A summary of this exclusive article was first published in the Spring 2004 People Matters
We are not short of data on 'people'. But we lack proper measures that link the workforce and cultural environment to business performance. Even the recent "Accounting for People" report left the field open for further experimentation - and procrastination within the HR community. Meanwhile the Accountants in the UK are broadening their competence across the intangibles that drive results in our knowledge-based industries and public services.
If there is some aversion to Finance among the HR community, this is misplaced. Indeed, Finance is often the advocate of good HR practices. For example, many Finance Directors are keen to help evaluate training and development themselves, both within their finance function and within the organisation as a whole ("Evaluation of Investment in People - A Survey of Finance Directors" - FiSSInG June 1997, based on 369 Finance Director respondents). 60% of the FDs believed that training and development was vital to the achievement of their organisations' goals. And nearly 40% thought that they should play a key role in evaluating the training and development in their organisations.
It's a two-way mutual help club. They reported that it was a lack of teamwork across corporate boundaries that was the biggest hindrance to their performance and that a lack of people management skills in the finance function itself was also holding back their own performance. So, Finance recognises the importance of good people management. In turn, HR does, of course, appreciate the need for financial disciplines and focusing on business results.
Should we turn to the US for inspiration, as we do so often? No! Ittner and Larcker's field research in more than 60 manufacturing and service companies, supplemented with survey responses from 297 senior executives, showed that most US companies have made little attempt to identify areas of non-financial performance that might advance their chosen strategy. Nor do they try to demonstrate a cause-and-effect link between improvements in non-financial areas and in financials such as cash flow, profit, or stock price. ("Coming Up Short on Nonfinancial Performance Measurement", HBR Nov 2003). Since non-financial measures can reflect intangible value that conventional accounting rules refuse to see as assets, we should work with our Finance partners to identify the intangible assets and grow them.
HR metrics are finding their way onto UK boardroom agendas due to the external pressures arising from corporate governance issues. Better HR metrics will be driven, perversely, not by the influence of the HR function, but by Accountants. The UK Accounting Standards Board has laid down standards that say external reports must be balanced, objective and audited. Intuition is not enough - we must have good metrics.
What are metrics?
Metrics are evidence-based performance measures. They may be plain numbers, money values, percentages, scales, ratios or indices. They may merely capture the extent to which a practice, opinion, capability or characteristic exists, or its cost or its impact on customer satisfaction or business results etc. Metrics can be presented as pie charts, red-amber-green colour indicators, 'church spire' measures and so on - even cartoons. The style of presentation is limited only by imagination. But, beware, the most eye catching, single-factor metrics can also be the most misleading.
Many of today's measures have been chosen for the wrong reasons. Apart from using what happens to be to hand, we tend to:
- select plausible measures that suit our own interests or
- abide by ingrained 'corporate wisdom' or
- brainstorm measures in groups to bring comfort.
How to make metrics
How can we develop the right metrics? It's as simple as ABC.
A. Link metrics to business strategy.
We can't come up with useful metrics if we do not understand the business strategy. We need to know the causes or, put another way, the drivers of success. The metrics should tell us something about the effect we are having on these drivers. So, we need:
- Performance benchmarks to indicate what is achievable - how far we have to go.
- Process benchmarks that help us to identify the right sort practices to get there.
- A map of the causal linkages between people management practices, leadership styles and the HR strategies that impact on results.
The IES Study findings were shared in a meeting of our benchmarking club. They are reported in "Committed Employees Raise Business Performance - It's True!" - FiSSInG Strategy Paper Number Four, Feb 2000. Contrary to usual wisdom, employee satisfaction and customer satisfaction does not drive business performance. But employee commitment has a direct impact on business performance. It also impacts indirectly via reduced absenteeism. The findings came from large-scale fieldwork and statistical analysis in one of our largest retailers.
For this retailer at least, for every 1 point increase in employee commitment on a 5-point scale, the store sales increase on average by 9%. This is driven by linkages identified by regression analysis based on demographic and opinion survey data on employees, customer satisfaction and buying intentions and subsequent sales:
- Changes in sales are linked to customer predictions about their change in spending
- Predicted change in spending is linked to customer satisfaction with service
- Customer satisfaction with service is linked to employee commitment
- Employee commitment is linked to company culture
- Company culture is linked to particular line management behaviours.
Since the key drivers of business performance in the retail sector include a positive organisation culture, good quality line management, committed employees and low rates of sickness, then HR has a significant part to play in making the service-profit chain work. For HR to play a lead role, however, the data and measures need to be in place to confirm the linkages.
