- Email: [email protected]
Benchmarking the performance of human resource management
Benchmarking the Performance of Human Resource Management Jean M. Hiltrop and Charles Despres
E
XPERIENCED MANAGERS KNOW THAT measuring an event draws attention to that event, and that tying rewards to the measurement process will both magnify the event and sharpen attention. They also know that an exclusive focus on traditional performance measures, such as return on equity and cash flow, ignores other key success factors in an enterprise, including customer satisfaction, R & D, and human resource management. When this happens, performance management becomes finance-driven and myopic, resulting in some organizational factors-less important ones, we would argue-being optimized at the when rewards are expense of others. Furthermore, tied to financial targets the organization often alienates employees who have little understanding of how their everyday transactions connect to overall corporate performance objectives which, consequently, produces little perceived ability to affect the ‘bottom line’. Recognition of these problems, and in particular the third, has led to a flurry of writing on the need to move toward a new paradigm of performance management. The call is to supplement the traditional and small set of financial performance measures with non-financial indicators of the processes that lie behind them.’ Authors such as Kaplan and Norton have even argued for placing non-financial measures (i.e. customer satisfaction, innovation and the development of human resources) on an equal footing with financial criteria when determining strategy, promotions and the allocation of organizational resources.2 The European Foundation for Quality Management (EFQM), formed by 14 leading Western European companies in 1988, agrees on this matter. In 1991 EFQM established the European Quality Award which Pergamon 0024-6301(94)00053~
This article focuses on performance measures in the field af human resource managembnt @I RM). It is shown that most efforts to assess HR performance have been restricted to 1. general measures of limited value, such as headcount or payroll costs, or 2, sophisticated measures that many managers are unwilling to use+As a result, adjustments in human resource policies and practices tend to be based on intuition rather than methodical assessment of concrete and specifiable effects. Alternative HRM performance management mefhods are discussed, including the now popular benchmarking approach, and prescriptions are offered for progressive organizational practice in this domain.
is ‘... awarded ,@early] to the most successful exponent of Total Quality Management in Western Europe’ (p. 2),3 and the criteria for this award are pertinent. EFQM developed the model in Figure 1 to depict the performance categories that are deemed critical to excellence in organizational performance. It would appear that financial measures are rather sparse among the EFQM performance criteria, and so they are. Figure 2 excerpts certain of these criteria in the first four performance categories : According to Eccles and Nohria,’ the justifications for this new paradigm are founded in three fundamental truths about performance management:
1. The use of non-financial measures encourages managers to adopt a broad and long-term view of organizational performance. Long Range Planning Vol. 27, No 6, pp. 43-57, 1994 Copyright 0 1994 Elsevier Science Printed in Great Britain. All rights reserved 0024-6301/94 $7.00+.00
Processes
HCustomer
Satisfaction j$$j
FIGUFW . The.l+ropean TOM rirodel(Eurotjgan Fotipdationfor $&t&y Management),
2. Measures
of non-financial variables target events that are meaningful and actionable in managerial experience, e.g. delivery times, market position, the development of organizational competence and employee turnover.
3. Non-financial
measures can serve as leading indicators of financial results and thus be made legitimate even to those for whom the bottom line is everything.
But the task of extending the traditional approach to performance management beyond common financial measures poses significant problems. One of the most difficult challenges facing both academics and practising managers is the development of non-financial measures that deliver realistic data on a company’s current position, and which serve well as leading indicators of future financial performance. This article focuses on performance measures in the field of human resource management (HRM), a range of activities and approaches that allow a firm to attract, retain and mobilize a critical mass of human talent. Most efforts to assess HR performance have been limited to I. general measures of limited value, such as headcount or payroll costs, or 2. sophisticated measures that managers may be unable or unwilling
to use. Moreover, experience shows that managers seldom review in a systematic way the intent, impact or results of an HR action or policy. As a result, adjustments in human resource policies and practices tend to be based on intuition rather than methodical assessment of concrete and specifiable effects. Like their counterparts in production, marketing, and financial management, many HR managers are being (understandably) forced to justify in a systematic way the costs of their activities, and to compare their activities and overall performance measures with those of other organizations .4 This need to evaluate the value-added effects of HR practices on organizational products and processes began in earnest during the late 1980s; given the current economic recession, it promises to become even more critical during the latter half of the 1990s. United Technologies, for example, convened a task force with just this issue in mind during the early 1990s.5 The group surveyed ‘internal customers’ of the HR function in each of United Technologies’ six major with the straightforward objective of businesses* comparing perceptions of performance between HR *Pratt and Whitney, Nordon Systems.
Benchmarking the Performance of Human Resource Management
SikorskyAircraft, Carrier, UT Automotive, Otis and
FIGURES 2. EFQM perfcmance criteria.
Long Range Planning Vol. 27
December
1994
HR professionals stood up for the HR perspective, which is good, but did it quite traditionally. They were fairly competent, but didn’t measure themselves very rigorously. They did their homework and came to meetings prepared, but were not seen as very innovative or risk taking. In short, the message from this survey was, ‘You’re not really a strategic partner’(pp. 15-18).5
and line managers. The eighteen-item instrument used is presented in Figure 3. The performance categories in this instrument are instructive and, generally, the task force found that HR professionals perceived the quality of their services to be higher than did line managers. More
worrisome,
HR
managers
competent but disconnected strategic direction :
were
from
the
as
company’s
The results of this effort included a two-day conference
Usually: 2
Always: 1
:,::i;., ..
viewed
Sometimes:
3
Rarely: 4
To what extent does the Human Resource organization...
.,
‘:‘_:
1
-
1. Understand
where the business is headed and what management
-
2. Stand up for the human resource perspective on business issues?
-
3. Staff the HR organization
with competent
is trying to accomplish?
professionals?
-
4. Participate actively in the business planning process?
-
5. Take appropriate
6. Respond in a timely manner?
-
7. Develop human resource objectives in the context of business priorities?
-
8. Do its homework?
-
9. Provide competent
-
10. Explore alternative solutions to problems? 11. Find ways to balance its functional interests with the needs of the business?
-
12. React quickly to changes in the needs of the business?
-
13. Anticipate
-
14. Help more than hinder the organization
-
15. Have people seek its advice?
-
16. Set high standards for evaluating its own effectiveness?
the Performance
):,
:‘:’_,
advice and support?
-
Benchmarking
:_:,:_ ::.*,:; _:, ,,; .., , *.
risks?
-
business problems?
FIGURE3. United Technologies
,”,:$‘., _,,I’
in attaining its business objectives?
human resources practices survey.
of Human Resource Management
,‘: :~::
where 100 HR and 20 line managers discussed the findings, set priorities, charted a new direction, and cascaded the process to corporate and business units. As United Technologies illustrates, the competitive environment is intensifying and the development of key HR performance indicators, and their associated monitoring systems, is becoming increasingly important. In fact, given the increased emphasis on cost reduction, quality and excellence in many organizations, it is surprising that human resource management has escaped scrutiny for so long.
