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Human Capital Diagnostics: Measuring the Intangibles

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An EEA White Paper

Human Capital Diagnostics: Measuring the Intangibles

Compelling proof that companies perform better when they make a concerted effort to measure things like employee performance, engagement, innovation and change

By Allan Schweyer, Chairman, Enterprise Engagement Alliance

Fact: Investments in human capital account for about 70% of organizational expenditures in U.S. organizations. Talent represents both the largest cost and the most critical asset, thus decisions about talent are among the most important any organization will make.

It follows, then, that accurate human capital diagnostic and assessment tools are vital to organizations in order to prevent expensive mistakes in hiring, training, deploying and managing the performance of talent. These tools can provide HR managers with an analytical framework to make better decisions and to predict and prevent potential problems. Unfortunately, the diagnosis, assessment and analysis aspects of human capital management are often sacrificed in order to focus on the initiatives themselves. The result is often misdirected investments and a slew of unfinished and abandoned projects leading to low morale, high turnover and sub-optimal performance.

This paper addresses the opportunity that Human Capital Diagnostics (HCD) offers to achieve advantages. It also provides insight into some of the tools available today and their application.

While some organizations are hampered in their diagnostic efforts by limited budgets, others are overwhelmed by the sheer number of choices available. However, the ability to implement diagnostics is not the only challenge ─ analyzing and correctly interpreting the results, and then implementing appropriate HR measures, can create a true strategic difference in the business. Some are frustrated because they are using diagnostics correctly, but continue to see a gap between the expectations and results.

While a minority of organizations may be using diagnostics well, various research has shown that HR often isn’t fully committed or prepared to apply and interpret the results of diagnostics. For example, according to the Conference Board, only 19% of HR departments believe their IT systems are worthy of data-gathering and of distributing briefings on people measures to all managers.

Talentship and Pivot Points

According to USC professors John W. Boudreau and Peter M. Ramstad in Talentship and HR Measurement and Analysis, the evolution of HR and HR measurement requires a sound “decision science” for human capital that truly informs and enhances decisions about human resources wherever they are made5. Boudreau and Ramstad believe this new decision science will accelerate our current focus on delivering excellent HR programs and processes by providing a framework to identify what decisions about human capital are most crucial, and how to connect those decisions logically to organizational effectiveness.

Using Boudreau and Ramstad’s Talentship methodology, organizations can diagnose and better understand human capital value to determine the most effective and efficient ways to improve organizational performance. FedEx, for example, knows that among the top few critical components of its success are shipping time and efficiency. Disney knows that visitor experience in the park is key. In both cases, HR, armed with diagnostic tools and the right questions, can determine what measures to take (in these examples, training investments) that are most likely to result in the largest difference for the organization at the lowest cost.

Boudreau and Ramstad’s Talentship model reveals opportunities by identifying strategy “pivot points” and the optimal talent and organizational decisions that address them. By understanding their organization’s unique strategic pivot points, HR can initiate diagnoses of their own to choose initiatives that will target those pivot points. In the cases of FedEx and Disney, they used this methodology to understand where their interventions might have the largest positive impact.

Talentship and other diagnostics help HR think analytically about talent and budget resources. HR programs and processes will earn credibility using decision science type assessments, as in the examples of FedEx and Disney above. Where HR can have a direct and demonstrable impact on the top drivers of corporate revenue and competitiveness, the value it creates will be irrefutable. Assessments like the above are particularly useful because they do not require enormous amounts of data, rather simple questionnaires and structured, logical thinking – a diagnostic framework, in other words.

The examples above demonstrate the power of simple diagnostics combined with an “ROI mentality” or approach to allocating resources. This process can be applied across all aspects of human capital management.

Human Capital Diagnostics: Digging Deeper

The downturn in the current economy has made it imperative for businesses to make the most of resources using cost-effective methodologies. Because there is so much scrutiny on profitability and headcount, the measurement of ROI and the value of tangible assets are increasingly critical. The most challenging assets and programs to measure, however, are those with largely intangible outcomes. The effectiveness of HR programs and human capital itself falls into this category. Nonetheless, numerous and credible research clearly links better HR practices and quality talent to revenues and profits.

In order for HR professionals to help their organizations remain competitive, they will need to align their processes and skills in such a way that all HR services and human capital metrics are working toward the overall business goals of the enterprise – the stated goal of CEOs. The following human capital diagnostic tools can assist you in that process.