See Case Study A, "Mutual Benchmarking Metrics" for another example of analysis of the service-profit chain, in a Mutual company that is not-for-profit!
Hard data on employees can be used readily to develop the right performance indicators. But whilst most UK retail sector businesses rely on "mystery shopper" surveys or face-to-face questionnaires to measure customer satisfaction, they do not collect or analyse the necessary data on employee commitment. This is crying out for collaborative partnership between HR, financial analysts and the operations management.
The list of possible drivers is endless. So, the approach must be methodical but not necessarily based on sophisticated statistical analysis. HR practitioners can use employee surveys to create metrics that drive operational performance through a simple process. See Case Study B, "Action Oriented Employee Survey Benchmarking" which describes how a NHS Trust based their Strategic Performance Management System on metrics derived from regular employee surveys.
It is not necessary to rely on HR interventions to create and use HR metrics. For an example of a line management initiative, see Case Study C, "Simple Metrics can be Powerful". Two simple business measures, understood and applied by all staff, were driven in the right direction to achieve remarkable results by just two further simple HR metrics.
Getting the right indicators onto the executive dashboard is the next step.
B. Focus on the right performance measures rather than precise targets.
This is strategic in focusing us on carefully selected right things to do rather than tempting us to over-reach on a wide front. A measure of success (the yardstick) is not a performance target (how far up the yardstick). We need to use the yardsticks that measure those things that impact most critically on performance. In the short term, we look for impact on revenue growth or customer loyalty or cost efficiencies or operational productivity or reaction times etc. - depending on the business strategy. For the longer term, we should address the impact on the human capital itself.
Such metrics require disciplined analysis - but they can help avoid a thousand times more wasted time and energy. And be clear whose performance the metrics tell us about. Workforce performance metrics would clearly be the concern of operations management, but don't throw everything at line management. The business leadership should focus on the emotional commitment of the workforce. And the HR community should take the lead in monitoring the communication infrastructure, relationship qualities and social capital. It's about time HR was held accountable for something!
C. Measure properly.
Sometimes we only need to know if something falls outside broad parameters in which case we might merely provide a Green, Amber or Red signal (e.g. when employee resignations fall outside the 'normal' levels). Or we may need to calibrate the yardstick to a high degree of sensitivity and precision (e.g. small changes in employee perceptions may signal critical changes in behaviour). Frequency of monitoring will vary too.
Beware that metrics may not measure what they are meant to or may underestimate or over-dramatise actual changes. Some may even bring in statistical errors of their own. Small samples of employee surveys with just a few questions on four point scales can mislead on all counts. This sort of problem can be overcome by using indices that combine several different measures in a single, valid formula.
Qualitative measures may be viewed sceptically as too subjective, soft or biased. However, the most important things to measure are often subjective. Don't let this put us off. We have all been 'assessing', 'observing' and measuring for years. The main problems are that we too often do this without being clear about what it is that we are trying to measure and without appreciating how much evidence is needed.
After all, metrics are evidence-based performance measures. The HR Analyst and Accountant should team up to clarify what needs to be measured and a constructive way to start is by engaging both in benchmarking - where we do have to appreciate the dynamics of metrics based on other people's disciplines.
CASE STUDY A - MUTUAL BENCHMARKING METRICS
Our HR Benchmarking Club examined the links between 149 HR performance indicators and measures of business success such as revenue, profits, customer satisfaction and employee added value. This was done using correlation analysis and it indicated that certain features of 'social structure' correlate strongly with business performance - at least among the 22 large corporations in the Club. Furthermore high corporate performance is linked with a higher than average proportion of staff with long service of over 10 years. In turn, this is also associated with lower absence costs and lower employee stress levels.
One of the members, a large financial services mutual, took the analysis a step further. They compared their staff data for each branch with its business results and found that an older age profile of employees linked to retention and was associated with higher customer satisfaction and business performance. There were other factors correlated with performance too, including certain values being aligned with the core corporate values. However, the particular age profile, easily measured and monitored, appears to be particularly significant for staff retention and empathy and warm relationships with customers. The proven measures are changing recruitment policy and practice.
CASE STUDY B - ACTION ORIENTED EMPLOYEE SURVEY BENCHMARKING
This was a large NHS Trust comprising three hospitals with 34 separately managed service departments. The Trust Board and Executive identified five areas of performance critical to meeting the needs of their various stakeholders (of whom the Government and its 'targets' was but one). The key areas were:
- Potential: the organisational capacity and capabilities of its people
- Policy: the extent to which individual service strategies align with the Trust's collective vision
- Control: balancing activity levels, income and expenditure plans
- Quality: clinical effectiveness and consumer satisfaction
And linking these together.
