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Questions…on Measuring Human Capital for Tom Norman One of the first purse strings managers tighten in a down-turning economy like the one we’re facing now is in human resources. Yet, Assistant Professor of Management Tom Norman suggests that’s the wrong approach. He’s not lobbying for some vapid morale booster like a ho-hum company picnic. Instead, the new CSUDH professor who worked in HR for Sun Microsystems and who is doing his dissertation on the outsourcing of the HR function at companies like Best Buy, suggests that human capital needs to be treated like every other kind of capital a company handles on its financials. The key, he says, is developing metrics to quantifiably measure human performance. Why is it that HR is one of the first things to be tightened down during a period of economic turmoil? There’s this mentality among many managers that they think their employees should just be grateful to have a job if the economy is bad. The problem with that though is that it can likely exacerbate any problems an organization is having with profitability during tough times. How can that “they should be happy that they have a job” mentality among managers make things worse? It takes the focus off employee engagement. That is the key measure every company should track among its work force, and the most important thing to keep people productive and committed to their work and organization, which everyone knows is vital because of the cost of hiring and training staff. It has been proven that if engagement goes down, turnover goes up. Some employees may leave, but many others may hang on with lower morale so they’re giving maybe 10 to 20 percent less effort or commitment. It creates a perilous downward spiral. Is there a distinction between an engaged and a happy employee? Absolutely. Happy employees are nice, but what good is a happy employee who doesn’t do his or her job? The same goes for content employees. If they are merely content because they don’t have to work hard, that’s no good. So what defines an “engaged” employee then? I get at it through what I call the DART model. There are four key purposes of HR: directing talent, attracting talent, rewarding talent, and training talent. That still sounds nebulous though. If you advocate for measuring engagement, how do you do that? The first key is an engagement survey that employees should take once a year that gets at these four areas of HR. There’s a Gallup poll, used by many companies and “The Great Place to Work Survey.” We used that at Sun Microsystems. I’m sure smaller companies can finder basic engagement survey questions on the Internet that would be helpful. The point is to correlate engagement with your company’s key drivers such as rises and falls in sales. At Best Buy, there’s been a direct and tight correlation on a store-specific basis – when those employees in the blue shirts describe themselves as engaged, the company has seen an increase in sales. That’s powerful. There are other specific metrics that might be used. Instead of benchmarking how many people are trained by counting butts in seats, there should be a measurement tool set in place to measure how much more effective employees are after the training. And this should be done on a regular basis. For example, if your employees work in manufacturing or warehousing, measuring the amount of training delivered on safety issues and then correlating an increase or decrease in days lost to employee injury would be appropriate. Why such a lack of metrics in HR? First off, when we talk in these lofty HR terms about rewarding people and keeping them engaged, it’s hard to bring that back to the bottom-line. But that’s my overall point – every company should work to develop appropriate people metrics because there is such an investment in human capital that you need to look at your employees in the same way you’d like at other assets and expenses on your balance sheet. Unfortunately, too few HR professionals are trained to develop and use good metrics. They don’t know how to go about setting up a system that will look at the ROI of HR programs or each employee hired. Just as importantly, HR professionals sometimes lack an understanding of the core business. So they may be training people for the goals set out last year when they should be training them for what will come two years from now. So what companies are doing this right? Companies like General Electric and Proctor & Gamble have always made this a focus. First off, they give all applicants cognitive tests. The tests tell whether you are or are not likely to grow into the position that will require certain skills; they use structured, behavioral-based interviews to get at interpersonal skills, not as the sole basis for hiring someone. Then, they track several key metrics and continue to evaluate employees on a regular basis to track their growth and engagement. They use tools like 360-degree feedback so that you’re not only getting comments from your manager, but also from colleagues and those who work for you. Microsoft does this too. I was actually really impressed with the measures Procter & Gamble had in place when I worked there too. They knew that I wouldn’t start to pay off – that idea of ROI – until my fifth year with the company. Google is another company that is doing some really interesting things with HR metrics. They are trying to come up with an HR team that is one-third academics, one-third management consultants, and one-third HR professionals. The point is that they want some quantitative folks (the academics), some consultants to convey the ideas, and the HR professionals to have the industry skills to carry out the tasks. Another added benefit about adding metrics to HR is that it can remove the office politics. How can HR metrics remove office politics? If there are numbers to back up the points being made in reviews or training, it opens the door to more frank conversations. It takes away the personal anger or resentment that can be directed at particular people. It also can be a positive in terms of transparency by allowing more people into the training and development of employees. So there becomes a more collaborative, team effort. All of this seems like a lot of work though. Is it really possible for a small business to focus on HR metrics when there are so many other things to do? The way I look at it, you don’t have time to not do it given the impact that your employees have on your bottom line. One of the top three people in the company needs to be taking managing human talent as a core component of his or her job. Think of it this way: You’re paying all these people’s salaries. Can you afford not to measure whether you are really getting your money’s worth? Am I suggesting every small company needs to pay for the Gallup survey and putting some robust system in place? No. But even leaders of small companies should sit down with their management team and ask what are the three key employee measures that most effect efficiency and/or the customer experience. And then set up a way to track them. If you don’t spend the time to do that now, you’re going to spend more time – and more money – on hiring and training because of turnover. Are there any ways that this is easier for a small business? At Sun Microsystems, we could see a change that needed to be made based on employee surveys measuring engagement but because of the size of the company, it was hard to make those changes noticeable to employees before the next survey came around. So it was hard to measure its efficacy. With a small company, you can take some of the major issues that people outline as problems during an engagement test one year and make the necessary changes to improve those areas by the time the next engagement test comes around. You can react and adapt more quickly.
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