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2006 SHRM® Research Ouarteriv

MaximizingHuman Capitai:Demonstrating HR Value WithKey Performance Indicators

Nancy R. Lockwood, SPHR, GPHR, M.A.Manager, HR Content Program

oResearch

2006 SHRM^ ' Research Quarterly

Abstract

To drive value and optimize company performance, human capital—the collective knowledge, skills andabilities of people that contribute to organizational success—is an asset to be leveraged. Based on corpo-rate culture, organizational values and strategic business goals and objectives, human capital measuresindicate the health of the organization. The effective use of key performance indicators (KPIs) that mea-sure human capital outcomes, such as talent management, employee engagement and high performance,illustrates the firm's business, financial and strategic goals, promotes partnership with senior manage-ment for organizational success and demonstrates HR value to the C-suite.

Introduction"In order to fully value human capital, we must gobeyond the view of human effort as purely individual.We, humans, affect each other profoundly, and it is theway we affect each other that determines our valueto our organizations. And. it is the way that strategichuman resource professionals bring this understand-ing to the fore of their organizations that determinesHR's vaiue at the senior management tabie."^

In 1995. the seminal study by management guruMark Huselid linked high-performance work prac-tices with company performance and revealed thatworkforce practices had an economic effect onemployee outcomes such as turnover and productiv-ity, as well as on short- and long-term measures ofcorporate financial performance.= This study markeda new era of measuring the Influence of HR to pro-mote effective organizational performance, sustain-ability and financial success.

As HR positions itself as a strategic business part-ner, one of the most effective ways to do so is tosupport the strategic business goals through keyperformance indicators. Key performance indica-tors (also known as KPIs) are defined as quan-tifiable, specific measures of an organization'sperformance in certain areas of its business. Thepurpose of KPIs is to provide the company withquantifiable measurements of what is determinedto be important to the organization's critical suc-cess factors and long-term business goals. Onceuncovered and properly analyzed, KPIs can beused to understand and improve organizationalperformance and overall success.^

Why Measure Human Capital?The primary motivation to measure human capitalis to improve the bottom line. To design betterKPIs. it is essential for HR to understand what isimportant to the business and what key businessmeasures exist. In addition, the drive to mea-sure human capital reflects the change of role ofhuman resources from administrative to that of astrategic business partner. In general, human capi-tal measurement is a measure of effective humanresource management.

Broadly stated. HR metrics measure efficiency(time and cost) and the effectiveness of certainactivities. Yet mastering human capital measures

can be a very complex undertaking. Today. HR pro-fessionals are expanding the "traditional" metrics,such as head count, time-to-fill and turnover, toKPIs that align with corporate objectives and cre-ate greater stakeholder value. However, KPIs oftendemand large amounts of data and technologicalsupport. In addition, the triai-and-error required toset appropriate and meaningful measures comesinto play, as well as patience and education ofthose involved. Yet despite these challenges, 84%of companies expect to increase the application ofhuman capital measures in the next few years.^

With a clear line of sight on workforce and orga-nizational performance, effective use of KPIs alsoillustrates HR's in-depth understanding of the linksto business success. KPIs help build the credibilityof the HR department, demonstrate HR value andfoster respect and partnership with senior manage-ment and the C-suite. For example, when an HRprofessional not only shows that a new recruitingprogram resulted in a lower time to fill positionsin the organization, but can also demonstrate thatthe program yielded an additional amount of rev-enue because billable staff were able to start atclient sites more quickly, he or she builds HR cred-ibility. Credibility is increased because HR is ableto link HR activities to firm performance and com-municate it in financial/business terms. Additionalcritical reasons to measure human capital includesteering human capital resource allocation, win-ning business cases for human capital investment,tracking human capital activities to develop humancapital predictions, linking variable compensationto human capital best practices, delivering humancapital information required by law and providinginvestors with information on human capital per-formance. Some firms even use KPIs to enhancetheir company image as a progressive employer ofchoice.^

Further, with many HR functions increasingly beingoutsourced, credibility is earned through activi-ties and outcomes that result in "deliverables"that promote and lead to organizational success.'^Consequently, it is important to select KPIs that aremost meaningful to the organization. For example,logical KPIs to select are those that reflect driversfor human capital measurement, such as financialoutcome measures (e.g., revenue growth and costreduction) and performance drivers (e.g., customer

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satisfaction, process technology innovation, producttechnology innovation, globalization). Within thatframework, the most common categories of peoplemeasures include turnover, productivity (revenue,profit per employee), employee satisfaction/employ-ee engagement, recruitment, diversity, remunera-tion, competencies/training, leadership, and healthand safety. Most frequently measured are turnover,voluntary resignation, average compensation, aver-age workforce age, diversity and compensation/total cost. Such KPIs will help HR professionalspredict what they need to know to act in a timelyand effective manner and identify ideas and areaswhere HR can develop new initiatives, or revisit oth-ers, to obtain stronger results.^ Clearly, KPIs are thewave of the future for HR.

