way we affect each other that determines our value to our

organizations. And, it is the way that strategic human resource professionals bring this understanding to the fore

of their organizations that determines HR's value at the senior management table."1

In 1995, the seminal study by management guru Mark Huselid linked high-performance work practices with

company performance and revealed that workforce practices had an economic effect on employee outcomes such

as turnover and productivity, as well as on short- and long-term measures of corporate financial performance.2

This study marked a new era of measuring the influence of HR to promote effective organizational performance,

sustainability and financial success.

As HR positions itself as a strategic business partner, one of the most effective ways to do so is to support the

strategic business goals through key performance indicators. Key performance indicators (also known as KPIs)

are defined as quantifiable, specific measures of an organization's performance in certain areas of its business.

The purpose of KPIs is to provide the company with quantifiable measurements of what is determined to be

important to the organization's critical success factors and long-term business goals. Once uncovered and

properly analyzed, KPIs can be used to understand and improve organizational performance and overall success.3

Why Measure Human Capital?

The primary motivation to measure human capital is to improve the bottom line. To design better KPIs, it is

essential for HR to understand what is important to the business and what key business measures exist. In

addition, the drive to measure human capital reflects the change of role of human resources from administrative to

that of a strategic business partner. In general, human capital measurement is a measure of effective human

resource management.

Broadly stated, HR metrics measure efficiency (time and cost) and the effectiveness of certain activities. Yet

mastering human capital measures can be a very complex undertaking. Today, HR professionals are expanding the

"traditional" metrics, such as head count, time-to-fill and turnover, to KPIs that align with corporate objectives and

create greater stakeholder value. However, KPIs often demand large amounts of data and technological support. In

addition, the trial-and-error required to set appropriate and meaningful measures comes into play, as well as

patience and education of those involved. Yet despite these challenges, 84% of companies expect to increase the

application of human capital measures in the next few years.4

With a clear line of sight on workforce and organizational performance, effective use of KPIs also illustrates HR's

in-depth understanding of the links to business success. KPIs help build the credibility of the HR department,

demonstrate HR value and foster respect and partnership with senior management and the C-suite. For example,

when an HR professional not only shows that a new recruiting program resulted in a lower time to fill positions in

the organization, but can also demonstrate that the program yielded an additional amount of revenue because

billable staff were able to start at client sites more quickly, he or she builds HR credibility. Credibility is increased

because HR is able to link HR activities to firm performance and communicate it in financial/business terms.

Additional critical reasons to measure human capital include steering human capital resource allocation, winning

business cases for human capital investment, tracking human capital activities to develop human capital

predictions, linking variable compensation to human capital best practices, delivering human capital information

required by law and providing investors with information on human capital performance. Some firms even use

KPIs to enhance their company image as a progressive employer of choice.5

Further, with many HR functions increasingly being outsourced, credibility is earned through activities and

outcomes that result in "deliverables" that promote and lead to organizational success.6 Consequently, it is

important to select KPIs that are most meaningful to the organization. For example, logical KPIs to select are

those that reflect drivers for human capital measurement, such as financial outcome measures (e.g., revenue

growth and cost reduction) and performance drivers (e.g., customer satisfaction, process technology innovation,

product technology innovation, globalization). Within that framework, the most common categories of people

measures include turnover, productivity (revenue, profit per employee), employee satisfaction/employee

engagement, recruitment, diversity, remuneration, competencies/training, leadership, and health and safety. Most

frequently measured are turnover, voluntary resignation, average compensation, average workforce age, diversity

and compensation/ total cost. Such KPIs will help HR professionals predict what they need to know to act in a

timely and effective manner and identify ideas and areas where HR can develop new initiatives, or revisit others, to

obtain stronger results.7 Clearly, KPIs are the wave of the future for HR.

Culture, Stakeholders and KPIs

As the saying goes, "what gets measured gets managed." The company culture and corresponding values define

what is measured. Therefore, when HR considers important KPIs, the first place to look is at corporate culture and

what is most valued within that culture. In addition, stakeholders (both internal and external) go hand-in-hand with

company culture. A stakeholder is an individual or entity with a stake in how the organization performs and/or

conducts itself. Internal stakeholders are employees, line managers, senior management, C-suite and the board of

directors. External stakeholders include shareholders, customers, vendors, the community and the government.

