There are probably as many ways to measure a company's success as there are to create it. However one factor is clear - measuring the impact of HR and people processes on the performance of organisations is still a major challenge for organisations.
By Bernadette Breen & Austin McEvoy, PricewaterhouseCoopers
Organisations know a great deal about, for example, marketing, production management, information technology, the financing of businesses and the formal governance and organisation of business entities. They know how to measure, evaluate and report on all of these areas. If a chief executive wants data and analysis, whether on his own business or on a peer group or on his key competitors, he will receive it.
Why measure HR?
Increasingly, the same demands are being made by executive management of the HR function. People are often the largest cost in a business and will always be one of the most significant. Regulatory developments indicate that reporting on the value of people may soon be a legal requirement in a number of jurisdictions. Also ,in the light of recent corporate scandals, there are increasing shareholder and stakeholder demands for more effective corporate governance and greater disclosure of information. Measuring HR effectiveness was also one of the top 3 global HR issues in a recent survey(1) which looked at the key challenges facing HR today and in 3 years’ time.
HR must respond to these demands which is made more difficult by the absence of clear and consistent people related measures. The challenge offered is to bring some rigour and consistency to investment and measurement in the people domain.
A major international study(2) provides insights into the effectiveness of international people strategies over the past 3 years. This study, one of the most extensive studies of its kind, is based on data collected from over 10,000 organisations across Europe and the US between 2001 and 2004, and represents industry sectors which include banking, financial services, manufacturing, telecommunications, chemicals, IT, utilities, retail and some selected public service operators.
The study provides valuable HR measurement information under a range of categories including financial performance, added value, productivity, remuneration and people behaviour. It also analyses the structure and role of the HR function and gives valuable indications of the measures that companies can take to evaluate the financial contribution of their workforce.
Financial Performance
One of the key findings of the study is that during the economically prosperous years of the late 1990s, organisations had generally lost control of their human capital cost base, recruiting wildly and losing essential workforce disciplines.
In the first two years of this decade, the US, Europe and elsewhere reported a widespread downturn in economic activity, resulting in recruitment freezes, people downsizing, and the implementation of rigorous cost management. Revenues declined and profits generally plummeted as business was lost more rapidly than organisations were able to adjust their total cost base. However, downsizing and other cost management actions, combined with experienced financial management, meant that deep recession was avoided in most lead markets.
The evidence from the study demonstrates that the US has recovered both revenue generation and bottom line profit growth faster than Europe. The study found that since 2001, revenue per employee increased by 18% in the US and by over 11% in Europe. The study would seem to indicate that in times of economic transition, the US is able to move faster and more flexibly than Europe, both when responding to adverse economic conditions and subsequently implementing innovative propositions for growth.
Added value performance
The study also found that the return that companies make on the investment in their people has also improved since 2001. A Human Capital Return on Investment (ROI) metric measures how many Dollars or Euros each employee produces for every Dollar or Euro paid to that employee. This results from this particular study suggests a significant increase to $1.48 in the US in the last full year measured, (an increase of almost 13%) with a marginal increase in Europe in the same period. Again, the different recovery rates for both markets may be reflective of their ability to respond to change.
Outsourcing and offshoring
Both these concepts will affect organisational and structural strategic thinking into the future and although both outsourcing and offshoring are essentially different concepts, they primarily have the same end objective of improving efficiency by reducing operating costs. Most organisations involved in the research, approximately 80%, cited that their main objective of both outsourcing and offshoring is cost reduction.
Consequently we are now witnessing some major organisations in Europe either moving operations to lower labour cost regions or attempting to negotiate higher productivity deals for the same reward. In the US, the move towards offshoring is both a commercial and political reality.
Offshoring in some sectors has more than tripled in the last 12 months, whilst outsourcing in Western Europe, not surprisingly, has continued to grow in the majority of sectors. Both seem set to have a major influence on human capital structures and thinking in the years ahead, raising major people related issues.
Leadership
The research also provides insights into a number of other HR issues, with some surprising results. Leadership, for example has been one of the hottest issues in the last two years, with many organisations devoting high resources to this area. It is estimated that European organisations spent some €1.5 billion on leadership training and development activities in the most recent full year which analysed. In the US, although data on spend is not available, it is thought the figure could run into several billion Dollars. Yet, the research findings show little evidence that this investment is currently demonstrating any major return.
Diversity
Another interesting finding from this international research is that the proportion of women in managerial posts in Europe fell by 1.9% to about one in four. In professional posts, the figures have fallen to from almost 34% to just under 30%. This research suggests that banking has the highest percentage of female managers at 44%. All indications are that female diversity strength at senior organisational levels lies in functional specialisms and therefore their numerical presence will remain vulnerable whenever functional strengths are downsized.
Training and Development & Talent Management
Overall, across Europe, up to the most recent full year analysed, the level of formal training activity appears to have reduced. At the same time, many organisations are now either refreshing their approach to talent management, or revising existing policies, systems, and processes so they successfully use the talent they employ. For these organisations to be successful in managing their talent a greater emphasis and investment needs to be placed on training. The study found that, unfortunately, despite this significant growth of interest in talent management, there are no indications that for the majority of organisations this interest has been transferred into action. This is a particularly concerning trend at a time when many businesses in various European countries are claiming critical levels of skill shortages.
Engagement and Commitment
Another hot topic for HR professionals is the level of engagement and commitment demonstrated by employees. The study includes a range of measures to gauge the level of commitment of an organisation’s employees. These measures include resignation rate, absence rate, pay/ performance related pay, number of training and development hours, level of staff suggestions and level of grievances. The research found that the organisations that had the highest levels of commitment tend to be dominated by global operators, many of them with American or Japanese parenthood, organisations with multinational coverage and organisations with a record of sustained commercial success.
The Challenge for the HR Function…………….
For many companies a key HR metric is the proportion of HR staff to full time staff. Given that the research suggest that the average number of HR practitioners to staff is increasing (with a higher increase in the US), combined with the continued emphasis on people issues within organisations, it might be expected that the specialist function responsible for people policy, would have gained considerable influence. Not according to the research which found that, in Europe, there is little evidence that the HR function is playing a more significant role in organisational life. Indeed in Europe, the number of HR Directors operating at the most senior levels in organisations saw something of a decline, whilst the internal drive to create a business partnership with line executives, intended to create a more strategic overall contribution, has not demonstrated any consistent progress.
The HR function is facing a major challenge. HR professionals need to focus their attention on what a business needs from a professional function to promote the highest achievable level of contribution from its people. In doing so HR needs to be able to demonstrate to the business that the investment in their staff is in the strategic interests of the organisation. As with any investment the availability of accurate and appropriate information is the key to making the right decisions. If HR is to move forward and become a strategic partner to business, and if business is to get the maximum return on its ‘most important asset’, then the insights provided in this research on the key area of HR measurement will be a crucial business resource going forward.
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(1) An international survey by PricewaterhouseCoopers and the World Federation of Personnel Management Associations (WFPMA), published Autumn 2005.
(2) Key Trends in Human Capital: A Global Perspective, published by Saratoga, the human capital arm of PricewaterhouseCoopers (PwC).
Bernadette Breen & Austin McEvoy are with PricewaterhouseCoopers’ HR Services group (www.pwc.com/ie/hrs) which helps organisations to create greater value for their business through their people.