Culture, Stakeholders and KPIsAs the saying goes, "what gets measured gets man-aged." The company culture and corresponding val-ues define what is measured. Therefore, when HRconsiders important KPIs, the first place to look isat corporate culture and what is most valued withinthat culture. In addition, stakeholders (both internaland external) go hand-in-hand with company culture.A stakeholder is an individual or entity with a stakein how the organization performs and/or conductsitself. Internal stakeholders are employees, linemanagers, senior management, C-suite and theboard of directors. External stakeholders includeshareholders, customers, vendors, the communityand the government.

Figure 1HR Value-AddedStrategic Activities

• Help identify or design strategy options.

• Help decide among the best strategy options.

• Help plan the implementation of a strategy.

• Help design the criteria for strategic success.

• Help identify new business opportunities.

• Assess the organization's readiness toimplement strategies.

• Help design the organizational structure toimplement a strategy.

• Assess possible merger, acquisition or divesti-ture strategies.

• Work with the corporate board on businessstrategy.

• Recruit and develop talent. ^^

Source: Adapted from Lawler III, E. £.. Boudreau. J. W.. & Mohrman. S.A. (2006). Achieving strategic excellence; An assessment of humanresource organizations. Palo Alto, CA: Stanford University Press.

Working closely with internal stakeholders is ben-eficial for HR to 1) prioritize capabilities and createaction plans to deliver them; 2) focus on deliver-ables rather than doables; 3) build relationshipsof trust; and 4) help resolve misconceptions ofHR.8 Different stakeholders have different criteria.The key priority is to give business partners theinformation they need to manage the company.For example, senior management values perfor-mance measures that predict and lead to futureorganizational financial success and sustainability.On the other hand, while one employee consid-ers the availability of upward career mobility veryimportant, another employee stays for health carebenefits. As a result, training to promote opportu-nities to move up in the organization and informa-tional sessions about employee benefits packagesmay be important. Cverall, most important areKPIs that track key business indicators of humancapital issues. HR must focus on KPIs that bestillustrate stakeholder values that will lead to orga-nizational success.

KPIs—A Strategic Management ToolTo think strategically about measurement and howbest to use KPIs as a strategic management tool,it is essential to understand the meaning of themeasurements and their purpose. This approachwill not only be beneficial to help better managethe HR function, but also will naturally lead toaligning HR's goals and objectives with those ofthe organization.^

According to a recent national longitudinal studyon the assessment of human resource organiza-tions, strategy is the top high-value add for HR.However, in only 60% of companies did the HRexecutive see HR as a "full partner." In addition,24% of executives outside of human resourcesviewed their HR counterparts as working at lowerlevels of strategic involvement, compared with40% of HR executives. The study suggests thatactivities related to strategy provide the most high-end impact for HR to demonstrate its value (seeFigure 1). In addition, the relationship betweenbusiness strategy activities and HR's strategic rolepoints to areas where HR can contribute; growth,the core business, quality and speed, information-based strategies, knowledge-based strategies, andorganizational performance. The study data alsoreveal key strategic HR activities that link busi-ness emphases with the organization's strategicfocus: 1) having a data-based talent strategy; 2)partnering with tine managers to develop busi-ness strategy; 3) providing analytic support forbusiness decision-making; 4) providing HR data tosupport change management; 5) driving changemanagement; and 6) making rigorous data-based

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decisions about human capital management.^"From these HR strategy activities, key performanceindicators can be developed.

