When considering human capital investment levels, it is necessary to determine the specific measures to monitor the HR effectiveness. These measures provide insight into the status and health of the human capital function. They signal when additional investment is needed and they serve as the baseline for measuring the progress and payoff of investing in a specific program or project. The first step to determine the measures needed is to examine those currently in use. Some of the HR effectiveness measures evolved from the beginnings of personnel administration to what is today known as human resources or human capital management. Although these measures have existed for some time, they are still important for understanding the nature, scope, and progress of human capital. The measures represent a balance of old-economy and new-economy organizations. Several measures are industry specific. For example, safety and health measurements may be an important issue where employees are routinely at risk for accidents, injuries, and illnesses. Service and white-collar businesses, such as financial services and software companies, would not necessarily list these measures as a priority. They include other measures, however, that are critical to developing and emerging industries, such as innovation, leadership, and competencies. This paper, by referring to a number of scholarly articles and sources, analyzes various ways of measuring HR effectiveness, focusing on HR metrics as the primary method of determining the worth HR function brings to the modern organization.
HR metrics have become the predominant method used by organizations to ensure that appropriate measures are tracked and improvement occurs. For example, top executives must take an active role in developing an appropriate human capital scorecard and must ensure that critical measures are tracked and monitored routinely; otherwise, the scorecard measures may be dominated by items that are not meaningful or strategically focused. Executives must also ensure that specific actions are taken to correct situations where measures are less than optimal. Using the return on investment (ROI) methodology, executives should take part in examining the payoff of investments in human capital projects.
This paper outlines the issues involved in creating an appropriate HR metrics, concentrating on developing a human capital scorecard.
Although the HR metrics process may take on different names, scorecard is a term that particularly resonates with the human resources community. This paper explores the development of these metrics and the role of lop executives in ensuring their proper implementation. It ends with a description of how the scorecard process can drive value in an organization. Proactively using the scorecard measures can remove future problems or correct minor problems as they appear. The most critical issue for executives is to use scorecards to drive performance.
A variety of studies highlight the status of metrics and scorecard development in organizations. Some of the most interesting information comes from a survey conducted by the Corporate Leadership Council of the Corporate Executive Board. In this survey of HR metrics, the majority of the 138 companies involved (80%) have yet to deliver the metrics needed (Walsh 2002). Only 8 percent have extensive use of the data in advising business leaders on workforce management issues. These statistics need to be reversed (Walsh 2002).
Another major study on this issue was conducted by Deloitte & Touche (Walsh 2002). The study primarily involved organizations in the United Kingdom and identified obstacles to progress in implementing scorecards. Fifty-two percent of survey respondents indicated the lack of time and resources as the number one barrier to making progress with scorecard; other priorities tended to get in the way. Forty-one percent listed the second reason as not recognizing measurement as a priority for the business; they failed to see the business need for evaluating success. As the third reason, forty-seven percent indicated the lack of clarity as to what the benefits for the business would be. Finally, the lack of clarity as to what exactly should be measured was reported by thirty-one percent (Walsh 2002).
Human capital professionals find these figures disturbing. So much has been written about human capital and so many tools are available to assist in the development and use of human capital scorecards, it seems these reasons are mere excuses for not taking accountability seriously. Unfortunately, many HR managers see human capital measurement as resource intensive, but, more important, they are unclear both in terms of what should be measured and how these results should be used.
These reasons support the conclusion that human capital professionals must use targeted approaches that can deliver clearly defined, measurable benefits (Nalbantian, Guzzo, Kieffer, and Doherty2004)
Although progress has been slow and legitimate barriers for progress exist, the need for HR effectiveness measurement is clearly present. Organizations must show the value of scorecards. The Corporate Leadership Council survey described previously shows that the pressure is on. In 37 percent of organizations, CEOs, COOs, and CFOs, the top three individuals in any major organization, are applying pressure to deliver and enhance HR data and capabilities (Walsh 2002).