Predictive Analysis
Predictive Analytics (PA) lies at the basis of assessment and diagnosis. The objective is to gain insight into potential challenges and opportunities in order to prevent potential problems and seize on potential opportunities. Predictive Analysis is a process HR and other business units can use to build better budget requests and provide insight so that better decisions can be made.

The emergence and development of the Predictive Management Model was published in an article by the “father of human resources measurement,” Dr. Jac Fitz-Enz, in 2009. It defined the model’s phases along with appropriate software. In the end, model users will be able to accomplish the following:

  1. Create a human capital plan that supports the strategic business plan.
  2. Coordinate with senior management to facilitate necessary changes in the organization.
  3. Audit HR processes and redesign them to meet future needs.
  4. Implement a workforce plan that is linked to institutional initiatives and budget processes.
  5. Provide integrated HR services to optimize the institution’s investment.
  6. Design a future-facing measurement system with strategic performance metrics, leading indicators and intangible measures.

The HR function can guide management to the optimum deployment and development of its human capital with a model such as this and through the use of assessments and diagnostics in the PA process. This capability can position the human resources function squarely in the middle of strategic organizational management. (See Exhibit 1).

Exhibit 1
Source: Human Capital Source

Leading Indicators
The need for information about the future has become increasingly important in these uncertain times. So-called “lagging indicators” provide useful data but are based on what has already happened. On the other hand, market research that determines consumer confidence is a “leading indicator” and among the only formal approaches to gleaning reliable information about the future used in business and economics.

Some lagging indicators have the potential to be leading indicators. Retention or turnover is one, employee engagement is another. A deeper look at turnover, which tells us what percent of the workforce left in the past year, can yield indicators of current and future effects. How is turnover currently affecting our ability to serve customers? If turnover continues along its present trend, what does that imply for the future?

Studying who left, why they left, and at what point in their career they left, allows us to see what can be done in the future to reverse the trend. We can also examine the effect of unwanted turnover on productivity, quality or service. By tracking turnover trends in parallel with organizational outcomes, we can uncover increased cost, late delivery of services or unhappy customers. And, we can look for correlations between absence and turnover or other employee activity. One ten-year study of absenteeism, for example, revealed that as absence rose, turnover increased within a six month period8. Monitoring absenteeism allows us to prevent it in the future.

An even more powerful leading indicator is employee engagement. Committed employees have a low absence rate, work effectively with co-workers, contribute ideas for better ways to work, produce more than the average worker and speak well of the company. Moreover, high engagement scores have been shown to be leading indicators of better customer satisfaction and higher revenues/profits in the future.

Balanced Scorecards
When applied to HR, Balanced Scorecards analyze employee capabilities, productivity, satisfaction and retention. Companies can also use them to track whether employees are motivated and engaged. The Balanced Scorecard method focuses on the strategy and metrics of the business.

A change of perspective – from seeing people as a cost to seeing them as the company’s most valuable asset to be managed – is required to implement Scorecards. Metrics can range from transaction (activity-based) metrics to strategic ones. Transactional metrics are the easiest to measure and include counting the number of new people hired, fired, transferred and promoted. The measures associated with these include information such as the cost of each new hire and the length of time and cost associated with transferring an employee. Typical ratios associated with transactional metrics include the training cost factor (total training cost divided by the employees trained) and training cost percentage (total training cost divided by operating expense). These transactional measures, however, don’t get at the strategic issues – namely, whether the right employees are being trained and whether they’re remembering and using what they learned. Measuring training effectiveness requires not only devising metrics but actually changing the nature of the training.

Scorecards are a vital tool because most organizations have much better control and accountability over their raw materials than they do over their workforce. A retailer can quickly identify the source of a bad product, but the same retailer can’t identify a poor-quality manager whose negative attitude is poisoning morale and strategic execution. Because the HR Scorecard provides developmental attention to each area, the organization will be more likely to be successful. Managers will discover what needs to be done to develop it, and, in the case of an individual worker, they can use it to better understand why that person may or not be effective in his/her current work setting. Priority areas for personal growth, learning and development can then be identified in order to help the business succeed.

ROI Assessment
Training and other HR initiatives can be assessed for their business impact and ROI. The ROI Methodology™, developed over the past several decades by Jack and Patti Phillips and applied in thousands of organizations worldwide, offers a standard and structured approach to HR ROI measurement (See Exhibit 2).

Exhibit 2

Not every project or initiative needs an ROI analysis but the methodological rigor associated with this type of assessment is appropriate for large and important expenditures, and one that will earn credibility for HR.

