Posts tagged ‘Human Capital metrics’
Question: What is the difference between good and bad analytics?
The answer is probably best illustrated like this;
This is bad analytics:
You have received the latest performance management data from all five divisions. You know from experience that the data is questionable – in two of the divisions many of the inputs are the default settings. You also hear that the managers have a somewhat relaxed attitude towards the accuracy of the data (to say the least). Your report show that absenteeism is flat at a reasonable level. You report this with satisfaction.
This is ok analytics:
You get the latest voluntary employee turnover data and see that the figures are trending upwards. The level is above the 6 month moving average. You dig deeper into the data and see that it is in particular in three division the employee turnover has been higher than expected. These division have three things in common; a new leader has been employed, workload has increased and they are client facing. You contact the relevant HR partner and suggest that they implement the usual retention initiatives.
This is great analytics:
You get the latest voluntary employee turnover data and see that the figures are trending upwards. The level is above the 6 month moving average and 2 %-point higher than sector-adjusted benchmark. You dig deeper into the data and see that it is in particular in three division the employee turnover has been higher than expected. These division have three things in common; a new leader has been employed, workload has increased and they are client facing. You then decide to interview relevant people in those divisions including leaders and employees as well as the HR partners. You read relevant academic research and case studies on effective measures against voluntary turnover in your particular sector and discuss this with experienced managers and HR partners within your company. You suggest three actions; coaching for the leaders, competency profiling to match job demands and team building. Your data suggest that these three initiatives will reduce the voluntary employee turnover from the current rate to 1 %-point below the benchmark at a ROI of 55%
So what is the difference? Great analytics
- are made with reliable data
- are combined with quantitative data
- use an evidence-based approach
- is predictive
Any other suggestions to differences between bad and great analytics?
HR data and HR analytics is becoming increasingly popular – and with good reason. Good data and clever use of the data can make HR better. Data mining, charts and data reports are used to guide innovation and process optimization. All good things.
There is an argument among some people in HR that “you cannot measure people and convert people (and feelings) into hard facts”. They somehow see HR analytics as reducing people to something objective, deprived of feelings and being non-human. That is simply not correct. Objective facts and observation about human behavior has guided management and psychology for many years and has increased our understanding of human behavior. Our increasing technological powers will improve our insights in human behavior and hopefully assist us in making better HR decisions on the back of these insights.
BUT the advocates of HR analytics sometimes forget the limitations HR data. HR analytics face many challenges – many of which are psychological and rooted in the mindset of HR – and some misunderstandings about what HR data can do persist. Let me express three common ones;
- The data will speak for itself. The views expressed in statements such as “the data will speak for itself”, “HR data will make decision-making easy” and “numbers will express the law of causality so clearly that you will have to stupid not to understand that a will lead to b” are all naive if not dangerous. HR data will only get you so far but they cannot take away the fact that you will need to make subjective decisions, that all data requires subjective input to be meaningful and that HR data will only take you so far. The data will not speak for itself, the conclusions will continue to be in the eye of the beholder.
- More data will make it easier to interpret. This statement is not correct – in fact the opposite is often the case; interpreting data is not getting easier. The more data you collect the harder it is to see the meaning of them. True, our capabilities to arrange them, visualize them and to publish them are getting better all the time. But interpreting data is not about arranging them, it is about finding out what they mean. Our obsession of collecting ever more data actually makes it even more difficult to find their meaning. And visualization techniques will not help us there.
- Data is objective. In one way HR data is objective but we should not be fooled that it is the same as getting a true representation of the world. The datasets are representations of the world gathered, generated, selected, put together, analyzed and adjusted for the particular purpose they are created for. Not only that, but in real life most HR Data is often incomplete, inaccurate or simply outdated. So instead of treating data as objective and non-debatable understand that HR data is nota true representation of the world – it is a subjective representation of the world. But a good one nevertheless.
But perhaps the most important thing that HR Data cannot tell you is that they cannot tell you why people react as they do. Even the most predictive HR data can ‘only’ give you better information for your predictions and probabilities to forecast what will happen. That’s all. HR Data will not tell you why it will happen or how the people will fell about it. But it is frankly also quite enough.
HR Data will do a lot and hopefully it will make HR better. But it will not take the human element out of HR. And for that we shall be happy.
ROI is used more and more in HR when justifying or evaluating HR projects. But it has at the same time come under a lot of criticism for being too difficult to use in HR. The first alternative I suggested was another financial ratio – CROCI – which may be better due to its focus on cash and the balance sheet. But while it is a much better ratio than ROI, it is more complicated to use. The second alternative was friction & flow, which is highlighting that HR should create flow and remove friction allowing employees to get on with their day-to-day things. This alternative is very common sense (its strength) but very vague (its disadvantage).