At the same time, when determining strategic KPIs,it is essential to consider who designs human cap-ital measures and how they are created. Researchby The Conference Board reveals key contribu-tors to these metrics. Overall, HR designs 94% ofhuman capital measures, often basing them onmeasures in the company scorecard. To createhuman capital measures, 77% of HR professionalsmeet with company business managers. For exam-ple, finance, strategic planning, outside consultingexperts, business managers and IT contribute toHR measurement design. However, if HR lacksexpertise with metrics, it is helpful to partner withgroups such as marketing that have considerableexpertise in measure design and analysis. "^

Alignment of people metrics with organizationalstrategy is still at an early stage in many firms. Tomove human capital investments fonward, severalkey points will assist HR to better strategicallyalign with organizational goals and gamer supportfor human capital programs; 1) involve HR in thedevelopment of overall business strategy; 2) enlistleaders outside of HR to help develop and backKPIs; 3) collaborate with business managers toensure KPIs link to business unit strategic goals;4) focus more attention on links between peoplemeasures and intermediate performance drivers(e.g., customer satisfaction, innovation, engage-ment); 5) increase manager acceptance throughtraining programs and concrete action plans; and6) work with HR to simplify metric and automatedata collection.I-"

In addition, benchmarking can make humancapital metrics more valuable. When used wisely,benchmarking data can protect programs that areperforming well, create support for organizationalchange and help executives in HR and other dis-ciplines make strategic decisions that affect theirorganizations." By focusing on internal benchmarks,customized measures may help improve the align-ment of activities to HR strategy. However, cautionshould be used with external benchmarks due tomixing "apples and oranges"—that is, differentindustry sectors and underlying issues in bench-marking measures. Also, external benchmarkstend to emphasize results rather than processes.Because an external benchmark does not explainwhat part of the process can lead to better results,the use of external measures may not always beappropriate for internal use. In the rapid expansionof highly advanced e-learning programs, for example,different programs may deliver the same content at

the same low cost, but the quality of the programsis not revealed in the benchmark itself.^^

Overall, the top KPIs for human capital and HReffectiveness can be used by all companies,regardless of size or industry. For example, the HayGroup found that the most admired companies hadeffective business practices in the following areas;organizational culture, strategy implementation,attraction and retention of talent, leadership devel-opment, fostering innovation, and performancemanagement. Successful companies assess per-formance by balancing profit measures with mea-sures of shareholder value, customer satisfactionand employee satisfaction.'^ Keeping this researchin the forefront will help HR develop effective andstrategic KPIs for their organizations.

The Importance of Lagging and Leading IndicatorsThe purpose of measuring KPIs and determiningwhat leads and what lags is to help the busi-ness make predictions. To demonstrate HR valuewith KPIs, it is imperative that HR has a work-ing knowledge of lagging and leading indicators.These terms describe data regarding outcomesand/or events that affect organizational perfor-mance. Lagging and leading indicators offer a wayto understand and/or predict various aspects offirm performance. However, to identify and quan-tify these relationships, it is essential to knowmore than HR is a leading variable and customersatisfaction is a lagging variable.^^ To accuratelygauge the relationship between lagging and leadingindicators, a sense of the magnitude of the timelag between changes in the leading indicator andsubsequent changes in the lagging indicator isrequired. (See Figure 2 for an example of laggingand leading indicators, with turnover as the laggingindicator in response to selection and supervisorytraining, the leading indicators.)

To be more specific, a lagging indicator representsinformation that is the result of change or an event.Lagging indicators, for example, are measures ofprofits, sales and service levels. They reveal vari-ous aspects regarding the success or failure of afirm. Lagging indicators are particularly useful forshareholders, creditors and government agencies.Lagging indicators do not, however, help a companyreact quickly, show what specifically went wrong orright, or indicate exactly what needs to be done toimprove. In general, lagging indicators are not usefulin managing on a day-to-day basis."

In contrast, a leading indicator precedes, antici-pates, predicts or affects the future. For example,higher employee turnover can precede outcomessuch as lower customer service scores. Of the two

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2006 SHRM' Re?iftarr,h Ouarter!

indicators, the leading indicator is more useful forinvestments or predictions. The state of the majorstock markets, for example, is a leading economicindicator for the global economy. Figuring out how tomeasure events, practices, initiatives or outcomeshelps to determine the most valuable leading indica-tors—that is. those indicators that may lead to clearoutcomes.^^ However, part of the difficulty is clearlyproving what indicators lead and with what degreeof influence. For example, while the availability oftalent is generally thought of as a leading indica-tor—as one can measure the quality of hire from it{the larger the talent pool, the more likely you are tohire more qualified people)—it is also a lagging indi-cator in comparison to certain political decisions.For example, consider how changes in a local taxa-tion rate, perception of crime and ratings of schoolquality affect people's desire to move to a city andbecome part of the talent pool. Here, political deci-sions lead and talent availability lags. In general,the most useful measures are leading indicators, asthey may predict future firm performance.