Approaches to Measuring HR Performance How can a forward-thinking organization develop an effective performance monitoring system in the area of human resource management? According to Morgan,” there are three approaches and each is reviewed below. One is to adopt a stepwise procedure, similar to the scientific method, in which meaningful and reliable variables are identified. The process begins by developing as many measures as possible, particularly in the HR areas of greatest concern. Second, measures whose potential benefit is outweighed by the expense or difficulty of data collection are eliminated. Third, systems are developed which regularly collect the necessary information, preferably devolved to line management, and a commitment is made to the time and effort needed for analysing the data and interpreting its meaning in the realm of HR strategy. After two or three years (often the time required to realize the impact of an HR activity) it becomes possible to reduce the number of measures to four or five key indicators by eliminating those which only confirm the results of For example, if employee turnover, job others. satisfaction, absenteeism and so forth were all perfectly correlated with one another, only one of the by examining this single measures is necessary; measure a manager would know the company’s performance for all the others. The relationship between performance measures is often complicated and non-linear, however, making multiple measures a virtual necessity. Although this approach is laudable in its attempt to capture all measurable aspects of HR performance, there is the risk that the task of collecting data, analysing them and interpreting the results will be costly, time-consuming and result in no clear guide-
lines for action. There is also the danger of what Eccles and Nohria called creeping numeration, which refers to ‘the temptation to turn every measure deemed relevant
into a crucial part of an oficial measurement system’(p. 16O).l Indeed, once the decision is made to expand the class of measures from a single (financial) category to three or four, and four or five measures are developed for each category, a company can quickly have twenty or more ‘key’ performance indicators. Secondly, a recent approach to performance management involves the identification of key performance indicators that are associated with a specific HR practice, such as recruitment and selection. From this perspective the wisdom lies in keeping things simple and avoiding information overload, and the implication is that only a few measures are needed to help line managers or HR professionals to gauge the current state of affairs. This second approach offers an appealing logic: if objectives have been defined in advance, there should be associated measures and thus no difficulty in collecting and interpreting the data. Most managers simply cannot attend to twenty measures at once--let alone optimize them-despite company rhetoric that may implore them to do so. In fact, imputing significance to each of these measures may only push the problem of devising a meaningful performance measurement system down to the level of each frustrated individual.* But as Morgan points out,’ this method also runs the risk of being too superficial. It is not enough to know that a specific practice or activity has worked to a greater or lesser extent. To be of real benefit there must be enough information to understand why the specific outcome has occurred, and to incorporate the lessons learned. A third approach to HR performance monitoring, and one which is gaining popularity, is through the process now known as benchmarkng. Benchmarking denotes a comparison with selected performance indicators from different organizations, typically in the same industry, or with comparable organizations that are considered to be ‘best in class’. Successful benchmarking requires careful selection and manipulation of comparison measures. Figure 4, for example, illustrates measures that might be considered ‘drivers’ of a given function: Benchmarking HR practices serves a number of purposes. 7 First, it enables a company to calibrate how it is delivering HR practices. By looking at how other organizations are accomplishing tasks and responsiLong Range Planning Vol. 27
December 1994
General Measure
Specific Measure
Proportion of QA employees
Research & Development
FIGURES. Sample productivity
Annual new product introductions per R&D employee
m@asurfx.
bilities, a company can audit itself and identify areas where practices are within or outside a given norm. Second, benchmarking enables a company to learn from others’ successes and mistakes. Building a continuous improvement mentality has become an important goal for many organizations in the last decade: benchmarking can open minds and create a climate in which active learning is encouraged. Third, benchmarking can be used as a tool for creating the motivation to change. By learning what other companies are doing, line managers and HR professionals can build a stronger case for allocating resources to HRM activities in ways similar to those of successful companies. Finally, benchmarking can be used to help set direction and priorities for an HR manager. Rather than fall into the trap of trying to do everything well and please everyone with limited resources (which typically results in no one being satisfied), HR managers can use benchmarking to focus on critical activities.l’ Currently, the most common form of HR benchmarking involves salary surveys. It is the rare HR manager who steps beyond this, for two principal reasons : Z. the difficulty of finding standard and
acceptable performance indicators similar to those used in financial management, such as return on capital and cash flow ratios, and 2. the reluctance of companies to divulge sensitive information about their employee retention, employment costs, and so on. There are other reasons for the lack of HR benchmarking in contemporary organizations, the most prevalent perhaps being the mythology that has developed around personnel work. As Jac Fitz-Enz observes : The Fundamental belief is that personnel is something of a complex and mysterious art. Allegedly, the true and full value of the work can only be judged by those who perform it. Even then, the appraisal is bounded by subjective criteria. Many of the faithful believe that, like virtue, personnel work is its own reward. Terms used to describe results are satisfied, quick, better, interesting, good, important, creative, and other similar non-specific terms (P. 71.a
There are also people who believe that measuring the effectiveness of human resource management is simply inappropriate. In their eyes, I-IRM is devoted to stimulating and supporting human happiness and development, and they see no reason to evaluate outcomes in other than humanistic terms.
Benchmarking the Performance of Human Resource Management
Benchmarking has its limitations. When used solely to emulate rather than improve performance, advantages may be short-lived, time consuming and expensive. Moreover, the most valuable information is generally not derived from the actual data, but rather the qualitative information on how and why the data outcomes were achieved. Nevertheless, a well established benchmarking process can help managers set goals and targets designed to make the company the best in its competitive field, and to initiate focused programmes that move the company from its current position. Many firms strive for performance improvements by benchmarking standards of excellence from other firms in such areas as production, research and development, and marketing. HR can be employed to similar competitive advantage, and it is sensible to unearth those HR indicators that contribute relatively more to overall performance than others. Janssen Pharmaceutics, a wholly owned subsidiary of Johnson and Johnson, undertook just such a benchmarking project in late 1989 as a response to competitive pressures rocking the pharmaceuticals Janssen examined in detail the internal industry.*’ components of its administrative overhead and, by comparing benchmarks with a select group of peer companies, addressed what was considered a ‘burgeoning problem that is di$Ticult to analyze and control To begin, the company determined that (p. 143).” administrative (white-collar) productivity could be defined through four key elements (Figure 5). Management then compared Janssen’s performance with that of other companies participating in the project. Janssen’s managers soon determined that achieving white- collar productivity improvements would be impossible unless appropriate performance measures were developed and installed. Figure 6 displays four such measures that Janssen now uses to monitor its performance in this area.
Effectiveness Criteria for HR Activities As noted earlier, developing the specific criteria which define effectiveness for HR activities is one of the most difficult challenges facing line managers and HR professionals alike. In this regard there are two schools of thought. The first school advocates monitoring the costs and benefits of human resource activities-those associated with the attraction, selec-
tion, retention, development, and utilization of people in organizations-in economic terms. The underlying assumption is that the ultimate single measure of HR effectiveness is financial . . . the ‘bottom line’. To illustrate this point, consider a comment by Cascio in his book entitled Costing Human Resources: For some time now, I have had the uneasy feeling that a lot of what we do in the human resource management field is largely misunderstcod and underestimated by the organizations we serve. In part, we in the field are responsible for this state of affairs because much of what we do is evaluated only in statistical and behavioural terms. Like it or not, the language of business is dollars, not correlation coefficients.”
