（人力资源知识）2020年
人力资源模型
When you sit down to evaluate your organization’s performance, what measures come to
mind?
Chances are, you first think about your balance sheet measures: how much
revenue did we generate last quarter, how much was our growth in sales and
profits or what gains did we make in our market share? Next, you may think
about the costs: equipment, material, travel and so on. Or perhaps it is your
customer measures that come up for consideration: have complaints increased,
are they repurchasing our products? These key performance indicators (KPIs) are
important and you consider them on a weekly, monthly and quarterly basis.
What is often missing from this list is an area that accounts for one of your
largest expenses and perhaps creates the most value: your people, or what many
now call “Human Capital”. People are one of the most important indicators of
an organization’s ability to create and sustain value: they come up with the
ideas for new innovations, they delight your customers, and they produce your
products. In spite of this, many organizations have difficulty demonstrating
how spending on people and people programs produce a return on investment.
Human Capital Measurement (HCM) bridges this gap by helping organizations focus
on people measures, to better understand and predict how employees contribute
to their success. It allows companies to quantify how employees are impacted by
programs such as training and development, recognition and work-life balance.
It also assesses how employees react to organizational changes such as mergers
or major restructuring. Most importantly, it can provide the same level of
rigor that other areas of your business apply to evaluate their investments.
Hewitt Associates has developed a leadership position in the use of Human
Capital Measurement. Our Best Employers research supports a growing amount of
evidence connecting effective people management with long-term organizational
performance. Similarly, we have a number of HCM approaches that we have applied
to help organizations sharpen their people investment strategies. In this issue
of HQ, we give you some insight into our approach to HCM and describe several
specific client situations where this approach has helped them achieve their
strategic goals and realize tangible results. Our philosophy toward HCM is to
align the approach to your specific situation. We illustrate a wide range of
approaches that describe how people scorecards and key organizational
performance metrics are developed, optimal people behaviors identified and
predictive models framed.
HCM can appear daunting and complex but our consultants can work with you from
wherever you are starting and to whatever level of sophistication you desire,
to help you understand and realize the value of your human capital. HCM is fun,
challenging and a leading-edge work. It provides our consultants with a feeling
of success and it produces great value for our clients.
Mick Bennett
Managing Director, Asia Pacific
Hewitt Associates LLC
The average human life span has risen dramatically from a life expectancy of 40
in the early 1900s to 75 years at the turn of the millennium. The human race
has learned what factors need to be monitored to increase longevity: a balanced
diet, regular exercise, monitoring key measures such as blood pressure,
cholesterol, etc. Identifying, monitoring and acting on the right measures has
doubled the human life span in one century.
Company life expectancy has not fared as well. In the late 1920s and 1930s the
average company life span was over 60 years. Now the average life span of
companies is 12-15 years. So many companies will “die” in their teens and
only a handful will survive into the next century.
To complicate the situation, the world as a marketplace is shrinking and
competitors straddle the globe. A new service offering is duplicated within
hours, a product launch sees competitors'‚ reply on the shop shelves within
days and a technical breakthrough is copied within weeks. The sourcing of raw
material and talent spans the globe. So does the supply.
Along with these changes, the days of a lone entrepreneur who performed all
functions single-handedly or with a couple of apprentices are long gone. Today,
world-class factories that house non-stop assembly lines work with hundreds of
employees. Products, processes and technology are easily available or
duplicated. So why do some companies survive and others fail in a short period
of time?
The company’s workforce has emerged as a key asset and is often described as
the only competitive advantage that a company possesses. Employee behavior, the
knowledge and experience they bring, together with their commitment to the
organization are key drivers for sustainability and growth.
Squeezing savings in the supply chain, ensuring higher capacity utilization at
the shop floor, continuously upgrading the product and delighting customers
with efficient service models are all efforts that are steered by employees.
Every business needs workers who take ownership of their work and the workplace.
They need to be bargain buyers, effective salespeople, have unfaltering faith
in their products, zealously guard their customers, painstakingly track the
competition and above all, have an uncompromising commitment, loyalty and
honesty towards the organization and its stakeholders.
To survive, sustain and grow in this context, where employee excellence is
required more than ever before to achieve sustainable growth, the role of the
corporation has been changing too. The old systems of training, monitoring and
awarding employees are inadequate. The sheer size of businesses deems that
impractical. Businesses now need to focus on attracting, retaining and
harnessing the best talent in a more holistic and strategic manner.
To be successful in all this, companies need to measure the value that
employees bring to the organization, evaluate their impact on business
performance and then align them with the business results. Companies have
always measured their investments in more tangible assets such as buildings,
equipment and even new products. Yet, many still pay less attention to their
employees. Companies continue to focus on physical assets that were crucial
historically or whose productivity is easily measurable financially.
“What gets measured gets done” may have described the dynamics of the factory
floor but did not have much to do with the human resource department. Moreover,
measuring the “soft stuff” or the human capital has been difficult if not
impossible. That is, till now.
Considerable evidence already exists, both in academic research and in work
done by Hewitt Associates, that successful companies know the value that people
can bring to the organization, invest appropriately in their talent and measure
the impact their investment has on the bottom line. The notion of the
employee-customer value chain was first made broadly popular in the January
1998 issue of the Harvard Business Review, which detailed a value driver model
at Sears in the United States. (See Figure 1.)
Today many similar models exist in organisations around the world. Hewitt’s
Best Employer studies have shown that these companies have higher revenue
growth and greater profitability than other organizations. These numbers vary
considerably across regions but what is common and consistent is better
business performance.
These organizations create an environment that enables employee engagement,
capturing the hearts and minds of employees to deliver extraordinary
performance. An engaged employee is one who consistently speaks positively
about the organization, stays with the organization despite opportunities to
work elsewhere and exerts extra effort in work and behavior that contributes to
business success. Hewitt’s Best Employer studies, for example, clearly
demonstrate that The Best have much higher employee engagement (73% vs. 52%)
and lower turnover (10% vs. 15%) on an average. This global research has
conclusively established the high correlation between employee engagement and
business performance gauged through key business measures. It has shown that
organizations that improved the employee engagement levels simultaneously
produced rises in productivity, employee retention, customer satisfaction,
total shareholder return (TSR) and sales growth. Using a database of over 100
public corporations that completed an engagement study over a five-year period,
Hewitt Associates has demonstrated the following:
High performing companies have an engagement score that is 20-25% higher
than average;
The correlation between employee engagement and a company’s average
five-year TSR is . This means the level of employee engagement explains
29% of the variation in TSR; and
A similar relationship exists between engagement and five-year sales growth.
The correlation measured here was , again indicating a strong
relationship.
On a micro level, Hewitt’s consulting work with specific organizations has
also identified a strong and consistent link between engagement and a variety
of measures like financial performance, customer satisfaction and employee and
customer retention.
As you will see in a later article, a Hewitt study involving companies that
show double-digit growth (DDG, showing cumulative 10%+ growth over a five-year
period), also exhibited a much higher level of engagement in the organization.
As many as 93% of executives at DDG companies are engaged compared to 52% for
all employees in all companies (see Figure 2).
All this research allows us to suggest a generic, high-level model for the
important role that employee engagement has in outperforming your competitors.
This notion of employee engagement is, we believe, certainly not the only but
without doubt the core and fundamental building block of human capital.
A giant step forward from attitude and satisfaction measures of the past, HCM
delivers invaluable data regarding employee engagement. And organizations that
are following through on strategies to boost their employee engagement are not
only improving their short and medium-term business results, but are also
solving the talent dilemma and driving long-term value for their shareholders,
customers, and employees.
For a detailed discussion of the Best Employers research, see Hewitt’s best
selling Leadership and Talent in Asia: How the Best Employers deliver
extraordinary performance.
Organizations are beginning to look at their human capital investments with
interest. HCM helps them understand the return on this investment as well as
evaluate its impact on business performance
Today, it is rare that an organization should not have employees as one of its
top three or four expense categories. Salaries, benefits, training and
development, recruiting, employee communication, lost productivity due to
turnover … it all adds up to a huge investment. While organizations apply
rigorous scrutiny to the investments they make in capital equipment,
acquisitions of business and similar investment decisions, few apply equivalent
rigour to question the multi-million dollar investment they make each year in
their employees. Fewer understand their employee investments beyond the cost of
salary and benefits and fewer still understand the return on their investment
in employees. This is the information that Human Capital Measurement (HCM)
provides to help you run your business efficiently.
Employees are not just a cost. Like any other investment, they provide a
return.
Employees are not just a cost. Like any other investment, they provide a return.
Increasingly, the contribution of employees accounts for more of an
organization’s ability to compete, grow and produce value. We all know that
there is a large gap between the market value of most organizations and what
appears on their balance sheets.
Hopefully for your business that gap is a positive difference — things are
serious when it’s negative. In today’s economy, it’s estimated that on
average the market value stands at $ for every $1 that appears on the
balance sheet. While this number has dropped from the heady highs of $ in
March 2000, this :1 ratio still accounts for a large portion of your
organization’s value. Figure 1 shows the results from Baruch Lev’s study of
market-to-book ratios – it clearly demonstrates the growth in this ratio since
the late 70s.
