Why care about personnel?
With the a rapid development of IT technologies and the Internet business owners sometimes tend to forget that their businesses are still run by people. Indeed, it is very easy to start believing that investments and IT solutions can perform magic. Everything was more or less fine until the recent economic meltdown. It was the time when most businesses came to understand that intellectual capital is one of the major things that can say the company. We have witnessed bankruptcy of various companies, including giants like General Motors. But at the same time, some companies managed to survive, and moreover to gain competitive advantage. Innovation is a key success factor in the today’s business. By offering unique products and services a company retains existing customers and attracts new ones. One has to admit that all innovative ideas come from people, not computers and machines. Sometimes, the most creative and revolutionary ideas may come from the lowest company level: ordinary clerks, front line managers etc.
This is to say that human resources and intellectual potential is the most valuable capital a company may have. Even having considerable investments and production facilities, the company may fail just because the personnel is not ready to use the money in an efficient way. For this reason importance of human resource management has grown over the past decade.
HR and BSC
There is a common misconception that human resource management is about just having a human resource department that hires and fires people, as well as conducts occasional training. Well, this is not so. Human resource department, as any business branch or business unit, should be well integrated into the organization structure of the company in terms of strategy, mission and values. And as any business unit, human resource management should undergo regular evaluation in order to assess HR efficiency of the company and conformity of human resource management with the company strategy. Such evaluation is extremely important as it often happens that HR goals and measures have nothing to do with the company strategy. Chairman of HR department may interpret strategic goals of the company in his own way while ordinary employees may have own concepts of company strategy. This is where Balanced Scorecard comes into play. BSC can align human resource policy with a strategy of the company, as well as communicate strategic and operational management, thus putting strategy into action. Balanced Scorecard is not just another business management tool. It gained tremendous popularity among the most successful companies in the world as it was the first to offer inclusion of non-financial indicators to the system of performance evaluation.
If we are talking about human resource management we cannot fully evaluate HR department with financial indicators only (although financial indicators are very important). Such things as organization climate, employee satisfaction, loyalty to the company and many others can be hardly represented with financial indicators. That’s why use of Balanced Scorecard to evaluate HR performance is especially effective.
HR evaluation with Balanced Scorecard: KPIs, categories, explanations
Implementation of Balanced Scorecard to evaluate HR performance starts just like implementation of BSC in any other business area. First and foremost, HR department should find and employ employees who will be responsible for BSC implementation and maintenance. One of the most common mistakes in Balanced Scorecard implementation is putting the burden on shoulders of ordinary employees who are not quite aware of what BSC is used for. Then comes the most important stage – choice of key performance indicators (KPIs).
Much has been written about the art of creating KPIs that must be measurable, informative, clear and understood. When making a choice of key performance indicators for HR evaluation it is recommended to split them into several categories. Human resource management is about recruitment, employment, education and retainment of personnel. So, it would be logical to select key performance indicators based on these categories.
It should be mentioned that some categories and key performance indicators would have higher priority for companies with different structure, position in the market and strategic goals. For example, it may be cheaper for a retail sales chain to recruit inexperienced employees and then educate them, while IT company will certainly look for experienced professionals who need no education and time to get used to the work. Do remember that the wrong choice of key performance indicators will result in the wrong evaluation results and failure to reach strategic goals.
Recruitment
Most HR managers use KPIs related to searching for employees, organization of interviews, evaluation of interview results. In simple words, the company looks for people who might be potentially interested in certain positions, invites these people to interview and then decides whether they meet job requirements.
At a first glance recruitment seems like an easy process. But in certain business areas finding a competent employee may become a real problem. Sometimes, companies have to spend serious money to employ the best professionals in a certain business area. That’s why, human resource department should control recruitment processes and evaluate recruitment efficiency. Thus, it is recommended to choose proper KPIs to evaluate them with Balanced Scorecard. There are dozens of key performance indicators related to recruitment efficiency. We will name the most common and indicative ones.
Average time to recruit. If the company is looking for new employees then it has vacant positions to be filled. Lack of employees may negatively affect performance of the company. So, the sooner HR department manages to find competent employees, the better for the company.
Average cost to recruit per position. In order to shorten recruitment time some HR managers spend too much on advertising and agent’s fees. As a result, newly employed professional becomes too expensive for the company. It is very important to control this indicator to keep costs at a reasonable level. For example, if a new employee needs further education, it wouldn’t be reasonable to spend too much to hire him.