This kind of pressure will undoubtedly increase. At the same time, organizations recognize the need to build a human capital scorecard. In the Deloitte & Touche study, organizations were asked about the rationale for building a more comprehensive scorecard and the benefits that can be derived. Almost 50 percent of the respondents desire an important scorecard so that human capital can be measured in a recognized way. Over 40 percent indicate that the human capital scorecard forms a basis for performance management/reward systems and allows the organization to specify how to increase human capital investment. Still almost 40 percent see the value in justifying the investment in human capital and over 30 percent track changes in the value of human capital. Clearly, there is not only pressure to measure human capital, but major rationale for accomplishing it (Walsh 2002).
In recent years, there has boon much interest in developing documents that reflect appropriate measures in an organization. Scorecards, such as those originally used in sporting events, provide a variety of measures for top executives. In Kaplan and Norton's famous book, The Balanced Scorecard (1996), the concept was brought to the attention of organizations. Kaplan and Norton suggested that data be organized in four categories: process, operational, financial, and growth.
HR metrics come in a variety of types, whether it is Kaplan and Norton's balanced scorecard, the scored set in the president's management agenda using the traffic light grading system, or some other kind. Regardless of the type, top executives place great emphasis on the concept of HR metrics. In some organizations, the HR metrics concept has filtered down to various functional business units and each part of the business has been required to develop scorecards. A growing number of HR executives have developed the HR metrics to reflect the human capital segment of the business (Nalbantian et al. 2004).
The HR metrics approach is appealing because it provides a quick comparison of key measures and examines the status of human capital in the organization. As a management tool, HR metrics, including scorecards, can be very important to shape the direction of humaan capital investment and improve or maintain performance of the organization through the implementation of preventive programs.
Interest in HR metrics has been phenomenal, particularly the Kaplan and Norton balanced scorecard. The Deloitte survey reports that 32 percent of organizations used the balanced scorecard methodology; 46 percent of those said this was effective for them (Walsh 2002).
Other similar terms are also used such as HR benchmarking, HR reports, HR information systems, HR dashboards, and HR human capital reports. This paper uses the terms ?HR metrics? and ?scorecard? to illustrate a range of possibilities for presenting data in a meaningful, organized way and representing performance from a variety of perspectives, using qualitative and quantitative data. More important, the data from an HR metrics can help organizations understand problems and opportunities and can be used for both diagnostic and prescriptive possibilities.
Executive input is critical when it comes to selecting the measures to be included in the HR metrics. There are a variety of options and categories. The remainder of this paper will cover a variety of approaches that can bring together the concepts and concerns crucial to the modern organization?s HR effectiveness measurement.
When building the HR metrics, it is helpful to start with the organization's strategy. Rather than search for an illusive ?best list? of human capital measures, some professionals prefer to know more about how they can implement a metrics project or convince managers and others to endorse the creation and use of people measures.
The starting point of any measurement project is to place it in the context of the company's strategic planning process (Mayo 2005). This is difficult if the HR executive is outside the upper management loop. Many HR executives are outside the strategic planning process, which adds to the challenge. Fortunately, this situation is changing; strategic planning and human resource planning are sometimes collectively connected. The involvement of the business unit leaders is rapidly changing. Ten years ago there would be almost no involvement. It is important for executives to be involved and take important roles in developing metrics projects. For example, Cisco Systems, the worldwide leader in networking for the Internet, listed sales in their 2004 annual report at over $22 billion and employees counted in at more than 34,000 worldwide. They have made tremendous strides in the development of a HR metrics (Nalbantian et al. 2004).
Several of Cisco's HR professionals are collaborating cross-functionally within HR to produce a roadmap that will deliver much-needed networked intelligence. Since the members of this group understand that business continues while they chart the new map, they are also building a few temporary solutions along the way. For example, when the HR team reviewed the current stale of people data, they discovered duplicated requests for numerous reports and that individuals were asking for information that already existed in other places (Nalbantian et al. 2004).
The proper HR metrics should cover a number of topics, including headcount, diversity, turnover, employee satisfaction, talent and movement, span of control, expense per employee, revenue per employee, ROl on human capital, and various HR functional measures. While the HR metrics is receiving wide use now, organization?s goal is to continue developing innovative solutions for bringing intelligence to the right people. It is clear that, if used and designed properly, HR metrics may serve as the critical measure in determining the effectiveness of HR function in the company. Certainly, care must be taken not to over-rely on such measures, yet the value of HR metrics is evident to the modern organization.