So what accounts for the difference? Typically, these are the organization’s
intangible assets. Intangibles include a variety of factors such as brand
strength and reputation, relationships with customers, patents and a variety of
factors that we call human capital; these include quality of leadership,
employee creativity, productivity, loyalty, passion and knowledge management.
Scarcity in one or more of these areas or sub-optimal productivity in them is
often more constraining for businesses than financial capital. At times,
businesses have been taken over merely to acquire their intellectual or human
capital.
“As the correlation between quality of human capital and business performance
becomes clearer, the notion of human capital being represented on financial
statements has surfaced,” says Mark C Ubelhart, Value-Based Management
Practice Leader with Hewitt Associates. Ubelhart has been working on developing
methods that can help measure the contribution of human capital and drive
decisions to invest in people. He says, “The new frontiers of measuring human
value are being developed in financial metrics similar to those being used in
everyday investment processes.”
HCM describes a variety of people measurement practices that help organizations
understand and quantify their people investments. As an approach, it also helps
HR build credibility with the line functions, as HR measures now become more
performance focused and demonstrate an understanding of value creation.
It would be wrong to think of HCM as a unified body of practice. There are
numerous approaches, models, “offers” and conceptual frameworks. A simple way
to try and get an understanding of HCM, no matter how evolved the thinking in
your organization, is illustrated in Figure 2.
As organizations begin to adopt these frameworks, HCM is evolving very quickly.
Until recently, there were few robust cases or methods for demonstrating the
relationships that exist between investments in people and business outcomes.
HCM consisted of measuring and benchmarking, for which the measures in vogue
were focused on either efficiency or accuracy (for example, the ratio of HR
staff to employees, number of payroll errors, time to fill vacant posts etc).
For evaluation, these productivity metrics were then benchmarked against best
practices and were not focused on the results they produce – a 10:1 or 20:1
employee to HR staff ratio does not necessarily produce a tangible result. The
majority of organizations continue to follow this approach that focuses mostly
on performance of policies. These cost-focused approaches often restrict the
HR’s role in the organization. To become a strategic partner, some HR
departments are using more sophisticated HCM approaches (see figure 3). A small
number are also measuring how human capital impacts strategic outcomes.
This change in philosophy to more sophisticated HC measures is precisely where
Hewitt has focused. We have developed a variety of approaches and measures for
organizations at various stages in their development. Hewitt’s measurement
solutions range from HR benchmarking and metrics to HR scorecards and from
there to human capital modelling (see articles on National Australia Group and
Cargill). At all times, our goal is to match and align the nature and depth of
HCM with the organization’s needs and level of sophistication. An overview of
our general approach is outlined below.
Benchmarking and Metrics
Hewitt’s approach to understanding the efficiency and effectiveness of the HR
function is detailed in a subsequent article (see HR Analyzer article).
Developing better benchmarking and metrics can provide an easy starting point
and entry into HCM. Appropriate and well-selected benchmarks and metrics can
help companies analyze and review HR data to outline improvements and benchmark
opportunities.
The scorecard ensures alignment of HR strategy with overall business strategy,
focuses HR initiatives on meeting strategic goals, and evaluates the impact of
diverse HR activities on an organization’s long-term business objectives.
This allows companies to review their existing HR measures, understand
benchmarks or innovatively measure a particular aspect of their programs,
polices, etc.
This approach will often identify functions, processes or systems that are not
performing as well as possible (relative to other companies) and identify
opportunities for improvement. It will not provide a measure of how effective
your human capital investments are on your business.
Hewitt aims to move organizations away from measurement processes that focus
predominantly on costs, efficiency and accuracy or solely on benchmarking. Such
an approach is only valid in a paradigm that views HR and employees as costs to
be managed. While simple to understand and calculate, today these measures
provide little linkage to a company's business strategy. This places many HR
functions at risk in a number of ways:
Measures reported are often lagging. There are no indicative signs of
future performance for management to take action in time;
It can often reinforce a dysfunctional leadership behaviour that sees the
HR function as a corporate expense — a prime candidate for downsizing,
elimination, or outsourcing; and Benchmarking focuses on what others are
doing and can inhibit outside-the-box thinking or refocus on new people
strategies.
Building HR Scorecards
The HR Balanced Scorecard is an effective tool to illustrate the contribution
of HR to achieving long-term value generation. It is based on the business
measurement framework provided by Robert S. Kaplan and David P. Norton. Besides
providing a framework for measuring the effectiveness of HR strategy, a Hewitt
HR scorecard serves as a communication and planning tool.
The scorecard ensures alignment of HR strategy with overall business strategy,
focuses HR initiatives on meeting strategic goals, and evaluates the impact of
diverse HR activities on an organization’s long-term business objectives. A
Hewitt HR scorecard uses four components to define and measure the
effectiveness of people-management activities and how they contribute to
long-term value creation for an organization:
Financial: This area of the scorecard focuses on the shorter-term financial
impact of people management and HR practices on business results.
Customer: This area of the scorecard focuses on the perceptions key
stakeholders have about HR effectiveness and people-management programs, such
as customer satisfaction and retention.
Operational: This area of the scorecard focuses on the internal efficiencies of
critical HR processes — for example, productivity, quality, cost, and cycle
time.
Strategic Capability: This area of the scorecard takes a broader view of the
development of critical people capabilities that can help the organization
achieve and maintain competitive success.
Details on this topic can be found in the People Scorecards article.
Human Capital Modelling
Human Capital Modelling (HCM) is a more sophisticated approach to determining
the impact of your employees on business performance, guiding potential
investment decisions, focusing your strategic planning and measuring the return
on your investment.
It works by identifying your organization’s strategies and the talent
requirements to achieve these strategies. It then incorporates the HR
strategies and the people leverage points in the business value chain. It
identifies how HR impacts these leverage points and then builds a fully
developed value chain that measures the impact of human capital and HR
activities on business outcomes.
One such model used by Hewitt with some clients is to look at the relationships
between employee engagement, capability, utilization and business performance
(see National Australia Group article).
Engagement is the state of emotional and intellectual involvement that an
employee has in the organization. Engaged employees are those individuals that
want to and do actually take action to improve the business results of their
organization.
Capability measures the extent of knowledge and skills. It is impacted by the
organization’s ability to attract talent, training, learning and development
opportunities as well as employee experience levels.
Utilization indicates the extent to which employees are able to apply their
skills for the organization’s benefit. Organizational structure, policies and
procedures, technology and clarity in the organization’s objectives and
direction impact the level of utilization.
By understanding the relationship between these higher-level levers and
business outcomes such as customer loyalty or revenue generation, organizations
can direct effort into the areas of greatest impact. For example, identifying
how investments in specific people programs (like leadership and career
development) impact business results through improvements in organizational
capability and employee engagement is a powerful strategic weapon in the battle
for differentiation and competitive advantage. It also sends a very clear
message to senior leaders in the business about where to focus their attention.
Details on this topic can be found in the Predictive Modelling article.
As more companies move towards adopting sophisticated people-measurement tools,
it needs to be made clear that understanding people value is the starting point,
not the endpoint. HCM is not about proving that people add value to the
business. Good leaders already have this fundamental philosophy. It is also
about guiding investment decisions and understanding the trade-offs among HR
programs, between capital and people investments and in people decisions.
With the human resource function being considered a strategic partner,
sophisticated measures that gauge its effectiveness and impact on business are
being thought of, formulated and applied
We see an interesting paradox when it comes to the reporting of people measures.
In many organizations, while HR continues to build its strategic capability and
leaders look for ways to build value through their people, HR measurement
activities continue to remain focused on evaluating efficiency or accuracy.
Calculating the ratio of HR staff to employees, absenteeism, employee turnover,
number of payroll errors and the like and benchmarking them against best
practice competitors still account for a lot of HR time.
These measurements work in a situation where HR and employees are seen as a
cost to be managed. Today, when HR is being viewed as a strategic partner,
these measures provide little insight into the value HR adds, its linkage to a
company’s business strategy and the areas it needs to focus on to impact
business further.
Moreover, this places many HR functions at risk in a number of ways. These are
typically lag measures — providing no indication of future performance for the
management to take action. They can, of course, also reinforce a pattern of
leadership behaviour, which views the HR function as a cost. Further,
benchmarking focuses on what others are doing and can inhibit innovation and
creativity.
An alternative model of HR measurement is beginning to emerge in which
organizations are focusing on the effectiveness of their HR function and not
just its efficiency. This emerging measurement mindset is illustrated in the
table below.
The starting place for any modern HR measurement needs to be a strategy that
makes explicit the role that the HR function plays in the achievement of
business objectives. Many businesses are turning to the development of HR
Balanced Scorecards to begin their measurement transformation.
Some Sample Balanced Scorecard Measures
The Balanced Scorecard is a strategic, business measurement methodology
developed by Robert S. Kaplan and David P. Norton. It is on their framework
that Hewitt Associates has evolved the HR Balanced Scorecard. It provides
business leaders with a tool and a process to measure the performance of people
practices and the HR function from multiple perspectives:
Strategic Perspective — the results of strategic initiatives managed by the HR
group. The strategic perspective focuses on the measurement of the
effectiveness of major strategy-linked people goals. In the example overleaf,
for instance, the business strategy called for major organizational change
programs as the business faced major restructuring and multiple mergers and
acquisitions. In this context, the organization’s change management capability
will be a key factor in the success or failure of its execution. Therefore,
measuring the ability of the business to manage change effectively is the core
measure of the effectiveness of HR and will be a key strategic contribution to
the future success of the business.
