As the end of another business year approaches, it is common practice to evaluate results, accomplishments, goals achieved and missed, key lessons to apply in the future, and personal lessons learned. HR often assesses established and repeatable processes through comments and feedback and evaluates standard metrics such as cost-per-hire, merit pay budget distribution, hours of learning delivered, total hires, and employee inquiries handled. While those provide insights into how well or efficiently HR processes ran, they tell us less about the state of the business. We take the position at Wowledge that assessing the business impact of HR is crucial to being business-aligned.  

While HR and people analytics continue to lag behind those generated by finance, marketing, and administration, HR is incredibly well-positioned to be data-driven. Consider the preponderance and adoption levels of automated systems such as the HRIS or HRMS, ATS, LMS, and TMS, which collect large amounts of data on employee activities, behaviors, actions, and reactions. They can track and analyze benefit selections, training programs, leave requests, performance ratings, career progression, life status changes, and employee and applicant job postings. The sheer number of transactions and resulting insights that can be drawn from these systems and processes is vast. 

That said, the most desired role of being a business-driving function with a proverbial “seat at the table” requires assessing the business impact of HR on the organization's operational mission, objectives, and outcomes. Generating such insights can enable an HR team to be a credible business partner, optimize its investments and intervention designs, and offer more objective decision support to leaders and managers across the organization. As a result, assessing the business impact of HR requires that those HR metrics be combined and analyzed with business outcome data to determine HR interventions' effect on the business.

The proof is clear and yet challenges exist in assessing the business impact of HR

Despite the common thread that HR analytic capabilities need to catch up to what business leaders want and need, there is a substantial body of evidence that supports the ability of HR to drive (directly or indirectly) business results. For example, Gallup has reported that HR’s focus on tracking and improving employee engagement significantly influences organizational success, improving enterprise sales, profitability, financial, customer, retention, safety, quality, and shrinkage measures. Similarly, a focus on employee experience (EX) has been equally connected to significant enhancements in innovations, customer satisfaction, revenue and profitability, quality, shrinkage, and operating expenses. 

Further evidence comes from studies demonstrating the power of a robust learning and development culture on earnings, profitability, innovation, and total return to shareholders (TRS). Aligning employee goals with the larger organization's objectives leads to significantly higher performance. The most robust HR and culture-driving practices deliver substantially higher shareholder returns.

However, “seeing is believing” and “perceptions rule.” Sadly, the perceptions of leadership appear to be stuck in their own experiences and lack of awareness. For example, a recent study revealed that only 27% of executives think HR can impact revenue growth (vs. 53% of HR executives). Similarly, business leaders are highly skeptical about HR’s impact on cost savings (27%), customer satisfaction (30%), and product or service quality (28%). Only 61% of C-Suite leaders believe that HR can impact employee productivity. Without leadership’s confidence in the basis for and value of HR’s consulting and advice, the uphill battle for credibility and business decision-support status will continue.

What needs to change?

The issue boils down to the core complaints about HR—that it is not contributing to business success and, to many, represents an administrative drain on business management. It is about HR’s credibility, with arguments that talent solutions are unnecessary, not aligned with business requirements and objectives, and too “squishy” and “soft,” among other common refrains. The fact is that aside from management's lack of understanding, assessing the business impact of HR is hamstrung by three key deficiencies:

1. HR teams are under-skilled and under-resourced in analytic capabilities

LinkedIn research demonstrated that only 22% of companies have adopted a formal HR Analytics approach, and even fewer (11%) have dedicated people, talent, or HR analytics teams.

2. Leaders complain about lacking needed insights

Even where HR dashboards and reports are produced and available, their utility needs to support leaders' decision-making. As typical HR reporting focuses primarily on process efficiencies and costs, the need for more insights into how HR and managerial practices, programs, and policies impact key business drivers diminishes their value in decision support. Deloitte research found that only 3% of surveyed executives felt they had sufficient information to make solid decisions about their employees.

3. Traditional HR metrics are inward-focused

Historically popular HR reporting focuses on process efficiency and summaries of HR transactions instead of business outcomes. Consider the lists of “best HR metrics” from a Google search, and pages upon pages of talent process measures will be presented – cost-per-hire, training completions, performance appraisal submissions, average compa-ratio, and benefits enrollment. These measure process compliance, volumes, and use volumes, all focused on efficiency instead of effectiveness. While other standard HR measures, such as employee engagement, turnover, time to fill, and headcount, measure process effectiveness, they are still primarily focused on how well the policies and programs operate.

