When you sit down to evaluate your organization’s performance what measures come to mind
Chances are you first think about your balance sheet measures how much revenue did we generate last quarter how much was our growth in sales and profits or what gains did we make in our market share Next you may think about the costs equipment material travel and so on Or perhaps it is your customer measures that come up for consideration have complaints increased are they repurchasing our products These key performance indicators (KPIs) are important and you consider them on a weekly monthly and quarterly basis
What is often missing from this list is an area that accounts for one of your largest expenses and perhaps creates the most value your people or what many now call Human Capital People are one of the most important indicators of an organization’s ability to create and sustain value they come up with the ideas for new innovations they delight your customers and they produce your products In spite of this many organizations have difficulty demonstrating how spending on people and people programs produce a return on investment
Human Capital Measurement (HCM) bridges this gap by helping organizations focus on people measures to better understand and predict how employees contribute to their success It allows companies to quantify how employees are impacted by programs such as training and development recognition and worklife balance It also assesses how employees react to organizational changes such as mergers or major restructuring Most importantly it can provide the same level of rigor that other areas of your business apply to evaluate their investments
Hewitt Associates has developed a leadership position in the use of Human Capital Measurement Our Best Employers research supports a growing amount of evidence connecting effective people management with longterm organizational performance Similarly we have a number of HCM approaches that we have applied to help organizations sharpen their people investment strategies In this issue of HQ we give you some insight into our approach to HCM and describe several specific client situations where this approach has helped them achieve their strategic goals and realize tangible results Our philosophy toward HCM is to align the approach to your specific situation We illustrate a wide range of approaches that describe how people scorecards and key organizational performance metrics are developed optimal people behaviors identified and predictive models framed
HCM can appear daunting and complex but our consultants can work with you from wherever you are starting and to whatever level of sophistication you desire to help you understand and realize the value of your human capital HCM is fun challenging and a leadingedge work It provides our consultants with a feeling of success and it produces great value for our clients
Mick Bennett
Managing Director Asia Pacific
Hewitt Associates LLC
The average human life span has risen dramatically from a life expectancy of 40 in the early 1900s to 75 years at the turn of the millennium The human race has learned what factors need to be monitored to increase longevity a balanced diet regular exercise monitoring key measures such as blood pressure cholesterol etc Identifying monitoring and acting on the right measures has doubled the human life span in one century
Company life expectancy has not fared as well In the late 1920s and 1930s the average company life span was over 60 years Now the average life span of companies is 1215 years So many companies will die in their teens and only a handful will survive into the next century
To complicate the situation the world as a marketplace is shrinking and competitors straddle the globe A new service offering is duplicated within hours a product launch sees competitors＇‚ reply on the shop shelves within days and a technical breakthrough is copied
within weeks The sourcing of raw material and talent spans the globe So does the supply
Along with these changes the days of a lone entrepreneur who performed all functions singlehandedly or with a couple of apprentices are long gone Today worldclass factories that house nonstop assembly lines work with hundreds of employees Products processes and technology are easily available or duplicated So why do some companies survive and others fail in a short period of time
The company’s workforce has emerged as a key asset and is often described as the only competitive advantage that a company possesses Employee behavior the knowledge and experience they bring together with their commitment to the organization are key drivers for sustainability and growth
Squeezing savings in the supply chain ensuring higher capacity utilization at the shop floor continuously upgrading the product and delighting customers with efficient
service models are all efforts that are steered by employees Every business needs workers who take ownership of their work and the workplace They need to be bargain buyers effective salespeople have unfaltering faith in their products zealously guard their customers painstakingly track the competition and above all have an uncompromising commitment loyalty and honesty towards the organization and its stakeholders
To survive sustain and grow in this context where employee excellence is required more than ever before to achieve sustainable growth the role of the corporation has been changing too The old systems of training monitoring and awarding employees are inadequate The sheer size of businesses deems that impractical Businesses now need to focus on attracting retaining and harnessing the best talent in a more holistic and strategic manner
To be successful in all this companies need to measure the value that employees bring to the organization evaluate their impact on business performance and then align them with the business results Companies have always measured their investments in more tangible assets such as buildings equipment and even new products Yet many still pay less attention to their employees Companies continue to focus on physical assets that were crucial historically or whose productivity is easily measurable financially
What gets measured gets done may have described the dynamics of the factory floor but did not have much to do with the human resource department Moreover measuring the soft stuff or the human capital has been difficult if not impossible That is till now
Considerable evidence already exists both in academic research and in work done by Hewitt Associates that successful companies know the value that people can bring to the organization invest appropriately in their talent and measure the impact their investment has on the bottom line The notion of the employeecustomer value chain was first made broadly popular in the January 1998 issue of the Harvard Business Review which detailed a value driver model at Sears in the United States (See Figure 1)
Today many similar models exist in organisations around the world Hewitt’s Best Employer studies have shown that these companies have higher revenue growth and greater profitability than other organizations These numbers vary considerably across regions but what is common and
consistent is better business performance
These organizations create an environment that enables employee engagement capturing the hearts and minds of employees to deliver extraordinary performance An engaged employee is one who consistently speaks positively about the organization stays with the organization despite opportunities to work elsewhere and exerts extra effort in work and behavior that contributes to business success Hewitt’s Best Employer studies for example clearly demonstrate that The Best have much higher employee engagement (73 vs 52) and lower turnover (10 vs 15) on an average This global research has conclusively established the high correlation between employee engagement and business performance gauged through key business measures It has shown that organizations that improved the employee engagement levels simultaneously produced rises in productivity employee retention customer satisfaction total shareholder return (TSR) and sales growth Using a database of over 100 public corporations that completed an engagement study over a fiveyear period Hewitt Associates has demonstrated the following
² High performing companies have an engagement score that is 2025 higher than average
² The correlation between employee engagement and a company’s average fiveyear TSR is 054 This means the level of employee engagement explains 29 of the variation in TSR and
² A similar relationship exists between engagement and fiveyear sales growth The correlation measured here was 046 again indicating a strong relationship
On a micro level Hewitt’s consulting work with specific organizations has also identified a strong and consistent link between engagement and a variety of measures like financial performance customer satisfaction and employee and customer retention
As you will see in a later article a Hewitt study involving companies that show doubledigit growth (DDG showing cumulative 10+ growth over a fiveyear period) also exhibited a much higher level of engagement in the organization As many as 93 of executives at DDG companies are engaged compared to 52 for all employees in all companies (see Figure 2)
All this research allows us to suggest a generic highlevel model for the important role that employee engagement has in outperforming your competitors This notion of employee engagement is we believe certainly not the only but without doubt the core and fundamental building block of human capital
A giant step forward from attitude and satisfaction measures of the past HCM delivers invaluable data regarding employee engagement And organizations that are following through on strategies to boost their employee engagement are not only improving their short and mediumterm business results but are also solving the talent dilemma and driving longterm value for their shareholders customers and employees