Although methods for estimating the costs and benefits of HR activities have been available for many years,13,14 they are only beginning to appear through the recent writing of academics such as Cascio, FitzEnz and Flamholtz,gV12S’5 and in the form of formulas and accounting procedures for measuring the economic worth of the organization’s human assets. Figure 7 gives an illustrative example of conducting simple exit interviews with terminating employees. This economic approach to measuring HR performance has the advantage of being simple and understandable, but it fails to provide guidance when implementing effective HR management programmes. Many HR managers (and their organizations) understandably feel a need for more detailed and comprehensive means of assessing their performance, and how their performance compares with other companies over time. The second school, espoused by academics such as Ulrich and Kravetz,‘oS’6 is to measure the set of HR practices delivered within an organization, and measure the contribution of each practice to the overall competitive advantage of the organization. A great deal of recent work has appeared which attempts to capture in a single conceptual model the variety of HR practices deployed by organizations to augment innovation, improve quality, and be the lowest-cost producer of goods and services. In 1984, Schuler introduced such a model which identified six categories of HR practices : planning, stafing, training and development, appraisal, compensation, and unionmanagement relations. He suggests that competitive advantage accrues to companies that identify and develop specific activities in each of these six areasI and that specific activities (such as internal staffing and flexible compensation) become important and Long Range Planning Vol. 27
December
1994
flGURE5. Sample productivity
Benchmarking
measures. Elements of white;cqtlar productivity (Janssan Pharmaceuticals).
the Performance of Human Resource Management
FIGURE& White-cotiar performance measures.
internal competencies. In addition, selection of HR practices should support overall corporate strategy and lead to committed employee behaviour. After a decade of conceptual and empirical research by Tsui,” Kravetz and others,16 it is now possible to define key performance indicators in most of the six categories identified by Schuler (Figure 8). These indicators can help managers evaluate how their HR practices relate to both the operational and strategic level of the enterprise, and lay the foundation for comparing (longitudinally, or sectorially) the effectiveness of HR practices and policies between companies, divisions or business units.
advantageous
I Another conceptualization evaluates the effectiveness of HR practices according to six performance criteria:l’ quality of delivery (in terms of conforming to some practice ideal, or fulfilling the intended purpose), quantity (expressed in terms such as dollar value, number of units, or number of completed HR activity cycles), timeliness (the degree to which an HR practice is completed, or a result produced, at the earliest time desirable), cost eflectiveness (in the sense of optimizing the gain or minimizing the loss from each unit or instance of use of human and financial resources), need for supervision (the degree to which a person or unit can carry out an HR practice without requesting assistance, or requiring intervention to prevent an Long Range Planning
Vol. 27
December
1094
adverse outcome), and positive impact (the degree to which an HI7 practice promotes feelings of self-esteem, goodwill, commitment, satisfaction, and co-operation among co-workers and subordinates). Based on this model, the most effective managers or HR professionals are those providing the highest possible quantity and quality of HR practices at the lowest cost and in the most timely fashion, with a minimum of supervision and with a maximum of positive impact on co-workers, organizational units, and the client/customer population. Ideally, the relative weights to be applied to these six criteria are directly linked to organizational objectives such as increased sales, improved productivity and, of course, return on investment. Strong linkages in this regard are extremely rare, however. As Ulrich points out,1° most organizations have difficulty even measuring overall performance in a reliable manner, and few systematically relate individual performance to unit or corporate performance. Moreover, organizations rarely get down to specifics on all six criteria and seldom relate them effectively to the objectives of the firm. Nonetheless, it is widely understood that the linkage is a necessary one if line managers are to be convinced that HR activities are integral to organizational objec-
tives, and that they create and sustain a competitive edge. In addition to HR practices, Ulrich et a1.l’ suggest that benchmarks may also be developed for the HR competencies of individual managers in the organization. Under the umbrella of strategic human resource management, three sets of HR competencies may be identified : knowledge of the business, quality of service, and the management of change. Knowledge of the business refers to the extent to which an HR professional (or a line manager with HR responsibilities) understands the financial, strategic and technological capabilities of the organization. Quality of service refers to the extent to which the HR or line manager provides high quality HR policies and services (such as training and development) to the other members of the organization. Management of change refers to the extent to which an HR professional or line manager is able to increase the organization’s capability for change through creativity, problem solving, relationship influence, innovation, transformation, and role influence. According to Ulrich,” measures may be established for specific behaviours in each of these three domains
Benchmarking the Performance of Human Resource Management
Recruitment and Selection 0
Number of long-term vacancies (over 6 months)/total
0
Average length of time to fill vacancies
0
Proportion of vacancies filled internally through promotion,
0
Average time spent in a job or function per employee
movements
number of jobs
demotion
or lateral
of prsonnel
Training and Development 0
Number of trainee days/number
0
Total training budget/total
of employees
employment
expenditure
Compensation and Rewards 0
Total compensation
0
Basic salary/total
0
Number of salary grades/employees
Employee
cost/total revenues
renumeration
relations
0
Number of resignations/total
0
Average length of service per employee
headcount per year
0
Rate of absenteeism
0
Average length of absence per employee
0
Number of supervisors and managers per employee
Overall HR management 0
Total revenue per employee
0
Total headcount this year compared to last year
0
Proportion of part-time employees to total number of staff
0
Employment
cost/total expenditure
l
Number of HR professionals
l
Age distribution
per employee
of employees
FlGlJRE8. Key I-M performance indicators.
Long Range Planning Vol. 27
December 1994
of HR competencies. However, these measures and behaviours have not been as well developed and researched as the performance indicators for HR practices discussed perviously. Figure 9 outlines a felicitous approach discussed by Burn and Thompson,” in which the organization defines an indigenous set of indicators, installs measurement standards, and monitors performance over time :
Phase I: Gather Fundamental
Linking
Key
HR
Performance
Indicators to Organizational Effectiveness Obviously, many managers and investors are interested in knowing if a certain activity or practice can serve as a leading indicator or determinant of financial
Data
0
Specify current activites in the HR department
l
Identify the structure of the HR department
l
Determine the cost of providing HR services in seven key functional areas:
0
Determine
0
staffing
0
development
0
employee
relations
0
organizational
0
reward systems
evaluation
0
administration
0
health and safety
HR contribution to the ‘bottom line’
Phase II: Asses HR Service Delivery 0 0
Determine
internal clients’ needs for services in each of the key functional areas
Determine
internal clients’ reactions to services delivered in each of the seven
functional areas
Phase Ill: Establish Standards 0
Set acceptable standards in each of the seven functional areas
0
Audit HR performance
in each functional area over time, and make the neccesary
adjustments
FIGURE9. A three-tier approach for assessing performance in the HR function.
Benchmarking
the Performance
of Human Resource Management
performance. When such an indicator goes up or down, an organization can take actions to minimize or maximize the impact by changing the relevant practice. Consequently, over the past few years, a number of studies have tried to link specific HR practices and organizational effectiveness in terms of financial performance, productivity, product quality, innovation, and so on. One such study was conducted by Kravetz.‘” In a book entitled The Human Resources Revolution Kravetz looked for the correlation between financial results and what he termed human resources progressiveness (HRP) in 150 US companies. HRP was defined as the extent to which an organization is : . . . operating in concert with the current and tirture workplace, rather than experimenting with radical programs or spending exorbitant amounts of money on human resources programs. A company high in HRP understands the critical importance of people to the bottom line and operates with this in mind (p. 36).16 A firm’s score on the HRP index was measured through a fifty-item questionnaire pertaining to HR practices and policies in the following nine areas : of openness
degree
0
degree of emphasis culture
cl
degree to which management
cl
emphasis workplace
cl
extensiveness
0
effectiveness tion
cl
degree of recognition mance
cl
usage of flexitime
0
degree of decentralization ment hierarchy
on
on people
creativity
in the
excellence
of career development in maximizing
company
is participative
and
employee
in
the
and training job satisfac-
and reward for good perfor-
and part-time
1. The assessment selection. 2. Flexible
employment
and flattened
manage-
The results showed that human resource progressiveness in these nine areas was significantly correlated with financial success over a 5 year period. In particular, Kravetz concluded that highly progressive companies enjoyed significantly higher sales growth, profit margins, equity growth and earnings per share growth than the less progressive ones. For instance, the annualized sales growth (five year trend) of high HRP
centre
approach
to personnel
or ‘cafeteria’ approach in reward systems.
3. Productivity
bonus plans.