- Responsiveness: the way the Trust responded to the needs of its purchasers.
At this stage there was no statistical analysis involved, however, it was a knowledge-based joint clinician / management appraisal of the factors critical to the success of the Trust. Grouping related critical success factors had identified each key area. For example Control included the application of 'best practice' systems for audits, budgeting, information provision, people management and resource / risk management.
The critical success factors were used to develop a Trust-wide questionnaire survey of factual and opinion based feedback using statements on a six point likert scale. Questionnaires were provided at briefing group meetings to all senior people and a 25% structured sample of the other 2,300 staff. The survey was constructed so that responses could be analysed at question, critical success factor and key area levels, by service and by professional grouping. A full-scale pilot survey was used to establish benchmark scores.
The metrics were simple - each service and professional grouping could see immediately by how much they varied from the benchmark for each of the key areas and critical factors. They were not targeted. They identified their own action needs. After each quarterly survey (later reduced to half yearly) they identified their top one, two or three priorities for action (no more) and set about improving their results for the next survey. All staff were involved in action planning.
This provided a framework for decision taking and measured performance management. Indeed the process was called their Strategic Performance Management System. For example, the leadership of one service received undeniable feedback that their main challenge was to provide proper, regular individual evaluations for their staff. If other divisions were doing this and it was considered by them to enhance performance of the division, then it was compelling to do it in this division.
Another priority that came to the fore was 'Collaborative Working' (communicating and helping across services) which was critical for waiting list management and quality of care. Although this required inter-dependent divisional action, it was not decided at Trust level, but came about because some services saw that they were lagging behind the rest. The metrics - scores showing the gap between what is being achieved compared to others - were undeniable. The service clinicians asked for help from other services that had achieved benchmark scores and learnt from their practices.
The survey results were not analysed by 'experts'. The scores were sufficient, when shown in bar-chart graphics, to identify the priorities. The metrics on their own were sufficient to galvanise the accountable leadership into action. The internal measures, based on their own people's perceptions, were a welcome change from the external targets imposed on them from the Department of Health.
Of course, the metrics stimulated the search for 'best practice', and once started, led them to seek external process benchmarks. The process achieved change in what had been a traditional and somewhat complacent environment.
CASE STUDY C - SIMPLE METRICS CAN BE POWERFUL
This company had a large direct life and pensions salesforce with a customer base of over a million people. It was critical to fulfil the contract applications quickly and so the operations (which I headed) were measured on correctly completing all incoming work within 1 day (branches) and 2 days (head office). Much of the work was quite complex and not merely transactional. These two simple speed and quality measures were known and understood by all 900 operations staff, with weekly feedback and monthly league tables and so on. Team leaders', managers' and my bonus were determined by these two business measures. Besides very strict budgetary controls (over-spending more or less ended one's career) this was the company strategy enforced by the Chairman and Executive. What's more, they were not satisfied that both standards were being achieved in only 95% of items - which would have been considered brilliant by the main competitors!
Our informal, external benchmarking indicated that we had adequate information processing systems, a very good management team, high staff energy levels (some staff changed into trainers at work in order to get about quicker!), competitive pay packages and efficient training. But it was a demanding workplace environment and operational staff turnover was running at 24% p.a. The corporate wisdom was that this was good in that it kept the payroll down (new staff were generally paid less than the staff they replaced). However, our comparison of post training and 12 month service staff showed that 'experience' was the critical factor behind low error rates at high speed. This may be obvious in hindsight but before we had the metrics, it was difficult to convince the Board. So, whilst the corporate centre measured and rewarded me and my management team on budget, transactional work turnaround and quality, we also measured and monitored staff turnover and absence rates ourselves, with help from HR. I made it clear to the line and HR that this was the critical measure to move in the right direction and that the leavers interviews showed it wasn't money that drove staff to pastures new, it was 'impatience'. Staff were put under too much performance and target monitoring too soon. My managers and their team leaders responded magnificently. Everyone had their own way of doing it, but the net effect a year later was a halving of staff turnover to 12%. The operational result was that deadlines were achieved in 98% and the quality standard in 97% of measured workloads. This would have been thought unachievable only a few years earlier. Simplicity works. The increase in productivity was in fact 14%, which went straight to the bottom line. We got our bonuses and the Accountants were happy too.