For a detailed discussion of the Best Employers research see Hewitt’s best selling Leadership and Talent in Asia How the Best Employers deliver extraordinary performance
Organizations are beginning to look at their human capital investments with interest HCM helps them understand the return on this investment as well as evaluate its impact on business performance
Today it is rare that an organization should not have employees as one of its top three or four expense categories Salaries benefits training and development recruiting employee communication lost productivity due to turnover … it all adds up to a huge investment While organizations apply rigorous scrutiny to the investments they make in capital equipment acquisitions of business and similar investment decisions few apply equivalent rigour to question the multimillion dollar investment they make each year in their employees Fewer understand their employee investments beyond the cost of salary and benefits and fewer still understand the return on their investment in employees This is the information that Human Capital Measurement (HCM) provides to help you run your business efficiently
Employees are not just a cost Like any other investment they provide a return
Employees are not just a cost Like any other investment they provide a return Increasingly the contribution of employees accounts for more of an organization’s ability to compete grow and produce value We all know that there is a large gap between the market value of most organizations and what appears on their balance sheets
Hopefully for your business that gap is a positive difference — things are serious when it’s negative In today’s economy it’s estimated that on average the market value stands at 450 for every 1 that appears on the balance sheet While this number has dropped from the heady highs of 750 in March 2000 this 451 ratio still accounts for a large portion of your organization’s value Figure 1 shows the results from Baruch Lev’s study of markettobook ratios – it clearly demonstrates the growth in this ratio since the late 70s
So what accounts for the difference Typically these are the organization’s intangible assets Intangibles include a variety of factors such as brand strength and reputation relationships with customers patents and a variety of factors that we call human capital these include quality of leadership employee creativity productivity loyalty passion and knowledge management Scarcity in one or more of these areas or suboptimal productivity in them is often more constraining for businesses than financial capital At times businesses have been taken over merely to acquire their intellectual or human capital
As the correlation between quality of human capital and business performance becomes clearer the notion of human capital being represented on financial statements has surfaced says Mark C Ubelhart ValueBased Management Practice Leader with Hewitt Associates Ubelhart has been working on developing methods that can help measure the contribution of human capital and drive decisions to invest in people He says The new frontiers of measuring human value are being developed in financial metrics similar to those being used in everyday investment processes
HCM describes a variety of people measurement practices that help organizations understand and quantify their people investments As an approach it also helps HR build credibility with the line functions as HR measures now become more performance focused and demonstrate an understanding of value creation
It would be wrong to think of HCM as a unified body of practice There are numerous approaches models offers and conceptual frameworks A simple way to try and get an understanding of HCM no matter how evolved the thinking in your organization is illustrated in Figure 2
As organizations begin to adopt these frameworks HCM is evolving very quickly Until recently there were few robust cases or methods for demonstrating the relationships that exist between investments in people and business outcomes HCM consisted of measuring and benchmarking for which the measures in vogue were focused on either efficiency or accuracy (for example the ratio of HR staff to employees number of payroll errors time to fill vacant posts etc)
For evaluation these productivity metrics were then benchmarked against best practices and were not focused on the results they produce – a 101 or 201 employee to HR staff ratio does not necessarily produce a tangible result The majority of organizations continue to follow this approach that focuses mostly on performance of policies These costfocused approaches often restrict the HR’s role in the organization To become a strategic partner some HR departments are using more sophisticated HCM approaches (see figure 3) A small number are also measuring how human capital impacts strategic outcomes
This change in philosophy to more sophisticated HC measures is precisely where Hewitt has focused We have developed a variety of approaches and measures for organizations at various stages in their development Hewitt’s measurement solutions range from HR benchmarking and metrics to HR scorecards and from there to human capital modelling (see articles on National Australia Group and Cargill) At all times our goal is to match and align the nature and depth of HCM with the organization’s needs and level of sophistication An overview of our general approach is outlined below
Benchmarking and Metrics
Hewitt’s approach to understanding the efficiency and effectiveness of the HR function is detailed in a subsequent article (see HR Analyzer article) Developing better benchmarking and metrics can provide an easy starting point and entry into HCM Appropriate and wellselected benchmarks and metrics can help companies analyze and review HR data to outline improvements and
benchmark opportunities
The scorecard ensures alignment of HR strategy with overall business strategy focuses HR initiatives on meeting strategic goals and evaluates the impact of diverse HR activities on an organization’s longterm business objectives
This allows companies to review their existing HR measures understand benchmarks or innovatively measure a particular aspect of their programs polices etc
This approach will often identify functions processes or systems that are not performing as well as possible (relative to other companies) and identify opportunities for improvement It will not provide a measure of how effective your human capital investments are on your business
Hewitt aims to move organizations away from measurement processes that focus predominantly on costs efficiency and accuracy or solely on benchmarking Such an approach is only valid in a paradigm that views HR and employees as costs to be managed While simple to understand and calculate today these measures provide little linkage to a company＇s business strategy This places many HR functions at risk in a number of ways
² Measures reported are often lagging There are no indicative signs of future performance for management to take action in time
² It can often reinforce a dysfunctional leadership behaviour that sees the HR function as a corporate expense — a prime candidate for downsizing elimination or outsourcing and
² Benchmarking focuses on what others are doing and can inhibit outsidethebox thinking or refocus on new people strategies
Building HR Scorecards
The HR Balanced Scorecard is an effective tool to illustrate the contribution of HR to achieving longterm value generation It is based on the business measurement framework provided by Robert S Kaplan and David P Norton Besides providing a framework for measuring the effectiveness of HR strategy a Hewitt HR scorecard serves as a communication and planning tool
The scorecard ensures alignment of HR strategy with overall business strategy focuses HR initiatives on meeting strategic goals and evaluates the impact of diverse HR activities on an organization’s longterm business objectives A Hewitt HR scorecard uses four components to define and measure the effectiveness of peoplemanagement activities and how they contribute to longterm value creation for an organization
Financial This area of the scorecard focuses on the shorterterm financial impact of people management and HR practices on business results
Customer This area of the scorecard focuses on the perceptions key stakeholders have about HR effectiveness and peoplemanagement programs such as customer satisfaction and retention
Operational This area of the scorecard focuses on the internal efficiencies of critical HR processes — for example productivity quality cost and cycle time
Strategic Capability This area of the scorecard takes a broader view of the development of critical people capabilities that can help the organization achieve and maintain competitive success
Details on this topic can be found in the People Scorecards article
Human Capital Modelling
Human Capital Modelling (HCM) is a more sophisticated approach to determining the impact of your employees on business performance guiding potential investment decisions focusing your strategic planning and measuring the return on your investment
It works by identifying your organization’s strategies and the talent requirements to achieve these strategies It then incorporates the HR strategies and the people leverage points in the business value chain It identifies how HR impacts these leverage points and then builds a fully developed value chain that measures the impact of human capital and HR activities on business outcomes
One such model used by Hewitt with some clients is to look at the relationships between employee engagement capability utilization and business performance (see National Australia Group article)
Engagement is the state of emotional and intellectual involvement that an employee has in the organization Engaged employees are those individuals that want to and do actually take action to improve the business results of their organization
Capability measures the extent of knowledge and skills It is impacted by the organization’s ability to attract talent training learning and development opportunities as well as employee experience levels