4. Goal-oriented 5. Alternative
of communication
cl
companies was 17.5 per cent, compared to 10.7 per cent for low HRP companies ; and the annualized profit growth of high HRP firms was 10.8per cent, compared to only 2.6 per cent for those low in HRP. In a second study on the same subject Frederick Schuster” examined the relationship between human resource management performance as measured by the Human Resources Index (HRI) and organizational effectiveness. His intent was to lay the foundation for the development of a reliable and practical instrument, which could be used as a benchmarking tool by companies representing a wide range of industries and sizes. The HRI survey contained 64 measures of human resource practices, six of which were the focus of this research:
performance
appraisal.
work schedules.
6. Organizational
development.
These six practices were chosen because they were though to be related to the general management philosophy which Peters and Watermanz2 termed attention to employee needs, and could therefore serve as an operational definition of this philosophy. Schuster’s hypothesis and findings were consistent with Kravetz in that he expected and found a small but meaningful relationship between the six HR practices and financial performance (as measured by return on equity and total return to investors). In particular, the total utility of the six HR practices for the average Fortune 1000 company was estimated at $7.5m per year. These two studies represent a small sample of the work currently being done in this field. Their formulations and findings have helped to explore the link between HR practices and overall organizational effectiveness. Of course, it can be argued that better financial performance leads to effective human resource practices (rather than the reverse). While this causal effect is possible, at this point the data indicate that the two types of performance go hand in hand. As Kravetz argues, Long Range Planning
Vol. 27
December 1994
It is difficult to envision why a company would change its management style, have more employees work out of their homes, or change the company culture to one strongly oriented toward people. Many companies, if they are enjoying great financial success, are not likely to change, figuring that you shouldn’t fix things that don’t need fixing. They retain their same successful practices until these need to be abandoned to address a static or declining market position. Success is not likely to breed this type of change (p. 43)‘”
A Prescription
5. Involve
line managers when developing and monitoring the HR performance measurement system. One of the great pitfalls of HR performance measurement systems is that they allow HR managers to argue that their actions are undiscussable as long as their performance targets are met. But for HR measures to have real impact, dialogue about their meaning and relevance must always remain open. Having a cross-functional team of people monitoring the system is one way to make sure that relevant measures are being used and understood.
for Action
This final section provides guidelines for installing an effective HR measurement system, and is an attempt to bring the article to a practical level without advocating a cookbook approach to the matter. Based on lessons learned, the following factors need to be considered when establishing a system for measuring HR effectiveness : 1. Recognize that the _ purpose of a measurement system is change. Understand what HR practices or policies are required to achieve business objectives, and be sure that appropriate measures are linked to these policies or practices. Focus on HR practices that can be changed by the individuals who will be monitored by the measurement system: conversely, avoid monitoring activities and outcomes that cannot be influenced by the persons involved. By this token, corporate training and development costs should not be allocated to division managers if these individuals have no control over training and development activities in their units. Make the measurements ‘robust’. As Eccles and Nohria point out, no single measure perfectly captures all aspects of HR performance, even allowing for time lags. An array of different performance measures-both quantitative and qualitative-increases the dimensions along which change can be guided.’ Managers will also gain a broader sense of the different HR practices that contribute to company goals. Avoid the measurement trap by monitoring key performance indicators, and only key performance
Benchmarking
indicators. Managers should challenge many traditional HR measures, such as employee turnover and direct labour costs. Such indicators may be irrelevant in the current economic environment, and they may focus attention on the wrong activities.23
the Performance
6. Communicate regularly the purpose and specifics of the system to all the employees involved, and be ready to clarify measures. Do not assume that everyone understands or accepts the new system without questioning its use or meaning. 7. Analyse the data regularly (at a rate compatible with their impact on decision-making), and draw appropriate conclusions by comparing the key performance indicators over time. . . between units and/or against predetermined targets. Benchmark the HR performance of business units or divisions against comparable units within the same industry, or against units and organizations that are considered best in class. 8. Finally, be ready to change the measurement system if a particular indicator fails to achieve business goals, or if the costs of collecting and analysing the data exceeds the potential benefits of their use. As Eccles and Nohria point out, the discipline needed to discontinue irrelevant performance measures should not be underestimated.’ The benefit of keeping the same measures for a period of time lies in the historical comparability thus afforded, and perhaps in longitudinal evaluation of the impact anticipated by the HR practice. The risk is that attractive new measures can always be found, and unless some existing ones are eliminated creeping numeration will be the result.
of Human Resource Management
References 1. R. Eccles and N. Nohria, Beyond the Hype: Rediscovering the Essence of Management, Harvard Business School Press, Cambridge (1992). 2. R. Kaplan and D. Norton, The Balanced Scorecard-Measures that Drive Performance, HarvardBusiness Review70, January-February, 71-79 (1992). 3. European Foundation for Quality Management, Total Quality Management: The European Mode/for SeffAppraisal 1993. The European Foundation for Quality Management, Eindhoven, The Netherlands (1993). 4. L. Mackay and D. Tonington, The Changing Nature of PersonnelManagement, I PM, London (1986). 5. Dailey, United Technologies Corporation. Human Resource Management, Spring and Summer, 15-l 7 (1992). 6. J. Morgan, Human Resource Information: A Strategic Tool, In M. Armstrong (ed.), StrategiesforHuman Resource Management, Kogan Page, London (1992). 7. Glanz and L. Daily, Benchmarking, Human Resource Management 31 (1 and 2), S-20 (1992). 8. J. Fitz-Enz, How to Measure Human Resource Management, McGraw Hill, New York (1984). 9. J. Fitz- Enz, Human Value Management: The Value-Adding Human Resource Management Strategy for the 799&, Jossey-Bass, Oxford (1 SSO).lO. D. Ulrich, Brockbank, W. and A. Yeung. Beyond Belief: A Benchmark for Human Resources, Human Resource Management28 (3), 31 l-335 (1989).11. Liebfried and McNair, Benchmarking. 12. W. Cascio, Costing Human Resources, third edition, PWS-Kent Publishing Company, Boston (1991). 13. H. Brogden, When testing pays off, Persona/Psychofogy2,171-183
(1949).
14. L. Cronbach and G. Gleser, Psychological Testsand Personnel Decisions (2nd ed.), UniversitY of Illinois Press, Urbana, IL (1965). 15. Flamholtz, Human Resource Accounting, Jossey- Bass, San Francisco (1985). 16. D. Kravetz, The Human Resources Revolution: Implementing Progressive Management Practices for Bottom-Line Success, Jossey-Bass, San Francisco (1988). 17. R. Schuler, Gaining Competitive Advantage through Human Resource Management Practices, Human Resource Management 23 (3). 241-255 (1984). 18. A. Tsui, Personnel Department Effectiveness: A Tripartite Approach, IndustrialRelations 23,184-l (1984).
97
A Contingency Approach to System Development and 19. H. Bernardin and J. Kane, Performance AppraisaL Evaluation (2nd ed.), PWS-Kent, Boston (1993).20. D. Burn and L. Thompson, When Personnel Calls in the Auditors, Personnel Management, January, 21-23 (1993). 21. F. Schuster, The Schuster Report: The Proven Connection Between People and Profits, Wiley, New York (1986). 22. T. Peters and R Waterman Jr, In Search of Excellence: Lessons from America’s Best-Run Companies, Harper and Row, New York (1982). 23. M. Hora and M. Schiller, Performance Measurement, In M. Rock,and L. Berger (eds), TheCompensation Handbook, MacGraw-Hill, New York (1991).
Dr. Charles Despres is a Research Fellow at the fnternational lnstjtute for Management Develop; ment (IMD) in Lausanne, Switzertand.