Operational Perspective — the operational tasks at which HR must excel. This
piece of the Balanced Scorecard provides answers to queries about the
effectiveness and efficiency in running HR processes that are vital to the
organization. Examples include measuring HR processes in terms of cost, quality
and cycle time such as time to fill vacancies.
Financial Perspective — this perspective tries to answer questions relating to
the financial measures that demonstrate how people and the HR function add
value to the organization. This might include arriving at the value of the
human assets and total people expenses for the company.
Customer Perspective — this focuses on the effectiveness of HR from the
internal customer viewpoint. Are the customers of HR satisfied with their
service; are service level agreements met; do the customers think they can get
better service elsewhere? Conducting an HR customer survey might typically
arrive at this.
All four components of the scorecard are used to define and measure the
effectiveness of people-management activities and how the HR function executes
them. This provides a strategic measurement and management process to show the
connection between a company’s business strategies and goals and its HR
strategies, activities, and results. The Balanced Scorecard can provide an
ideal approach to measure the contribution that human resource management makes
to business success.
With the HR Balanced Scorecard in place, Hewitt can assist organizations in
selecting, designing, and implementing scorecard and analytic software, which
allows them to easily monitor the workforce indicators that are key to their
business success. Such solutions enhance HR’s ability to provide counsel to
line management and deliver results that make a difference to the achievement
of their goals and strategy and thereby to shareholders.
The apparent and inherent values that the HR Balanced Scorecard brings include:
Measurement provides the data and facts to support business decisions,
giving credibility to HR recommendations and initiatives;
Collecting and using data to make decisions regarding retaining and
motivating the workforce, giving the organization a competitive advantage
in the marketplace;
The right mix of lead and lag measures helps the business assess its
strategic alignment and progress towards its objectives;
HR will be proactive in identifying potential improvements and bringing
suggestions to the business that improve bottom-line results; and
A business and linked measurement framework focuses activity on those tasks
that contribute to organizational success. This process lifts the role of
HR from being viewed purely as a cost centre to that as strategic business
partner.
Single framework based on accounting rules
Multiple measures and performance categories
Simple, linear causal relationship
between measures
Multiple, complex, non-linear relationships
Short-term perspective Long-term perspective
Focus on past performance; a
“snapshot” looking backwards at
performance indicators
Multiple time-frames including forward- looking
indicators
View people as costs to the organization People as assets, investments
Financial measures dominate in
reports and information systems
Financial and other perspectives; measures
tracked, reported and evaluated regularly
The HR Balanced Scorecard is also consistent with the initiatives many
organizations are introducing to their people-management practices like
cross-functional staffing, variable pay, team and individual accountability and
multiple feedback sources. The measure would eventually help the organization
understand the effectiveness of HR policies and processes.
As Kaplan and Norton note, the Balanced Scorecard has “...enabled companies to
track financial results while simultaneously monitoring progress in building
the capabilities and acquiring the intangible assets they would need for future
growth. The scorecard wasn’t a replacement for financial measures; it was
their complement.”
It is difficult to overstate the power of measurement as a tool for change and
strategic impact. As we have all heard before, “What gets measured, gets
done.” Measuring the contribution of HR to business success is the foundation
to its becoming a strategic business partner.
HCM Trends In Europe
Organizations across Europe are becoming world leaders in their application of
people measurement. Human Capital Measurement (HCM) is gaining both clarity and
popularity within Europe as an approach to monitoring and building value. The
adoption of more sophisticated HCM techniques is predominantly being driven by
their ability to enhance the way organizations manage their HC to grow value
for the business.
A recent study of Europe’s Fortune 500 found that 86% of organizations that
used HCM improved unit or company bottom line performance. Other motivations
for adopting HCM included:
Direct HC resource allocation
Win business cases for HC investment
Track HC activities to develop HC predictions
Link variable compensation to HC best practice
Deliver HC information required by law; and
Provide investors with information on HC performance.
Increasingly governments, academics, industry groups and policy advisors are
also realising the benefits and are taking steps to ensure the inclusion of HC
measures within regulatory reporting frameworks. The EU’s Modernisation
Directive, which comes into effect in 2005, will require organizations to
report non-financial performance indicators, such as employee retention and
development. Similarly, the Kingsmill report, published by the UK government in
2001 urges that company reports should make clear links between the company’s
business strategy and its HCM policies and practices.
Deutsche Bahn’s Human Capital Scorecard
Deutsche Bahn AG, the national German railway company, has found increasing
benefits from human capital measurement. In 2003 Deutsche Bahn partnered with
Hewitt to implement their human capital model developed in cooperation with The
Boston Consulting Group. This model provides concrete key performance
indicators for managing the organization’s people resources and capabilities.
In a joint effort three quantitative measures were identified as critical to
the Deutsche Bahn success. These were employee engagement, employee
competencies and leadership quality. Hewitt and Deutsche Bahn operationalized
the qualitative measures and designed the engagement portion of this study for
about 250,000 Germany-based employees. For this, Hewitt’s global engagement
product was modified to fit the specific needs of Deutsche Bahn. Employee and
leadership quality measures were developed to link to the existing Deutsche
Bahn competencies models.
After designing the measurement tools they were tested in one of the Deutsche
Bahn’s subsidiaries, the Deutsche Bahn Energie. The results provided concrete
measures for assessing how Deutsche Bahn’s employees and leaders are
contributing to the business. The data has informed their decisions about
specific people investments and using the scorecard leaders will be able to
base their people decisions on solid premises.
A DIVERSE, GLOBAL COMPANY IMPROVES ITS PERFORMANCE THROUGH A COMMITMENT TO AN
INVESTMENT IN HUMAN CAPITAL - CASE STUDY
"Human Capital is viewed as a business strategy at Cargill and not an HR
program," says Ben Redshaw, Team Leader of Employee Engagement at Cargill Inc.
To put human capital in perspective, Cargill is an international provider of
agricultural, food and risk management products and services. It has 101,000
employees in 60 countries. This privately — held company comprises
approximately 90 business units with annual sales of $60 billion. To complicate
the situation, Cargill has a diverse population of employees across a wide
range of countries. The work varies from high intellectual capital positions
such as commodity and debt traders, to high "sweat equity" positions such as
plantation workers and slaughterhouse employees. In this diverse and
challenging environment, has found a way to invest in its people and produce a
tangible and quantifiable outcome in performance.
Five years ago, Cargill began a corporate transformation centered on changing
from a commodity/products supplier to an integrated food products and food
services company — from a supplier of ingredients to a provider of solutions.
“We want to provide expertise that helps our customers succeed,” says Redshaw.
While Cargill primarily solves business-to-business issues, they offer a wide
range of products that consumers use every day-oil in foods, starch in napkins,
beef for burgers, and many other products such as salt, sweeteners and flour.
The end goal of this transformation is to become the global leader in
nourishing people.
Convinced of the importance that people have in helping the organization
succeed, Cargill made human capital measurement one of four corporate-wide
performance measures, along with satisfied customers, enriched communities and
profitable growth. In 2000, Cargill took the first formal step in the journey
of measuring and acting on human capital information.
Convinced of the importance that people have in helping the organization
succeed, Cargill made human capital measurement one of four corporate-wide
performance measures
They partnered with Hewitt Associates to pilot an employee engagement study in
four separate business units comprising 7,500 employees. Following the
successful pilot, Cargill then worked with Hewitt in 2001 to conduct an
engagement study of 25,000 salaried and some hourly employees around the world.
This was a benchmarking year for Cargill — it was the year they obtained their
first picture of engagement across all business units and the year they
committed to annual global engagement surveys. “We want all employees to know
that their opinion and their engagement matters,” says Redshaw.
The results from these initial studies solidified the position that to achieve
its goals, Cargill needs to focus on its people. Nancy Siska, Corporate Vice
President of Human Resources at Cargill, explained, “We benchmarked a group of
companies and ended up with compelling evidence that to succeed as a customer
solutions provider, we have to excel at employee engagement.” Research from
Hewitt supports Siska’s assessment. Analysis of more than 1,500 companies
shows that organizations with engagement scores above 60% deliver higher total
shareholder return than those with lower scores.
Cargill has also used this information to drive the business forward. The
initial focus was on three areas:
1. Strong commitment from leadership to employee engagement — Leadership
visibly demonstrated their commitment to engagement by following up with their
direct reports on engagement actions and making the engagement measure part of
the business performance contract each business unit had with the CEO.
2. Development of action plans to improve engagement — This was done at the
location, department and workgroup level to drive employee engagement and
behaviors. The data prompted some Cargill business units to redesign their
compensation discussions with employees and establish individual recognition
systems. Others have made changes to day-to-day work activities or enhanced
their career development programs, and several have improved communication
between senior management and employees.
3. Demonstrating a link between engagement and business results — Established
a positive, directional relationship between their key financial measures,
return on gross investment and employee engagement.