Scorecards and DashboardsIn recent years, HR scorecards and dashboardshave gained popularity as a management tool.Documenting and tracking defined metrics vali-dates human capital investments. For example,firms are increasingly tracking employee movementas a metric. Cisco Systems, Inc., the California-

based communications giant, views building tal-ent as a priority and has added to its dashboardof people measures a metric to track how manypeople move and the reason why. including rev-enue per employee. This KPI allows Cisco execu-tives to quickly identify divisions that are creatingnew talent. Another firm. Valero Energy Corp. inSan Antonio, developed a recruitment model usinghuman capital metrics based on applying the sup-ply-chain business process to labor. Scorecardshelp the company track the labor sources thatprovide the most productive employees. Using adetailed analysis of these metrics, the companycan accurately forecast the demand for talent bydivision and title three years in advance.^^

The HR scorecard, based on the format of thebalanced scorecard. is a Key management tool tostrengthen HR's strategic influence in the organiza-tion. The scorecard has four perspectives—stra-tegic, operational, financial and customer—thathelp organize and track areas where HR addsvalue: 1) the strategic perspective focuses onmeasurements of effectiveness of major strategy-linked people goals; 2) the operational perspectivereflects the effectiveness of HR processes; 3) thefinancial perspective relates to financial measuresof HR value to the organization; and 4) the custom-er perspective focuses on the effectiveness of HRfrom the internal customer viewpoint. Depending

Figure 2 The Effects of Selection and Supervisor Training on Turnover

Overall quality (leading indicator)

Fit wtth supervisor (leading indicator)

Annuatized turnover (lagging indicator)

Note.- Assessment begins in April, training in August. aMtionai training in November.Source: The Gabriel institute (2006. June), www.thegaarjelinstitute.com

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on the organization's business goals, these per-spectives also help determine KPIs that best dem-onstrate HR value (see Figure 3).=" Additional keybenefits of the HR scorecard are 1) reinforcementof the distinction between HR "doables" and HR"deliverables" (i.e., a policy implementation is adoable and becomes a deliverable when it createsemployee behaviors that drive strategy); 2) HR'sability to control cost and create value; 3) mea-surement of leading indicators; 4) assessment ofHR's contribution to strategy implementation andto the bottom line; 5) support of HR to manage itsstrategic responsibility; and 6) encouragement offlexibility and change.^'

KPIs and Employee EngagementEmployee engagement is quickly becoming a criti-cal success factor for competitive advantage. UsingKPIs, HR can demonstrate organizational successas well as gain support for initiatives related toemployee engagement. Research studies offerevidence that employee engagement is key toorganizational success. In the SHRM 2006 JobSatisfaction Survey Report, employees identifiedfour key aspects of job satisfaction directly linked toemployee engagement; meaningful ness of job, con-tribution of employee's work to the firm's businessgoals, the work itself and variety of work. ^ WatsonWyatt's research. The Humar) Capital ROI Study,reinforces the link between employee engagement,reward systems and retaining valuable human capi-

tal.^^ / Carlson/Gallup study on employee engage-ment and business success shows that employeeswho are extremely satisfied at work are four timesmore likely than dissatisfied employees to have aformal measurement process in place as well asreceive regular recognition. Further, 82% said recog-nition motivated them to improve job perform a nee. ^Thus, as these studies highlight, employee engage-ment—whether through job satisfaction indicators,reward systems, effective communication programsor succession planning initiatives—has the powernot only to clearly demonstrate HR value, but moreimportantly, to propel human capital investment tothe forefront of the C-suite agenda.

KPIs for Organizations WithSmall HR Departments—Mini Case Study No. 1Not all organizations have the luxury of a dedicatedHR staff to develop, track and analyze HR metrics.When an HR staff of a small organization haslimited time to track all possible HR KPIs, care-ful choices must be made about which KPIs bestserve HR's needs. This mini case study illustratesthe types of KPIs selected and tracked by a smallHR staff supporting a workforce of 400 employeesof a firm that sells and leases health care equip-ment to hospitals. With only an HR director and HRassistant, this tiny HR department tracks humancapital measures that reflect the state of the orga-nization, selecting KPIs based on metrics that bestreflect the company's culture and strategic goals.

