Posts tagged ‘Human Capital’

3 alternatives to ROI in HR – Part 2

Alternatives to ROI in HR

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.

11/10/2012 at 15:52 2 comments

HR analytics should combat illusory correlation with a bit of fun

When I see people describe HR analytics as people who are “just collecting data”, I often wonder if they know how wrong they are. HR analytics have tremendous amount of power – perhaps more than it realizes. It’s real power lies not in obtaining data or facts and passing it on. Instead, the real power lies in converting facts to information and knowledge and presenting it.  Question is, do people employed within HR analytics know how to mange this power?

How you present your information is important. Jeremy Shapiro has highlight how important it is to keep the information down to the bare essentials due to cognitive load. I have also shown how  cognitive dissonance will create a bias for a certain decision despite of facts and evidence may favor the alternative. A third important concept to be aware of when presenting your information is illusory correlations.

Illusory correlation is the belief that two variables are associated with one another when little or no actual association exists. This was probably best illustrated by Hamilton & Gifford in 1976 in the following experiment (from Stephen Franzoi’s ‘Social Psychology’) . Hamilton & Gifford asked participants to read information about people from two different groups, “Group A” and “Group B”. Twice as much information was provided about Group A than about Group B which made Group B a kind of “minority group” in this study. In addition, twice as much of the information give about both groups involved desirable behaviors rather than undesirable ones. Desirable information included statements such as, “John, a member of Group A, visited a sick friend in the hospital”. An example of an undesirable statement was, “Bob, a member of Group B, dropped litter in the subway station”.

Even though there was no correlation between group membership and the proportion of positive and negative information, participants perceived a correlation. As the figure below shows, participants overestimated the frequency with which Group B, the “minority group” (who where only described has a much as the “majority group”) and the undesirable actions (which occurred only half as much as desirable behaviors) were both distinctive aspects of participants’ social perceptions.

This is an important study for several reasons. It concludes that humans make wrong correlations/judgments even when they are faced with correct data and that this often goes against a minority group.

There are many reasons why humans (and therefore also HR analytics people) fall prey to illusory correlation. One reason is the psychological term ‘heuristics‘, which essentially mean that we use cognitive shortcuts to make judgments fast. We leave out a lot of relevant information in order to make a judgment. Stereotyping is one such heuristic. Whatever the reason is – we all do it all the time!

How does this apply to HR analytics? First, we need to understand that what and how we present “objective data” is hugely influential to how judgments and conclusions are made. Therein lie the power of HR analytics. Secondly, we must be careful that we do not make false and illusory correlations. We can do this in several ways; 1) constantly be aware of this phenomenon (studies show that education, reevaluation and reinterpretations help), 2) be in a better mood (Steven Stroessner (1992) found that people in a positive mood are less likely to perceive an illusory correlation). Perhaps all we need to do is to have more fun in HR analytics 🙂

06/08/2012 at 18:01 5 comments

HR should measure against the pacebo effect – you will be surprised…

I believe HR can learn a lot from psychology – not just in terms of how to develop and manage people but also how to think about its own existence, which activities to do and approach to take. For example, I have recently argued that the concept of cognitive dissonance could make us understand why we (HR) make poor decisions even face with good data and what implications this may have on HR analytics.

Another psychological concept – the placebo effect – is useful to consider. I believe it should be the benchmark for all HR activities, and that HR should measure some of its activities against the placebo effect once in a while.

Measure HCM against placebo effect

The placebo effect can be defined as “the physiological or psychological response to an inert substance or procedure”. This means that you can give somebody an inactive stimuli or treatment and it can have an effect. For instance, if you give a sugar pill (which has no effect) to a person with a headache and tell him that it is a pill which relieves pain for headache (such as aspirin), he is likely to experience no or a lower level of headache despite the fact that the pill has no physical impact.

The placebo effect has been proven in many experiments and not just medicine. One experiment measured the response of humans when under the influence of alcohol. Some subjects were given successive doses of alcohol and their responses were measured after each dose. Other subjects were instead given a placebo meant which mimicked the taste of alcohol and they were told that they were drinking alcohol. As expected, the group that was given actual alcohol exhibited signs of drunkenness and lack of coordination. What was surprising was that the placebo group exhibited the same signs, with some even seeming drunk. It seemed that the mere suggestion of drinking alcohol produced inebriated behavior.

Why does the inactive pill, the fake alcohol and other placebos work? First of all, for the placebo effect to occur, the subject must believe that he/she is given effective treatment and that it must be suggested that the treatment is effective. It works probably as a result of classical conditioning – people are conditioned to associate a particular stimulus with a particular response. Another reason may be that they are more motivated to feel better and which to cooperate with an experimenter.