Utilization indicates the extent to which employees are able to apply their skills for the organization’s benefit Organizational structure policies and procedures technology and clarity in the organization’s objectives and direction impact the level of utilization
By understanding the relationship between these higherlevel levers and business outcomes such as customer loyalty or revenue generation organizations can direct effort into the areas of greatest impact For example identifying how investments in specific people programs (like leadership and career development) impact business results through improvements in organizational capability and employee engagement is a powerful strategic weapon in the battle for differentiation and competitive advantage It also sends a very clear message to senior leaders in the business about where to focus their attention
Details on this topic can be found in the Predictive Modelling article
As more companies move towards adopting sophisticated peoplemeasurement tools it needs to be made clear that understanding people value is the starting point not the endpoint HCM is not about proving that people add value to the business Good leaders already have this fundamental philosophy It is also about guiding investment decisions and understanding the tradeoffs among HR programs between capital and people investments and in people decisions
With the human resource function being considered a strategic partner sophisticated measures that gauge its effectiveness and impact on business are being thought of formulated and applied
We see an interesting paradox when it comes to the reporting of people measures In many organizations while HR continues to build its strategic capability and leaders look for ways to build value through their people HR measurement activities continue to remain focused on evaluating efficiency or accuracy Calculating the ratio of HR staff to employees absenteeism employee turnover number of payroll errors and the like and benchmarking them against best practice competitors still account for a lot of HR time
These measurements work in a situation where HR and employees are seen as a cost to be managed Today when HR is being viewed as a strategic partner these measures provide little insight into the value HR adds its linkage to a company’s business strategy and the areas it needs to focus on to impact business further
Moreover this places many HR functions at risk in a number of ways These are typically lag measures — providing no indication of future performance for the management to take action They can of course also reinforce a pattern of leadership behaviour which views the HR function as a cost Further benchmarking focuses on what others are doing and can inhibit innovation and creativity
An alternative model of HR measurement is beginning to emerge in which organizations are focusing on the effectiveness of their HR function and not just its efficiency This emerging measurement mindset is illustrated in the table below
The starting place for any modern HR measurement needs to be a strategy that makes explicit the role that the HR function plays in the achievement of business objectives Many businesses are turning to the development of HR Balanced Scorecards to begin their measurement transformation
Some Sample Balanced Scorecard Measures
The Balanced Scorecard is a strategic business measurement methodology developed by Robert S Kaplan and David P Norton It is on their framework that Hewitt Associates has evolved the HR Balanced Scorecard It provides business leaders with a tool and a process to measure the performance of people practices and the HR function from multiple perspectives
Strategic Perspective — the results of strategic initiatives managed by the HR group The strategic perspective focuses on the measurement of the effectiveness of major strategylinked people goals In the example overleaf for instance the business strategy called for major organizational change programs as the business faced major restructuring and multiple mergers and acquisitions In this context the organization’s change management capability will be a key factor in the success or failure of its execution Therefore measuring the ability of the business to manage change effectively is the core measure of the effectiveness of HR and will be a key strategic contribution to the future success of the business
Operational Perspective — the operational tasks at which HR must excel This piece of the Balanced Scorecard provides answers to queries about the effectiveness and efficiency in running HR processes that are vital to the organization Examples include measuring HR processes in terms of cost quality and cycle time such as time to fill vacancies
Financial Perspective — this perspective tries to answer questions relating to the financial measures that demonstrate how people and the HR function add value to the organization This might include arriving at the value of the human assets and total people expenses for the company
Customer Perspective — this focuses on the effectiveness of HR from the internal customer viewpoint Are the customers of HR satisfied with their service are service level agreements met do the customers think they can get better service elsewhere Conducting an HR customer survey might typically arrive at this
All four components of the scorecard are used to define and measure the effectiveness of peoplemanagement activities and how the HR function executes them This provides a strategic measurement and management process to show the connection between a company’s business strategies and goals and its HR strategies activities and results The Balanced Scorecard can provide an ideal approach to measure the contribution that human resource management makes to business success
With the HR Balanced Scorecard in place Hewitt can assist organizations in selecting designing and implementing scorecard and analytic software which allows them to easily monitor the workforce indicators that are key to their business success Such solutions enhance HR’s ability to provide counsel to line management and deliver results that make a difference to the achievement of their goals and strategy and thereby to shareholders
The apparent and inherent values that the HR Balanced Scorecard brings include
² Measurement provides the data and facts to support business decisions giving credibility to HR recommendations and initiatives
² Collecting and using data to make decisions regarding retaining and motivating the workforce giving the organization a competitive advantage in the marketplace
² The right mix of lead and lag measures helps the business assess its strategic alignment and progress towards its objectives
² HR will be proactive in identifying potential improvements and bringing suggestions to the business that improve bottomline results and
² A business and linked measurement framework focuses activity on those tasks that contribute to organizational success This process lifts the role of HR from being viewed purely as a cost centre to that as strategic business partner
Traditional Measurement Focus
Emerging Measurement Focus
Single framework based on accounting rules
Multiple measures and performance categories
Simple linear causal relationship between measures
Multiple complex nonlinear relationships
Shortterm perspective
Longterm perspective
Focus on past performance a snapshot looking backwards at performance indicators
Multiple timeframes including forward looking indicators
View people as costs to the organization
People as assets investments
Financial measures dominate in reports and information systems
Financial and other perspectives measures tracked reported and evaluated regularly
The HR Balanced Scorecard is also consistent with the initiatives many organizations are introducing to their peoplemanagement practices like crossfunctional staffing variable pay team and individual accountability and multiple feedback sources The measure would eventually help the organization understand the effectiveness of HR policies and processes
As Kaplan and Norton note the Balanced Scorecard has enabled companies to track financial results while simultaneously monitoring progress in building the capabilities and acquiring the intangible assets they would need for future growth The scorecard wasn’t a replacement for financial measures it was their complement
It is difficult to overstate the power of measurement as a tool for change and strategic impact As we have all heard before What gets measured gets done Measuring the contribution of HR to business success is the foundation to its becoming a strategic business partner
HCM Trends In Europe
Organizations across Europe are becoming world leaders in their application of people measurement Human Capital Measurement (HCM) is gaining both clarity and popularity within Europe as an approach to monitoring and building value The adoption of more sophisticated HCM techniques is predominantly being driven by their ability to enhance the way organizations manage their HC to grow value for the business
A recent study of Europe’s Fortune 500 found that 86 of organizations that used HCM improved unit or company bottom line performance Other motivations for adopting HCM included
² Direct HC resource allocation
² Win business cases for HC investment
² Track HC activities to develop HC predictions
² Link variable compensation to HC best practice
² Deliver HC information required by law and
² Provide investors with information on HC performance
Increasingly governments academics industry groups and policy advisors are also realising the benefits and are taking steps to ensure the inclusion of HC measures within regulatory reporting frameworks The EU’s Modernisation Directive which comes into effect in 2005 will require organizations to report nonfinancial performance indicators such as employee retention and development Similarly the Kingsmill report published by the UK government in 2001 urges that company reports should make clear links between the company’s business strategy and its HCM policies and practices
