HR EVALUATION-

UNDERSTANDING THE IMPACT OF HRM ON BUSINESS PERFORMANCE

NEED• to justify HRM existence and value of HR function

• to demonstrate HR contribution to organizational performance as a strategic partner

• To provide insight into the difficulties of measurement

• To speak in terms of deliverables

Definition-HR evaluation• ‘to determine the value of HR towards organizational goals,

• BRATTON-‘the procedures and processes that measure, evaluate and communicate the value added of HRM practices to the organization’

Benefits

• Assessment of the HR impact on performance /organizational goals

• Identify the bottom line contribution

• Strength and weaknesses of HR function

HR Value Chain

Measuring the impact on business performance

• What should be evaluated?• How should be evaluated?• At what level it should be evaluated?

• What are the criteria of evaluation?

Overview of HR Evaluation

HR EVALUATION

SCOPE

FOCUS

STRATEGIC LINKAGE

LEVELOF

ANALYSIS

EVALUATION CRITERIA

Overall effectiveness

departmentprofessionals

practices

Reactive or proactive

strategicmanagementoperational

outcomes

processes

narrow

How to be evaluated? ( HR audit)

Practices offered by HR dept

Professionals-4 clusters of competencies

research

Knowledge of HRPersonal credibility

Knowledge of business

activity

Customer value

Cost/benefit

Knowledge of change process

HR dept.Effectiveness of functionability

HRM and performance• Do HRM practices make a difference to business results?Investment on HRM reflect with a result of economic return

• When?If organizations take an investment perspective of HR

Investment-Oriented Organization

• Sees people as central to mission & strategy

• Mission statement & strategic objectives espouse value of human assets in achieving goals

• Management philosophy encouraging development & retention of human assets

• Does not treat human assets in same ways as physical assets

• WHAT ARE THE FACTORS THAT DETERMINE INVESTMENT ORIENTATION OF AN ORGANIZATION?

Factors Influencing Investment Orientation

Investment Orientation Factors

• Senior Management Values & Actions– Managers need “investment orientation” toward people

• Attitude Toward Risk– Investment in human resources inherently riskier

– Human assets never absolutely “owned” • Nature of Skills Needed by Employees

– The more marketable in skill development employee skills, the riskier the firm’s investment

Investment Orientation Factors

• Utilitarian (“Bottom Line”) Mentality– Attempt made to quantify employee worth through cost-benefit analysis

– “Soft” benefits of HR programs difficult to objectively quantify

• Availability of Outsourcing– Given availability of cost-effective outsourcing, investments in HR should produce highest returns & sustainable competitive advantages.

Researchers on impact of performance

Decade Researcher Linkage between HRM and firm performance

1980’s NKOMO Investment planning donot correlate with business performance

LEWIN et al No relationship

ULRICH Correlations found on specific HR practices and business results

1990’s YEUNG et al Alignment resulted in impact of performance

DELANEY Relationship between progressive HRM practices and performance in manufacturing firms

ARTHUR High commitment-high productivity-lower turnover than those of high control systems

Mac DUFFIE Integrated HRM practices correlated with high productivity in automotive plants

Linkage between HRM and firm performance- T V

Rao’s model

HR PRACTICES•training prgram•appraisal•rewards etc

OTHER FACTORS•Environment•Technology•Resource availability

HRCLIMATE•Proactiveness•Authencity•Openness•Risk taking

HROUTCOMES•Employee competency•Teamwork•Commitmment•Job satisfaction

ORGANIZATIONALEFFECTIVENES•Higher productivity•More profits•Cost reduction

Linkage between HRM and firm performance- BRATTON and GOLD model

HRM PRACTICES,PROGRAMMESPOLICIESSYSTEMS

OTHER FACTORS•economy•Technology•industry

HR/Employee PERFORMANCE MEASURES•INDIVIDUAL (ABSENTEEISM, TURNOVER ,Commitment)•GROUP(dynamics, processes,performance)

ORGANIZATIONALPerformance measuresOperating performance(Labour productivity/service quality)

Financial performance• profits•Market share•ROI

MEARUREMENT PROBLEMS• Accuracy of measurement variables• Disconnect between what is measured and what is important

• Financial performance measures are tangibles and HR are in tangibles

• Influence of extraneous variables• Difficult to demonstrate casual link

Trends creating the need for HR Evaluation

High levels of competition

Need for HR EvaluationBenchmarking

Transformation of employee contract(Job for life is not there)

Measures of HRM performance

HR MEASURES EXAMPLES PROBLEMS

Efficiency Cost per hireTime to fillTraining costsTime taken to process grievances

Do not reflect the talent value, fixation on cost reduction can reject more expensive decision options are of better value

Employee turnover % of employee leaving the firm More directly influenced by line managers than HR managers

Staffing ratios Ratio of HR staff per 100 employees Do not indicate how efficiently the resources have been used

Expenditure of resources

Cost of HR function Using fewer resources do not always suggest efficiency in utilization

Level of activity BenchmarkingNumber of people hiredNumber of people trained

No way to know if organization’s need are met

Employee attitudes

Satisfaction surveys More directly influenced by line managers than HR managers

Indicators of effectiveness of HR practices

HR Planning

Staffing training

Extent to which organization must hire in the open labor market, speed of filling up of positions internally by qualified candidates

Cost per hire, number of resumes received

Annual cost of training

More directly influenced by line managers who prepare sub ordinates for higher positions

Influenced by factors other than HR function

May not be related to training need for identification and hence performance improvement