Placebos are highly used in medical research. In fact the FDA will not approve any new drug unless it can show a significant effect over and above the placebo effect – something many consider to be the biggest barrier for the approval of new medicine. Why not set the same criteria for HR? Why not test HR activities against the placebo effect before they are approved internally?

Let me propose a few examples

  • Recruitment – an expensive recruitment process with multiple tests and many rounds of interviews must produce a better job/person fit, higher performance and lower new employee turnover than a placebo recruitment process
  • Coaching – an expensive coach using the right techniques must be able to deliver a better result than a placebo coach
  • Teambuilding – a teambuilding program promise to create better performance, fewer conflicts and lower employee turnover. But such an event is expensive. It should be evaluated against a (very cheap) placebo event

The problem with experiments like these are of course the ethical aspect – you just cannot do experiments on people without their consent. However you can do experiments and tests which are ethical, easy and valuable.

HR activities should be effective, they must be measured and their performance/effectiveness must be better than the placebo effect. Lets measure smarter.

22/06/2012 at 12:01 1 comment

HR analytics: Don’t think for a minute that data or information change behavior. Knowledge does.

HR analytics promise to give HR better data so they can make better decisions. And who would disagree? If you don’t know your levels of, say, talent turnover, how do you know if you have a problem, which of your current programs work and which don’t etc. In other words, with no or poor data you cannot make good decisions. I totally agree.

The incorrect assumption, which is sometimes made by some in the HR analytics community is, however, that people automatically will (or is even likely to) base their decisions upon good objective data. I would argue this is wrong.

I have previously argued that the concept of cognitive dissonance will actually make people make irrational and poor decisions even faced with good and objective facts. Elsewhere it has been argued that information overload (too much good data) will make people to make emotional or irrational decisions. Studies with placebo effects have also proved that people will act and make decisions based upon (irrational) beliefs rather than facts and data.

To understand why, I think it is important to remind ourselves of the difference between data, information and knowledge (see Davenport and Prusak for more).

1. Data is the fact of the world which can be subject to graphs, tables, statistics etc. They often reside in company’s archives, computers or records. Data do not carry any inherent meaning and more data is not always better as it can be difficult to make sense of raw data.

Examples: We have 5,000 employees, our annual talent turnover is 8.2%, profit per FTE (Full Time Equivalents) is $100,000.

Implication: Human beings cannot base their actions or change behavior on data alone!

2. Information is inferred from data and  essentially means that the data has been processed by a human being (or increasing by an intelligent computer) and conclusions are drawn on the basis of the data. Peter Drucker said that information is “data endowed with meaning and relevance”.  Some call them “value-added data” – it is sent from sender to receiver indented to change the receiver’s perception of something.

Examples: The talent turnover rate is too high and should be at 4%, our talent turnover is higher than our competitors’ and have been trending upwards

Implication: Evidence from diverse areas such as behavioral finance, social psychology and neuroscience show that people rarely act on the basis of information. Concepts such as cognitive dissonance (and many other) simply override information. More habit-breaking actions are impossible to make on the basis of information whereas more routine and simple actions can be done.

3. Knowledge is inferred from information and is produced by taking information and adding experience, evidence (research, case-studies, theory), contextual information, consequence etc. To produce knowledge requires human beings – it cannot be produced by intelligent software only. It represents our ‘map of the world’.

Examples: Increasing pay levels will not reduce talent turnover in our company but a 2-year talent management program will.

Implication: Knowledge is the only level which will produce ‘real decisions’ and therefore impact behavior in individuals and organizations. HR must take the best possible information and turn it into knowledge before it has the impact it was meant to have. An approach which looks at a mix of experience, values, context and not least (a high degree of) evidence-based research will produce knowledge.

So when we say that HR analytics will enable HR to make better HR decisions we need to understand that it has the potential but it will not necessarily do so. If the data is presented as, well, data then it will have little or no effect. If it is produced as information it may have some but not much impact. If HR analytics can produce real knowledge it will have a profound impact.

The solution is therefore not to remove HR analytics away from HR as has been suggested by some. No doubt that the actual skills of setting up and running an effective analytics department requires skills not present in any HR department today. But removing it too far from HR makes it difficult to use this data and information to produce knowledge. Knowledge is produced by human beings with experience in the subject matter. At least a (very) strong connection between the analytics department and HR must be established.