Throughout this journey, Cargill’s view and use of human capital measures
continued to evolve and its thinking progressed well beyond measurement to
actions and results. During this process, they have learned some valuable
lessons on how to create a competitive advantage through their focus on people.
As Redshaw says, “Cargill believed in the concept of engagement but was
lacking a framework.” Hewitt was able to help in three areas. “First they
provided a model of employee engagement that was both applicable and
understandable. Second, they provided administrative support to a large,
complex and diverse population. Third, they helped Cargill understand
engagement results and how this could help improve business results.”
There were certainly surprises during the process. Employees were skeptical at
first. As Redshaw points out, “They did not believe that their feedback
carried any weight or that the organization would act on the information. With
concrete action planning and communication of results, Cargill was able to
build employee trust.” This was helped by the actions of managers and
leadership. Managers embraced the notion strongly, and there was support from
senior leadership.
One key to success was the de-emphasizing of a single score such as engagement,
and focusing more on action planning and intended results. As Redshaw
summarizes, “We focused on measuring behaviors not attitudes. Action planning
is tangible and the right actions will motivate our people. People who are
properly motivated will correctly mix feed and minimize the amount of red meat
that hits the floor, reducing shrink.” To succeed, action planning was carried
out at a granular level, thus addressing the fairly specific needs of employees.
Based on this success, Cargill is building a pool of committed, engaged
employees that will help grow the business.
Cargill was not satisfied to stop here. It moved to the next level of human
capital measurement — quantifying the return on investment. Working in
Cargill’s favor was a strong and inherent belief in people measures and their
importance to the business. In 2004, with Hewitt’s assistance, they undertook
an analysis of how employees impact key performance indicators.
To succeed, it was necessary to develop an approach that was both practical and
rigorous. The approach that Cargill and Hewitt used included the following:
Focusing on a single business unit in North America to control and minimize
variables (like geography and industry) that would impact both their people
and business performance;
Focusing on a unit with a relatively large number of locations, to provide
a sufficient data set;
Utilizing a set of consistent financial and non-financial business
performance metrics across locations;
Selecting a unit where employees have a good understanding of how they fit
and why they matter; and
Utilizing three years of employee engagement data at the location level.
The results of this analysis were quite compelling. As Redshaw says, “We were
able to demonstrate that engaged employees can make a big difference. They
impact the company operations in many areas. These focus on efficiency,
turnover and reducing shrink, and on satisfying Cargill’s customers. Retention
in this group of employees is higher, resulting in an experienced and
high-performing workforce. The net result goes to the bottom line, with a
higher Return on Gross Investment (ROGI).”
So how did Cargill get here so quickly? Siska explains, “We believed from the
start that human capital was critical, and that engaging our workforce would
help us achieve sustained business results, lower turnover, and increase
retention of the right people. Now, we are able to maintain a ready pool of
qualified people to promote as the company grows. We also know that it improves
employee’s alignment and understanding of how their work impacts the
company’s business results.”
The employee engagement concept enjoys tremendous support from Cargill senior
management, starting with Chairman and CEO, Warren Staley. “Engagement is
synonymous with high performance at Cargill,” Redshaw says. “Our CEO talks
about it in virtually every speech he gives.” This support encourages
cooperation from HR managers around the world. Clearly, employee engagement at
Cargill is not only viewed but also practiced as a business strategy and not an
HR program.
The impact of employee behavior on organizational performance has been a
subject of study for quite some time. Human capital measurements and the models
developed unravel this relationship and help guide people investment.
OUR CLIENTS ARE INCREASINGLY ASKING TWO QUESTIONS. ONE, CAN THEY QUANTIFY THE
IMPACT THAT PEOPLE HAVE ON THEIR ORGANIZATION’S PERFORMANCE? TWO, WHICH COMES
FIRST: CHANGES IN EMPLOYEE BEHAVIOR THAT LEADS TO FINANCIAL AND MARKET
PERFORMANCE OR PERFORMANCE THAT IMPACTS EMPLOYEE ATTITUDE?
IT IS THE OLD CHICKEN AND EGG PROBLEM. IN THIS CASE, HOWEVER, THE ANSWER IS
MORE THAN A PHILOSOPHICAL EXERCISE. NO DOUBT THE QUESTIONS ARE INTER-RELATED.
STUDIES ON THE PREDICTABILITY OF EMPLOYEE ATTITUDES ON PERFORMANCE HAVE A LONG
HISTORY IN ORGANIZATIONAL RESEARCH. THE RESEARCH SUGGESTS THAT WHILE THE
RELATIONSHIP BETWEEN HUMAN CAPITAL AND ORGANIZATIONAL PERFORMANCE IS COMPLEX,
IT CAN BE QUANTIFIED AND THERE ARE METHODS TO ESTABLISH THE DIRECTION OF THE
RELATIONSHIP.
HEWITT ASSOCIATES HAS DONE A NUMBER OF STUDIES ON THIS TOPIC AND THERE IS
SUPPORT FROM ACADEMIC RESEARCH THAT INDICATES CHANGES IN EMPLOYEE ATTITUDES AND
BEHAVIOUR PRECEDE CHANGES IN PERFORMANCE. THE ANSWER, HOWEVER, IS NOT 100%
CLEAR. OUR VIEW, WHICH IS SUPPORTED BY A RECENT ACADEMIC STUDY CONDUCTED OVER
AN EIGHT-YEAR PERIOD, SUGGESTS A MORE RECIPROCAL RELATIONSHIP — A VIRTUOUS
CYCLE. SO WHILE THERE IS SOME INCONSISTENCY, EXAMINING THE RESEARCH IN MORE
DETAIL PROVIDES A MORE COHERENT PICTURE.
BUILDING HUMAN CAPITAL MODELS
Understanding the links between people and business performance is just the
beginning. It is not the endpoint for organizations interested in improving
their performance. Human Capital (HC) Modelling is not only about proving the
value people add to the business. Good leaders already have this fundamental
philosophy. It goes further to allow organizations to:
Quantify the relationship between people attitudes, behaviours and
performance;
Identify areas of focus to improve employee performance;
Quantify the benefits and trade-offs in people decisions to guide
investment decisions; and
Increase understanding of inter- relationships which allows for better
performance management of particular areas.
Just as marketing departments collect and use data on consumer behaviour and
resulting sales or customer satisfaction to guide decision making, Human
Resources can develop similar predictive models of employee behaviour and
resulting performance. This supports decisions regarding people investments
such as pay, communications, training and development and even merger and
acquisition activity. Such models offer organizations more insight and allow
them to allocate funds efficiently for the greatest financial benefit.
Just as there are unique models for customer segments in marketing,
organizations will have HC Models unique to their employee environment. Our
research and experience already shows that HC Models will vary depending on an
organization’s value proposition, business strategy and employee demographics
(See the National Australia Group Experience in this issue of HQ).
How do we Build HC Models?
Having collected a significant amount of data on employee behaviour and
performance, there are a number of approaches for using data to build HC Models.
This article outlines four of the methods we have used and what we can learn
from each approach. Our philosophy is not to rely on a single method, but to
link the analysis to the type of issues faced by an organization and the type
of information available. Our basic approach is to focus on both key people
measures along with key performance indicators (KPIs). These measures often
vary across organizations, but we have identified a set of KPIs that are
measured by most companies:
Employee engagement — emotional and intellectual commitment to the
organization;
Employee opinions — employee perceptions of opportunities, communication,
work-life balance, management, how HR programs affect productivity;
Employee skills, utilization & alignment — do employees have the skills
needed to complete their work? Are all of their skills being utilized and
are they aligned to support company goals and strategy?
Employee behaviors (. innovation, customer service, absenteeism) — are
employees engaging in the behaviors you need to be successful?
Non-financial measures (. retention, productivity, work processes) — do
employees remain with the organization and are they productive? Do the work
processes support company products and services?
Customer measures (. satisfaction, quality, churn) — are customers
satisfied and loyal?
Financial measures (. revenue, profitability, return on investment) —
are you realizing appropriate increases in revenues and profitability?
Depending on the amount and level of detail of data, structure of the
organization and number of time periods among other things, there are a number
of analytic approaches we use to study the relationship between attitudes and
performance. They can be classified into four major categories:
Relationship assessments (correlation or regression approaches);
Experiments (test & control group);
Time series; and
Value mapping.
Relationship assessment
This is perhaps the most popular and easiest to execute approach. It involves
collecting attitude and performance data from a number of independent groups.
These groups can consist of individuals, locations/stores or business units.
Once we have these two pieces of information (people measures and business
performance), we can do a number of analyses (. correlations, regressions,
structural equations) to demonstrate the relationship between employee
attitudes and performance. An example of this type of analysis is shown in
Figure 1.
Experiments
In the strictest sense, an experiment would consist of two units (stores,
locations business units, plants) that are identical on all or more
realistically, the most important variables. We would then manipulate employee
attitudes in one or a subset of the locations (test), but not in other
locations (control). The next step is to measure the difference between test
and control, and attribute the change to engagement (the manipulated variable).
This is an ideal, but often not a realistic or practical approach to
demonstrate how changes in employee attitudes impact performance. Companies
that believe in the relationship between human capital and performance would
not want to implement programs to improve performance in only a few of their
locations. In addition, it would have the potential to impact some employees
negatively (why is the company experimenting with my unit or conversely why is
my unit being ignored?).