Figure 3 Exampies of Key Performance Indicators for the HR Scorecard

Strategic Perspective

Operational Perspective

Financial Perspective

Customer Perspective

Organizational culture survey

HR budget/actuai

Employee skills/competency levels

Change management capability of the organization

Training cost per employee

Attrition rate

Time to fill vacancies

Average employee tenure in the company

Compensation and benefits per employee

Turnover cost

Sales per employee

Profit per employee

Employee perspective of human resource management

Employee perspective of the company as an employer

Source.- Adapted from Becker. B. E.. HuseM. M. A., & Ulrich, D. (2001). The HH scotecard: Linking people, strategy and performance, Boston:Harvard Business School Press.

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In this company, certain KPIs are tracked through-out the year, while others (e.g., absenteeism) arereviewed on a quarterly basis. Overall, the HRdepartment benchmarks progress against prioryears, with the goal that the employee cost tracksfavorably against revenue and profit. The primarymetrics tracked are employee cost over salesrevenue, employee cost over net income beforetaxes, turnover of full- time and part-time staff,absenteeism, time-to-fill for critical positions, andHR performance ratings. Of these metrics, four aretagging indicators: employee cost over sales rev-enue, employee cost over net income before taxes,turnover and performance ratings. The other twometrics—absenteeism and time-to-fil!—are lead-ing indicators. The tumover of full-time staff, forexample, was 11% in 2004 and 16% in 2005. thedifference reflecting the recent retirement of sev-eral long-time employees. As a result of analyzingthe turnover increase, HR developed a knowledgemanagement transfer program for employees closeto retirement. Finally, to anticipate the possibleeffect on the next year's budget. HR reviews anychanges in benefits programs against the cost ofbenefits per employee.

The Value of Qualitative KPis—Mini Case Study No. 2KPIs^as a simple tabulation of numerical indica-tors—do not necessarily provide managementwith useful information. Moving from "bean count-ing" to strategic HR. a more qualitative type ofkey performance indicator becomes essential. Asthis mini case study illustrates, turnover rate, asa leading indicator, is an excellent example. In amid-size manufacturing company with 650 employ-ees, HR. using a qualitative assessment process,asked questions to explore the true reason behindthe high turnover rate of 30%. First, what was thevalue of the employees who left the organization?Since the turnover rate was high, for example, werethe employees who left a drag on performance?If yes. then the hiring process was the next stepto examine. Second, was the high turnover amongvaluable employees? If yes. then the next step wasto examine the nature of the employee-organizationinteraction.

To begin, HR went back to its performance assess-ment process and considered people who left ineach of the four categories: 4—exceeds expecta-tions. 3—meets expectations, 2—needs improve-ment to meet expectations and 1—not performingeven to minimal expectations. They looked at highturnover among the 3s and 4s. which representeda loss of high performers who. assuming theperformance assessment was valid, were morevaluable to the organization. They also consideredhigh turnover among the I s and 2s. a possible

indication that supervisors were doing a good job ofweeding out those who could not perform. Lookingat turnover rates over time. HR found a need forsupervisor training as well as the need to improvepre-hiring screening and the overall selection pro-cess. After tracking tumover for a year following thesupervisor training initiative and improvements inthe hiring process, the end result was that the sav-ings in reduced turnover far outweighed the cost ofthe pre-hire assessment and supervisor training.

Role of Technology and KPIsToday, the increasing demand for HR technologyruns parallel with the growing use of workforceanalytics and KPIs. HR technology systems arefast proving to be a critical vehicle for HR to con-tribute value to their organizations. Whiie initiallyused primarily by large organizations, more smalland mid-size companies now use software prod-ucts to both effectively measure human capitalinvestment and track a wide range of HR metrics.Further, there is growing evidence of cost savingsin organizations that effectively use HR technology.Consequently, HR in companies of all sizes willincreasingly use technology to better showcase theeffects of human capital initiatives.^^

Research by management gurus Boudreau, Lawlerand Mohrman points to the critical role of tech-nology and the corresponding strong relationshipbetween HR and IT. Two key findings reveal that,due to technology, completely integrated HR ITsystems lead to the highest level of HR effective-ness, and the effectiveness of the HR IT systemis strongly related to the overall effectiveness ofthe HR organization. Further, the SHRM 2005 HRTechnology Survey Report emphasizes the impor-tance of return on investment (ROI) to build a busi-ness case to incorporate HR technology systemsin the firm. The top five successes of HR technol-ogy systems are: increased accuracy of employeeinformation; decreased cycle time for processingemployee information transactions; less timespent by HR staff on administrative work; greateraccess by managers to employee information;and the HR department's ability to manage theworkforce with the same number of HR staff. Yet.few organizations document the advantages of HRtechnology systems:^^

• 65% of organizations are not measuring the ROIfor HR technology systems.