Summary of HR practice measures

HR Practice Possible MeasuresStaffing Acceptance per offer ratio

Number of applicants contacted compared with those reporting for job interview

Time to fill a job Cost of filling a job Percentage of internally filled jobs Performance of hired applicants Ratio ob backup talent (number of

prepared backups in place for top jobs)Training and

development Cost per trainee hour Percentage of employees involved in

training Number of courses taught by subject Payroll expense per employee Time for new programme design Number of training days and programmes

held per year

Summary of HR practice measures

Performance appraisal

Acceptance of appraisal process by employees

Percent of employees receiving performance appraisal

Average merit increase granted by performance classification

Extent of which measurement systems are seen as credible

Safety and health

Lost work days Cost of injuries Incidence of injuries Trends in workforce illness

HR professionals

HR competencies

HR function Ratio of total employees to HR professionals (measure of productivity)

Ratio of rupees spent on HR function to total sales

Administrative costs (efficiency of HR function)

Performance against the annual HR department budget

Three clusters of HR Measures

HR MeasuresInternal operational

measures

Internal strategic measures

External strategicmeasures•Traditional

•Focus on efficiency, quality of services, speed of delivery•Appropriate whenHR is seen as cost centre

Assess effectiveness of HR Practices

in building organizational capabilities

Focus on effectivenessof HR Practices

obtaining satisfaction of key external stakeholders

Process Measures

(cycle time,Cost of HRPractices,quality

Outcome Measures(level of training

Evaluation,Job offer acceptRatios)

Organizational capabilities

Employee satisfaction

Change in Customer

satisfaction

Share holder satisfaction

(ROA)

Approaches to HR Evaluation

• The productivity of any function can be measured by some combination of cost, time, quantity or quality indices.

• These approaches of HRM measurement aims to demonstrate the relationship between HRM and organizational outcomes and to use this understanding to improve the quality of HR decisions,

General approaches to HR Evaluation

Approaches to HR evaluation

Stakeholder/Audit Approach

Utility/Analytical Approach

Business Consulting Approach

Focus To determine the satisfaction of key users with HR services

Cost benefit analysis, and determining financial utility of HR services

HR functions as a strategic business unit and helps customers achieve maximum value from HR products and services

Criteria of HR Effectiveness

Employee satisfaction surveys; Perceived effectiveness of HR; Absenteeism rate; Cost of HR as a percentage of sales; Average number of days taken on hire an employee

Asset method:Value of employees

(cost of training/total number of employees)

Expense model:Economic effects of

employee behaviour like absenteeism, turnover, etc.

Economic profitability:Employee’s contribution

to the firm’s performance (reward programme that improves productivity)

Cost benefit ratio:Comparing benefits of

HR practice to cost of delivery (ROI)

HR reviewed as profit centre

Quantitative measures: decrease in turnover translated in financial terms to determine money value of training benefits

Qualitative measures : changes in employee satisfaction index

Contemporary approaches to HR Evaluation

• Balanced scorecard• HR scorecard• Benchmarking• Business Excellence Model

Balanced scorecard• It is a resultant of the dissatisfaction of traditional financial measures for measuring the performance

• Kaplan and Norton• Based on stake holder approach• According to it , if a business is successful it is considered that the three stake holders of business are satisfied- customers, investors and employees

• Measurement -investors: financial performance, profits, market value, cash flow

-customers: market share, customer retention and commitment

Employee measures through balance scorecard

- productivity= output/input or output/total no. of employees

- People= turnover, absenteeism, employee commitment, satisfaction

- Process= linking employee perception of leadership to a manager’s salary increases

HR scorecard• It measures the effectiveness and efficiency of the HR Function in producing those employee behaviours that are important for a firm to achieve its strategic goals

• It shows the metrics used by the organization to measure HR activities as well as employee behaviour

• Provides the link between HR activities, employee behaviour and resulting organizational outcome and performance

Creating strategically resulted HR system – steps in using HR

scorecard• Defining business strategy• Outline the value chain of the company• Identify strategic organizational outcomes• Identify required workforce competencies and behaviour

• Identify relevant HR systems and practices• Design HR scorecard measurement• Periodically evaluate the measurement system.

Benchmarking • It denotes a comparison of selected performance indicators of an organization with those from different organizations, typically in the same industry, or with comparable organizations that are considered ‘ best in class’

Benchmarking – Purposes • Self-audit• Learn from others• Tool to create motivation to

change• Helps provide focus and set

priorities for HR manager• To assess improvement in HR

competencies over time

Identify HR practices to be benchmarked

Identify the team members of the benchmarking exercise

Identify the benchmarking partnersAgainst whom benchmarking will be done

Collect data from benchmarking partners

Analyze and interpret data

Prepare a written report of the findings

Determine performance gaps

Develop action plans

Benchmarking partners ( other relevant firms)

ABC

THE BENCHMARKING PROCESS

Business Excellence Model (BEM)

• It is designed to assist organizations achieve excellence through continuous improvement in the management and development of processes to encourage a wider use of best practice activities.

• The model assess the quality of performance of the organizational processes relative to previous years and to competitors or benchmark organizations.

BEM uses seven criteria to evaluate performance

• Result orientation• Customer focus• Leadership and constancy of

purpose• Management by processes and facts• People development and involvement • Partnership development• Public responsibility

• TATA Business excellence model• It uses MALCOLM BALDRIGE CORE VALUES

• 11 core values for high performing organization

MALCOLM BALDRIGE CORE VALUES• Visionary leadership• Customer centered• Organizational and personal learning• Valuing staff and partners• Agility• Focus on the future• Managing for innovation• Management by fact• Public responsibility and citizenship

• Focus on results and creating value• Systems and perspective