Deutsche Bahn’s Human Capital Scorecard
Deutsche Bahn AG the national German railway company has found increasing benefits from human capital measurement In 2003 Deutsche Bahn partnered with Hewitt to implement their human capital model developed in cooperation with The Boston Consulting Group This model provides concrete key performance indicators for managing the organization’s people resources and capabilities In a joint effort three quantitative measures were identified as critical to the Deutsche Bahn success These were employee engagement employee competencies and leadership quality Hewitt and Deutsche Bahn operationalized the qualitative measures and designed the engagement portion of this study for about 250000 Germanybased employees For this Hewitt’s global engagement product was modified to fit the specific needs of Deutsche Bahn Employee and leadership quality measures were developed to link to the existing Deutsche Bahn competencies models
After designing the measurement tools they were tested in one of the Deutsche Bahn’s subsidiaries the Deutsche Bahn Energie The results provided concrete measures for assessing how Deutsche Bahn’s employees and leaders are contributing to the business The data has informed their decisions about specific people investments and using the scorecard leaders will be able to base their people decisions on solid premises
A DIVERSE GLOBAL COMPANY IMPROVES ITS PERFORMANCE THROUGH A COMMITMENT TO AN INVESTMENT IN HUMAN CAPITAL CASE STUDY
FACTS ABOUT CARGILL
No of Employees
101000
Total Revenue (USD)
60 billion
Services
Processor marketer and distributor agricultural food financial and industrial products and services
Others Interesting Facts
Cargill has over 90 business units in 60 countries across a number of food industries Cargill is privately owned
It currently provides solutions for many large and successful companies such as CocaCola General Mills NestlePepsiCo and McDonalds
Human Capital is viewed as a business strategy at Cargill and not an HR program says Ben Redshaw Team Leader of Employee Engagement at Cargill Inc To put human capital in perspective Cargill is an international provider of agricultural food and risk management products and services It has 101000 employees in 60 countries This privately — held company comprises approximately 90 business units with annual sales of 60 billion To complicate the situation Cargill has a diverse population of employees across a wide range of countries The work varies from high intellectual capital positions such as commodity and debt traders to high sweat equity positions such as plantation workers and slaughterhouse employees In this diverse and challenging environment has found a way to invest in its people and produce a tangible and quantifiable outcome in performance
Five years ago Cargill began a corporate transformation centered on changing from a commodityproducts supplier to an integrated food products and food services company — from a supplier of ingredients to a provider of solutions We want to provide expertise that helps our customers succeed says Redshaw While Cargill primarily solves businesstobusiness issues they offer a wide range of products that consumers use every dayoil in foods starch in napkins beef for burgers and many other products such as salt sweeteners and flour The end goal of this transformation is to become the global leader in nourishing people
Convinced of the importance that people have in helping the organization succeed Cargill made human capital measurement one of four corporatewide performance measures along with satisfied customers enriched communities and profitable growth In 2000 Cargill took the first formal step in the journey of measuring and acting on human capital information
Convinced of the importance that people have in helping the organization succeed Cargill made human capital measurement one of four corporatewide performance measures
They partnered with Hewitt Associates to pilot an employee engagement study in four separate business units comprising 7500 employees Following the successful pilot Cargill then worked with Hewitt in 2001 to conduct an engagement study of 25000 salaried and some hourly employees around the world This was a benchmarking year for Cargill — it was the year they obtained their first picture of engagement across all business units and the year they committed to annual global engagement surveys We want all employees to know that their opinion and their engagement matters says Redshaw
The results from these initial studies solidified the position that to achieve its goals Cargill needs to focus on its people Nancy Siska Corporate Vice President of Human Resources at Cargill explained We benchmarked a group of companies and ended up with compelling evidence that to succeed as a customer solutions provider we have to excel at employee engagement Research from Hewitt supports Siska’s assessment Analysis of more than 1500 companies shows that organizations with engagement scores above 60 deliver higher total shareholder return than those with lower scores
Cargill has also used this information to drive the business forward The initial focus was on three areas
1 Strong commitment from leadership to employee engagement — Leadership visibly demonstrated their commitment to engagement by following up with their direct reports on engagement actions and making the engagement measure part of the business performance contract each business unit had with the CEO
2 Development of action plans to improve engagement — This was done at the location department and workgroup level to drive employee engagement and behaviors The data prompted some Cargill business units to redesign their compensation discussions with employees and establish individual recognition systems Others have made changes to daytoday work activities or enhanced their career development programs and several have improved communication between senior management and employees
3 Demonstrating a link between engagement and business results — Established a positive directional relationship between their key financial measures return on gross investment and employee engagement
Throughout this journey Cargill’s view and use of human capital measures continued to evolve and its thinking progressed well beyond measurement to actions and results During this process they have learned some valuable lessons on how to create a competitive advantage through their focus on people As Redshaw says Cargill believed in the concept of engagement but was lacking a framework Hewitt was able to help in three areas First they provided a model of employee engagement that was both applicable and understandable Second they provided administrative support to a large complex and diverse population Third they helped Cargill understand engagement results and how this could help improve business results
There were certainly surprises during the process Employees were skeptical at first As Redshaw points out They did not believe that their feedback carried any weight or that the organization would act on the information With concrete action planning and communication of results Cargill was able to build employee trust This was helped by the actions of managers and leadership Managers embraced the notion strongly and there was support from senior leadership
One key to success was the deemphasizing of a single score such as engagement and focusing more on action planning and intended results As Redshaw summarizes We focused on measuring behaviors not attitudes Action planning is tangible and the right actions will motivate our people People who are properly motivated will correctly mix feed and minimize the amount of red meat that hits the floor reducing shrink To succeed action planning was carried out at a granular level thus addressing the fairly specific needs of employees Based on this success Cargill is building a pool of committed engaged employees that will help grow the business
Cargill was not satisfied to stop here It moved to the next level of human capital measurement — quantifying the return on investment Working in Cargill’s favor was a strong and inherent belief in people measures and their importance to the business In 2004 with Hewitt’s assistance they undertook an analysis of how employees impact key performance indicators
To succeed it was necessary to develop an approach that was both practical and rigorous The approach that Cargill and Hewitt used included the following
² Focusing on a single business unit in North America to control and minimize variables (like geography and industry) that would impact both their people and business performance
² Focusing on a unit with a relatively large number of locations to provide a sufficient data set
² Utilizing a set of consistent financial and nonfinancial business performance metrics across locations
² Selecting a unit where employees have a good understanding of how they fit and why they matter and
² Utilizing three years of employee engagement data at the location level
The results of this analysis were quite compelling As Redshaw says We were able to demonstrate that engaged employees can make a big difference They impact the company operations in many areas These focus on efficiency turnover and reducing shrink and on satisfying Cargill’s customers Retention in this group of employees is higher resulting in an experienced and highperforming workforce The net result goes to the bottom line with a higher Return on Gross Investment (ROGI)
So how did Cargill get here so quickly Siska explains We believed from the start that human capital was critical and that engaging our workforce would help us achieve sustained business results lower turnover and increase retention of the right people Now we are able to maintain a ready pool of qualified people to promote as the company grows We also know that it improves employee’s alignment and understanding of how their work impacts the company’s business results