Long Range Planning Vol. 27
December
1994
E
XPERIENCED MANAGERS KNOW THAT measuring an event draws attention to that event, and that tying rewards to the measurement process will both magnify the event and sharpen attention. They also know that an exclusive focus on traditional performance measures, such as return on equity and cash flow, ignores other key success factors in an enterprise, including customer satisfaction, R & D, and human resource management. When this happens, performance management becomes finance-driven and myopic, resulting in some organizational factors-less important ones, we would argue-being optimized at the when rewards are expense of others. Furthermore, tied to financial targets the organization often alienates employees who have little understanding of how their everyday transactions connect to overall corporate performance objectives which, consequently, produces little perceived ability to affect the ‘bottom line’. Recognition of these problems, and in particular the third, has led to a flurry of writing on the need to move toward a new paradigm of performance management. The call is to supplement the traditional and small set of financial performance measures with non-financial indicators of the processes that lie behind them.’ Authors such as Kaplan and Norton have even argued for placing non-financial measures (i.e. customer satisfaction, innovation and the development of human resources) on an equal footing with financial criteria when determining strategy, promotions and the allocation of organizational resources.2 The European Foundation for Quality Management (EFQM), formed by 14 leading Western European companies in 1988, agrees on this matter. In 1991 EFQM established the European Quality Award which Pergamon 0024-6301(94)00053~
This article focuses on performance measures in the field af human resource managembnt @I RM). It is shown that most efforts to assess HR performance have been restricted to 1. general measures of limited value, such as headcount or payroll costs, or 2, sophisticated measures that many managers are unwilling to use+As a result, adjustments in human resource policies and practices tend to be based on intuition rather than methodical assessment of concrete and specifiable effects. Alternative HRM performance management mefhods are discussed, including the now popular benchmarking approach, and prescriptions are offered for progressive organizational practice in this domain.
is ‘... awarded ,@early] to the most successful exponent of Total Quality Management in Western Europe’ (p. 2),3 and the criteria for this award are pertinent. EFQM developed the model in Figure 1 to depict the performance categories that are deemed critical to excellence in organizational performance. It would appear that financial measures are rather sparse among the EFQM performance criteria, and so they are. Figure 2 excerpts certain of these criteria in the first four performance categories : According to Eccles and Nohria,’ the justifications for this new paradigm are founded in three fundamental truths about performance management:
1. The use of non-financial measures encourages managers to adopt a broad and long-term view of organizational performance. Long Range Planning Vol. 27, No 6, pp. 43-57, 1994 Copyright 0 1994 Elsevier Science Printed in Great Britain. All rights reserved 0024-6301/94 $7.00+.00
Processes
HCustomer
Satisfaction j$$j
FIGUFW . The.l+ropean TOM rirodel(Eurotjgan Fotipdationfor $&t&y Management),
2. Measures
of non-financial variables target events that are meaningful and actionable in managerial experience, e.g. delivery times, market position, the development of organizational competence and employee turnover.
3. Non-financial
measures can serve as leading indicators of financial results and thus be made legitimate even to those for whom the bottom line is everything.
But the task of extending the traditional approach to performance management beyond common financial measures poses significant problems. One of the most difficult challenges facing both academics and practising managers is the development of non-financial measures that deliver realistic data on a company’s current position, and which serve well as leading indicators of future financial performance. This article focuses on performance measures in the field of human resource management (HRM), a range of activities and approaches that allow a firm to attract, retain and mobilize a critical mass of human talent. Most efforts to assess HR performance have been limited to I. general measures of limited value, such as headcount or payroll costs, or 2. sophisticated measures that managers may be unable or unwilling
to use. Moreover, experience shows that managers seldom review in a systematic way the intent, impact or results of an HR action or policy. As a result, adjustments in human resource policies and practices tend to be based on intuition rather than methodical assessment of concrete and specifiable effects. Like their counterparts in production, marketing, and financial management, many HR managers are being (understandably) forced to justify in a systematic way the costs of their activities, and to compare their activities and overall performance measures with those of other organizations .4 This need to evaluate the value-added effects of HR practices on organizational products and processes began in earnest during the late 1980s; given the current economic recession, it promises to become even more critical during the latter half of the 1990s. United Technologies, for example, convened a task force with just this issue in mind during the early 1990s.5 The group surveyed ‘internal customers’ of the HR function in each of United Technologies’ six major with the straightforward objective of businesses* comparing perceptions of performance between HR *Pratt and Whitney, Nordon Systems.
Benchmarking the Performance of Human Resource Management
SikorskyAircraft, Carrier, UT Automotive, Otis and
FIGURES 2. EFQM perfcmance criteria.
Long Range Planning Vol. 27
December
1994
HR professionals stood up for the HR perspective, which is good, but did it quite traditionally. They were fairly competent, but didn’t measure themselves very rigorously. They did their homework and came to meetings prepared, but were not seen as very innovative or risk taking. In short, the message from this survey was, ‘You’re not really a strategic partner’(pp. 15-18).5
and line managers. The eighteen-item instrument used is presented in Figure 3. The performance categories in this instrument are instructive and, generally, the task force found that HR professionals perceived the quality of their services to be higher than did line managers. More
worrisome,
HR
managers
competent but disconnected strategic direction :
were
from
the
as
company’s
The results of this effort included a two-day conference
Usually: 2
Always: 1
:,::i;., ..
viewed
Sometimes:
3
Rarely: 4
To what extent does the Human Resource organization...
.,
‘:‘_:
1
-
1. Understand
where the business is headed and what management
-
2. Stand up for the human resource perspective on business issues?
-
3. Staff the HR organization
with competent
is trying to accomplish?
professionals?
-
4. Participate actively in the business planning process?
-
5. Take appropriate
6. Respond in a timely manner?
-
7. Develop human resource objectives in the context of business priorities?
-
8. Do its homework?
-
9. Provide competent
-
10. Explore alternative solutions to problems? 11. Find ways to balance its functional interests with the needs of the business?
-
12. React quickly to changes in the needs of the business?
-
13. Anticipate
-
14. Help more than hinder the organization
-
15. Have people seek its advice?
-
16. Set high standards for evaluating its own effectiveness?
the Performance
):,
:‘:’_,
advice and support?
-
Benchmarking
:_:,:_ ::.*,:; _:, ,,; .., , *.
risks?
-
business problems?
FIGURE3. United Technologies
,”,:$‘., _,,I’
in attaining its business objectives?
human resources practices survey.
of Human Resource Management
,‘: :~::
where 100 HR and 20 line managers discussed the findings, set priorities, charted a new direction, and cascaded the process to corporate and business units. As United Technologies illustrates, the competitive environment is intensifying and the development of key HR performance indicators, and their associated monitoring systems, is becoming increasingly important. In fact, given the increased emphasis on cost reduction, quality and excellence in many organizations, it is surprising that human resource management has escaped scrutiny for so long.