Another way to approach this is to examine historical data. In the example in
Figure 2 we have identified two locations that are identical or similar on
number of employees, region, age, etc. They do however differ in engagement.
This allows us to attribute the difference in revenue to the different
engagement levels.
Time Series
This is a more time intensive approach, but also an approach that provides a
clearer answer. For this approach to be successful, we need to collect multiple
measures of both variables — people and business performance over a period of
time. This allows us to determine the lead and lag time for changes in both
employee attitudes and performance. In other words, do changes in engagement
precede or lag changes in performance and by how much? An example of this
approach is shown in Figure 3.
Value-Driver Mapping
This approach requires the highest level of involvement from our clients, and a
deeper understanding of the organization. Much of the information for this
approach would be based on in-depth interviews with key individuals in the
organization, such as their finance, operations and business unit leaders. Due
to the involvement of these key individuals, it requires a high level of
commitment from both Hewitt and the client to be successful.
Basically, in this approach we work with the client to identify their key
outcome variables. Depending on the company objectives, these could be growth
measures such as revenue, sales, job creation or earning, or they could be
return measures such as return on investment (ROI) or total shareholder return
(TSR).
Once this step is accomplished, we then identify the business strategy,
objectives, actions and employee behaviour that influence these measures. This
would include an exhaustive set of variables (like competitors, marketing). We
continue to work backwards in this manner until we can isolate the specific
employee behaviours that influence the client’s key measures. This allows us
to identify key employee attitudes and behaviours that drive performance.
You have the Relationship. Now what?
Having defined the relationship and identified the strength of the relationship,
you are able to better plan HR resources and spending. First, you can determine
where to focus your efforts – recruiting, training on knowledge, training on
behaviors, retention and so on. Second, you can identify the type and amount of
return you should anticipate for your investment. This allows HR to be a part
of the financial planning process and the company’s success measurement.
The predictive nature of models is managed like any other modelling process. A
number of assumptions should be created based on the data and a level of
tolerance around the predicted value helps to build the model’s creditability.
Continuing to collect the same data over time allows these models to be tested
and updated as the business grows and changes.
Conclusion
Our experience with organizations such as National Australia Group (National)
and Cargill demonstrate the power of understanding these relationships. At the
National this process identified areas where employees were not adding value in
the way expected. It also identified what the key people drivers were for
longer-serving sales employees. The National will continue to refine the
predictive models, to narrow tolerance levels and increase their decision
support capability. Cargill was able to demonstrate how developing and
implementing action plans from their employee engagement survey led to
improvement in safety, less waste and an increase in ROGI. We also have many
examples of how organizations decreased turnover resulting in a large reduction
in recruiting and training costs and no loss of productivity, which goes right
to the bottom line.
Developing Predictive Models with Singapore Economic Development Board
Late in 2003, the Singapore Economic Development Board (EBD) engaged Hewitt
Associates and AC Nielsen to undertake a study to investigate the relationship
between their employee engagement and customer satisfaction levels. The
hypothesis being that employees who are more engaged will have higher customer
satisfaction scores. The first round of data gathering took place in November
2003, and pulse surveys are scheduled for Q3 of 2004, and Q2 of 2005. By
adopting such a longitudinal approach, and partnering with a reputable research
house such as AC Nielsen, the intent is to create a causal pathway model to
identify what are the right areas to focus on in the employee engagement model
to drive up customer satisfaction.
Work on this project is still in progress.
HC Foresight
Employee valuation continues to challenge organizations. Hiring and retaining
talent is time consuming and expensive. Aligning your talent to business goals,
engaging your workforces to optimize results and providing training in the
latest skills and knowledge takes resources and funding. How can you justify
this spending and how do you know its impact?
To address this question, Hewitt has developed Human Capital Foresight (HCF), a
service that will turn a company’s HR data into actionable insights. HCF was
developed based on data from over 900 clients and 17 million employees and
allows organizations to analyze people investments and their impact on
business.
HCF is an array of sophisticated predictive measurement techniques that
evaluate the present and future impact of their human capital on business
results. Organizations are working with Hewitt to pilot and refine HCF. Says
Mark Ubelhart, Hewitt’s Value-Based Management Practice Leader, “These new
metrics will lead to insights on how key characteristics of human capital such
as talent attraction, motivation and retention, impact shareholder value and
what can be changed to enhance the ROI.”
How does it work? Let’s take differential pay packages as an example.
Companies are using differential pay packages to retain their best talent. To
assess the impact of pay differential, HCF uses a variety of measures and
techniques. For example, we calculate a Gini Coefficient to assess pay
uniformity across the organization and compare it to other companies. We then
determine its impact on attracting and retaining top talent by calculating a
Transition Quality Measure, which refers to the flow of employees into and out
of the company and is used to determine if the inflow of high performers
exceeds their outflow. Using these and other tools, we can determine what
factors drive these flows.
While circumstances vary by function and business units within an organization,
the analysis of pay differential packages indicates that application is
critical. While attractive in theory, organizations can apply them
inappropriately which results in a loss of good employees. The predictive
analytics of HCF will identify the actual gain and loss of employees from
various HR applications and investments. In the variable pay example, poor
transition quality can be improved by actual/target bonus distributions that
are more uniform or team based as opposed to individually determined.
Findings from transition quality, in combination with other metrics and
employee data will create linkages to economic value drivers of the business.
These include cash flow return on investment (CFROI®1), as well as customary
financial metrics. The predictive analytics employed focus on the human capital
characteristics that enable a company to “beat the fade” – that is, sustain
performance in spite of competitive pressure.
Ubelhart predicts this is just the beginning of decisive measurement tools for
human capital. “This is just the tip of the iceberg as we evolve
strategy-shaping benchmarking of labor costs, the related implications for
business performance and shareholder value, and the ROI on HR programs,” he
says.
The immeasurable will soon become measurable.
Following a pilot of the Human Capital Foresight, the service will be added to
Hewitt HR outsourcing (Workforce Management, Benefits and Payroll) engagements
at no charge by early 2005, at which time we expect to provide clients with an
initial, customized Human Capital Foresight report.
Registered trademark of CSFB HOLT.
The National always knew that people were its key assets. In its HCM pilot with
Hewitt, the National sought to further understand the nature of relationships
between people value drivers and business results to take decisions that would
mean substantially better outcomes for all stakeholders.
When the National Australia Group (the National), a listed bank with over
42,000 employees, partnered with Hewitt Associates to pilot a Human Capital
Measurement (HCM) Model, it never doubted that people were one of the key
drivers of its competitive advantage. The bank however was seeking to go deeper,
to quantify and fine-tune its people investment decisions. An interview with
three of the National’s line, finance and people & culture executives
highlights many of the benefits and learnings from their two-year quest.
The National focused on developing an HCM approach with Hewitt to be piloted in
two business areas – a business banking area (a revenue centre) and a shared
service provider (a cost centre). The goal was to understand Human Capital
Measurement’s applicability and implications in different operating
environments. Specifically, how it could enhance decision making about
investments in people. Jennifer Jones, the National’s Strategy Principal for
People & Culture says, “Our motivation was to be able to drill down, so that
we could understand the nature of the relationships between the people value
drivers and business outcomes. This would help us make more informed decisions
and better aligned effort for greater return on our people investments.”
The HCM pilot identified relationships between specific people measures and the
bank’s performance. It confirmed the academic research in the
employee-customer profit chain research (Rucci, Kirn and Quinn, 1988; Guest et
al 2000). The results were specific recommendations for future people measures
and predictive tools to assess the business impact. While these were very
positive outcomes, the most notable learnings for the National came from the
many surprises along the way. These had a dramatic impact on the dialogue among
senior leaders as they explored how their people create value for the business.
As David Thompson, Head of Finance for Business Financial Services reflected,
“The HCM Pilot has been an interesting journey to say the least. It has
changed my perspective, as I understand that building Human Capital Models is a
complex art form that requires a very flexible approach to understand
surmounting data issues. The quality of the conversation has been very rich.”
The Journey
In both the profit and cost centres, key people measures were tested to explore
the impact they had on financial and customer measures. Determining which
people measures to use was the first source of discussion among the project
team.
As most readers of Human Capital research are aware, the construct of Human
Capital Measures can be defined in many ways.
“Our motivation was to be able to drill down, so that we could understand the
nature of the relationships between the people value drivers and business
outcomes. This would help us make more informed decisions and better aligned
effort for greater return on our people investments.”
These definitions vary from an output orientation, using measures like turnover,
performance ratings and tenure (Brown, 1999) to value addition, using
productivity measures (Monti- Belkaoui, 1995), or even emotional, intellectual
and structural equity dimensions (Kaplan, 1992; Gratton & Ghoshal, 2002). With
this in mind, the model chosen focussed on measures of engagement, capability
and utilization:
Engagement is the state of emotional and intellectual involvement that an
employee has in the organization. Engaged employees are those individuals that
want to and do actually take action to improve the business results of their
organisation. Engagement was measured through an employee survey.