The employee engagement concept enjoys tremendous support from Cargill senior management starting with Chairman and CEO Warren Staley Engagement is synonymous with high performance at Cargill Redshaw says Our CEO talks about it in virtually every speech he gives This support encourages cooperation from HR managers around the world Clearly employee engagement at Cargill is not only viewed but also practiced as a business strategy and not an HR program
The impact of employee behavior on organizational performance has been a subject of study for quite some time Human capital measurements and the models developed unravel this relationship and help guide people investment
OUR CLIENTS ARE INCREASINGLY ASKING TWO QUESTIONS ONE CAN THEY QUANTIFY THE IMPACT THAT PEOPLE HAVE ON THEIR ORGANIZATION’S PERFORMANCE TWO WHICH COMES FIRST CHANGES IN EMPLOYEE BEHAVIOR THAT LEADS TO FINANCIAL AND MARKET PERFORMANCE OR PERFORMANCE THAT IMPACTS EMPLOYEE ATTITUDE
IT IS THE OLD CHICKEN AND EGG PROBLEM IN THIS CASE HOWEVER THE ANSWER IS MORE THAN A PHILOSOPHICAL EXERCISE NO DOUBT THE QUESTIONS ARE INTERRELATED STUDIES ON THE PREDICTABILITY OF EMPLOYEE ATTITUDES ON PERFORMANCE HAVE A LONG HISTORY IN ORGANIZATIONAL RESEARCH THE RESEARCH SUGGESTS THAT WHILE THE RELATIONSHIP BETWEEN HUMAN CAPITAL AND ORGANIZATIONAL PERFORMANCE IS COMPLEX IT CAN BE QUANTIFIED AND THERE ARE METHODS TO ESTABLISH THE DIRECTION OF THE RELATIONSHIP
HEWITT ASSOCIATES HAS DONE A NUMBER OF STUDIES ON THIS TOPIC AND THERE IS SUPPORT FROM ACADEMIC RESEARCH THAT INDICATES CHANGES IN EMPLOYEE ATTITUDES AND BEHAVIOUR PRECEDE CHANGES IN PERFORMANCE THE ANSWER HOWEVER IS NOT 100 CLEAR OUR VIEW WHICH IS SUPPORTED BY A RECENT ACADEMIC STUDY CONDUCTED OVER AN EIGHTYEAR PERIOD SUGGESTS A MORE RECIPROCAL RELATIONSHIP — A VIRTUOUS CYCLE SO WHILE THERE IS SOME INCONSISTENCY EXAMINING THE RESEARCH IN MORE DETAIL PROVIDES A MORE COHERENT PICTURE
BUILDING HUMAN CAPITAL MODELS
Understanding the links between people and business performance is just the beginning It is not the endpoint for organizations interested in improving their performance Human Capital (HC) Modelling is not only about proving the value people add to the business Good leaders already have this fundamental philosophy It goes further to allow organizations to
² Quantify the relationship between people attitudes behaviours and performance
² Identify areas of focus to improve employee performance
² Quantify the benefits and tradeoffs in people decisions to guide investment decisions and
² Increase understanding of inter relationships which allows for better performance management of particular areas
Just as marketing departments collect and use data on consumer behaviour and resulting sales or customer satisfaction to guide decision making Human Resources can develop similar predictive models of employee behaviour and resulting performance This supports decisions regarding people investments such as pay communications training and development and even merger and acquisition activity Such models offer organizations more insight and allow them to allocate funds efficiently for the greatest financial benefit
Just as there are unique models for customer segments in marketing organizations will have HC Models unique to their employee environment Our research and experience already shows that HC Models will vary depending on an organization’s value proposition business strategy and employee demographics (See the National Australia Group Experience in this issue of HQ)
How do we Build HC Models
Having collected a significant amount of data on employee behaviour and performance there are a number of approaches for using data to build HC Models This article outlines four of the methods we have used and what we can learn from each approach Our philosophy is not to rely on a single method but to link the analysis to the type of issues faced by an organization and the type of information available Our basic approach is to focus on both key people measures along with key performance indicators (KPIs) These measures often vary across organizations but we have identified a set of KPIs that are measured by most companies
² Employee engagement — emotional and intellectual commitment to the organization
² Employee opinions — employee perceptions of opportunities communication worklife balance management how HR programs affect productivity
² Employee skills utilization & alignment — do employees have the skills needed to complete their work Are all of their skills being utilized and are they aligned to support company goals and strategy
² Employee behaviors (eg innovation customer service absenteeism) — are employees engaging in the behaviors you need to be successful
² Nonfinancial measures (eg retention productivity work processes) — do employees remain with the organization and are they productive Do the work processes support company products and services
² Customer measures (eg satisfaction quality churn) — are customers satisfied and loyal
² Financial measures (eg revenue profitability return on investment) — are you realizing appropriate increases in revenues and profitability
Depending on the amount and level of detail of data structure of the organization and number of time periods among other things there are a number of analytic approaches we use to study the relationship between attitudes and performance They can be classified into four major categories
² Relationship assessments (correlation or regression approaches)
² Experiments (test & control group)
² Time series and
² Value mapping
Relationship assessment
This is perhaps the most popular and easiest to execute approach It involves collecting attitude and performance data from a number of independent groups These groups can consist of individuals locationsstores or business units Once we have these two pieces of information (people measures and business performance) we can do a number of analyses (eg correlations regressions structural equations) to demonstrate the relationship between employee attitudes and performance An example of this type of analysis is shown in Figure 1
Experiments
In the strictest sense an experiment would consist of two units (stores locations business units plants) that are identical on all or more realistically the most important variables We would then manipulate employee attitudes in one or a subset of the locations (test) but not in other locations (control) The next step is to measure the difference between test and control and attribute the change to engagement (the manipulated variable)
This is an ideal but often not a realistic or practical approach to demonstrate how changes in employee attitudes impact performance Companies that believe in the relationship between human capital and performance would not want to implement programs to improve performance in only a few of their locations In addition it would have the potential to impact some employees negatively (why is the company experimenting with my unit or conversely why is my unit being ignored)
Another way to approach this is to examine historical data In the example in Figure 2 we have identified two locations that are identical or similar on number of employees region age etc They do however differ in engagement This allows us to attribute the difference in revenue to the different engagement levels
Time Series
This is a more time intensive approach but also an approach that provides a clearer answer For this approach to be successful we need to collect multiple measures of both variables — people and business performance over a period of time This allows us to determine the lead and lag time for changes in both employee attitudes and performance In other words do changes in engagement precede or lag changes in performance and by how much An example of this approach is shown in Figure 3
ValueDriver Mapping
This approach requires the highest level of involvement from our clients and a deeper understanding of the organization Much of the information for this approach would be based on indepth interviews with key individuals in the organization such as their finance operations and business unit leaders Due to the involvement of these key individuals it requires a high level of commitment from both Hewitt and the client to be successful
Basically in this approach we work with the client to identify their key outcome variables Depending on the company objectives these could be growth measures such as revenue sales job creation or earning or they could be return measures such as return on investment (ROI) or total shareholder return (TSR)
Once this step is accomplished we then identify the business strategy objectives actions and employee behaviour that influence these measures This would include an exhaustive set of variables (like competitors marketing) We continue to work backwards in this manner until we can isolate the specific employee behaviours that influence the client’s key measures This allows us to identify key employee attitudes and behaviours that drive performance
You have the Relationship Now what
Having defined the relationship and identified the strength of the relationship you are able to better plan HR resources and spending First you can determine where to focus your efforts – recruiting training on knowledge training on behaviors retention and so on Second you can identify the type and amount of return you should anticipate for your investment This allows HR to be a part of the financial planning process and the company’s success measurement
The predictive nature of models is managed like any other modelling process A number of assumptions should be created based on the data and a level of tolerance around the predicted value helps to build the model’s creditability Continuing to collect the same data over time allows these models to be tested and updated as the business grows and changes
Conclusion