Approaches to Measuring HR Performance How can a forward-thinking organization develop an effective performance monitoring system in the area of human resource management? According to Morgan,” there are three approaches and each is reviewed below. One is to adopt a stepwise procedure, similar to the scientific method, in which meaningful and reliable variables are identified. The process begins by developing as many measures as possible, particularly in the HR areas of greatest concern. Second, measures whose potential benefit is outweighed by the expense or difficulty of data collection are eliminated. Third, systems are developed which regularly collect the necessary information, preferably devolved to line management, and a commitment is made to the time and effort needed for analysing the data and interpreting its meaning in the realm of HR strategy. After two or three years (often the time required to realize the impact of an HR activity) it becomes possible to reduce the number of measures to four or five key indicators by eliminating those which only confirm the results of For example, if employee turnover, job others. satisfaction, absenteeism and so forth were all perfectly correlated with one another, only one of the by examining this single measures is necessary; measure a manager would know the company’s performance for all the others. The relationship between performance measures is often complicated and non-linear, however, making multiple measures a virtual necessity. Although this approach is laudable in its attempt to capture all measurable aspects of HR performance, there is the risk that the task of collecting data, analysing them and interpreting the results will be costly, time-consuming and result in no clear guide-
lines for action. There is also the danger of what Eccles and Nohria called creeping numeration, which refers to ‘the temptation to turn every measure deemed relevant
into a crucial part of an oficial measurement system’(p. 16O).l Indeed, once the decision is made to expand the class of measures from a single (financial) category to three or four, and four or five measures are developed for each category, a company can quickly have twenty or more ‘key’ performance indicators. Secondly, a recent approach to performance management involves the identification of key performance indicators that are associated with a specific HR practice, such as recruitment and selection. From this perspective the wisdom lies in keeping things simple and avoiding information overload, and the implication is that only a few measures are needed to help line managers or HR professionals to gauge the current state of affairs. This second approach offers an appealing logic: if objectives have been defined in advance, there should be associated measures and thus no difficulty in collecting and interpreting the data. Most managers simply cannot attend to twenty measures at once--let alone optimize them-despite company rhetoric that may implore them to do so. In fact, imputing significance to each of these measures may only push the problem of devising a meaningful performance measurement system down to the level of each frustrated individual.* But as Morgan points out,’ this method also runs the risk of being too superficial. It is not enough to know that a specific practice or activity has worked to a greater or lesser extent. To be of real benefit there must be enough information to understand why the specific outcome has occurred, and to incorporate the lessons learned. A third approach to HR performance monitoring, and one which is gaining popularity, is through the process now known as benchmarkng. Benchmarking denotes a comparison with selected performance indicators from different organizations, typically in the same industry, or with comparable organizations that are considered to be ‘best in class’. Successful benchmarking requires careful selection and manipulation of comparison measures. Figure 4, for example, illustrates measures that might be considered ‘drivers’ of a given function: Benchmarking HR practices serves a number of purposes. 7 First, it enables a company to calibrate how it is delivering HR practices. By looking at how other organizations are accomplishing tasks and responsiLong Range Planning Vol. 27
December 1994
General Measure
Specific Measure
Proportion of QA employees
Research & Development
FIGURES. Sample productivity
Annual new product introductions per R&D employee
m@asurfx.
bilities, a company can audit itself and identify areas where practices are within or outside a given norm. Second, benchmarking enables a company to learn from others’ successes and mistakes. Building a continuous improvement mentality has become an important goal for many organizations in the last decade: benchmarking can open minds and create a climate in which active learning is encouraged. Third, benchmarking can be used as a tool for creating the motivation to change. By learning what other companies are doing, line managers and HR professionals can build a stronger case for allocating resources to HRM activities in ways similar to those of successful companies. Finally, benchmarking can be used to help set direction and priorities for an HR manager. Rather than fall into the trap of trying to do everything well and please everyone with limited resources (which typically results in no one being satisfied), HR managers can use benchmarking to focus on critical activities.l’ Currently, the most common form of HR benchmarking involves salary surveys. It is the rare HR manager who steps beyond this, for two principal reasons : Z. the difficulty of finding standard and
acceptable performance indicators similar to those used in financial management, such as return on capital and cash flow ratios, and 2. the reluctance of companies to divulge sensitive information about their employee retention, employment costs, and so on. There are other reasons for the lack of HR benchmarking in contemporary organizations, the most prevalent perhaps being the mythology that has developed around personnel work. As Jac Fitz-Enz observes : The Fundamental belief is that personnel is something of a complex and mysterious art. Allegedly, the true and full value of the work can only be judged by those who perform it. Even then, the appraisal is bounded by subjective criteria. Many of the faithful believe that, like virtue, personnel work is its own reward. Terms used to describe results are satisfied, quick, better, interesting, good, important, creative, and other similar non-specific terms (P. 71.a
There are also people who believe that measuring the effectiveness of human resource management is simply inappropriate. In their eyes, I-IRM is devoted to stimulating and supporting human happiness and development, and they see no reason to evaluate outcomes in other than humanistic terms.
Benchmarking the Performance of Human Resource Management
Benchmarking has its limitations. When used solely to emulate rather than improve performance, advantages may be short-lived, time consuming and expensive. Moreover, the most valuable information is generally not derived from the actual data, but rather the qualitative information on how and why the data outcomes were achieved. Nevertheless, a well established benchmarking process can help managers set goals and targets designed to make the company the best in its competitive field, and to initiate focused programmes that move the company from its current position. Many firms strive for performance improvements by benchmarking standards of excellence from other firms in such areas as production, research and development, and marketing. HR can be employed to similar competitive advantage, and it is sensible to unearth those HR indicators that contribute relatively more to overall performance than others. Janssen Pharmaceutics, a wholly owned subsidiary of Johnson and Johnson, undertook just such a benchmarking project in late 1989 as a response to competitive pressures rocking the pharmaceuticals Janssen examined in detail the internal industry.*’ components of its administrative overhead and, by comparing benchmarks with a select group of peer companies, addressed what was considered a ‘burgeoning problem that is di$Ticult to analyze and control To begin, the company determined that (p. 143).” administrative (white-collar) productivity could be defined through four key elements (Figure 5). Management then compared Janssen’s performance with that of other companies participating in the project. Janssen’s managers soon determined that achieving white- collar productivity improvements would be impossible unless appropriate performance measures were developed and installed. Figure 6 displays four such measures that Janssen now uses to monitor its performance in this area.
Effectiveness Criteria for HR Activities As noted earlier, developing the specific criteria which define effectiveness for HR activities is one of the most difficult challenges facing line managers and HR professionals alike. In this regard there are two schools of thought. The first school advocates monitoring the costs and benefits of human resource activities-those associated with the attraction, selec-
tion, retention, development, and utilization of people in organizations-in economic terms. The underlying assumption is that the ultimate single measure of HR effectiveness is financial . . . the ‘bottom line’. To illustrate this point, consider a comment by Cascio in his book entitled Costing Human Resources: For some time now, I have had the uneasy feeling that a lot of what we do in the human resource management field is largely misunderstcod and underestimated by the organizations we serve. In part, we in the field are responsible for this state of affairs because much of what we do is evaluated only in statistical and behavioural terms. Like it or not, the language of business is dollars, not correlation coefficients.”