• Of those that do measure the ROI. 68% measureit by determining cost savings and losses and31% consider HR headcount.

• 10% of HR professionals do not know how theROI is measured.

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2006 SHRM -' Research Quarterly

Recent Studies: Human CapitaiPractices Drive PerformanceIncreasingly, research finds that best practicesaround human capital can help companies suc-cessfully compete with their peer organizations.The following studies highlight the importance ofhuman capital practices to drive organizationalperformance. Correspondingly, KPIs that measurethese practices both validate the value of HR andadvance the profession at all levels.

• Achieving Strategic Excellence: An Assessmentof Human Resource Organizations^^This national study, the fourth in a series on theHR function in large corporations, focuses onmeasuring whether the HR function is changingto become more effective and, more specifically,whether HR is changing to become an effectivestrategic partner. The key findings show a "strongrelationship between what is happening in theHR function and a company's strategic focuses."The degree to which the firm has knowledge andperformance strategies is the degree to which HRis viewed as a strategic business partner. Overall,with the importance placed on talent management,the emphasis on human capital, knowledge andcompetencies creates a favorable environment forthe HR function.

• SHRM 2006 Human Capital BenchmarkingThis executive summary provides HR profession-als with key human capital measures from nearly600 organizations on HR departments and theirexpenses, employment, health care, compensation,and organizational revenue and size. The key find-ings reveal changes and trends in the workplace.For example, of the 57% of firms that expectedtheir HR department expenses to increase, 11%were in durable goods manufacturing. For allindustries, the median for HR expense per full-timeemployee was $1,072. And in 2005, organizationsalso increased their hiring by more than 50% fromthe previous year, Telecommunications, services(profit) and biotechnology industries had the topthree highest medians for percentages of posi-tions filled in 2005.

• 2006 FORTUNE Most Admired Companies: TheEffectiveness of Managing Globally^^This study of 74 companies worldwide found thatsuccessful global organizations exploit uniqueknowledge and capabilities. They then effectivelydiffuse and adopt them worldwide to their strategicobjectives, contributing to competitive differentia-tion. Successful global leaders, for example, takea hands-on approach to develop talent manage-ment and provide ongoing coaching to their work-force. Most admired companies have a better

understanding of their talent, and consequently,positions can be filled more quickly based onrequired skills and career objectives.

• Maximizing the Return on Your Human CapitalInvestment; The 2005 Watson Wyatt Human CapitalIndex Report^°This study of 147 organizations representing allmajor North American industries illustrates thatcompanies with superior human capital practicescan create more shareholder value that substan-tially surpasses companies with average humancapital practices. Excellent human capital prac-tices—such as recruiting excellence, employeedevelopment, total rewards, turnover managementand communication—make a difference, no matterthe state of the economy. Key findings, for example,show that companies that filled vacancies fasterreduced disruption and lost productivity from turn-over. Organizations that filled positions quickly (inabout two weeks) outperformed those that took lon-ger (around seven weeks) by 48% (59% three-yeartotal returns to shareholders versus 11%).

Using KPis In the Giobai HR FunctionThe value of global HR is assessed by how wellglobal HR strategy, policies and practices link with,support and fonward organizational strategy (seeFigure 4). In addition, global HR is often assessedby its effectiveness to deliver major organizationalchange. HR is often called upon, for example, tohelp in the design of high-level projects for majorglobal business initiatives (e.g., talent manage-ment for expansion into new regions, a global com-munications program regarding new organizationalvalues).

Yet measuring the contribution of HR on an inter-national level becomes ever more complicateddue to factors such as complexities of scope.

Exampies of KeyPerformance Indicators forGiobai HR Effectiveness

• Design and implementation of an internationalHR information system.

• Development of global leadership throughcross-cultural assignments.

• Development of a global mindset for allemployees through training and development.

• Cost reduction of expatriate assignments.