Our experience with organizations such as National Australia Group (National) and Cargill demonstrate the power of understanding these relationships At the National this process identified areas where employees were not adding value in the way expected It also identified what the key people drivers were for longerserving sales employees The National will continue to refine the predictive models to narrow tolerance levels and increase their decision support capability Cargill was able to demonstrate how developing and implementing action plans from their employee engagement survey led to improvement in safety less waste and an increase in ROGI We also have many examples of how organizations decreased turnover resulting in a large reduction in recruiting and training costs and no loss of productivity which goes right to the bottom line
Developing Predictive Models with Singapore Economic Development Board
Late in 2003 the Singapore Economic Development Board (EBD) engaged Hewitt Associates and AC Nielsen to undertake a study to investigate the relationship between their employee engagement and customer satisfaction levels The hypothesis being that employees who are more engaged will have higher customer satisfaction scores The first round of data gathering took place in November 2003 and pulse surveys are scheduled for Q3 of 2004 and Q2 of 2005 By adopting such a longitudinal approach and partnering with a reputable research house such as AC Nielsen the intent is to create a causal pathway model to identify what are the right areas to focus on in the employee engagement model to drive up customer satisfaction
Work on this project is still in progress
HC Foresight
Employee valuation continues to challenge organizations Hiring and retaining talent is time consuming and expensive Aligning your talent to business goals engaging your workforces to optimize results and providing training in the latest skills and knowledge takes resources and funding How can you justify this spending and how do you know its impact
To address this question Hewitt has developed Human Capital Foresight (HCF) a service that will turn a company’s HR data into actionable insights HCF was developed based on data from over 900 clients and 17 million employees and allows organizations to analyze people investments and their impact on business
HCF is an array of sophisticated predictive measurement techniques that evaluate the present and future impact of their human capital on business results Organizations are working with Hewitt to pilot and refine HCF Says Mark Ubelhart Hewitt’s ValueBased Management Practice Leader These new metrics will lead to insights on how key
characteristics of human capital such as talent attraction motivation and retention impact shareholder value and what can be changed to enhance the ROI
How does it work Let’s take differential pay packages as an example Companies are using differential pay packages to retain their best talent To assess the impact of pay differential HCF uses a variety of measures and techniques For example we calculate a Gini Coefficient to assess pay uniformity across the organization and compare it to other companies We then determine its impact on attracting and retaining top talent by calculating a Transition Quality Measure which refers to the flow of employees into and out of the company and is used to determine if the inflow of high performers exceeds their outflow Using these and other tools we can determine what factors drive these flows
While circumstances vary by function and business units within an organization the analysis of pay differential packages indicates that application is critical While attractive in theory organizations can apply them inappropriately which results in a loss of good employees The predictive analytics of HCF will identify the actual gain and loss of employees from various HR applications and investments In the variable pay example poor transition quality can be improved by actualtarget bonus distributions that are more uniform or team based as opposed to individually determined
Findings from transition quality in combination with other metrics and employee data will create linkages to economic value drivers of the business These include cash flow return on investment (CFROI®1) as well as customary financial metrics The predictive analytics employed focus on the human capital characteristics that enable a company to beat the fade – that is sustain performance in spite of competitive pressure
Ubelhart predicts this is just the beginning of decisive measurement tools for human capital This is just the tip of the iceberg as we evolve strategyshaping benchmarking of labor costs the related implications for business performance and shareholder value and the ROI on HR programs he says
The immeasurable will soon become measurable
Following a pilot of the Human Capital Foresight the service will be added to Hewitt HR outsourcing (Workforce Management Benefits and Payroll) engagements at no charge by early 2005 at which time we expect to provide clients with an initial customized Human Capital Foresight report
Registered trademark of CSFB HOLT
The National always knew that people were its key assets In its HCM pilot with Hewitt the National sought to further understand the nature of relationships between people value drivers and business results to take decisions that would mean substantially better outcomes for all stakeholders
When the National Australia Group (the National) a listed bank with over 42000 employees partnered with Hewitt Associates to pilot a Human Capital Measurement (HCM) Model it never doubted that people were one of the key drivers of its competitive advantage The bank however was seeking to go deeper to quantify and finetune its people investment decisions An interview with three of the National’s line finance and people & culture executives highlights many of the benefits and learnings from their twoyear quest
The National focused on developing an HCM approach with Hewitt to be piloted in two business areas – a business banking area (a revenue centre) and a shared service provider (a cost centre) The goal was to understand Human Capital Measurement’s applicability and implications in different operating environments Specifically how it could enhance decision making about investments in people Jennifer Jones the National’s Strategy Principal for People & Culture says Our motivation was to be able to drill down so that we could understand the nature of the relationships between the people value drivers and business outcomes This would help us make more informed decisions and better aligned effort for greater return on our people investments
The HCM pilot identified relationships between specific people measures and the bank’s performance It confirmed the academic research in the employeecustomer profit chain research (Rucci Kirn and Quinn 1988 Guest et al 2000) The results were specific recommendations for future people measures and predictive tools to assess the business impact While these were very positive outcomes the most notable learnings for the National came from the many surprises along the way These had a dramatic impact on the dialogue among senior leaders as they explored how their people create value for the business As David Thompson Head of Finance for Business Financial Services reflected The HCM Pilot has been an interesting journey to say the least It has changed my perspective as I understand that building Human Capital Models is a complex art form that requires a very flexible approach to understand surmounting data issues The quality of the conversation has been very rich
The Journey
In both the profit and cost centres key people measures were tested to explore the impact they had on financial and customer measures Determining which people measures to use was the first source of discussion among the project team
As most readers of Human Capital research are aware the construct of Human Capital Measures can be defined in many ways
Our motivation was to be able to drill down so that we could understand the nature of the relationships between the people value drivers and business outcomes This would help us make more informed decisions and better aligned effort for greater return on our people investments
These definitions vary from an output orientation using measures like turnover performance ratings and tenure (Brown 1999) to value addition using productivity measures (Monti Belkaoui 1995) or even emotional intellectual and structural equity dimensions (Kaplan 1992 Gratton & Ghoshal 2002) With this in mind the model chosen focussed on measures of engagement capability and utilization
Engagement is the state of emotional and intellectual involvement that an employee has in the organization Engaged employees are those individuals that want to and do actually take action to improve the business results of their organisation Engagement was measured through an employee survey
Capability measures extent of knowledge and skill It is impacted by the organization’s ability to attract talent learning and development opportunity and employee skill (competence) and experience levels Technical and behavioural capabilities were measured through a manager assessment and selfassessment questionnaires for each individual
Utilization indicates the extent to which employees are able to apply their skills for the organization’s benefit Organizational structure policies and procedures technology and the clarity in the organization’s objectives and direction impact the level of utilisation Utilization was measured through timesheet data and through an employee opinion survey where timesheet data was not available
These people measures were then correlated to business measures In the Shared Services (cost) centre people measures were linked to internal customer measures of value In the profit centre people measures were linked to financial outcomes such as income and customer outcomes such as satisfaction intention to stay and intention to recommend to others (see diagram above)
