If the real purpose, the only purpose, of HRM is to achieve organizational outcomes, then we’d better be able to measure the effects of specific investments in HRM on those organizational outcomes. Otherwise, why would anyone trust us with a budget?
The primary outcome measures for private sector organizations are revenues and profits, so we’d better be able to explain how what we’re doing in HRM, to include investments in HR technology but also investments in everything from total compensation to workforce development, increases ideally both of these in measurable and provable ways. Those are the metrics that matter and the only metrics that will capture and hold executive attention.
About now my colleagues are saying, and with good reason, that Naomi is off again on her quest for the holy grail of HRM, for those provable, measurable impacts of HRM on the real business outcomes of organizations. But if we really can’t do this, if we really can’t show a line of sight from improving the practice of HRM to improving those required business outcomes, we deserve to be relegated to the record-keeping, compliance and payroll responsibilities of our past.
There’s a ton of respected research as well as my own experience to convince me that it’s possible to figure out this line of sight for a given organization. Imagine the possibilities if we could embed some of the relevant analytical methodologies, tools and intelligence in HRM software? Do you suppose that’s what at least some of the HRM software vendors mean by analytics? Trust but verify might apply here.
I still don’t know how to develop this line of sight in the abstract, but I do know how to make the linkage work once I know an organization’s very specific business outcomes and what drives those business outcomes, when I know which flavor of revenue and profit are linked in the most direct way to what the workforce does. This varies considerably by industry and even by company within industry, so I usually ask someone in the know, in addition to observing, what measure I should use of revenue and profitability as the numerator in the two metrics I’m about to describe. If the mere mention of metrics or analytics unleashes your personal demons or causes your eyes to glaze over, the intersection of HRM and IT is not your preferred neighborhood.
With those revenue and profit numbers for the numerators of two separate metrics, we must search very carefully for the appropriate denominators, which will be the same for both metrics. We’re looking for an accurate and fairly reliable measure of the workforce effort deployed to achieve those revenues and profits. Is it primarily a full-time, employed workforce? Then perhaps a count of the employees who are actually working at the end of the relevant measurement period would be a good denominator. Is it primarily a part-time, employed workforce? Then try FTEs of employees who are actually working at the end of the relevant measurement period. Are there lots of contract/contingent non-employee workers? Then broaden those active employee counts or FTEs to include those non-employee workers. This isn’t about headcount but about the amount of workforce members used to achieve the revenue and profit numbers.
We can now measure in actually dollars (or whatever the preferred currency) the revenue and profit contribution per employee/employee FTE/workforce member/workforce FTE. These are the two ratios that we’re trying to improve by means of HRM. There may well be other useful metrics, much more finely tuned to particular groups within the organization, but business outcomes are always about “show me the money.”
The bottom line? Putting aside the baseline budget we must spend on HRM just to do the essential record-keeping, compliance and payroll (notice that I consider actually compensation and benefits outlays, as well as benefits administration, completely open for discussion), every other dollar invested, to include every total compensation dollar, should be focused on and justified by how it moves these ratios in a positive direction — and by how much.