I freely admit that I believe HR analytics can add a lot of value in any organization. I also strongly suggest that it is only by converting information to knowledge that it can fulfill its promise of being an enabler of better HR decisions.

15/06/2012 at 09:41 9 comments

HR KPIs: The good, the bad and the ugly

This week I have had meetings with two HR executives about their HR KPIs (Key Performance Indicators).  They both complained about two things I hear a lot; 1) we have too many and 2) they are not very good. While recognising that they have too many they both found it hard to actually get rid of any. At the same time, while they felt that they were not pushing the business in the right direction, they didn’t know what the difference between a good and a bad HR KPI is.

The problem with KPIs is that they actually work most times. That is, if you start to measure people in certain ways and you link their pay to meeting those measures they will in most cases try to meet these goals (KPIs) at the cost of other things.  This is a problem because there is always a consequence with any KPI and if they are the wrong ones the consequences may be dire.

This can be simply illustrated here:

  • If you are in the recruitment department and your KPI is ‘Time To Fill’, you will be focused on filling a position with a person who may not be right for the job as long as it is done fast. The right person may have a three month notice period whereas another (not fitting the job as well) may only have one month notice period.
  • If your KPI is ‘Performance of the new employee after 6 months’ you will want to spend (a significant) extra time and money on finding the right person who can deliver performance fast, which means that the position may be vacant for many months thus disrupting the workplace in the meantime.
  • If your KPI is ‘Cost Per Hire’, you may use the cheapest channels, the fastest processes with the cheapest personality-tests because this will make you hit your target. The result may be that is the not the right person but it is the cheapest hire. Maybe you need to buy out the right person but this will ruin your KPI

 

The Good HR KPI
The good ones (i.e. the best ones) are the ones which are
  • 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). Meeting the target of the KPI should lead to meeting business goals.
  • Few.  It is better to meet the target of five of five  KPI’s than to meet six of ten. When you have too many KPI’s 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 KPI’s 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.

The Bad HR KPI
Bad ones are the ones which appear good because they follow the characterises of good KPI but they are not strategic and relevant. So at the end of the year you and the rest of the organisation congratulate yourself on meeting your targets only to discover that you failed to deliver on your strategy.

You may have a really well defined KPI on recruitment, but if your issue is a high turnover of talented employees your KPI may be well defined, actionable, personally owned etc. but it is not relevant nor strategic.

The Ugly HR KPI
The truly ugly ones are the ones which are not strategic, relevant or cannot even be measured. An example could be:

  • Title: Most managers perform annual reviews
  • Description: % of managers who perform annual review
  • Target: Higher than last year

The trouble with this one is that it is a mean-KPI (see above), it is poorly defined and most likely not relevant. This is an ugly HR KPI.

It is not difficult to find HR KPI’s (see for example this library). It is a little more difficult to define them well and have processes in place to meet them . But this is certainly something most can do. But it requires work to make the to be one of The Good ones.

30/03/2012 at 12:46 12 comments

5 myths about the hardest thing when measuring ROI on HR

Measuring ROI on HR is not difficult. In fact, with some training anyone can master this. If you know how to do it right, it is really all about planning, persistence and probabilities. However, at (at least) one point during the process, you will be left with a question which goes something like this: “How much of theses benefits was the result of this project and how much was due to other factors?”. This is the problem of isolating the impact of the activity.

The problem of isolating the impact when measuring ROI on HR is real but it should not – as many do – lead to the conclusion that you therefore cannot measure ROI on HR. You just need to overcome the issue.

In every HR project there will be a multiple of factors which influence the outcome. You create a talent management program and subsequently the turnover of talent fall. How much is explained by the talent management program and how much is due to general higher unemployment rates (and therefore fewer jobs for talents to leave for)? You send your middle managers on a training program in effective communication and subsequently the job satisfaction goes up. How much is due to other factors such as spring arriving, generous pay increases, general increase in job satisfaction across the country, the fact that your product has improved and your customers are more happy? Isolating the benefit is tricky.