Unlike many previous studies linking people and performance the National took a unique approach that focused on understanding these relationships for each individual employee Employees who scored highly in terms of engagement capability or utilization were expected to perform more strongly in terms of their customer and financial outcomes Having the analysis at an individual level raised some challenges but had the advantage of creating a significant number of data points with which to conduct regression and multivariate regression analysis In many cases expected relationships were identified
In both pilot areas a neutral to strong relationship was identified between engagement and business outcomes This suggests that the strength of relationships between engagement and business outcomes will vary across business units depending on their specific circumstances For example employee demographics the nature of the work the business model and the amount of change all impacted the strength of these relationships in different areas of the business
It was found that capability had a strong relationship with business outcomes It was found that capability improvements must be directed at the customer for a positive effect to occur in the short term Using multivariant analysis it was shown that specific capabilities drove revenue growth through increased customer satisfaction
There was also a relationship between utilization and business outcomes in the shared service area It was also identified that employees with high utilisation also have high engagement And employees with high engagement have little variation in their utilization While not a proxy engagement could be used as an indicator of utilization
The Learnings
The pilot has provided a rich source of learnings for all involved On reflection some of these learning for the National have included
1 Know the reasons for adopting an approach to HCM
HCM is not about proving to the business that people matter This was considered a fundamental philosophy and one critical to effective leadership Greg HydeHead of Finance Shared Service Centre AsiaPacific said Intrinsically I have always had a sense that there are linkages between people behaviours and business outcomes I’ve therefore operated on the assumption that if you understand the people drivers and then manage them well you’ll get the outcome you’re looking for The National were focused on adopting a HCM toSupport people investment decisions with more qualitative data andFocus measures on those that are the most critical to business success
2 HCM is a great tool for crossfunctional discussions about people and value generation
The HCM process built a platform to facilitate people discussions across various functions in the business about what the key people drivers of success are Jennifer describes the values of these exchanges Finance Line managers and P&C came together on this project to enable us to look more specifically at the business and to explore the key drivers in a people sense The project process the dialogue between project members during the life of the project and ultimately the outcomes have enabled us to hold more specific conversations around how to align people investments with outcomes
3 Multiple HC Models are needed
We realised that building one HC model would not suffice for the whole organization Whilst in both business units relationships between people measures and business outcomes were identified the relative strength of these relationships were different in each part of businessdepending on such dimensions as type of work business model and strategy and employee demographics This reinforces the importance of building human capital frameworks that are business unit specific and aligned to their particular strategy
4 Garbage ingarbage out
Having good data to start with is a critical success factor Whilst the team knew going into the pilot that the data points would not be as clean as we would like we underestimated the work that would be required to have meaningful data to use This included things as simple as access to historical data isolating individual data sets definition of constructs etc Given the importance of trend analysis and multiple data points for bivariant analysis this required considerable effort to ensure data integrity This was also exacerbated by the amount of change going on within the organisation David describes this In hindsight the task was a tough one given the amount of change that a large organization typically experiences I absolutely think it’s worthwhile but I do think that securing a relatively stable base of data is a challenge
5 HC Measurement tests the quality of measures
Having good measures to start with was a critical success factor In some areas the team overestimated the robustness of existing measurement constructs such as customer service and revenue growth at an individual level While these measures did exist there were significant differences in aspects such as interpretation of the constructs and how the data was collected which resulted in reworking data analysis in line with agreed interpretations It also resulted in redefining and tightening some of the existing constructs For example Greg describes how the process helped them develop a stronger measure of customer value We saw some good correlations which made sense In other areas where there weren’t correlations we didn’t think it was proving our philosophy wrong Often there was a reason which helped us learn how we could or should measure the feedback from customers in the future which I think will provide stronger correlations next time around
6 The value of surprises
The journey had its own fair share of surprises As Jennifer summed it up the greatest benefit came in unexpected ways In trying to wrestle with data sets that didn’t fall the way we expected we gained an enormous amount of value For example the process helped to deepen our understanding of the human capitalrevenue growth relationship in particular business segments We had made a couple of assumptions within this project that subsequently proved to be incorrect The result of this is that we have needed to take a deeper look at how we construct our measures of success so we focus on the right issues This reinforces the view of many in this field that just focusing on quantitative relationships only provides partial evaluation of the value of this field of study Adding qualitative understanding to the data was critical
7 Get started and keep it going
Like any new field of study it takes time to build the frameworks and data sets that eventually provide the most beneficial outcomes Time will also build stronger predictive modelling capability as well as differentiate lead and lag indicators David concluded Human Capital Measurement offers the potential to build leading indicators rather than lagging outcomes as ways of driving the business and is a process worth pursuing Many of the measures we have previously focused on are outcome driven and therefore lag indicators External reporting requirements and current data systems reinforce the way we currently use measures and it may take many years of refinement to completely integrate leading human capital models into the way we do things
Wrapping Up
The pilot has provided a great opportunity for the National Group to keep building its Human Capital Framework The value of the work is best summarized by each of the steering committee members
Greg Knowing there’s a relationship between business performance and leading your people well has always been about confidence and faith that the concept works What the pilot has brought to the table is some empirical way of trying to test that out through the identification of some strong correlations
David Human Capital models will bring greater clarity and precision to the soft metrics we use around people This will allow us to better allocate scarce resources My experience in this pilot has increased my desire to get there
Jennifer It’s about enabling meaningful dialogue to understand the nature of relationships between people value drivers and business outcomes Ultimately then it’s about how this enables more effective decision making and enhanced outcomes for our customers shareholders employees and other stakeholders
The National is continuing to explore ways in which it can enhance it HCM to develop more sophisticated people measurement It is also developing a process to roll out the learnings of the pilot across its subsidiary groups
Most organizations use some measures of human capital – headcount turnover productivity – or make some assessment of the value produced These measures vary in their complexity in the amount of information they provide and the value they contribute to the company’s decisionmaking process Clearly there is no single measurement formula that works for all organizations that have different goals strategies and people practices Our work in HCM however has shown that there are certain principles you need to consider to maximize the benefit you receive from using HCM
1 Measurement is a starting point
The power of measurement is not the metrics or data you collect Rather the benefit comes from your ability to use the information to diagnose your organizational situation and make better decisions to move the business towards its strategic goals Organizations should review current measures in the light of their use for decisionmaking
2 HCM supports but does not replace good people management
HCM helps you identify where to focus your efforts People managers still need to develop HR programs and implement them effectively
3 Understanding the value of people is a starting point
HCM is not about proving the value people add to the business good leaders already have this fundamental philosophy It is about guiding investment decisions and understanding the benet and tradeoffs in people decisions
4 HCM includes a wide range of approaches
HCM ranges from basic metrics to comparative information from scorecards to predictive models To succeed with HCM organizations need to select the HCM approach that aligns with their context and needs This need could be developing or identifying key metrics setting performance levels or measuring the ROI of HR practices