The core credibility issue can be addressed by better supplying objective, data-based insights into the workforce challenges that leaders and managers see (and cannot see). The opportunity to use data to better understand and explain trends, issues, or occurrences within workforce segments and work in partnership with leaders to evaluate and make decisions based on it represents a game-changer for HR teams.

Critical considerations when assessing the business impact of HR

Define the purpose and value of what is to be analyzed

Have an apparent business reason and intention for compiling data and conducting analyses that answer the critical questions. Always consider the organization’s mission, market positioning, primary business strategy, values, and primary areas of leadership focus. These become good starting points for identifying the business value of a high-utility measure or analysis. Examples include: 

• Driving continuous improvement, low costs, and effective resource allocation.
• Enhancing employee experience and engagement in ways that improve business and stakeholder (customer, financial, shareholder) value.
• Managing an early warning and risk management system for threats to corporate objectives and business continuity.
• Identifying portals and barriers to enhanced innovation, customer satisfaction, growth opportunities, and competitive advantage.
  
  

Ask better questions

Resolving the dilemma about better assessing the business impact of HR starts with what experts on business analytics propose as the critical first step—asking questions that address stakeholders' most pressing issues and concerns. Think about turnover from the perspective of a line manager, director, or vice president. Is high turnover a problem in a historically high-churn industry, job level, or role? Or is the loss of high-performing, longer-tenured, or high-potential workers in those roles leading to a 3% drop in sales? 

From a business leaser’s perspective, instead of just looking at the cost of running an HR process, how many people participated in it, and how long it took to complete it (all useful for the HR process owner’s review of efficiency), consider broader questions that address leadership’s concerns. As Dave Ulrich suggests, the questions to answer are not only “what” one wants to understand but also add a “so that” to the question – which generates an understanding of the operational rationale or business purpose of the analysis or metric.   

Examples might include:  

• Are we optimizing our use of human resources? Is the organization right-sized and affordable, given revenue projections and profitability goals? 
• Are our processes and programs efficient and effective, and are they adding value relative to business objectives?   
• Are our managers properly leveraging the resources we have assigned to them to enhance their product or service output? 
• To what extent are our investments in manager and employee time, effort, and expenses driving or contributing to sales, profit, customer satisfaction, or market share?
  
  

Clarify whose impact is being measured

As previously mentioned, measuring HR process or practice efficiency undoubtedly has value—it allows for good budget stewardship and identifies opportunities for streamlining and improving employee experience and managerial effectiveness. It can also be crucial in cases where cost management is a key priority relative to the organization’s mission (e.g., as a low-cost provider), times of economic distress, or budget overruns. However, those measures are generally less meaningful to managers and are best left off their dashboards and reports. 

The focus, however, should be on how HR and people programs and interventions relate to and impact the business, operating environment, and their primary operators (line managers and leaders). That means assessing managerial effectiveness and HR’s impact on organizational capabilities and drivers of organizational performance, productivity, culture, and health. All HR processes (and managerial results of using them) should be evaluated and tracked for their effect and degree of influence on these outcomes. Measuring managers is a business-aligned and -focused approach.

Combine business data with HR or talent data

Generating meaningful insights that can drive objective and improved decision-making requires access to and use of business data (sales, lead conversions, revenue, expenses, profitability, production, customer churn, service calls, shrinkage, product defects, and returns), often by department, business unit, or location. Gaining access can be met with resistance, but following the previous considerations and engaging with an executive or senior leader as a champion for the analytic value proposition will most often ease the pathway to access.

Leverage more advanced statistical techniques

Combining business and HR data is designed to produce an “if-then” assessment of the relationship between two or more variables or actions. This often calls for more advanced statistical methods, such as correlations or regressions that indicate the level of covariance (how much a and b rise and fall together) or causality (to what extent a causes or impacts b).

Alternatively, covariance can be evaluated by simply plotting the occurrence of “a” (over time) on a line graph, with “b” (over time) as a separate line; the extent to which the lines rise and fall together can indicate a relationship beyond coincidental.  

If the HR team lacks these statistical skills, a partnership can be formed with capable employees in Finance, Marketing, Operations, Engineering, or other internal functions where business analysis or STEM skills reside. Alternatively, external experts from local consulting companies, temporary agencies, or academic institutions can be hired on a project or temporary basis.