• Implementation of formal systems thatimprove worldwide communications.

Source: Adapted from Sparrow. P. Brewster. C. & Harris. H. (2004).GiobalJzing human resource management, London: Routledge.

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authority level, and political, cultural and legislativebarriers that directly affect the link between orga-nizational performance and HR. Two approachesare recommended: identifying and proving the linkbetween organizational performance and peoplemanagement, and using methods of evaluationof the global HR function's contribution. The mea-sure of the global HR function also often rests on"perceptions of effectiveness" from key stakehold-ers—that is. the company's worldwide employeesand managers. Therefore, the ability to market HRglobally as a source of competitive and strategicadvantage is fundamental to measuring the contri-bution of the corporate global HR function.^'

Measuring the value of international assignments.for example, is a critical success factor for globalHR. Companies measure the ROI of internationalassignments through cost estimating, trackingand comparison. A recent global relocation trendssurvey, for example, found that 70% of companiesrequired a statement of assignment objectivesprior to funding assignments. In addition, to mini-mize expatriate turnover—a global HR KPI—64%of companies found opportunities to use inter-national experience, with 50% of firms offering a

RecommendationsSelecting practical KPIs requires thoughtful con-sideration of the message behind measures andtheir corresponding effect on the organization.The real-life examples below—starting at theidea stage and ending at results with meaningfulmeasures—demonstrate HR value through KPIs.

1. Qualitative measurement is one path toassess qualitative characteristics of the workforce,such as engagement.Example: A public agency was experiencing highcustomer complaints and low staff morale. Acombination of open-ended survey and focusgroup outputs was analyzed, and leading indica-tors were identified. Training was specificallydesigned to target the key areas, and as a result,customer complaints fell as morale improved.

2. Employee feedback provides usefulperspectives on HR efficiency.Example: Health care costs were unusuallyhigh and customer service was very poor forthe last fiscal year. Six months after a newhealth care provider was chosen, costs weredown by 20%. The organization's HR managerdeveloped a survey for employees to providefeedback about the new program relative tothe previous one and learned that employee

greater choice of positions upon return and 43%offering repatriation career support.^^ However, ashighlighted in an SHRM case study on repatriation,different assignments have different measuresof success and, consequently, different results. Acommon KPI is the retention rate of expatriatesfollowing repatriation for one and/or two years.Other measures may also reflect "softer" results,such as managerial approach shifts or culturalchanges. The concept behind using a variety ofmeasures is to create a "report card" that canprovide a broad view of the assignment overall.^^

)n ClosingBecoming more facile with metrics in general is agoal of many HR professionals. Further, as moreHR professionals become immersed in human cap-ital measurement, they can more effectively usekey performance indicators to illustrate the valueof human capital investments through successfulorganizational performance at many ieveis. Theseimportant steps will increasingly demonstrate thehigh value-add required by the C-suite to be a truestrategic business partner.

perception of the new program was extremelyfavorable.

3. Whenever possible, the impact of recruiting isbest described in terms of financial gains.Example: An organization wanted to know theeffect of its new recruiting program. The programwas able to reduce time-to-fill by an average ofseven days, which meant new employees couldstart billing sooner to client sites. Since theaverage daily bill rate per person was $900,the recruiting program was able to increasethe firm's revenue by $6,300 per new billableemployee hired.

4. Retaining older workers for future leadershiproles depends on what they most value.Example: A survey by a multinational corporationof its older worker population in North Americaand Europe revealed the following top three keyvalues: 1) support from managers; 2) abilityto make one's own job-related decisions; and3) opportunities for advancement. Leadershipdevelopment programs were created to retain keytalent from this group. Over a two-year period,tracking of performance, mentoring and promo-tions of older workers in the leadership develop-ment program found that turnover rates for olderworkers decreased by 28%.

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AcknowledgmentsThe author extends appreciation and thanks tomembers of the SHRM Human Capital/HR MetricsSpecial Expertise Panel (Ronald L. Adier, CristBerry, SPHR, Bette J. Francis, SPHR, Virginia C.Hall, SPHR, Janice Presser, Ph.D.} and to StrategicResearch at SHRM (John Dooney, Noel Smith andBelin Tai).9

Endnotes' Presser. J. (2006. February). Approachmg a meiric of fiuman capital syn-

ergy [SHRM White Paper]. Retrieved iune 10. 2006, from www.shrm.org

^ Huselid, M. (1995, June). The impact of human resource managementpractices on turnover, productivity and corporate financial pefformance.Academy of Management Journal. 38, 3, 635+.

