The New HR Analytics: Predicting the Economic Value of Your Company's Human Capital Investments

Read an Excerpt

PREFACE

This book was twenty-five years in the writing. It started in 1984, with the

publication of my How to Measure Human Resources Management; it was

augmented with Human Value Management six years later; and then the

concept was updated ten years ago in The ROI of Human Capital. Those

books chronicle the development of metrics in human resources from its

inception in the 1970s to today. They have passed the test of time with

second and third editions, and two were honored with Book of the Year

Awards from the Society for Human Resource Management.

Now, The New HR Analytics is both the product of these endeavors

and the look into the future. Although this book talks to human resources

managers, it deals with the broader issue of human capital management

processes. Hence, it is as applicable to the work of line managers as to

that of the human resources department. Anyone who manages people

can find value in the model we present here and the case studies that are

offered in support of that model.

HR as an Expense

Having come into HR in 1969 from ten years in line jobs, I could not

understand why any company would create a function that was only an

expense. But then, too, at that time line management itself was not so

sophisticated. Management models of the day were a patchwork quilt of

fads that came and went, sometimes to reappear later. Others flashed

across the sky like a meteor and burned out when they hit the atmosphere

of managerial impatience. During that period, HR was simply a place

where you put people ‘‘who couldn’t do any harm,’’ as a manager in my

company said at the time.

I quickly discovered the problem behind the perception. It had two

parts. One part was that HR people actually believed and accepted the

idea that they were an expense center and nothing more. To be sure, there

were a few who fought that perception, but they were overwhelmed by

the accounting-driven belief system of the time. The second part of the

problem was that HR didn’t know, and never talked about, the value they

were generating because they couldn’t—they had no language for it. All

their terms were qualitative, subjective, and equivocal. Anecdotes were

their only way of responding when management asked for evidence of

the value added by HR’s services.

‘‘How is employee morale?’’

‘‘It’s good!’’

‘‘How good?’’

‘‘Very good.’’

Could you run any other function with such performance indicators?

It is enough to make one despair.

The Introduction of Metrics

The solution was obvious. We in HR needed to learn to speak in quantitative,

objective terms, using numbers to express our activity and value

added. Business uses numbers to explain itself. Sales, operating expenses,

time cycles, and production volumes are principal indices that express

business activity. In the 1970s, productivity was the key issue. In the

1980s, the quality movement emphasized process quality as a competitive

advantage. Both relied on numbers to express degrees of change.

At the time, I asked the HR director of a major corporation if he

was involved in these initiatives. He answered that they were not human

resources management issues. Here were the major initiatives of the day,

and he could not see what they had to do with people. Is it any wonder

that people write about nuking the HR function?

During the 1970s, we in HR began to experiment with simple cost,

time, and quantity metrics to show that HR was at least managing

expense and generating something of value. In the beginning it was

largely a defensive maneuver. But by the 1980s, we were able to show

that we were indeed adding measureable value. In 1984, I wrote the first

book mentioned earlier. In 1985, at my consulting company, the Saratoga

Institute, we published the first national benchmarks, and this led to publi-

cation of Human Value Management, which was a marketing model

applied to the HR function. By 2000, we had advanced the methodology

to a point where we were talking about return on investment. Basically,

we shifted the paradigm from that of running the HR department to that

of managing human capital in the organization. At that point we were

still using primarily standard arithmetic functions. Later in the decade

we began to apply simple statistical tools, and this opened up the era of

human capital analytics—which brings us to today.

The Era of Analytics

We are on the threshold of the most exciting and promising phase of the

evolution of human resources and human capital management. We’ve

gone from the horse and buggy to the automobile to the airplane. Now

it’s time to mount the rocket and head for the stratosphere.

Like arithmetic, statistics are bias free and are applicable over a vast

range of opportunities. They can be used in studies of single, localized

problems or for supporting organization-wide makeovers. The secret

sauce of statistics is just like the source code of computer programs—a

buried logic that can go step-by-step or leap ahead, using macros to speed

to the solution.

Today, we shift our attention to predictability. This book is about

predictive management. We think of it as ‘‘managing today, tomorrow.’’

Predictive management, or HCM:21, is the outcome of our eighteen-

month study called the Predictive Initiative. It is the first holistic, predictive

management model and operating system for the human resources

function. We launched it in the last quarter of 2008 and it has been suc-

cessfully applied in industry and government, in the United States and

overseas.

HCM:21 is a four-phase process that starts with scanning the marketplace

and ends with an integrated measurement system. In the middle, it

addresses workforce and succession planning in a new way and shows

how to optimize and synchronize the delivery of HR services. It is

detailed in the chapters that follow.