Jack and Patricia Phillips write in their book “Show me the money”, which I will recommend to anyone wanting to embark on the journey of becoming better at doing ROI on HR, about common myths when isolating the impact of the activity. I believe there are five myths:

  1. The project is complementary to other activities and projects and therefore we should not calculate ROI on this project. All projects complement each other. So do all investments across the business. This is not a reason not to look at the individual components. Indeed if done well, this will actually show the value of how they complement each other.
  2. Estimations adds no value. During the process of isolation you will need to make certain estimation based upon experience or ‘best guesses’. Although this should only be done when there are no other alternative, it can provide value and credibility.
  3. There is no control group so therefore we cannot isolate the impact of this project. The best way to isolate the impact is though a control group. No doubt about that. Control groups can prove cause and effects. But this is often not possible to use such a design. Correlation studies can be used instead although they do not prove cause and effect. They may make the link probable and this is good enough in many cases. The challenge is make the conclusion as credible as possible.
  4. It is obvious how this links to shareholder value, so we do not need to isolate the impact for this project. I hear this so often. “It is so obvious that the leadership development program adds value – just look at the strategy map” . Unfortunately this is not the case. Stakeholders may conceptually understand it but they are more willing to accept it when they see the proof.
  5. Others don’t do it – let’s ignore it. 10 years ago, you could have ignored it. You could have pointed out that the isolation issue made it impossible to do a ROI calculation on your HR activity. No longer.

ROI on HR is not difficult. But there are a few steps in the process, which requires more attention and care than others. Isolating the impact is one of them.

22/02/2012 at 10:25 2 comments

The ultimate definition of Human Capital

If you Google “definition of Human Capital” you will be surprised and overwhelmed. It is a vast and contradictory  amount of definitions you will get. And frankly not very helpful as they don’t explain exactly what it is. For example, if you look at Wikipedia under ‘Human Capital Management’ you will find that it redirects to ‘Human Resource Management’. To them it is the same thing.

To me, the definition of human capital is: “all strategic issues of people, performance and culture in an organization”. This is still vague and broad so let me elaborate. This is probably best illustrated in the figure below. HR can be viewed from three levels; strategic, tactical and operational. While it is important to get all three right, it is the strategic element which encompass Human Capital.

The definition of human capital includes two things; the strategic framework and the core strategic activities. This is illustrated in the figure further below.

The strategic framework is the set of principles and guidelines to which all strategic HR activities should adhere. They should be documented and implemented in such a manner that they are aligned with the company’s own mission, and operational so they can be used in the HR processes. The framework covers;

  1. HR strategy which must be totally aligned with the company’s strategy.
  2. Performance culture. All companies have a culture, but not all promote high performance and superior customer service. While HR is not the bearer or primary shaper of a company’s culture, it is up to HR to design and implement activities so they promote such a culture.
  3. Measure & evaluate. HR must measure and evaluate its initiatives constantly in an objective and tangible way. By using tools such as HR Analytics, HR can make better strategic and people-investment decisions, thus making HR more efficient

While all HR activities have an strategic and an operational side to them, there are some activities which are more strategic by nature. Activities which HR must get right to master Human Capital Management and they are core to the definition of Human Capital.

  1. Leadership Development. Leadership Development is a must-win battle any organization. Leaders shape the culture of the organisation and make the processes stick. Leadership Development must involve top management participation to underline its significance. Leaders, at all levels, must be able to guide and motivate based upon human understanding, respect and responsibility – competencies which must be constantly developed.
  2. Performance Management is one of the most effective strategic HR activities. Research show that it is directly linked with: 1) higher profits; 2) quicker execution of company strategy; and 3) reduced employee turnover through higher engagement in their work. Goal alignment also makes it possible to establish a true pay-for-performance culture by linking reward systems with both individual and team performance. Also, performance management serves both as a clear measure of individual performance and development, and also provides a clear pipeline to talent identification and succession planning.
  3. Talent Management. ‘The War for Talent’ is continuing with increased speed despite the current global slowdown. According to The Economist, Board members in global multinational companies single out the ability to attract and retain talent as the single most critical catalyst for growth today. Talent Management is a range of continuous processes and development programs that aim to identify, attract, retain, engage and intelligently deploy the best employees in order to become the future leaders on all levels – a leadership and specialist pipeline.
  4. Employee Engagement is widely recognized to be major driving force behind many business outcomes. Research clearly shows that engaged employees are more productive, more profitable, more customer-focused and more loyal. Improving engagement requires a constant focus on changing behaviors, processes and systems to anticipate and respond to the organisation’s needs. Improving engagement means measuring and analysing the level of engagement. It is not possible to improve what you cannot measure.
  5. Succession Planning has two main purposes: one is to mitigate risk by having emergency successors identified, to step in when needed; the other is to have a longer-term development view of how positions are filled. The advantages of doing this well are anchored in business continuity. An effective, proactive succession plan leaves the organisation prepared for the loss of key employees, and prepared for growth, filling new jobs and employee promotions.

This was a long post on the definition of Human Capital but I think it is important to get right. I would be happy to be challenged on the above.

16/12/2011 at 10:53 7 comments

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