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Employee Engagement: From Analysis to Action

Not surprisingly, engagement has become a key measure since the 1990’s. Many, if not most, mid-size and large organizations today have evolved their use of employee satisfaction surveys into employee engagement surveys. These diagnostics are essential in gauging the commitment level of their employees. A great deal of research, including the Enterprise Engagement Alliance’s 2009 paper, The Economics of Engagement, demonstrate a strong link between employee engagement, productivity and profits. Employee engagement surveys abound in variety and style, but most get at the same core factors that have been shown to drive employee engagement or disengagement. The Gallup Q12 is among the best known of these instruments, having been applied more than 17 million times around the world over the past three decades.

Whatever the tool, employee engagement assessments and diagnostics must be properly implemented, assessed and, most importantly, acted upon and measured. Organizations should classify employees into at least four major groupings – Fully Engaged; Engaged; Somewhat Disengaged; and Fully Disengaged are common labels.

Next, through an analysis of employee engagement and performance data, organizations can estimate a percentage gain and loss in productivity depending on where an employee falls on the engagement ladder. Using “Engaged” as a baseline (meaning Engaged employees are set at 100% productivity) an organization should be able to determine the productivity loss it suffers when an employee is Fully Disengaged or Somewhat Disengaged. A Fully Engaged employee, on the other hand, will normally exceed the baseline 100% productivity of an Engaged employee.

Next, the insights from the engagement study and analysis should be put into action. A very effective and scalable approach is for HR to work with line managers and supervisors to implement initiatives designed to increase engagement. These initiatives should be tracked and measured to ensure that they’re being applied consistently. If so, the next engagement survey should reveal improvements where initiatives were applied and, perhaps, variations in improvement such that HR knows which initiatives are the most impactful and generate the best possible returns.

Tying People to Strategy

As HR professionals align their processes and skills so that their services and human capital metrics are working toward overall business goals, they will become part of the solution to keep their companies competitively viable. Still, according to the Conference Board’s Human Capital Measurement State of Readiness report, only 52% partially tied their people measures and targets to strategic plans, and only 46% tied them to annual budgets.

Organizations should also measure employees’ personal and practical belief in the company strategy and its execution. Web-based strategic engagement assessments, such as the Strategic Engagement Gap Analysis (SEGA) diagnostic developed by StratACHIEVE, can highlight areas of strength, challenges and opportunities that guide the company toward strategic execution. This establishes baselines for alignment of thought and engagement. Each item is specifically related to a behavior that has been shown to be important to strategic execution and to measurable business outcomes, such as customer loyalty, productivity or profitability.

SEGA prioritizes initiatives to direct focus to areas that need the most attention. It includes input from all employees, highlights aligned and nonaligned priorities, raises issues that need to be addressed in order to move forward as a company and provides results quickly in an objective, non-threatening manner.

A Clear Answer

Some managers may be inclined to ask, “Why bother doing all this?” Research by John Lingle and William Schiemann provides a clear answer. They examined how executives measured six strategic performance areas:

  1. financial performance
  2. operating efficiency 
  3. customer satisfaction 
  4. employee performance
  5. innovation and change
  6. community/environment issues.

To evaluate how carefully the measures were tracked, the researchers asked executives, “How highly do you value the information in each strategic performance area?” and “Would you bet your job on the quality of the information on each of these areas?” Lingle and Schiemann found that the companies that paid the closest attention to the metrics and had the most credible information were the ones identified as industry leaders over the previous three years (74% of measurement-managed companies, compared with 44% of others) and reported financial performance in the top one-third of their industry (83% compared with 52%).

Conclusion: Assessments and diagnostics, properly chosen and implemented, followed by rigorous analysis, disciplined action and measurement, will often spell the difference between HR program success and failure. In an era in which human capital accounts for most of an organization’s expenses and nearly all of its competitive differentiation, organizational success depends more than ever on effective HR and human capital management.

This White Paper is based on the report, “Best Practices in Workforce Diagnostics: Diagnose, Analyze, Act & Measure.” For a copy of the full 21-page report, click here.

Author Allan Schweyer is Chairman of the Enterprise Engagement Alliance and a Principal at the Center for Human Capital Innovation. Mr. Schweyer directs EEA’s research efforts and leads CHCI’s design of new human capital transformation systems tailored specifically for Federal, state, and local government.  He is the author of the book “Talent Management Systems” and has published numerous articles and white papers in dozens of popular media and industry-specific publications worldwide.

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