What To Measure? – The Great HR Metrics Debate

I want to start this post by stating that my belief is the reason that HR metrics and analytics have not been adopted by the world on a more frequent, useful basis is because most organizations have no idea what to measure.  Do standards help?  I believe they are a STARTING POINT, but not the HOLY GRAIL.  I wish that HR would stop trying to apply a “peanut butter spread” to all things HR as each organization should be using intelligence to create their own competitive advantage and uniqueness.

A recent Business Week article entitled, HR Group Creates Workforce Metrics, sheds some light on the state of our industry, and HR’s quest to be treated like a business function.

A project, led by the Society of Human Resource Management (SHRM), asked a group of 600 HR professionals to draft guidelines for standardizing metrics of things like workforce diversity, turnover, and job training.  This group is also tasked with drawing up a template for how organizations should report this kind of information to shareholders.  SHRM believes that both companies and investors would benefit from a single set of “human capital” metrics.

The article quotes Erika Karp, head of Global Sector Research at UBS Investment Bank, who has been involved in devising the standards. “In the financial-services sector, my supply chain is human capital—it’s relationships, it’s ideas.  A stock picker choosing between two banks should favor the one that spends more money training and rewarding its employees, thereby lowering turnover, which is costly.  Investors will also gravitate to companies with a deep leadership bench.  With the metrics, you have more transparency on factors that result in better profitability.  It’s what a reasonable investor would want to know.”

However, not everyone thinks that reporting on standardized human capital measures is a good idea.  In fact, the idea is drawing fire from those who believe these kinds of reporting standards would place an unnecessary burden on public companies already shouldering a mountain of paperwork under Sarbanes-Oxley.  Who are these detractors?  The HR Policy Association (HRPA) – a lobbying group whose members include the top HR officers at more than 300 of the largest U.S. companies. 

Am I to understand that HR executives DON’T like the idea of stepping up to the level of their Finance counterparts by providing business-decision support metrics?  I thought we DID want this.  

According to Tim Bartl, a senior official with HRPA, “Information on how much time and money companies spend on training and what kinds of workers they are hiring would be less valuable to investors than to rivals.  These are all things the competition would love to know.”

Throwing support behind the HRPA position is Peter Cappelli, director of the Center for Human Resources at the Wharton School, who is quoted in the Business Week article as saying, “While most companies would agree they need to have a succession plan, a requirement to name candidates for the top job would irk some.  In a lot of firms that particular question isn’t even known to the participants.”

Other HRPA members agree that an organization’s financial statements aren’t designed to capture the value of their workforce and the intellectual property workers create, but believe the SHRM standards are not the tool to do it with.  The flaw in the SHRM plan, they say, is the “one-size-fits-all” approach to metrics which might be great for management to use, but offer little insight upon which investors can draw a conclusion. 

Back on SHRM side, members of the task forces drawing up the standards say the proposals merely codify practices already in place, such as tracking training time or employee satisfaction, most of which are already being collected in today’s companies, and argue that a decade ago HR’s job was to manage employee benefits and administer the corporate payroll; now it’s helping top management make strategic decisions.

Laurie Bassi, an economist who has studied the relationship between human capital and corporate performance, chairs the SHRM working group devising the reporting standards for publicly listed companies believes that a consistent set of HR metrics makes sense given the shift in the U.S. from a manufacturing to a service economy.  “The evidence is pretty compelling for investors looking for indicators of future performance,” she says.

With implementation of these kinds of investor metrics several years (or maybe decades) away, both sides of the debate believe the market will decide whether companies adopt them or not.  If the standards help attract investors, companies will most likely embrace them.  

The ability to place a financial value on intangibles like employee engagement will no doubt provide investors with new tools for prediction performance.  But does the competitive advantage gained by measuring something like employee loyalty quickly evaporate if your competitors are privy to your secrets?

Are national standards on HR metrics the key to elevating HR to a true business function and getting that seat at the table?  Or are they yet another make-work process heaped on an already overworked HR function that will do little to get HR out of the paper pusher role.  Another question, does it even make sense to try to change the way investors think based on the current way investors work?  Would it be better to develop a set of standards that HR can use to help correlate their efforts to business outcomes without talking about the tactics they use to reach those outcomes?

Financial metrics have been institutionalized for decades, looking back in 20-30 years, will these standards be things that are talking about on CNBC?  Hmm.  Morning Joe talking training spend?

Please jump in with a few comments below.

PS.  Has SHRM done the research as to what it would actually take to get organizations to comply or reach these standards from a HR technology standpoint?  Can they mandate this like the US did with Sarbanes?  Whew, lots of meat to chew on here.

Another infusion of knowledge…