My third alternative is trying to measure HR’s strategic relevance. To understand why, let’s take a step back and ask “what is the purpose of HR?”. What is the ultimate outcome of the services HR provides? I am not thinking about HR’s activities (recruitment, annual appraisals, talent management etc.). So answers like “To hire the best talent” or “To retain our best people” are not good answers. They are ‘means’ not ‘ends’ purposes/goals. I am thinking about HR’s true and ultimate purpose.
For me, there is only one purpose for HR, which is to: “support the vision and strategy of the company”. This can be followed up by “…by hiring, developing, deploying and retraining the best talent and creating an environment for high performance “. In other words, an HR activity has value if brings the company closer to its strategic targets.
So my third alternative to ROI is what I will call the “Strategic Value Index” (made up for the occasion). It goes something like this. Any HR initiative will get a number of points – from 0 to 100 – based on how strategic and impactful it is.
Two examples may illustrate the index:
- Imagine a succession management program. It is designed to identify emergency and long term successors for top 100 managers, identify skills gaps for the long term successors and create individual development programs to fill these gaps. The design is excellent but in reality it does not work. The long term successors are not used with a position becomes available and the development programs are seldom effective. This program will get a Strategic Value Score of, say, 40. It will get a lot of points for a great design, being strategic in its set-up, but very little for execution. In addition, the program has an annual total cost of $1m, which gives a Strategic Value Index score of 40 (40/1.0).
- The second example is an upgrade to the annual assessment days for graduates. Each year, 100 graduates are invited to the annual assessment days with a prospect of a job. 25 young hopefuls are offered a job. The current selection process is not good (close to random). An upgrade will align the company’s strategic competency needs with the exercises and selection criteria of the assessment centre. The Strategic Value Score is, say, 20. The program gets a lot of points for being strategic, its ability to align competency needs with recruitment criteria but does not get many point for impact. The upgrade will cost $100k, which gives a Strategic Value Index score of 200 (20/0.1).
A program should only be approved if it is above the dotted line on the graph to the right. If there are more programs to choose between, the program which is furthest above the line should be approved (best value for money). In the above example, of the two programs HR should choose the upgrade to the assessment centre.
The advantage of this tool is, that it rewards strategic impact, which is really important. Better to do a smaller program which gets the company in the right direction according to its strategy than creating a monster of a program which has no strategic value. A second advantage is that it is relatively easy to measure AND you can use it in case you want to evaluate to investment decisions. ALSO it is an excellent communication tool with you C-suite.
This index does not really exist. I just made it up. But perhaps it should be used?
In this series , I look at alternatives to ROI in HR. I was asked to come up with alternatives since ROI is sometimes met with some resistance. In my last post, I argued that CROCI is an excellent alternative to ROI if you are looking for an even better financial ratio. It is better because it also focuses on cash and balance sheet items.
But perhaps it is worth asking the question: Is ROI in HR worth the ROI? You often need a tremendous amount of time and resources when measuring intangible activities like human behavior. And frankly is this measuring process worth it? If you calculate how much time goes into the whole process, it is likely you will have lost any savings the project generated.
In my view, the answer is that ‘yes’, sometimes it is worth doing a ROI on a project but for many (most) project it is not. For a talent management project you should always do a ROI, but for 10 leaders doing a leadership workshop it is probably not worth it.
So you need an evaluation system, which on one hand is simple and easy to use but also give you valuable information on which you can base decisions. An alternative to ROI is then perhaps not a financial ratio but perhaps something else. Something very basic.
So my second alternative to HR is flow & friction.
I was inspired by the Harvard Business Review article written by J. Craig Mundy called, “Why HR Still Isn’t a Strategic Partner“. It is a great article in many ways, but in this article he writes about flow and friction: ” Of every action you take as an HR leader, ask this simple question: does it cause friction in the business or does it create flow? Friction is anything that makes it more difficult for people in critical roles to win with the customer. Flow, on the other hand, is doing everything possible to remove barriers and promote better performance”. Excellent stuff.
When you are faced with an investment decision you should use friction as the primary evaluation criteria. For example; should you upgrade your appraisal processes, should the IT department go on a course to upgrade their SAP competencies or should you send your middle mangers on a coaching program? Your choice of program should be the one which creates most flow or removes most friction.
I argued in a blog last week that ROI is not always the answer for HR. I argued that if it was just about getting approval for a project then ROI was too complicated and time consuming. If on the other hand it is used to make better HR investment decisions and/or to evaluate HR projects then ROI is an excellent tool. In many respects, I am a big fan of ROI but I think you should be aware of the pitfalls of ROI.
One person commented and asked me if I could suggest alternatives to ROI. What a great challenge. Let me therefore suggest three alternatives in this and two coming blogs.