^ Glossary of Human Resources Terms, www.shrm.ors/hrresources/higlossary_published

* Schneider, C. (2006, February 15). The new humarvcapital metrics. CFO1+.

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Gates, S. (2003). Linhingpeopie to strategy; From fop management sup-port to line management buy-ih. New York: The Conference Board.

Ulrich, D.. & Brockbank, W. (2005). The HR vaiue proposition. Boston:Harvard Business School Press.

Becker. B. E., Huselid, M. A., & Ulnch, D, (2001). The HR scorecarcl.- Unkingpeople, strategy and performance. Boston: Han/ard Business School Press,

' Lawler III, E. E., Boudreau. J. W., & Mohrman, S. A. (2006). Achievingstrategic exceiience: An assessment of human resource or^nizations.Palo Alto, CA: Stanford University Press,

• Gates, S. (2002), Vaiue at work: The risks and opportunities of humancapital measurement and reporting. New York: The Conference Board.

' Ibid.

' Dooney, J., & Smith, N. (2005). SHRM human capital benchmarkingstudy: 2005 executive summary. Alexandria, VA: Society for HumanResource Management.

Gates, S. (2002). V Jue at work: The risks and opportunities of humancapita' measurement and reporting. New York: The Conference Board.

HayGroup. (2005, February). What makes the most admired companiesgreat? Retrieved May 4. 2006, from www.haygroup.com

Becker. B. E., Huselid. M. A., & Ulrich, D, (2001). The HR scorecard:Linking peopie. strategy and performance. Boston: Harvard BusinessSchool Press.

Denton, D. K. (2006, March). Measuring relevant things. PerformanceImprovement. 45, 3, 33-38.

Ibid.

Schneider, C. (2006, February 15). The new human-capital metrics. CFOMagazine. 1*.

Becker, B. E., Huselid, M, A,. & Ulricn, D. (2001). The HR scorecard:Unking people, strategy and performance. Boston: Harvard BusinessScnooi Press.

Ibid.

Esen, E. (2006, June). 2006/00 satisfection survey report. Alexandria,VA: Society for Human Resource Management

Watson Wyatt and Human Resource Planning Society. (2006, April).The human capitai ROi study. Retrieved May 4. 2006, fromwww. watsonwyatt .com

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Lawler III, E. E.. Boudreau, J. W., & MoHrman, S. A. (2006). rtcfiievingstrategic exceiience: An assessment of human resource organizations.Ralo Alto, CA: Stanford University Press.

i^ooney. J., & Smith, N. (2006), SHRM human capital benchmarkingstudy: 2006 execudve summary. Retrieved June 29. 2006, fromwww.shrm.ofg

Online Resources

2005 Watson Wyatt Human Capital Index* Reportwwvi'. watso n wyatt. com

Balanced Scorecard Institutewww.balancedscorecard.org

HR Technology Competencies:New Roles for HR Professionalswww.shrm.org/research/quarterly

Human Capital: The Elusive Assetwww.shrm.org/research/quarterly

Human Capital Institutewww.humancapitalinstitute.org

HR Metrics Toolkitvi/ww.shrm.org/metrics/library

SHRM 2005 HR Technology Survey Reportwww.shrm.org/surveys

SHRM Human Capital CustomizedBenchmarking Servicewww.shrm.org/research/benchmarks

The Conference Boardwww.conference-board.org

Understanding Expatriate RO!:Improving the Bottom Linewww.shrm.org/global

HayGroup. (2006, Apni), Leading the global organization: Structure, pro-cess, and people as the keys to success. Hay Group Insight Selections.11,1-A.

' Watson W>9tt Woridwide. (2005). Maximizing the return on your humancapital investment: The 2005 Watson Wyatt human capitai index report.Washington. D,C,: Author.

Sparrow, P. Brewster. C, & Harris, H. (2004), Giobalizing human resourcemanagement. London: Routledge.

• GMAC Relocation Services. (2006). Global relocation trends 2005 surveyreport, Woodridge, IL: Author.

' Society for Human Resource Management. (2005, November). Measuringthe success of a repatriation program [SHRM Case Study]. Retrieved May9. 2006. from www,shrm.org/hrresources/casestudies_publtshed/GlobalHR.asp

Maximizing Human Capital