Working closely with internal stakeholders is beneficial for HR to 1) prioritize capabilities and create action plans

to deliver them; 2) focus on deliverables rather than doables; 3) build relationships of trust; and 4) help resolve

misconceptions of HR.8 Different stakeholders have different criteria. The key priority is to give business partners

the information they need to manage the company. For example, senior management values performance

measures that predict and lead to future organizational financial success and sustainability. On the other hand,

while one employee considers the availability of upward career mobility very important, another employee stays for

health care benefits. As a result, training to promote opportunities to move up in the organization and

informational sessions about employee benefits packages may be important. Overall, most important are KPIs that

track key business indicators of human capital issues. HR must focus on KPIs that best illustrate stakeholder

values that will lead to organizational success.

KPIs-A Strategic Management Tool

To think strategically about measurement and how best to use KPIs as a strategic management tool, it is essential

to understand the meaning of the measurements and their purpose. This approach will not only be beneficial to

help better manage the HR function, but also will naturally lead to aligning HR's goals and objectives with those of

the organization.9

According to a recent national longitudinal study on the assessment of human resource organizations, strategy is

the top high-value add for HR. However, in only 60% of companies did the HR executive see HR as a "full partner."

In addition, 24% of executives outside of human resources viewed their HR counterparts as working at lower levels

of strategic involvement, compared with 40% of HR executives. The study suggests that activities related to

strategy provide the most highend impact for HR to demonstrate its value (see Figure 1). In addition, the

relationship between business strategy activities and HR's strategic role points to areas where HR can contribute:

growth, the core business, quality and speed, informationbased strategies, knowledge-based strategies, and

organizational performance. The study data also reveal key strategic HR activities that link business emphases

with the organization's strategic focus: 1) having a data-based talent strategy; 2) partnering with line managers to

develop business strategy; 3) providing analytic support for business decision-making; 4) providing HR data to

support change management; 5) driving change management; and 6) making rigorous data-based decisions about

human capital management.10 From these HR strategy activities, key performance indicators can be developed.

At the same time, when determining strategic KPIs, it is essential to consider who designs human capital

measures and how they are created. Research by The Conference Board reveals key contributors to these metrics.

Overall, HR designs 94% of human capital measures, often basing them on measures in the company scorecard.

To create human capital measures, 77% of HR professionals meet with company business managers. For example,

finance, strategic planning, outside consulting experts, business managers and IT contribute to HR measurement

design. However, if HR lacks expertise with metrics, it is helpful to partner with groups such as marketing that have

considerable expertise in measure design and analysis.11

Alignment of people metrics with organizational strategy is still at an early stage in many firms. To move human

capital investments forward, several key points will assist HR to better strategically align with organizational goals

and garner support for human capital programs: 1) involve HR in the development of overall business strategy; 2)

enlist leaders outside of HR to help develop and back KPIs; 3) collaborate with business managers to ensure KPIs

link to business unit strategic goals; 4) focus more attention on links between people measures and intermediate

performance drivers (e.g., customer satisfaction, innovation, engagement); 5) increase manager acceptance

through training programs and concrete action plans; and 6) work with HR to simplify metric and automate data

collection.12

In addition, benchmarking can make human capital metrics more valuable. When used wisely, benchmarking data

can protect programs that are performing well, create support for organizational change and help executives in HR

and other disciplines make strategic decisions that affect their organizations.13 By focusing on internal

benchmarks, customized measures may help improve the alignment of activities to HR strategy. However, caution

should be used with external benchmarks due to mixing "apples and oranges"-that is, different industry sectors

and underlying issues in benchmarking measures. Also, external benchmarks tend to emphasize results rather

than processes. Because an external benchmark does not explain what part of the process can lead to better

results, the use of external measures may not always be appropriate for internal use. In the rapid expansion of

highly advanced e-learning programs, for example, different programs may deliver the same content at the same

low cost, but the quality of the programs is not revealed in the benchmark itself.14

Overall, the top KPIs for human capital and HR effectiveness can be used by all companies, regardless of size or

industry. For example, the Hay Group found that the most admired companies had effective business practices in

the following areas: organizational culture, strategy implementation, attraction and retention of talent, leadership

development, fostering innovation, and performance management. Successful companies assess performance by

balancing profit measures with measures of shareholder value, customer satisfaction and employee

satisfaction.15 Keeping this research in the forefront will help HR develop effective and strategic KPIs for their

organizations.

The Importance of Lagging and Leading Indicators

The purpose of measuring KPIs and determining what leads and what lags is to help the business make

predictions. To demonstrate HR value with KPIs, it is imperative that HR has a working knowledge of lagging and

leading indicators. These terms describe data regarding outcomes and/or events that affect organizational

performance. Lagging and leading indicators offer a way to understand and/or predict various aspects of firm

performance. However, to identify and quantify these relationships, it is essential to know more than HR is a

leading variable and customer satisfaction is a lagging variable.16 To accurately gauge the relationship between

lagging and leading indicators, a sense of the magnitude of the time lag between changes in the leading indicator

and subsequent changes in the lagging indicator is required. (see Figure 2 for an example of lagging and leading

indicators, with turnover as the lagging indicator in response to selection and supervisory training, the leading

indicators.)