The first alternative to ROI is CROCI – an acronym for “Cash Return On Capital Invested”. I used this ratio intensively when I worked as an financial analyst. In my view, it is a much better ratio to gauge the creation of shareholder value and certainly much better than ROI. Without getting into too much nerdy details, then this ratio takes pre-tax pre-interest operating free cash-flow and divide it with gross capital invested. In some ways it is comparable to ROE (Return on Equity) but the strength of this one is that it is calculated on a cash basis and this is important.
Why would this be relevant to HR? If HR used CROCI it would be forced to think about cash when working out investment returns on HR projects. HR often produce non-cash benefits and this is not always as interesting to a CFO as cash benefits are.
Let me offer a (very!) simple example. You want to improve your annual review processes. This includes investing in an upgrade to the existing software and a 3-hour mandatory training module for all employees. One of the benefits is that each appraisal meeting will take one hour instead of the current two hours. Your company has 25,000 employees. The total one-time cost is $3m (software upgrade = $1.3m, internal development time = $0.2m, time for employees to attend training = $1.5m). You calculate that the annual savings on one hour twice a year (annual review + mid-year review) is $1m, so the ROI over a five year period is 147% or 20% p.a. (based on a 5% inflation). Not bad.
The problem with this is that some of the costs and benefits are cash and some are not. The CFO will ask you where he can draw the $2m you will give him in return. And you can’t. There is no $2m. Most of this is paper money and some is even fictitious. If you are the head of a department and your employees get two hours more each year I doubt that you will see an increase in productivity of two hours a year per employee. On the other hand, if your employees will have to go to a three hour training module in annual review processes you will probably not lose three hours – you will ask them to ‘run a bit faster’ or stay a bit longer at no extra cost.
If you use CROCI instead you will only be allowed to use the cash benefits and costs. This is more real to the CFO and in many ways closer to reality.
The major drawback from CROCI is that it makes it even more complex and difficult to calculate the return on a HR investment. For many, this tool will be too time consuming and non-relevant. In most cases CROCI will be too complex and add little value for HR. But in some cases it will be a better tool than ROI.
You are an HR executive and you are sitting in your monthly strategy meeting with the top executives of your organization. You are about to present your monthly workforce data and updates on your KPI’s and strategic initiatives. This is the moment when the people who matters are really listening to you. You have the floor. But you dread this moment, because you know that they know that the data is bad. You hand out the status reports and you begin your presentation. And everybody in the room – including yourself – are thinking the same thing: “this report looks nice, but we don’t trust the data. It just doesn’t look and feel right”. And actually you know that the data isn’t right, but it is the best that you and your analytics department can find. It is not that the data is completely wrong – it is just not right. But you know that if you were to try to make the data right it would require so much work and resources. Resources you don’t have. So you continue with your presentation and hope that nobody asks. They usually don’t.
This is a problem for many in HR (as well as all other functions). You are using workforce data which doesn’t quite feel right but you use it because that is what is available and you or your analytics department have no alternative.
Bad data is a big problem and it affects every part of an organization, from sales to HR. Many studies have shown that bad data quality cost a lot for organizations. A Gartner survey revealed that in US:
- 140 companies surveyed lost an average of $8.2M annually due to bad data
- 30 companies surveyed estimated their losses at $20M
- 6 companies surveyed estimated their losses to be more than $100M annually
Why does it cost so much? There are three reasons; bad data quality lead to bad decision, bad processes and ultimately bad data can lead to mistrust with your customers.
All organizations have bad data to some degree, but it seems that some have much more than others. There are four reasons behind why bad data happens:
- Lack of a coherent data strategy. Having a purely operational approach to your data is probably the biggest reason behind bad data. Data is suppose to support you in your strategic decision making and a lack of a coherent data strategy to support your organization’s strategy means that you approach becomes random and often meaningless.
- Assume that analytics software is the answer. HR analytics software is great, but it is simply just another data collection tool, albeit one with more potential than most. To get the most out of HR analytics you must go through a strategic data process and decide what data is of strategic importance to you and how they ideally look like.
- Garbage in, garbage out. This one is often overlooked although it should be clear to everyone. Your data is only as good as the component inputs.
- Lack of critical data sources. While the quality of the data is critical, what data sources you incorporate is equally important.
So how to avoid bad data? Thomas Redman, writes in his blog that “data creators must create data correctly, the first time, with full understanding of what that means to customers, those who use data they create. Data customers must communicate their data requirements to sources of data, and they must provide feedback when data are wrong. Virtually everyone recognizes they are at once data creators and data customers. There is, of course, a lot more to data quality management. But let’s not make this any more complicated than it needs to be.”