Capability measures extent of knowledge and skill. It is impacted by the
organization’s ability to attract talent, learning and development opportunity,
and employee skill (competence) and experience levels. Technical and
behavioural capabilities were measured through a manager assessment and
self-assessment questionnaires for each individual.
Utilization indicates the extent to which employees are able to apply their
skills for the organization’s benefit. Organizational structure, policies and
procedures, technology and the clarity in the organization’s objectives and
direction impact the level of utilisation. Utilization was measured through
timesheet data and through an employee opinion survey, where timesheet data was
not available.
These people measures were then correlated to business measures. In the Shared
Services (cost) centre people measures were linked to internal customer
measures of value. In the profit centre people measures were linked to
financial outcomes such as income and customer outcomes such as satisfaction,
intention to stay, and intention to recommend to others (see diagram above).
Unlike many previous studies linking people and performance, the National took
a unique approach that focused on understanding these relationships for each
individual employee. Employees who scored highly in terms of engagement,
capability or utilization were expected to perform more strongly in terms of
their customer and financial outcomes. Having the analysis at an individual
level raised some challenges, but had the advantage of creating a significant
number of data points with which to conduct regression and multi-variate
regression analysis. In many cases expected relationships were identified.
In both pilot areas a neutral to strong relationship was identified between
engagement and business outcomes. This suggests that the strength of
relationships between engagement and business outcomes will vary across
business units, depending on their specific circumstances. For example:
employee demographics, the nature of the work, the business model, and the
amount of change, all impacted the strength of these relationships in different
areas of the business.
It was found that capability had a strong relationship with business outcomes.
It was found that capability improvements must be directed at the customer for
a positive effect to occur in the short term. Using multi-variant analysis it
was shown that specific capabilities drove revenue growth through increased
customer satisfaction.
There was also a relationship between utilization and business outcomes in the
shared service area. It was also identified that employees with high
utilisation also have high engagement. And employees with high engagement have
little variation in their utilization. While not a proxy, engagement could be
used as an indicator of utilization.
The Learnings
The pilot has provided a rich source of learnings for all involved. On
reflection, some of these learning for the National have included:
1. Know the reasons for adopting an approach to HCM.
HCM is not about proving to the business that people matter. This was
considered a fundamental philosophy and one critical to effective leadership.
Greg Hyde,Head of Finance Shared Service Centre, Asia-Pacific said,
“Intrinsically, I have always had a sense that there are linkages between
people behaviours and business outcomes. I’ve therefore operated on the
assumption that, if you understand the people drivers and then manage them well,
you’ll get the outcome you’re looking for.” The National were focused on
adopting a HCM to:Support people investment decisions with more qualitative
data; andFocus measures on those that are the most critical to business
success.
2. HCM is a great tool for cross-functional discussions about people and value
generation
The HCM process built a platform to facilitate people discussions across
various functions in the business about what the key people drivers of success
are. Jennifer describes the values of these exchanges, “Finance, Line managers,
and P&C came together on this project to enable us to look more specifically at
the business and to explore the key drivers in a people sense. The project
process, the dialogue between project members during the life of the project
and ultimately the outcomes have enabled us to hold more specific conversations
around how to align people investments with outcomes.”
3. Multiple HC Models are needed
We realised that building one HC model would not suffice for the whole
organization. Whilst in both business units relationships between people
measures and business outcomes were identified the relative strength of these
relationships were different in each part of business-depending on such
dimensions as type of work, business model and strategy and employee
demographics. This reinforces the importance of building human capital
frameworks that are business unit specific and aligned to their particular
strategy.
4. Garbage in-garbage out
Having good data to start with is a critical success factor. Whilst the team
knew going into the pilot that the data points would not be as “clean” as we
would like, we underestimated the work that would be required to have
meaningful data to use. This included things as simple as access to historical
data, isolating individual data sets, definition of constructs etc. Given the
importance of trend analysis and multiple data points for bi-variant analysis,
this required considerable effort to ensure data integrity. This was also
exacerbated by the amount of change going on within the organisation. David
describes this, “In hindsight the task was a tough one given the amount of
change that a large organization typically experiences. I absolutely think
it’s worthwhile but I do think that securing a relatively stable base of data
is a challenge.”
5. HC Measurement tests the quality of measures
Having good measures to start with was a critical success factor. In some areas
the team overestimated the robustness of existing measurement constructs such
as customer service and revenue growth at an individual level. While these
measures did exist, there were significant differences in aspects such as
interpretation of the constructs and how the data was collected, which resulted
in reworking data analysis in line with agreed interpretations. It also
resulted in redefining and tightening some of the existing constructs. For
example, Greg describes how the process helped them develop a stronger measure
of customer value: “We saw some good correlations which made sense. In other
areas where there weren’t correlations, we didn’t think it was proving our
philosophy wrong. Often there was a reason which helped us learn how we could
or should measure the feedback from customers in the future, which I think will
provide stronger correlations next time around.”
6. The value of surprises
The journey had its own fair share of surprises. As Jennifer summed it up, the
greatest benefit came in unexpected ways. “In trying to wrestle with data sets
that didn’t fall the way we expected, we gained an enormous amount of value.
For example, the process helped to deepen our understanding of the human
capital-revenue growth relationship in particular business segments. We had
made a couple of assumptions within this project that subsequently proved to be
incorrect. The result of this is that we have needed to take a deeper look at
how we construct our measures of success so we focus on the right issues.”
This reinforces the view of many in this field that just focusing on
quantitative relationships only provides partial evaluation of the value of
this field of study. Adding qualitative understanding to the data was critical.
7. Get started and keep it going
Like any new field of study, it takes time to build the frameworks and data
sets that eventually provide the most beneficial outcomes. Time will also build
stronger predictive modelling capability as well as differentiate lead and lag
indicators. David concluded, “Human Capital Measurement offers the potential
to build leading indicators rather than lagging outcomes as ways of driving the
business and is a process worth pursuing. Many of the measures we have
previously focused on are outcome driven and therefore lag indicators. External
reporting requirements and current data systems reinforce the way we currently
use measures and it may take many years of refinement to completely integrate
leading human capital models into the way we do things.”
Wrapping Up
The pilot has provided a great opportunity for the National Group to keep
building its Human Capital Framework. The value of the work is best summarized
by each of the steering committee members:
Greg: “Knowing there’s a relationship between business performance and
leading your people well has always been about confidence and faith that the
concept works. What the pilot has brought to the table, is some empirical way
of trying to test that out, through the identification of some strong
correlations.”
David: “Human Capital models will bring greater clarity and precision to the
soft metrics we use around people. This will allow us to better allocate scarce
resources. My experience in this pilot has increased my desire to get there.”
Jennifer: “It’s about enabling meaningful dialogue to understand the nature
of relationships between people value drivers and business outcomes. Ultimately
then it’s about how this enables more effective decision making and enhanced
outcomes for our customers, shareholders, employees and other stakeholders.”
The National is continuing to explore ways in which it can enhance it HCM to
develop more sophisticated people measurement. It is also developing a process
to roll out the learnings of the pilot across its subsidiary groups.
Most organizations use some measures of human capital – headcount, turnover,
productivity – or make some assessment of the value produced. These measures
vary in their complexity, in the amount of information they provide, and the
value they contribute to the company’s decision-making process. Clearly, there
is no single measurement formula that works for all organizations that have
different goals strategies and people practices. Our work in HCM, however, has
shown that there are certain principles you need to consider to maximize the
benefit you receive from using HCM.
1. Measurement is a starting point.
The power of measurement is not the metrics or data you collect. Rather, the
benefit comes from your ability to use the information to diagnose your
organizational situation and make better decisions to move the business towards
its strategic goals. Organizations should review current measures in the light
of their use for decision-making.
2. HCM supports but does not replace good people management.
HCM helps you identify where to focus your efforts. People managers still need
to develop HR programs and implement them effectively.
3. Understanding the value of people is a starting point.
HCM is not about proving the value people add to the business; good leaders
already have this fundamental philosophy. It is about guiding investment
decisions and understanding the and trade-offs in people decisions.
4. HCM includes a wide range of approaches.
HCM ranges from basic metrics to comparative information, from scorecards to
predictive models. To succeed with HCM, organizations need to select the HCM
approach that aligns with their context and needs. This need could be
developing or identifying key metrics, setting performance levels or measuring
the ROI of HR practices.
5. Think about people value and not only about people costs.
Many organizations understand their people costs quite well. However, not all
of them consider how people help the organization achieve its goals. Consider
the person who works late to check the accuracy of a customer order or the
person that comes up with efficiency improvement ideas. Both of them add value
well beyond their costs.
6. HCM brings HR closer to the line.
HR is often viewed as the softer side of the business. It often struggles to
demonstrate its value. As HCM takes root in an organization, "soft" measures
become performance focused and demonstrate value creation; this buys HR
credibility with the line and a place at the decision-makers table.
7. Use measurement to identify where you will get the biggest return.
A variety of tools are available to help your organization focus on growing and
maintaining performance through your employees. It is well established that
motivated or engaged employees contribute more to a company's bottom line.
Hewitt's approach is unique in that our engagement approach not only helps you
motivate employees, but also helps you maintain and grow the performance of
high performing employees.