Although methods for estimating the costs and benefits of HR activities have been available for many years,13,14 they are only beginning to appear through the recent writing of academics such as Cascio, FitzEnz and Flamholtz,gV12S’5 and in the form of formulas and accounting procedures for measuring the economic worth of the organization’s human assets. Figure 7 gives an illustrative example of conducting simple exit interviews with terminating employees. This economic approach to measuring HR performance has the advantage of being simple and understandable, but it fails to provide guidance when implementing effective HR management programmes. Many HR managers (and their organizations) understandably feel a need for more detailed and comprehensive means of assessing their performance, and how their performance compares with other companies over time. The second school, espoused by academics such as Ulrich and Kravetz,‘oS’6 is to measure the set of HR practices delivered within an organization, and measure the contribution of each practice to the overall competitive advantage of the organization. A great deal of recent work has appeared which attempts to capture in a single conceptual model the variety of HR practices deployed by organizations to augment innovation, improve quality, and be the lowest-cost producer of goods and services. In 1984, Schuler introduced such a model which identified six categories of HR practices : planning, stafing, training and development, appraisal, compensation, and unionmanagement relations. He suggests that competitive advantage accrues to companies that identify and develop specific activities in each of these six areasI and that specific activities (such as internal staffing and flexible compensation) become important and Long Range Planning Vol. 27
December
1994
flGURE5. Sample productivity
Benchmarking
measures. Elements of white;cqtlar productivity (Janssan Pharmaceuticals).
the Performance of Human Resource Management
FIGURE& White-cotiar performance measures.
internal competencies. In addition, selection of HR practices should support overall corporate strategy and lead to committed employee behaviour. After a decade of conceptual and empirical research by Tsui,” Kravetz and others,16 it is now possible to define key performance indicators in most of the six categories identified by Schuler (Figure 8). These indicators can help managers evaluate how their HR practices relate to both the operational and strategic level of the enterprise, and lay the foundation for comparing (longitudinally, or sectorially) the effectiveness of HR practices and policies between companies, divisions or business units.
advantageous
I Another conceptualization evaluates the effectiveness of HR practices according to six performance criteria:l’ quality of delivery (in terms of conforming to some practice ideal, or fulfilling the intended purpose), quantity (expressed in terms such as dollar value, number of units, or number of completed HR activity cycles), timeliness (the degree to which an HR practice is completed, or a result produced, at the earliest time desirable), cost eflectiveness (in the sense of optimizing the gain or minimizing the loss from each unit or instance of use of human and financial resources), need for supervision (the degree to which a person or unit can carry out an HR practice without requesting assistance, or requiring intervention to prevent an Long Range Planning
Vol. 27
December
1094
adverse outcome), and positive impact (the degree to which an HI7 practice promotes feelings of self-esteem, goodwill, commitment, satisfaction, and co-operation among co-workers and subordinates). Based on this model, the most effective managers or HR professionals are those providing the highest possible quantity and quality of HR practices at the lowest cost and in the most timely fashion, with a minimum of supervision and with a maximum of positive impact on co-workers, organizational units, and the client/customer population. Ideally, the relative weights to be applied to these six criteria are directly linked to organizational objectives such as increased sales, improved productivity and, of course, return on investment. Strong linkages in this regard are extremely rare, however. As Ulrich points out,1° most organizations have difficulty even measuring overall performance in a reliable manner, and few systematically relate individual performance to unit or corporate performance. Moreover, organizations rarely get down to specifics on all six criteria and seldom relate them effectively to the objectives of the firm. Nonetheless, it is widely understood that the linkage is a necessary one if line managers are to be convinced that HR activities are integral to organizational objec-
tives, and that they create and sustain a competitive edge. In addition to HR practices, Ulrich et a1.l’ suggest that benchmarks may also be developed for the HR competencies of individual managers in the organization. Under the umbrella of strategic human resource management, three sets of HR competencies may be identified : knowledge of the business, quality of service, and the management of change. Knowledge of the business refers to the extent to which an HR professional (or a line manager with HR responsibilities) understands the financial, strategic and technological capabilities of the organization. Quality of service refers to the extent to which the HR or line manager provides high quality HR policies and services (such as training and development) to the other members of the organization. Management of change refers to the extent to which an HR professional or line manager is able to increase the organization’s capability for change through creativity, problem solving, relationship influence, innovation, transformation, and role influence. According to Ulrich,” measures may be established for specific behaviours in each of these three domains
Benchmarking the Performance of Human Resource Management
Recruitment and Selection 0
Number of long-term vacancies (over 6 months)/total
0
Average length of time to fill vacancies
0
Proportion of vacancies filled internally through promotion,
0
Average time spent in a job or function per employee
movements
number of jobs
demotion
or lateral
of prsonnel
Training and Development 0
Number of trainee days/number
0
Total training budget/total
of employees
employment
expenditure
Compensation and Rewards 0
Total compensation
0
Basic salary/total
0
Number of salary grades/employees
Employee
cost/total revenues
renumeration
relations
0
Number of resignations/total
0
Average length of service per employee
headcount per year
0
Rate of absenteeism
0
Average length of absence per employee
0
Number of supervisors and managers per employee
Overall HR management 0
Total revenue per employee
0
Total headcount this year compared to last year
0
Proportion of part-time employees to total number of staff
0
Employment
cost/total expenditure
l
Number of HR professionals
l
Age distribution
per employee
of employees
FlGlJRE8. Key I-M performance indicators.
Long Range Planning Vol. 27
December 1994
of HR competencies. However, these measures and behaviours have not been as well developed and researched as the performance indicators for HR practices discussed perviously. Figure 9 outlines a felicitous approach discussed by Burn and Thompson,” in which the organization defines an indigenous set of indicators, installs measurement standards, and monitors performance over time :
Phase I: Gather Fundamental
Linking
Key
HR
Performance
Indicators to Organizational Effectiveness Obviously, many managers and investors are interested in knowing if a certain activity or practice can serve as a leading indicator or determinant of financial
Data
0
Specify current activites in the HR department
l
Identify the structure of the HR department
l
Determine the cost of providing HR services in seven key functional areas:
0
Determine
0
staffing
0
development
0
employee
relations
0
organizational
0
reward systems
evaluation
0
administration
0
health and safety
HR contribution to the ‘bottom line’
Phase II: Asses HR Service Delivery 0 0
Determine
internal clients’ needs for services in each of the key functional areas
Determine
internal clients’ reactions to services delivered in each of the seven
functional areas
Phase Ill: Establish Standards 0
Set acceptable standards in each of the seven functional areas
0
Audit HR performance
in each functional area over time, and make the neccesary
adjustments
FIGURE9. A three-tier approach for assessing performance in the HR function.
Benchmarking
the Performance
of Human Resource Management
performance. When such an indicator goes up or down, an organization can take actions to minimize or maximize the impact by changing the relevant practice. Consequently, over the past few years, a number of studies have tried to link specific HR practices and organizational effectiveness in terms of financial performance, productivity, product quality, innovation, and so on. One such study was conducted by Kravetz.‘” In a book entitled The Human Resources Revolution Kravetz looked for the correlation between financial results and what he termed human resources progressiveness (HRP) in 150 US companies. HRP was defined as the extent to which an organization is : . . . operating in concert with the current and tirture workplace, rather than experimenting with radical programs or spending exorbitant amounts of money on human resources programs. A company high in HRP understands the critical importance of people to the bottom line and operates with this in mind (p. 36).16 A firm’s score on the HRP index was measured through a fifty-item questionnaire pertaining to HR practices and policies in the following nine areas : of openness
degree
0
degree of emphasis culture
cl
degree to which management
cl
emphasis workplace
cl
extensiveness
0
effectiveness tion
cl
degree of recognition mance
cl
usage of flexitime
0
degree of decentralization ment hierarchy
on
on people
creativity
in the
excellence
of career development in maximizing
company
is participative
and
employee
in
the
and training job satisfac-
and reward for good perfor-
and part-time
1. The assessment selection. 2. Flexible
employment
and flattened
manage-
The results showed that human resource progressiveness in these nine areas was significantly correlated with financial success over a 5 year period. In particular, Kravetz concluded that highly progressive companies enjoyed significantly higher sales growth, profit margins, equity growth and earnings per share growth than the less progressive ones. For instance, the annualized sales growth (five year trend) of high HRP
centre
approach
to personnel
or ‘cafeteria’ approach in reward systems.
3. Productivity
bonus plans.