I agree. It is not that difficult, but once you are using bad data in your reporting, ROI’s and updates it is so difficult to change it for primarily psychological and political reasons. So 1) get it right first time and 2) when you observe bad data correct it immediately.
Ultimately, I believe that many executives are sitting with status reports, KPI’s and ROI calculations based upon bad data. And many know this to be true but it takes too much effort to correct it. The bad news is that you have to change it. There is simply no excuse to continue to use bad data. If you don’t have the resources to make them better at least stop using them. The good news is that good data makes a big difference. The quality of the decisions, processes and programs based on good data is worth so much more than it cost to find them – even if it means that you have to change many existing processes and disregard existing data sources. You (and your data) will be so much more trustworthy.
So what to do when bad data happen to good HR people? Fix it.
Key Performance Indicators – or KPIs to everyone these days – continue to be a hotly debated topic in HR. There are those who are simply against them. They see no use of them. This group is divided into two sub-groups; those who simply don’t belive that you can or should attempt to put figures, numbers or monetary value on people. Figures and charts say nothing about people is the argument. To them, it does not matter how well they are formulated or how they are used – they simply don’t like numbers, metrics and KPIs on people related matters at all.
The second sub-group in this first group is a mix of some HR analytics, some senior HR executives and some top management executives. Their argument against KPIs is that it just doesn’t work in practice. The senior HR executives have used KPIs for so long without success that they now disregard them. The top management has seen HR use KPIs but still feel that HR has not delivered over the years. And some in HR analytics believe that it is analytics and not metrics and/or KPI’s which is the answer.
The second group of people believe KPIs can add significant value. This group also have two sub-groups; one believe that KPI’s are they answer to all and everything and use them as much as possible. In fact, their departments are almost entirely run by KPIs.
The second sub-group of this second group also believe that KPIs can add significant value but with a caveat namely that they should be used very carefully, only in small doses and if in doubt not at all. I admit that I belong to this group . I believe that in 95% of all organizations, HR KPIs are truly ugly (see definition) – non-strategic, there are too many of them, they are poorly measured and with no real impact and frankly they have not been given the attention they should. So I am left with a strange admission; I belief HR KPIs are a great and effective tool but I have very little evidence to back up this claim as I see as many if not more evidence in practice of the opposite.
I don’t think you can come up with clear definitive rules as to how to make good KPIs. They simply have to be adapted to each organization – what may work in one may not in another. However, I do believe that the best HR KPI’s I have seen follow these rules of thumb:
- Aligned with the strategy and business plan of the organisation. The targets of the HR KPI should be linked directly to the strategy of the organisation
- Personally owned. The HR KPI should be owned in two ways; firstly it should be linked to one person who is accountable for its success. This means that it is not falling between roles and people can argue about fault etc. Secondly the HR KPI should be meaningful for that person.
- Actionable. Every HR KPI should have a project or a set of actions which will lead to meeting the target. It should be within the circle of influence.
- Well defined. Every KPI should be precisely defined. An exact definition, which data are involved, where the data is collected from and delivered by whom. It should be formulated in a way so an outsider will be able to look at it and find the result.
- Relevant. It must be relevant in the specific context of this HR department in this particular company.
- Timely. There must be a specific time when the target should be met.
- End KPIs (compared to Mean KPIs). Consider a KPI which is about the number of people who had an annual review. This is a classic ‘mean’ goal. It is not an end in itself to hold annual reviews. It is the desired results of the annual review which are interesting. All HR KPI targets should be end-goals not mean-goals.
- Predictive (i.e. leading indicators).
- Few. It is better to meet the target of three or four KPIs than to meet six of ten. When you have too many KPIs you tend to select the ones you feel are the ones to meet and consciously or unconsciously not even try to meet the others. This subjective section of KPIs are bad for an organisation. Better select a few and meet them all.
- Linked to bonus. It should make a difference to the person if he/she meets the HR KPI target or not.
So why are most HR KPIs so bad? I think it is down to three things; 1) Some just copy from other organizations, consultants or books. As I stated above – it simply doesn’t work. 2) Some don’t think strategic. Only strategic KPI’s will ever have the chance of being good. Unfortunately, creating strategic KPIs is more difficult than non-strategic ones. 3) They don’t matter. If there is no consequence of meeting the KPI target they will not have any effect.
My conclusion about HR KPIs is that it is a powerful tool to manage an HR department. However they still fail and do not deliver their promise and consequently are increasingly getting a bad reputation because they are poorly formulated and used. In practice this happens in most places. I believe that bad HR KPIs are a lot worse than not having any at all. Take the time to formulate a few really outstanding ones or don’t use them at all. The problem is that KPI’s do work in as much as people tend to follow them. If they are badly formulated employees will behave equally bad.