8. Understand the ROI of your investment in people.
By using predictive models to help you understand how much and where to invest
your people dollars, you can understand the return on each investment, whether
it is recruiting or training new employees, motivating or increasing skills
among existing employees or implementing new procedures and processes.
9. Adapt your approach and innovate to meet your evolving needs.
Your organization will have different HCM needs as you modify you goals and
strategies to compete in the marketplace. This will include modifying your
strategies to attract, set expectations, retain, motivate and maximize
performance of your employees. It will also include optimizing utilisation of
limited HR resources. Some of the approaches we use in this area are described
in subsequent sections (see HC Foresight and HR Analyzer).
10. If you ignore HCM, you will be at a competitive disadvantage.
Organizations are expanding their use of HCM. Some are using sophisticated
tools to identify and implement people programs that impact business results
directly and dramatically. These organizations produce significant return on
investment and revenue growth. The longer you wait to implement HCM, the more
ground you need to make up. Can you afford that expense?
With Malaysia entering the Asian Free Trade Agreement in 2005, market realities
for most organizations in the country are all set to change. The same is true
for Perodua Sales Sdn Berhad, Malaysia's second largest car company. With
almost its entire focus on pushing sales volume thus far, the company had been
growing rapidly in size. However, Perodua recognised that in the new,
increasingly competitive scenario, a sales focus alone may not work. The
company needed to have world-class practices in many areas. It needed to be
closer to the customer, focus on product improvements, have a creative market
positioning, increase employee engagement, enhance leadership strength and
bring about a culture of accountability and excellence.
To consolidate and grow its position in the Malaysian car market, Perodua
decided to undergo a business transformation through a leadership development
program and assessment of human capital throughout the organization.
Perodua began working on the transformation with Hewitt Associates in October
2002, and has since developed performance metrics, cascaded new measures
through the performance management system, connected leaders to its new
business model and focused its employees through more effective measures. With
the transformation of its sales model, Perodua continues to be the leader in
the small car market in Malaysia, maintaining a third of the local market
share.
In August 2003, Hewitt conducted a detailed review of their measurement system.
A key recommendation was to adopt a more comprehensive and balanced framework
for setting key performance indicators in the form of a balanced scorecard.
Starting at the top
The transformation needed to start at the top. Hewitt Associates initiated work
with Perodua with a Leadership Development Program for the top management group
and a review of the Perodua Sales Performance Management System. While the
leadership team at Perodua Sales had successfully led the business through
rapid growth, they recognised the need to strengthen competencies to meet the
challenges of the manifold rise in competition. For this, 360-degree
assessments were done to reveal the strengths and development needs of senior
leaders and individual and team development activities were conducted to
address the gaps. A leadership competency model was developed to preface these
activities.
Individual coaching sessions and a series of leadership workshops to address
business and people management issues and facilitate individual and team
development followed. The process is now in place and the final outcome will be
a re-assessment of the leadership team's competencies in October 2004 to
measure specific improvements and changes in individuals and the team.
As part of the leadership assessment exercise, Hewitt and Perodua identified
several organizational performance opportunities:
Expand focus to sales and service as opposed to sales alone;
Focus on service and spare parts to increase share in a more competitive
environment;
Drive product improvements, evolve a creative market position and
understand customer needs by enhancing synergies between the sales,
marketing and manufacturing arms; and
Create a culture of accountability for performance and excellence.
Using measurement to drive performance.
The leadership team agreed on the need to review and revamp their performance
management system and introduce more tangible measures that were aligned to the
new business model and strategies.
In August 2003, Hewitt conducted a detailed review of their measurement system.
A key recommendation was to adopt a more comprehensive and balanced framework
for setting key performance indicators in the form of a balanced scorecard.
Hewitt led the team through a series of discussions on their business model and
plans for 2004 and facilitated the process of designing a corporate balanced
scorecard for Perodua Sales. This was subsequently cascaded down to all the
leaders/members of the management team in the form of individual scorecards.
Hewitt also conducted training workshops for all its managers. Simultaneously,
Perodua's HR team also conducted training workshops for the rest of the
executives. By March 2004, all Perodua executives had aligned performance
scorecards/KPIs.
The key process steps included:
1. Aligning the organization's vision with a business model for the
short/medium term
Hewitt worked with Perodua's management team to articulate the vision, mission
and key strategic imperatives. This was followed by a gap analysis between the
current and desired state. Finally, the corporate balanced scorecard was
established. The key metrics included financial measures, customer perceptions,
work processes and organisational capability, along with high-level action
plans to achieve the same.
2. Cascading the performance metrics to the divisional & departmental levels
Hewitt worked with each of the management team members to develop their
divisional scorecards. These metrics were subsequently cascaded to the next
level.
3. Review and redesigning of the new Performance Management System
Hewitt made the performance management system more objective and development
focused by incorporating new features like a revised rating scale, weights and
leadership competencies. In addition, Hewitt recommended the introduction of
formal and informal review sessions during the course of the performance cycle
to encourage managers to have regular conversations with their subordinates and
avoid end-of-the-year surprises. Hewitt also shared best practices from other
leading organizations.
4. Launch of the new Performance Management System and Key Performance
Indicators
The revised system along with the corporate and divisional performance metrics
was launched through a series of road shows covering the regional and branch of.
ces. Hewitt worked with Perodua's HR team to educate managers and executives on
the usage of the new system and to develop the skills in setting aligned and
SMART Key Performance Indicators.
The Results
While the leadership development program is ongoing, Perodua is looking forward
to tangible results from the exercises conducted so far. At a leadership team
action-planning workshop in June 2003, an expectation of seeing a 15-20%
improvement in the assessment scores owing to leadership development
interventions has been articulated. This is bound to translate into a positive
feedback on the leadership team's vision/strategic thinking among other things.
There has also been a significant increase in cross-team sharing or learning
via cross-divisional action learning projects. At a business strategy
assessment discussion facilitated by Hewitt, for example, two core issues were
identified for immediate attention — customer segmentation and product
reclassification. Two action-learning programs were subsequently initiated that
had members of sales, service and support functions. This provided an
opportunity for people from different functions to come together and exchange
ideas and information and eventually contribute to improving business
performance.
In fact, communication has become open and interactive on a routine basis. The
leadership now conducts regular meetings to discuss ongoing business
performance involving managers from different function areas. Such open-house
discussions have also been cascaded. An employee suggestion scheme is now in
place at the shop floor level too.
Hewitt has also impacted the organization by creating awareness for "urgency in
action" to take on the increasing competition through measurement of progress,
ongoing monitoring and dialogue. As one leader commented, "No one at Perodua
can talk about being taken by surprise any more"
Perodua in turn has already cut out Hewitt's work for the future: making a
development program for their younger, high potential employees known as the
'highiers' and institutionalizing a succession planning process.
When Ispat Industries, the third largest steel company in India, decided to aim
for the top position in the industry about two years back, it started a change
process that touched almost all aspects of its business. Led by the vision of
its promoters Chairman & Managing Director Pramod Mittal and Managing Director
Vinod Mittal, the nearly 20-year-old company aimed to become a world-class
organization.
To realize its vision to double capacity and almost double turnover to Rs
10,000 crore in two years and expand presence both in India and abroad, the
promoters decided the organization needed a complete restructuring. Apart from
re-engineering, enhancing presence, reworking growth strategy, tightening
supply chain management and cutting response time to consumers, the top
leadership realized that mindset was where the change had to begin. For that,
human resource processes, culture and competency had to be aligned with the
business plan.
Says Satyabir Bhattacharyya, Director (Strategy & Business Excellence),
"Transformation of the scale we envisioned could not happen without HR. There
had to be a strategy for human resources and it had to be implemented. We
realized it was important to have the right structure, empower people, put
performance measurement systems in place and see that the key performance
indicators were in alignment with the company strategy." In fact, Bhattacharyya
says Ispat wants to be in the best employer category in India by bringing in
best HR practices and setting up global benchmarks.
For a core sector company in India to focus on its people assets itself is
quite unusual. Quality of manpower here is rarely in focus unlike in the
service industries. At Ispat this was clearly not the case.
The transformation exercise started by putting an organization structure in
place. This had a two-fold impact. On the one hand, the structure itself was
reworked to bring efficiencies and on the other, new roles were created to aid
in change and growth. For example, an integrated supply chain management
function was put in place instead of purchase and sales functions that worked
independent of each other.
For change management, portfolios that would assist in the process were created.
While President HR itself was a new portfolio created to signal the change from
its limitation to personnel, separate cells were created specifically for roles
like recruitment, performance measurement rollout and competency management.
Bhattacharyya himself was brought in as director in charge of strategy and
business excellence to implement the transformation exercise.
Bhattacharyya says when the transformation started, organization readiness was
a question mark. After attempts to bring about changes through primarily new
systems and processes, the organization realized that the change could only be
felt by ensuring that people saw the impact in a tangible form. To do this,
Ispat has embarked on an integrated implementation focused exercise. Aspects
like training, compensation and performance management now have only one
barometer — has the change been felt?
