We all know that HR is at the heart of finding, attracting and retaining new talents and stays in the middle of digital transformation. But how do you see the HR function is delivering everything it needs in the most effective way possible? Let’s look at how to identify the most meaningful indicators for measuring HR effectiveness.
Top indicators for measuring HR productivity
Traditionally, we have regarded the human resource department as a cost center or fee burner. For this reason, there’s always a lot of emphasis on cost reduction within HR. Today, measuring HR costs is a key component of HR accounting.
Four main reasons why you’d want to measure HR costs
1. Monitor departmental costs
For example, for budgeting purposes. At the start of the year, a department receives a certain budget; and at the end of the year, it needs to report how this budget was spent.
2. Measure impact and overall success
If HR costs increase while HR effectiveness decreases, we have a problem. HR efficiency goes down. E.g., two organizations are trying to lower employee absence. One of the organizations provides a free fitness subscription to everyone. The other removes unhealthy snacks from the canteen and provides free fruit — both interventions lower absence by 5%. However, the costs for the first organization are 4x higher than the second. In other words: the second is more efficient.
If HR costs increase while HR effectiveness decreases, we have a problem.
3. Predict future costs
4. Calculate a return of investment (ROI)
Calculating an ROI is the final reason why HR professionals are interested in estimating Human Resource costs. Cost is a critical element in the ROI formula.
If the ROI is larger than 1 (which equals 100%), then it’s positive. If it is smaller than 1 (50%), it’s negative. If only 50% of the costs are recouped then it’s a bad investment.
HR metrics are operational measures, addressing how efficient, effective and impactful an organization’s HR practices are. They leverage the power of data to help you make decisions that drive a better outcome for your company and its employees.
- Time to hire: The number of days between a position opening up and a candidate signing the job contract.
- Cost per hire: How much it costs the company to hire new employees.
- Time since last promotion: A straightforward metric that can show why top employees leave.
- Revenue per employee: Shows the amount of income brought into the company per employee.
- Performance and potential: Shows which employees are underperformers, valued specialists, emerging potentials or top talents.
- Cost of HR per employee: Indicates the cost efficiency of HR expressed in dollars.
- The ratio of HR professionals to employees: It also shows HR’s cost efficiency. An organization with fully developed analytical capabilities should be able to have a smaller number of HR professionals do more.
- The ratio of HR business partners per employee: Like the previous metric, it enables HR to measure and predict the impact of HR policies, helping HR be more efficient and reduce the number of HR professionals to employees, saving the firm money.
- Turnover: Shows how many workers leave the company in a given year; tracks the company’s attrition rate.
- Timesheet and scheduling match: It helps to determine how closely the number of hours scheduled is in line with the number of hours worked, providing insight into understaffing or overstaffing.
Measuring HR internal efficiency and effectiveness
This means assessing whether HR services are being delivered as efficiently as they could be. Then, you must ask yourself and your team:
- Are we recruiting through the most effective channels?
- How effective are we at recruiting the competencies the business needs?
- What are our costs-per-hire?
- What are our training costs?
- How effective are the different types of training?
Auditing HR compliance
Concerning all the legal requirements surrounding HR, this is perhaps the least exciting area to measure. Yet, interestingly, I find this is the area where HR teams focus too much of their time and attention. Clearly, compliance is essential and needs monitoring regularly, but this must be done in conjunction with measuring those functions that are related to the organization’s strategic priorities.
Key things to measure here may include:
- Are our policies and practices up to date?
- Are employees properly trained on new policies and procedures?
- Do employees understand key policies and practices?
- Is our employee handbook up to date?
- Are we meeting our equality and diversity obligations?
Standard metrics for assessing HR compliance include:
- Percentage of employees trained in company policies
- Salary competitiveness
- Diversity rate/employee demographics
- Gender pay gap
- Number of diversity initiatives
So, what’s the line on this?
Human Resource costing is an essential and established mechanism to manage cost. However, there is an important aspect that you should keep.
HR focuses too much on cost reduction and efficiency. So, in the end, what matters is value-added. If HR can show added value, then costs are irrelevant.