As seen on Drake Business Review (Volume 7, Number 2) Page 26.
In a world where it’s easy to get a snapshot assessment of your personal physical health or your organization’s financial or IT security effectiveness, what could be more valuable than an easy-to-conduct executive-level snapshot assessment of talent management and HR?
Unfortunately, most in HR are satisfied with a subjective or low-level tactical assessment, which instead of business impacts, covers spending efficiency, lean staffing, and whether managers and employees are satisfied with us. To be considered credible, a snapshot must be strategic and should “mirror” the executive snapshots from finance, customer service, and IT. To assess how well you’re doing, you also need a benchmark number so that you can compare your results with those of your direct competitors.
These six simple business metrics by themselves are enough to give you a snapshot but accurate view of talent’s business impact.
1. Revenue per employee
A revenue-per-employee workforce effectiveness measure gives a quick uncomplicated assessment of the value of your employee outputs by telling you how much revenue the average employee generates each year.
The more revenue an average employee generates, the more productive and effective your workforce is. Financial websites like MarketWatch include it in their stand- ard financial profile for each firm, making it easy to measure change in your company’s productivity over last year and to quickly compare the productivity of your workforce to that of your top five industry competitors.
You calculate this ratio by dividing your company’s total revenue by the number of employees (company revenue/number of employees). It’s best to make comparisons within the same industry, but the top benchmark revenue per employee number to compare yourself is Apple, where the average employee generates an astonishing $2.19 million in revenue every year. As a rule of thumb, in most industries, above-average firms produce revenue per employee that exceeds three times their average employ- 2ee’s salary. At Apple, it exceeds nine times.
2. ROI on workforce expenditures
Metric #1, revenue per employee, has a sig- significant weakness in that it omits the cost of an average employee. The gold standard of efficiency assessment in any business area is ROI, which compares the cost of an item to the value of its output. The profit generated per dollar spent on the employee is your second most valuable snapshot metric. Although it is more complex, this ROI on workforce expenditures is a more accurate measure because it includes the cost of employees rather than just the number of employees, and it substitutes profit for revenue, a better measure of company success. To get this ROI ratio, divide the company’s total profit for the year by the total cost of the workforce, including all salaries, benefits, and HR costs. The higher the ratio of profit generated per dollar spent, the more efficient you are.
Dividing Apple’s profit of $37 billion by their 2014 estimated total cost of labour of $16 billion ($200,000 per employee), you get an astounding ROI of 2.3 to 1. At other firms, a ratio of .20 to 1 could be considered a minimum target. Unfortunately, because total labour costs are not publicly available, you cannot easily compare your efficiency with other firms, so focus on year-to-year improvement, which means getting more profit from each labour dollar spent.
3. Percentage of corporate revenues from new products
Effective workforce innovations directly increase corporate revenue, producing up to five times the economic value of merely being productive. So once you’ve determined whether your workforce is productive, effective, and efficient, your next concern should be whether it is innovative. Rather than counting the number of ideas or innovations generated by the workforce, look at the impact of implemented innovations on corporate revenue. After all, you can’t consider an idea effective unless it is implemented and proven to be valuable in the marketplace.
An innovative workforce generally produces high-value innovations, and a significant portion of corporate revenues come from these. The metric for assessing the impact of your workforce innovations is the per- centage of corporate revenues from new products, those introduced or completely revised during the last 18 months. The benchmark comparison number depends on the industry, but the revenue percentage from new products should be at least 33% to show that they are being well received by the marketplace. The higher the percentage of revenue coming from these new products means that you are not only effectively pushing out new products and services, but that you are also making current products
4. Prominence of results in annual report
Companies are required to list their major accomplishments and problems in their annual reports. Everything with a high business impact is prominently mentioned in the annual report. If you do not receive prominent coverage — number of lines or pages compared to other functions, either your function has only a minor business impact, or you have somehow failed to demonstrate and quantify that impact to senior executives.
Focus further assessment only on the highest impact talent functions
After calculating these four strategic indications of talent management’s impacts on the business, you may want to go further to measure the efficiency of every individual talent function, including engagement, leadership, T&D, and compensation. However, avoid falling into that trap, because you can safely assume that great leadership, training, compensation, and performance management will directly lead to the improvement of your workforce productivity and innovation. You can go a step further if you restrict your metrics to the highest-impact talent areas. A recent Boston Consulting Group study of 22 different talent functions identified the ones with the highest impact on revenue and profit: Top was recruiting (with the closely related employer branding in fourth place) and second was retention.
5. Number of applications and referrals
You have many indirect ways to measure recruiting and employer branding effectiveness, but the most revealing is the number of applications your firm receives each year, the only way to tell if your message has been effective. Your target is the same number of applications each week as you have employees. If you’re curious about how your total number of applications compares to those of other firms, Zappos gets 31,000 each year, Yahoo gets over 600,000, and Google gets over 2,000,000.
A related indicator of your employee brand strength is your employee referral rate. The referral percentage out of all hires is important because only employees who like where they work recommend it to their top-performing colleagues. If their morale, satisfaction, and engagement are low, they certainly won’t take the time to refer their most admired colleagues. And so it makes sense to use the percentage of all hires that come from referrals as an indication that your employees like where they work. The benchmark is at least 45% of all hires c6oming from employee referrals.
6. Financial value of top performer turnover
Losing key assets directly to competitors is never a good thing, so a key success measure of great talent management is your firm’s effectiveness in keeping its highest-performing employees, those rated in the top 10% of performers. Listing that turnover percentage is not enough; you must go the next step and quantify the financial impact of this loss if you want to ensure that you get the attention of your executives.
To get the financial value of turnover, multiply the number of lost top performers by the percentage of increased performance that you get from your top performers, assumed to be at least 10% above your average revenue per employee. The target turnover percentage varies by industry and the current unemployment rate, but the best firms overall routinely hit below 5%, and the top-performer turnover rate should be half of the standard rate. A low turnover rate viewed independently cannot be an automatic indication that your firm is a great place to work: If your firm also has a relatively low employee productivity rate or low job application rate, the low turnover could indicate that your employees have little initiative or that they are not desirable in the marketplace.
Talent management tends to use too many metrics, so try to avoid adding any more to this short business impact list. It is fine to use common tactical metrics, such as time to fill, training hours, and employee engagement scores, but be aware that these are tactical and not strategic impact metrics to use for internal continuous improvement purposes. However, if you train, develop, move employees, and hire effectively, these successes will all improve the business impact measures.
No matter what metrics you pick, executives won’t find them credible unless they have been fully vetted by the CFO, the undisputed King of Metrics. Therefore, before you go very far in creating your snapshot assessment, work with the CFO’s office to ensure that they support the metrics you selected and their formulas, the methods for gather- ing the relevant data, and which benchmark number will be used to judge yearly success against. Then run these metrics by a sample of managers and executives to identify their concerns and to be able to answer each one whenever you present your snapshot metrics. After calculating your metrics, if you find that your firm is simply not competitive, ask yourself what the top firms are doing in talent management that you are not.