Top approaches for assessing the business impact of HR

The range of potential metrics is substantial and linked to any organization’s primary mission, performance drivers, business objectives, and talent priorities. However, a list of examples should provide context and a starting point for organizations that aspire to generate more meaningful insights for assessing the business impact of HR. The key is to follow the guidance above, identify the most critical business outcomes, and ask thoughtful questions about how HR efforts, processes, and programs impact those. 

Take the position of a scientist testing theories and hypotheses that are believed to impact specific business outcomes. Take the people-related events, occurrences, or programs most likely to help or hurt the organization's efforts to meet its financial and market objectives. Create a narrative for each that explains the hypothesis or theory that the analysis will prove or disprove. Some illustrative examples of these hypotheses and approaches include:

Turnover drains productivity, production volumes, and quality. Analyze the impact of turnover rates of critical role holders, high performers, new hires, diverse employees, and high potentials on outcomes such as revenue per employee, profit per employee, units produced, deadlines achieved, patent satisfaction, or orders filled. It also serves as a view into managerial effectiveness and efficiency by asking, “Are certain managers, locations, or departments churning employees at a rate that negatively impacts their output or customer outcomes?”

Position vacancy rate assesses the impact and cost of position vacancies, time to fill (TTF), and vacancy length on business outcomes such as productivity (units per production employee, revenue per employee, profit per employee) and customer service. Analyze critical departments such as manufacturing, distribution, sales, customer support, supply chain, coding and app development, and project teams.

Employee engagement is a core talent outcome analysis, widely demonstrated as a driver of business outcomes. Conducting statistical tests that reveal how much engagement is related to, or (even more powerfully) predictive of sales, production, profitability, revenue, and market share growth can create a business case for making significant investments in strengthening managerial capabilities and performance, enhancing the meaningfulness of work, and customer-centric strategies.

Net hiring assesses the extent to which managers or departments are over-relying on recruitment at the expense of retaining quality employees. It is designed to provide insights into the impact of staffing levels and activities on achieving objectives and can offer insights into lower levels of innovation or collaboration. It also provides insights into managerial effectiveness by asking questions such as “Are we hiding poor managerial performance by maintaining reasonable headcount-to-budget ratios?

Skills growth provides a view into the value and benefits of continuing development (formal and informal) in meeting enterprise objectives. Consider analyzing skill growth rates for critical or strategic skills on market competitive indexes such as the number of product or service innovations introduced, process efficiencies implemented, or employee suggestions adopted. Compare the volume of strategic skills courses and certifications completed on market share, customer satisfaction, or sales performance. This is best accomplished if a skills library is used and employees enter new or improved skill or competency ratings into the system. Performance review data can also be reviewed for newly added skills and capabilities for such an analysis.

Leadership and managerial effectiveness are critical drivers of employee engagement and operational performance. Use HR measures such as 360-degree assessments, leadership competency model ratings, and net talent producer scores (ratio of high-performer transfers and promotions out versus high-performer hires or transfers in) and analyze their impact on productivity/production levels, product or service quality, customer satisfaction, revenue, and profitability. Analyses should also be conducted on all leadership development activities (e.g., courses, seminars, coaching, job rotations, mentoring, project management) and the extent to which they impact managerial quality and goal achievement, 360-degree and competency assessments, and other role or function-specific outcomes (e.g., sales, revenue, profitability, market share).

Quality of hire (QOH) is the most valuable assessment of a recruiting process, shedding equal light on the capabilities of the recruiting function and hiring managers. Key talent outcomes for assessing QOH include post-hiring speed to competency, retention or length of tenure, performance ratings, high potential or succession plan status, promotions, and talent review results.  Evaluating the impact of hiring and retaining high-performing, high-potential, and culture-aligned team members at scale on key business outcomes can provide proof of the value of excellence in people assessment and management.

Role criticality is a unique way of leveraging the job architecture (and workforce planning (WFP)) to assess the relative value of every job in an organization and search for the relative impact of those on key business outcomes, such as revenue generation, profitability, and market share. As with the classic critical workforce segmentation (CWS) exercise conducted by Disney, which found that Street Sweepers had the most impact on theme park visitors’ satisfaction levels, such an analysis can help identify under-valued roles that require more attention and investment.

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