Financial analysis skills will be key to determining HR success - Human Resources Management: Ideas & Trends

HR Magazine, August, 1997

Measurement is obviously essential for determining whether HR practices and the HR function add value to an organization. Generally, HR is considered a cost or resource absorption center; however, it will become increasingly more common for HR to price and sell its services internally and externally. In the alternative, HR can justify its contribution by demonstrating cost savings, reduced turnover, enhanced employee productivity and increased job satisfaction.

Three approaches. There are at least three approaches to assessing HR's value:

* volume/activity ratios that frequently take the form of efficiency indices;

* internal customer/employee satisfaction surveys; and

* program evaluation and benchmarking.

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Within each approach, aggregate measures and assessments can be taken. Specific analysis of particular HR practices or programs can be performed as well (see Table 2).

Common measures. No clear pattern of measurement/assessment use and importance emerged. However, some aggregate measures are commonly used: employee turnover rate and employee absence rate.

Financially based measures de= aired. Other aggregate measures less commonly used include sales revenue per employee, HR cost per sales dollar and return on HR investment. These measures. tend to be more financially based and generally require more analytical skill to develop, use and interpret. Likewise, program evaluation and benchmarking are not commonly used, although they are powerful approaches to demonstrating HR's organizational contributions. External wage and benefit surveys, a form of benchmarking, were used by all respondents, however.

Several of the more specific measures (cost per employee training hour, cost per hire, labor contract costing, and benefit cost ratios) are also based in cost accounting or financial analysis. Again, many of these tended to be used less and were rated as less important. One of the most frequently used and the most important measure was the OSHA incident rate; this is the only measure on the list with a basis in federal regulation.

Efficiency vs. effectiveness. Many of the measures capture aspects of efficiency, but do not necessarily provide much indication of effectiveness. For example, consider average time to fill new and vacant positions: over a period of time, an HR department could significantly reduce the cycle time to fill positions, but unless the right applicants are chosen, HR may not be effective in staffing the organization.

Return on HR investment, program evaluation and attitude surveys do address effectiveness concerns. Unfortunately, HR respondents indicated less use of these methods. Several measures of HR staffing performance were also rated as lower in importance or had less usage. Staffing is one of the HR functions that is information- and relationship-based, making it more deserving of careful assessment.

New direction. Research demonstrates that a variety of HR measures and methods are used, but insufficient importance may be attached to some of them. As executives and other managers demand HR efficiency and effectiveness, more HR effort will need to be directed at program evaluation and using financial indices.