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 I have found that 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.
In order to be considered as credible, instead this snapshot must be strategic, and it should mirror the executive snapshots that are available in finance, customer service, and IT. In order to assess how well you’re doing, a benchmark number must also be provided so that you can compare your results to your direct competitor firms. I have included six simple measures that by themselves are enough to give you a snapshot but accurate view of talent’s business impact.
- A high revenue-per-employee number is as an easy-to-compare indication of a productive and effective workforce — this “revenue per employee” workforce effectiveness measure will give you a quick, uncomplicated assessment of the value of your employee outputs by telling you how much revenue the average employee generates each year. Obviously the more revenue that the average employee generates, the more productive and effective your workforce is. Revenue per employee is listed as the first snapshot metric because it is an easy number to compare between competitor firms because financial websites like MarketWatch include it in their standard financial profile for each firm. That makes it incredibly easy to measure the increase in productivity over last year and to quickly compare the productivity of your workforce to your top five industry competitors. You calculate this ratio by simply dividing the number of employees into the company’s total revenue (company revenue/number of employees). 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. If you really need a rule of thumb, in most industries you would expect above-average firms to produce a revenue per employee that should exceed three times their average employee’s salary (at Apple it exceeds nine times).
- A high ROI on workforce expenditures is an indication of efficiency — the revenue per employee measure listed above has a significant weakness in that it omits “the cost” of an average employee. And since 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, if you have time to calculate it, the profit generated per dollar spent on employee costs is the next-most-valuable snapshot metric. This “ROI on workforce expenditures” is a more complex but more accurate measure because it includes the cost of employees (as opposed to just the number of employees) and it substitutes profit for revenue (a better measure of company success). You get this ROI ratio by simply dividing the dollars spent on your employees, known the Total Cost of the Workforce (which includes all salaries, benefits, and HR costs) into the company’s total profit for the year. Obviously the higher the ratio of profit generated per dollar spent, the more efficient you are. A rough estimate of Apple’s total cost of labor last year is $16 billion ($200,000 spent per employee) and dividing that into its profit of $37 billion gives you 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 labor 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 labor dollar spent.
- Effective workforce innovation will directly increase corporate revenue — once you determine whether your workforce is productive (i.e. effective and efficient), your next concern should be whether it is innovative. This is because innovations can produce up to five times the economic value that results from merely being productive. Rather than counting the number of ideas or innovations that are generated by the workforce, a superior success measure is to look at the impact of implemented innovations on corporate revenue. The revenue impact of innovations is important because you can’t consider an idea effective unless it is implemented and it has proven to be valuable by the marketplace. An innovative workforce generally produces high-value innovations, and as a result, a significant portion of corporate revenues will come from those new products. So the metric for assessing the impact of your workforce innovations is the percentage of corporate revenues that come from new products (i.e. products that were introduced or completely revised during the last 18 months). Once again the benchmark comparison number depends on the industry, but the revenue percentage from new products should be at minimum 33 percent in order to show that your recent innovations are being well received by the marketplace. Obviously the higher the percentage of revenue coming from these new products means that you are effectively pushing out my new products and services but that you are also obsoleting your own current products (which is a good thing).
- Everything with a high business impact is prominently mentioned in the annual report — the fourth but the simplest measure covering whether you are considered to have a significant business impact is how prominently your results are displayed in the annual report. It’s a simple concept but legally companies are required to list their major accomplishments and problems in their annual reports. So 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, there is a natural tendency to want to go further and to measure the efficiency of every individual talent function like engagement, leadership, T&D, and compensation. But you should avoid falling into the trap, because you can safely assume that great leadership, training, comp, performance management, etc. will directly lead to the improvement of your workforce productivity and innovation. However, if you want to go a step further, it is okay if you restrict your metrics to the highest impact talent areas. A recent study by the prestigious Boston Consulting Group, out of 22 different talent functions, identified the ones that had the highest impact on revenue and profit. So if you want to directly assess the two highest impact functions, they were recruiting (and the closely related employer branding at No. 4) and retention.
- Great recruiting and employer branding will result in a large number of applications and referrals — there are many indirect ways to measure recruiting and employer branding effectiveness, but the first revealing bottom line measure is the number of applications that your firm receives each year. This is because no matter what you or others have said, the only way to tell if your message has been effective is by the number of job applications you receive each year. The benchmark number to target is that you should receive the same number of applications each week as you have employees. Or if you’re curious about how your total number of applications compares to other firms, Zappos gets 31,000 each year, Yahoo gets over 600,000, and Google gets over 2 million. A related indicator of your employee brand strength is your employee referral rate. The referral percentage (out of all hires) is important because if you don’t like something, you certainly won’t recommend it to your top-performing colleagues. And if your morale, satisfaction, and engagement are low, you certainly won’t take the time to refer your 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 standard is having at least 45 percent of all hires coming from employee referrals.
- Calculating the $ value of top performer turnover will demonstrate a high business impact — losing key assets directly to competitors is never a good thing, so one of the key success measures of great talent management is how effective your firm is at keeping its highest-performing employees (i.e. those rated in the top 10 percent of performers in a job family). But listing that turnover percentage is not enough. You must go the next step and quantify the dollar impact of this loss if you want to ensure that you get the attention of your executives. To get the dollar value of turnover, multiply the number of lost top performers by the percentage of increased performance that you get from your top performers (it is usually assumed to be at least 10 percent above your average revenue per employee). Once again the target turnover percentage varies by industry and the current unemployment rate, but the best firms overall routinely hit below 5 percent and the top performer turnover rate should be half of the standard rate. A low turnover rate viewed independently cannot not be an automatic indication that your firm is a great place to work because there is an important caveat regarding low turnover. If your firm has a relatively low turnover rate but it doesn’t have a relatively high employee productivity rate or a high job application rate, this low turnover rate could be an indication that your employees either simply have little initiative or that they are not desirable in the marketplace.
You May Be Tempted to Look Further at Other Metrics, But Don’t
There is a tendency in talent management to use way too many metrics, so be careful about adding any more to this short business impact list. While it is of course okay to measure common tactical metrics including time to fill, training hours, employee engagement scores, and other factors, be aware that these are tactical metrics not strategic impact metrics.
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Use these tactical metrics for internal continuous improvement purposes, but the bottom line is if you train, develop, move employees, and hire effectively, these successes will all improve the above 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). As a result 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, their formulas, the methods for gathering the relevant data, and the benchmark comparison number that will be used to judge yearly success against.
You should then run these metrics by a sample of managers and executives, so that you can identify all of their questions and concerns and be able to answer each one whenever you present your snapshot metrics. After calculating issue your metrics, if you find that your firm is simply not competitive, you then must ask yourself what the top firms are doing in talent management that you are not.