Apple’s workforce is 9x more productive than IBM’s, and wouldn’t your CEO be mad if your productivity lagged behind that much within your industry? Yes, it’s a standard business practice to measure the productivity of your major assets. Unfortunately, however, most HR functions don’t provide a single strategic measure that covers the business impact of the most expensive asset of most corporations, it’s employees. However, there is such a metric, and it is known as “workforce productivity.”
Industry Comparisons Are Easy With These Workforce Productivity Metrics
CEO’s love comparison metrics, so rather than just presenting a single isolated workforce productivity number, why not show HR’s competitiveness by providing a side-by-side comparison of your workforce productivity directly alongside each of your competitors. Fortunately, industrywide comparisons are now easy for the two workforce productivity metrics suggested here because they rely only on publicly available information. And after you begin comparing workforce productivity between your firm and your competitors, you will quickly learn that a few firms produce breathtaking productivity results which provide an exceptional opportunity to learn. For example, (based on the chart below) you can quickly see that the superior HR programs at Apple produce nearly 9 times the Revenue Per Employee (RPE) of another firm in their industry, IBM*. Also, with further comparisons, you will learn that some firms are extremely effective with their salary spending. For example, the Revenue Per Salary Dollar (RPSD) return that Apple receives is an astonishing ratio of 32 to 1, which is 9 times the salary return ratio of its competitor, IBM.
Don’t numbers like that cause you to want to know what Apple HR does in order to generate those amazing performance differentials?
Lessons To Be Learned
These phenomenal workforce performance differential examples should serve as a signal to every smart HR leader that there’s a great deal that they can learn from workforce productivity comparisons. Those learning should include:
Commit to a single overall strategic metric.
Most HR departments routinely produce a confusing hodgepodge of tactical metrics, where each metric covers results only from a specific HR sub-function. Instead, what is needed is one single overarching strategic metric that reveals HR’s total business impact. And that strategic metric area should be workforce productivity. If you have the time additional, more advanced productivity metrics like the dollar of profit per employee or cents of profit from each dollar invested in employee costs should also be considered.
Understand that there is a huge performance differential.
Once you begin making side-by-side workforce productivity comparisons. you will instantly become aware that there is almost always a huge gap in workforce productivity performance between companies. And like any performance gap, you should consider this as an opportunity to learn what factors in HR cause that huge productivity difference.
Identify the best performing firms.
The workforce comparison ranking will reveal the specific firms that you should benchmark and learn from. Because of their amazing results, regardless of your industry; Apple, Google, and Amazon should also be included in your benchmark firms.
Identify the highest contributing HR elements.
Start your research into which HR functions have the highest impact on revenue and profit margins by examining the landmark BCG research that ranked recruiting as the #1 business impact function. Next, internally use root cause analysis to identify your own highest impact HR areas. And then utilize benchmarking and best practice trading in order to learn as much as you can about HR success factors at each of the top-performing firms in your industry. If you don’t have much time, start by assuming that recruiting, retention, onboarding, and internal movement in revenue-generating jobs will have the highest revenue/business impacts.
Set as a goal to build a continuous competitive advantage.
Finally, realize that extremely high workforce productivity and innovation levels provide your firm with a competitive advantage. So set high goals in those areas, reallocate your HR resources, and report the improvement in your results each year to your executives.
The Data For Workforce Productivity Comparisons Is Now Readily Available
Fortunately, the data covering how other firms in your industry are performing in the workforce productivity area is now readily available.
- Revenue per employee data (RPE) – almost every Fortune 500 firm is already calculated in a consistent way on MarketWatch.com (simply type in the corporate stock symbol in the search box). And if you need industry averages, CSIMarket can provide insights into revenue per employee averages for different industries.
- Revenue per salary dollar (RPSD) – as a result of new SEC reporting requirements, the median employee salary for each corporation is now publicly reported. (Note: it is an okay substitute for the average salary because I haven’t found any reliable sources for average salaries). Dividing the median employee salary into the average revenue per employee gives you your revenue returned per salary dollar ratio. Obviously, the higher the ratio the more value that you’re getting from your salary dollar.
If You Don’t Need External Comparisons – The Ambiguity Goes Away
Almost all of the arguments against specific workforce productivity measures go away if you only make year-to-year comparisons within your own firm. So, in this case, use these workforce productivity metrics.
- Cents of profit (or revenue) per dollar spent on employee and HR costs
- Profit (or revenue) per FTE
- Total labor costs per unit of output (including outsourcing labor costs)
- Percentage of the total corporate budget that goes to employee and HR costs
- Percentage of total contribution to team productivity out of 100% that can be attributed to HR, and then to other overhead functions (from a yearly survey of senior managers)
Almost everyone in HR is openly striving “to be more strategic.” Yet when you look at the metrics that HR reports to senior executives, universally, only tactical metrics are found. And there is no single unifying strategic metric covering all of HR’s total impact. That is an omission that should end today. I recommend that you immediately begin reporting industry-wide comparisons of revenue per employee. Starting with your own improvement rate over the last few years. And next, show your revenue per employee within a top to bottom-ranked list of the best-performing companies in your industry. Do the same for your revenue per salary dollar. Highlighting these two workforce productivity metrics and their comparisons will quickly reveal HR’s overall impact in dollars (which is after all the language of business).
Note: This “think piece” is designed to stimulate your thinking about strategic HR metrics.
Author’s Note: Please pass this article around within your team and network. If it stimulated your thinking and provided actionable tips, please take a minute to follow and/or connect with Dr. Sullivan on LinkedIn, where you can also leave comments on this article.
© Dr. John Sullivan 11/19/20 for the DJS newsletter updated 12/6/20