To be more specific, a lagging indicator represents information that is the result of change or an event. Lagging

indicators, for example, are measures of profits, sales and service levels. They reveal various aspects regarding the

success or failure of a firm. Lagging indicators are particularly useful for shareholders, creditors and government

agencies. Lagging indicators do not, however, help a company react quickly, show what specifically went wrong or

right, or indicate exactly what needs to be done to improve. In general, lagging indicators are not useful in

managing on a day-to-day basis.17

In contrast, a leading indicator precedes, anticipates, predicts or affects the future. For example, higher employee

turnover can precede outcomes such as lower customer service scores. Of the two indicators, the leading indicator

is more useful for investments or predictions. The state of the major stock markets, for example, is a leading

economic indicator for the global economy. Figuring out how to measure events, practices, initiatives or outcomes

helps to determine the most valuable leading indicators-that is, those indicators that may lead to clear

outcomes.18 However, part of the difficulty is clearly proving what indicators lead and with what degree of

influence. For example, while the availability of talent is generally thought of as a leading indicator-as one can

measure the quality of hire from it (the larger the talent pool, the more likely you are to hire more qualified people)-

it is also a lagging indicator in comparison to certain political decisions. For example, consider how changes in a

local taxation rate, perception of crime and ratings of school quality affect people's desire to move to a city and

become part of the talent pool. Here, political decisions lead and talent availability lags. In general, the most useful

measures are leading indicators, as they may predict future firm performance.

Scorecards and Dashboards

In recent years, HR scorecards and dashboards have gained popularity as a management tool. Documenting and

tracking defined metrics validates human capital investments. For example, firms are increasingly tracking

employee movement as a metric. Cisco Systems, Inc., the Californiabased communications giant, views building

talent as a priority and has added to its dashboard of people measures a metric to track how many people move

and the reason why, including revenue per employee. This KPI allows Cisco executives to quickly identify divisions

that are creating new talent. Another firm, Valero Energy Corp. in San Antonio, developed a recruitment model

using human capital metrics based on applying the supply-chain business process to labor. Scorecards help the

company track the labor sources that provide the most productive employees. Using a detailed analysis of these

metrics, the company can accurately forecast the demand for talent by division and title three years in advance.19

The HR scorecard, based on the format of the balanced scorecard, is a key management tool to strengthen HP's

strategic influence in the organization. The scorecard has four perspectives-strategic, operational, financial and

customer-that help organize and track areas where HR adds value: 1) the strategic perspective focuses on

measurements of effectiveness of major strategylinked people goals; 2) the operational perspective reflects the

effectiveness of HR processes; 3) the financial perspective relates to financial measures of HR value to the

organization; and 4) the customer perspective focuses on the effectiveness of HR from the internal customer

viewpoint. Depending on the organization's business goals, these perspectives also help determine KPIs that best

demonstrate HR value (see Figure 3).20 Additional key benefits of the HR scorecard are 1) reinforcement of the

distinction between HR "doables" and HR "deliverables" (i.e., a policy implementation is a doable and becomes a

deliverable when it creates employee behaviors that drive strategy); 2) HR's ability to control cost and create value;

3) measurement of leading indicators; 4) assessment of HR's contribution to strategy implementation and to the

bottom line; 5) support of HR to manage its strategic responsibility; and 6) encouragement of flexibility and

change.21

KPIs and Employee Engagement

Employee engagement is quickly becoming a critical success factor for competitive advantage. Using KPIs, HR

can demonstrate organizational success as well as gain support for initiatives related to employee engagement.

Research studies offer evidence that employee engagement is key to organizational success. In the SHRM 2006

Job Satisfaction Survey Report, employees identified four key aspects of job satisfaction directly linked to

employee engagement: meaningfulness of job, contribution of employee's work to the firm's business goals, the

work itself and variety of work.22 Watson Wyatt's research, The Human Capital ROI Study, reinforces the link

between employee engagement, reward systems and retaining valuable human capital.23 A Carlson/Gallup study

on employee engagement and business success shows that employees who are extremely satisfied at work are

four times more likely than dissatisfied employees to have a formal measurement process in place as well as

receive regular recognition. Further, 82% said recognition motivated them to improve job performance.24 Thus, as

these studies highlight, employee engagement-whether through job satisfaction indicators, reward

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