Bhattacharyya says, "We have ventured through uncharted territory. We have
worked on details, for example, in our efforts to train and develop the entire
company. We have now tied up with Indian School of Business (India's premier
business school) for developing a leadership program for us. We constantly seek
inputs from our consulting partner Hewitt Associates. They have been working
with us as a part of the organization team in ensuring that the details and
implementation have a grounding in robust principles." In fact, the revamped HR
committee at Ispat that takes all key decisions and comprises its line function
directors also has Hewitt consultants on board.
Once the organization structure was in place, next on the agenda was
performance measurement system. For this, balanced scorecards were made for
each division from which the individual scorecards flowed. The business
scorecards are currently being aligned to individual scorecards and then on to
the key result areas. The exercise, which helps measure individual performance
against the target on the scorecards and eventually aims to raise
capability, has meant a satisfactory alignment of HR to business targets says
Dr Rakesh Mehta, President HR.
Going forward, Hewitt is also working on competency models, assessment centres
(complete with role play and group activities) and role definition exercises
for Ispat managers and deciding on training programs thereof. Mehta says the
company finally aims to define roles in line with the vision for the function,
empower people and bring in greater accountability.
Ispat is also adopting benchmarking as a practice. For example, the salary
restructuring this year was done with Hewitt based on these benchmarks says
Mehta. In their bid to value human capital, Mehta says the compensation was
introduced with market correction this time. Not only that, the HR head went
out to the employees before increments were declared and gave them an
explanation as to how the figures were arrived at, addressing over 500 people.
The idea was to bring transparency in the system says Mehta.
Ispat is also focusing on driving the transformation through leadership
interventions. It is undertaking a leadership study to enhance the leadership
capability and bring about a cultural change within the organization. It is
currently studying the leadership style and subsequently there will be coaching
and grooming of the top team, helping it interact with other leaders in the
corporate sector and developing a succession plan.
At the factory level, satisfaction surveys are being undertaken with the
blue-collar workers too. Their areas of concern are being identified, a skill
inventory being undertaken, people practices being noted and a formal role
document being prepared. A simpler performance measurement system is also being
evolved for them. Mehta says work is already being done on the issues voiced by
the workers. Developmental work is also on to improve the skill and knowledge
levels of workers that is directly relevant to business and would increase
productivity.
How are people at Ispat responding to these host of changes? The response has
been more than enthusiastic says Mehta. "People are very happy as it has made
their processes simpler and added value in the way they work," he says. The
cross-functional initiatives have also helped build bonds among employees. This
was particularly important, as nearly 20% of the Ispat employees have come
aboard in the last year as part of the restructuring exercise.
Says Mehta, "When people get impacted by positive changes, they put their
weight behind the effort to make it successful. This is precisely what is
happening at Ispat."
Theirs was a brand name an entire generation of post-independence Indians grew
up with. Part of a well-known family-owned group in India, the product
portfolio of this consumer durables company included fans, sewing machines and
domestic appliances, making it literally a household name.
Market realities changed rapidly about a decade back. The homegrown contender
for the top slot in almost all appliances and durables across the 16 states it
was present in found itself facing stiff competition from either cheaper
Chinese imports or from multinational brand names.
Employee morale crumbled as the sales graph held flat. Most of the sales force
failed to meet targets, attrition rates of the front line sales people were
high and incentive plans failed to motivate. The company was also emerging as a
happy hunting ground of front line sales people for competition. The result:
corporate performance suffered.
The company decided to bring in Hewitt Associates to deal with its human
capital management and align it with the business goals. The key issues were
sales force performance and motivation. Top management admitted target setting
was unscientific and most divisions were left grappling with unrealistic
targets that had historically been forced down. Needless to say, at the end of
the year, incentives were distributed among a small fraction of employees who
had been able to meet the targets. The result: low motivation levels. To make
matters worse, the company’s pay structure was not competitive either.
The key focus of the exercise was therefore tailor-making an effective
target-setting process. It was also to be aligned with the performance
measurement system (PMS) and the incentive pay plan. Hewitt was to eventually
design, implement and train the company’s HR function on target setting
tools/process. It also aimed to measure the impact PMS and target setting had
on the top line of the firm as well as employee costs in terms of incentive
payout.
Various options were studied instead of the existing top-down approach for
arriving at an effective target-setting formula. Balance, stretch, vertical
alignment, accountability and shared responsibility, flexibility and SMART
goals were all looked at. And instead of targets being forced from above, a
bottom up as well as a combination of the top-down and bottom-up approach was
contemplated.
Owing to the company’s vast product portfolio that it sold in a variety of
markets, each product was analyzed separately. A set of five criteria was
defined to select an appropriate process for each:
Nature of the product (trade versus non-trade);
Nature of the market it catered to (predictive versus volatile);
Availability of information and data;
Desired degree of centralization; and
Benchmark to be used for the process (historical versus
market/competition).
Considering the market realities of the various product lines, two models were
short-listed:
Time series-analysis taking into account four kinds of changes, namely
secular trends, cyclical fluctuations, seasonal variations and irregular
variations; and
Econometric mode: taking into account economic factors such as market size,
number of competitors and the number of front-line sales people.
Finally, a target-setting template was created which tracked/rejected the
organization's performance on a regular basis. Simultaneously, a cost-benefit
analysis was completed, especially for the incremental cost incurred through
the incentive route vis-à-vis benefits accrued through a structured and
scientific target-setting mechanism.
At the end of the entire exercise, sales targets were forecast for the next
fiscal year with a deviation of +/- 4% for each product category. Thereafter,
targets were cascaded from the corporate level to the division, and
subsequently to the front-line sales force.
The approach, whether top down or bottom up or a mix of both, was decided for
each product category. Once that was done, the relevant forecasting tool (time
series or econometric model) was used to set the sales target for the ensuing
year. The figures that emerged, for fans for example (in '000s) were the
following:
Details were then worked out as to how the total incentives would be impacted
under the new system. Around 40 cases (front-line sales people) were tested to
see the impact on individuals with varying levels of past performance.
The table above illustrates the impact of the new PMS and target setting under
varying levels of performance that were defined on a scale of one to five with
a rating of four taken as the target level.
The organization had paid Rs lakh in incentives in 2002-03, a year when
the performance level was much below target. This was based on the ratings
given to employees according to the company's existing systems. The new ratings
(see table) represent the "expected" ratings of employees for the same fiscal
year, had the PMS and incentive system recommended by Hewitt been in place. In
this exercise, if the company were to have paid around Rs 50 lakh more, it
would impact the bottom line to grow by at least Rs 90 lakh for the following
year.
Hewitt’s performance measurement system will soon be put in place and should
be steering the business performance in the desired direction.
THERE WAS A TIME WHEN IMPROVING THE BOTTOM LINE WAS RELATIVELY EASY. COMPANIES
SIMPLY RAISED THE PRODUCT PRICES. THIS OPTION IS NO LONGER VIABLE, PROVIDING A
SHORT-TERM IMPACT AT BEST. ORGANIZATIONS NOW FACE INTENSE AND INCREASING
COMPETITION, DEMANDING BUT FICKLE CUSTOMERS AND PAPER-THIN MARGINS. IN THIS
HIGHLY COMPETITIVE GLOBAL ENVIRONMENT, MAINTAINING AND IMPROVING BOTH THE TOP
AND THE BOTTOM LINE HAS BECOME A CONSTANT CHALLENGE.
Centralization, restructuring, mergers and acquisitions have become the new
tools to improve efficiency, reduce costs and raise profitability. These
exercises, however, set off alarms across the organization. Department heads
find themselves buried in paperwork, preparing dockets and detailing value they
add to the organization. Fear and apprehension grip employees and productivity
drops.
In these scenarios, most function heads are able to quantify their contribution
to the organization. The human resource function too feels the pressure to
distance itself and the current staffing levels from being viewed merely as
costs. The pressure on HR is higher. While most companies recognize that human
resources is a key asset and the HR function a strategic partner in their
growth, in practice, human resources has difficulty justifying value and
continues to be viewed as a cost and the HR function a corporate expense.
To help HR departments in this exercise, Hewitt has developed a tool that
identifies cost-saving opportunities and improves efficiency. Hewitt’s HR
Analyzer allows an organization to rapidly create:
Starting with a vision of where it is headed, HR must also work with key
stakeholders to improve the HR model and efficiencies in order to maximize the
return on HR investments. The pressure on HR to demonstrate value has never
been greater.
Recent Hewitt Associates research shows that a majority of HR departments are
being pressured to cut operating budgets and headcounts. Too much focus on
short-term reductions without appropriate measurements of return on investment
(ROI) can create a vicious and never-ending cycle of cost cuts for HR
departments, which ultimately undermines its effectiveness.
To add to the pressure, most HR departments don’t expect cost-cutting
pressures to end. A recent survey conducted by Hewitt of more than 100
companies in North America indicated that 76% of organizations are under
significant pressure to reduce costs, now and through 2005. The situation is
similar in other parts of the world. The need to formulate effective and value
adding measures for cost cutting continues to grow.
The HR heads therefore have little option but to identify and understand all
costs, overcome organizational resistance to change and measure the
effectiveness and impact of HR cost. Starting with a vision of where it is
headed, HR must also work with key stakeholders to improve the HR model and
efficiencies in order to maximize the return on HR investments. The pressure on
HR to demonstrate value has never been greater.
A baseline of HR expenditures and