4. Goal-oriented 5. Alternative
of communication
cl
companies was 17.5 per cent, compared to 10.7 per cent for low HRP companies ; and the annualized profit growth of high HRP firms was 10.8per cent, compared to only 2.6 per cent for those low in HRP. In a second study on the same subject Frederick Schuster” examined the relationship between human resource management performance as measured by the Human Resources Index (HRI) and organizational effectiveness. His intent was to lay the foundation for the development of a reliable and practical instrument, which could be used as a benchmarking tool by companies representing a wide range of industries and sizes. The HRI survey contained 64 measures of human resource practices, six of which were the focus of this research:
performance
appraisal.
work schedules.
6. Organizational
development.
These six practices were chosen because they were though to be related to the general management philosophy which Peters and Watermanz2 termed attention to employee needs, and could therefore serve as an operational definition of this philosophy. Schuster’s hypothesis and findings were consistent with Kravetz in that he expected and found a small but meaningful relationship between the six HR practices and financial performance (as measured by return on equity and total return to investors). In particular, the total utility of the six HR practices for the average Fortune 1000 company was estimated at $7.5m per year. These two studies represent a small sample of the work currently being done in this field. Their formulations and findings have helped to explore the link between HR practices and overall organizational effectiveness. Of course, it can be argued that better financial performance leads to effective human resource practices (rather than the reverse). While this causal effect is possible, at this point the data indicate that the two types of performance go hand in hand. As Kravetz argues, Long Range Planning
Vol. 27
December 1994
It is difficult to envision why a company would change its management style, have more employees work out of their homes, or change the company culture to one strongly oriented toward people. Many companies, if they are enjoying great financial success, are not likely to change, figuring that you shouldn’t fix things that don’t need fixing. They retain their same successful practices until these need to be abandoned to address a static or declining market position. Success is not likely to breed this type of change (p. 43)‘”
A Prescription
5. Involve
line managers when developing and monitoring the HR performance measurement system. One of the great pitfalls of HR performance measurement systems is that they allow HR managers to argue that their actions are undiscussable as long as their performance targets are met. But for HR measures to have real impact, dialogue about their meaning and relevance must always remain open. Having a cross-functional team of people monitoring the system is one way to make sure that relevant measures are being used and understood.
for Action
This final section provides guidelines for installing an effective HR measurement system, and is an attempt to bring the article to a practical level without advocating a cookbook approach to the matter. Based on lessons learned, the following factors need to be considered when establishing a system for measuring HR effectiveness : 1. Recognize that the _ purpose of a measurement system is change. Understand what HR practices or policies are required to achieve business objectives, and be sure that appropriate measures are linked to these policies or practices. Focus on HR practices that can be changed by the individuals who will be monitored by the measurement system: conversely, avoid monitoring activities and outcomes that cannot be influenced by the persons involved. By this token, corporate training and development costs should not be allocated to division managers if these individuals have no control over training and development activities in their units. Make the measurements ‘robust’. As Eccles and Nohria point out, no single measure perfectly captures all aspects of HR performance, even allowing for time lags. An array of different performance measures-both quantitative and qualitative-increases the dimensions along which change can be guided.’ Managers will also gain a broader sense of the different HR practices that contribute to company goals. Avoid the measurement trap by monitoring key performance indicators, and only key performance
Benchmarking
indicators. Managers should challenge many traditional HR measures, such as employee turnover and direct labour costs. Such indicators may be irrelevant in the current economic environment, and they may focus attention on the wrong activities.23
the Performance
6. Communicate regularly the purpose and specifics of the system to all the employees involved, and be ready to clarify measures. Do not assume that everyone understands or accepts the new system without questioning its use or meaning. 7. Analyse the data regularly (at a rate compatible with their impact on decision-making), and draw appropriate conclusions by comparing the key performance indicators over time. . . between units and/or against predetermined targets. Benchmark the HR performance of business units or divisions against comparable units within the same industry, or against units and organizations that are considered best in class. 8. Finally, be ready to change the measurement system if a particular indicator fails to achieve business goals, or if the costs of collecting and analysing the data exceeds the potential benefits of their use. As Eccles and Nohria point out, the discipline needed to discontinue irrelevant performance measures should not be underestimated.’ The benefit of keeping the same measures for a period of time lies in the historical comparability thus afforded, and perhaps in longitudinal evaluation of the impact anticipated by the HR practice. The risk is that attractive new measures can always be found, and unless some existing ones are eliminated creeping numeration will be the result.
of Human Resource Management
References 1. R. Eccles and N. Nohria, Beyond the Hype: Rediscovering the Essence of Management, Harvard Business School Press, Cambridge (1992). 2. R. Kaplan and D. Norton, The Balanced Scorecard-Measures that Drive Performance, HarvardBusiness Review70, January-February, 71-79 (1992). 3. European Foundation for Quality Management, Total Quality Management: The European Mode/for SeffAppraisal 1993. The European Foundation for Quality Management, Eindhoven, The Netherlands (1993). 4. L. Mackay and D. Tonington, The Changing Nature of PersonnelManagement, I PM, London (1986). 5. Dailey, United Technologies Corporation. Human Resource Management, Spring and Summer, 15-l 7 (1992). 6. J. Morgan, Human Resource Information: A Strategic Tool, In M. Armstrong (ed.), StrategiesforHuman Resource Management, Kogan Page, London (1992). 7. Glanz and L. Daily, Benchmarking, Human Resource Management 31 (1 and 2), S-20 (1992). 8. J. Fitz-Enz, How to Measure Human Resource Management, McGraw Hill, New York (1984). 9. J. Fitz- Enz, Human Value Management: The Value-Adding Human Resource Management Strategy for the 799&, Jossey-Bass, Oxford (1 SSO).lO. D. Ulrich, Brockbank, W. and A. Yeung. Beyond Belief: A Benchmark for Human Resources, Human Resource Management28 (3), 31 l-335 (1989).11. Liebfried and McNair, Benchmarking. 12. W. Cascio, Costing Human Resources, third edition, PWS-Kent Publishing Company, Boston (1991). 13. H. Brogden, When testing pays off, Persona/Psychofogy2,171-183
(1949).
14. L. Cronbach and G. Gleser, Psychological Testsand Personnel Decisions (2nd ed.), UniversitY of Illinois Press, Urbana, IL (1965). 15. Flamholtz, Human Resource Accounting, Jossey- Bass, San Francisco (1985). 16. D. Kravetz, The Human Resources Revolution: Implementing Progressive Management Practices for Bottom-Line Success, Jossey-Bass, San Francisco (1988). 17. R. Schuler, Gaining Competitive Advantage through Human Resource Management Practices, Human Resource Management 23 (3). 241-255 (1984). 18. A. Tsui, Personnel Department Effectiveness: A Tripartite Approach, IndustrialRelations 23,184-l (1984).
97
A Contingency Approach to System Development and 19. H. Bernardin and J. Kane, Performance AppraisaL Evaluation (2nd ed.), PWS-Kent, Boston (1993).20. D. Burn and L. Thompson, When Personnel Calls in the Auditors, Personnel Management, January, 21-23 (1993). 21. F. Schuster, The Schuster Report: The Proven Connection Between People and Profits, Wiley, New York (1986). 22. T. Peters and R Waterman Jr, In Search of Excellence: Lessons from America’s Best-Run Companies, Harper and Row, New York (1982). 23. M. Hora and M. Schiller, Performance Measurement, In M. Rock,and L. Berger (eds), TheCompensation Handbook, MacGraw-Hill, New York (1991).
Dr. Charles Despres is a Research Fellow at the fnternational lnstjtute for Management Develop; ment (IMD) in Lausanne, Switzertand.
Long Range Planning Vol. 27
December
1994