Cycle time from job acceptance until job start. Very often there is so much paperwork and formalities that having accepted job offer, a person starts working only in a month or so. The task of HR department is to decrease this cycle time and make it possible for an employee to start working as soon as possible.
New hire retention rate. It is very important to make newly hired employees stay with the company by creating suitable working conditions and positive organization climate, especially if the company invested in education of such an employee. This is an excellent indicator to evaluate efficiency of HR department.
Percentage of recommended job applicants. If people were recommended to work in the company, such company is a good employer which signals about positive reputation of the company in the society which is a great advantage since HR department spends less for advertising and recruitment purposes.
Education and training
Average number of training hours per employee. This is a universal key performance indicator used by HR managers in various business areas. Of course, everything should be in moderation and the number of training hours should not exceed the number of working hours. Besides, it is extremely important to organize effective training campaigns interesting for employees who should understand why the need education and what benefits of this education are.
Average training cost per employee. Every company should spend money for education of its employees. However, the growth of training budget will not necessarily result in higher performance. That’s why average training cost per employee should be strictly controlled and compared to actual training results.
Percentage of HR budget spent on training. As already said above, different companies have different goals and requirements to personnel. Sometimes it is really cheaper to hire an inexperienced employee and educate him than to hire an experienced professional. So this key performance indicator should be evaluated according to company strategy and goals.
Percentage of courses that are web based. With the development of the Internet online and web-based courses have become very popular. As a rule, they are cheaper and much more accessible since employees may participate in such courses directly from their work places.
ROI on training. This is perhaps the most important indicator as any training session aims at improvement of employees’ skills and broadening their knowledge. It is measured through tests conducted before and after training sessions.
Employees satisfaction with training. This simple indicator is also measured through tests and surveys conducted after the training. Employees satisfied with training sessions are more likely to effectively use obtained skills and knowledge in real work then those were not satisfied with training.
Redeployment and retirement
Average staff turnover costs. It is not a secret that a company spends a certain amount of money to recruit and educate new employees. If there is a high staff turnover rate the company will spend much money to fill in vacant positions. That’s why it is important to control every staff turnover costs for any midsize and large company.
Average retirement age and percentage of early retirements. These to indicators will help optimize work of the company by evaluating retirement, retirement ages and reasons for retirement.
Percentage of employees talking ill health retirement. If there are many people in the company who retired because of health concerns it may signal about inappropriate working conditions.
Reward and Retainment
Average number of vacation days per employee. It is very important that all employees in the company have their vacations according to requirements of their job positions. Employees should be satisfied with the number of vacation days.
Compensation cost as percentage of revenue. In most businesses employees receive salary and special bonuses in form of percentage from sales or revenue volumes. The company should know how much it spends for compensation as compared to total revenue or sales volume. When companies start to save, they usually begin with compensation which causes conflicts between management and employees.
Female-male salary ratio. In today’s world women have the same rises the men. That’s why, in order to avoid problems with feminist organizations the company should track female-male salary ratio, especially if men and women working the same conditions.
Talent retention percentage. It is very important to identify the group of most talented employees and track the turnover in the company. In other words, this is evaluation of how talent is used.
Personal development and discipline
Absence and lateness rate. This is an excellent indicator that shows personal discipline of employees (except for valid excuses for lateness and absence).
Percentage of employees receiving regular performance review. If an employee underwent performance review of a year ago it does not mean that he has the same performance level now. That’s why it is important to regularly evaluate employees. In such a way, this indicator shows efficiency of HR department.
Percentage of low and high performing employees. Any human resource department must control efficiency of company personnel by reviewing its performance level.
Summary
Of course, this is not the full list of all indicators relevant for HR evaluation in different business areas. However, this article might be helpful for those who are considering implementation of balanced scorecard to evaluate HR performance in the company. One should remember that improvements in the company must always begin in improvement of personnel. The point is that human resource department does not earn money. To moreover, it spends company’s money to provide it with personnel capable of solving complex tasks, offering creative ideas and showing high performance. Those business owners who disregard such indicators as employee loyalty or organization climate soon discover that the company faces problems. Remember that satisfied and loyal employees have the most satisfied and loyal customers. Any commercial business aims at earning money, and customers are the source of money.
Evaluation of human resource performance is a good way to start taking the company to new level in order to stand tough competition in the market and gain competitive advantage . One should never forget that businesses and companies are run by people, and thus human factor is a number one success factor.
Learn more about HR evaluation in various business areas.
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