5 Think about people value and not only about people costs
Many organizations understand their people costs quite well However not all of them consider how people help the organization achieve its goals Consider the person who works late to check the accuracy of a customer order or the person that comes up with efficiency improvement ideas Both of them add value well beyond their costs
6 HCM brings HR closer to the line
HR is often viewed as the softer side of the business It often struggles to demonstrate its value As HCM takes root in an organization soft measures become performance focused and demonstrate value creation this buys HR credibility with the line and a place at the decisionmakers table
7 Use measurement to identify where you will get the biggest return
A variety of tools are available to help your organization focus on growing and maintaining performance through your employees It is well established that motivated or engaged employees contribute more to a company＇s bottom line Hewitt＇s approach is unique in that our engagement approach not only helps you motivate employees but also helps you maintain and grow the performance of high performing employees
8 Understand the ROI of your investment in people
By using predictive models to help you understand how much and where to invest your people dollars you can understand the return on each investment whether it is recruiting or training new employees motivating or increasing skills among existing employees or implementing new procedures and processes
9 Adapt your approach and innovate to meet your evolving needs
Your organization will have different HCM needs as you modify you goals and strategies to compete in the marketplace This will include modifying your strategies to attract set expectations retain motivate and maximize performance of your employees It will also include optimizing utilisation of limited HR resources Some of the approaches we use in this area are described in subsequent sections (see HC Foresight and HR Analyzer)
10 If you ignore HCM you will be at a competitive disadvantage
Organizations are expanding their use of HCM Some are using sophisticated tools to identify and implement people programs that impact business results directly and dramatically These organizations produce significant return on investment and revenue growth The longer you wait to implement HCM the more ground you need to make up Can you afford that expense
With Malaysia entering the Asian Free Trade Agreement in 2005 market realities for most organizations in the country are all set to change The same is true for Perodua Sales Sdn Berhad Malaysia＇s second largest car company With almost its entire focus on pushing sales volume thus far the company had been growing rapidly in size However Perodua recognised that in the new increasingly competitive scenario a sales focus alone may not work The company needed to have worldclass practices in many areas It needed to be closer to the customer focus on product improvements have a creative market positioning increase employee engagement enhance leadership strength and bring about a culture of accountability and excellence
To consolidate and grow its position in the Malaysian car market Perodua decided to undergo a business transformation through a leadership development program and assessment of human capital throughout the organization
Perodua began working on the transformation with Hewitt Associates in October 2002 and has since developed performance metrics cascaded new measures through the performance management system connected leaders to its new business model and focused its employees through more effective measures With the transformation of its sales model Perodua continues to be the leader in the small car market in Malaysia maintaining a third of the local market share
In August 2003 Hewitt conducted a detailed review of their measurement system A key recommendation was to adopt a more comprehensive and balanced framework for setting key performance indicators in the form of a balanced scorecard
Starting at the top
The transformation needed to start at the top Hewitt Associates initiated work with Perodua with a Leadership Development Program for the top management group and a review of the Perodua Sales Performance Management System While the leadership team at Perodua Sales had successfully led the business through rapid growth they recognised the need to strengthen competencies to meet the challenges of the manifold rise in competition For this 360degree assessments were done to reveal the strengths and development needs of senior leaders and individual and team development activities were conducted to address the gaps A leadership competency model was developed to preface these activities
Individual coaching sessions and a series of leadership workshops to address business and people management issues and facilitate individual and team development followed The process is now in place and the final outcome will be a reassessment of the leadership team＇s competencies in October 2004 to measure specific improvements and changes in individuals and the team
As part of the leadership assessment exercise Hewitt and Perodua identified several organizational performance opportunities
² Expand focus to sales and service as opposed to sales alone
² Focus on service and spare parts to increase share in a more competitive environment
² Drive product improvements evolve a creative market position and understand customer needs by enhancing synergies between the sales marketing and manufacturing arms and
² Create a culture of accountability for performance and excellence
Using measurement to drive performance
The leadership team agreed on the need to review and revamp their performance management system and introduce more tangible measures that were aligned to the new business model and strategies
In August 2003 Hewitt conducted a detailed review of their measurement system A key recommendation was to adopt a more comprehensive and balanced framework for setting key performance indicators in the form of a balanced scorecard Hewitt led the team through a series of discussions on their business model and plans for 2004 and facilitated the process of designing a corporate balanced scorecard for Perodua Sales This was subsequently cascaded down to all the leadersmembers of the management team in the form of individual scorecards
Hewitt also conducted training workshops for all its managers Simultaneously Perodua＇s HR team also conducted training workshops for the rest of the executives By March 2004 all Perodua executives had aligned performance scorecardsKPIs
The key process steps included
1 Aligning the organization＇s vision with a business model for the shortmedium term
Hewitt worked with Perodua＇s management team to articulate the vision mission and key strategic imperatives This was followed by a gap analysis between the current and desired state Finally the corporate balanced scorecard was established The key metrics included financial measures customer perceptions work processes and organisational capability along with highlevel action plans to achieve the same
2 Cascading the performance metrics to the divisional & departmental levels
Hewitt worked with each of the management team members to develop their divisional scorecards These metrics were subsequently cascaded to the next level
3 Review and redesigning of the new Performance Management System
Hewitt made the performance management system more objective and development focused by incorporating new features like a revised rating scale weights and leadership competencies In addition Hewitt recommended the introduction of formal and informal review sessions during the course of the performance cycle to encourage managers to have regular conversations with their subordinates and avoid endoftheyear surprises Hewitt also shared best practices from other leading organizations
4 Launch of the new Performance Management System and Key Performance Indicators
The revised system along with the corporate and divisional performance metrics was launched through a series of road shows covering the regional and branch of ces Hewitt worked with Perodua＇s HR team to educate managers and executives on the usage of the new system and to develop the skills in setting aligned and SMART Key Performance Indicators
The Results
While the leadership development program is ongoing Perodua is looking forward to tangible results from the exercises conducted so far At a leadership team actionplanning workshop in June 2003 an expectation of seeing a 1520 improvement in the assessment scores owing to leadership development interventions has been articulated This is bound to translate into a positive feedback on the leadership team＇s visionstrategic thinking among other things
There has also been a significant increase in crossteam sharing or learning via crossdivisional action learning projects At a business strategy assessment discussion facilitated by Hewitt for example two core issues were identified for immediate attention — customer segmentation and product reclassification Two actionlearning programs were subsequently initiated that had members of sales service and support functions This provided an opportunity for people from different functions to come together and exchange ideas and information and eventually contribute to improving business performance
In fact communication has become open and interactive on a routine basis The leadership now conducts regular meetings to discuss ongoing business performance involving managers from different function areas Such openhouse discussions have also been cascaded An employee suggestion scheme is now in place at the shop floor level too
Hewitt has also impacted the organization by creating awareness for urgency in action to take on the increasing competition through measurement of progress ongoing monitoring and dialogue As one leader commented No one at Perodua can talk about being taken by surprise any more
Perodua in turn has already cut out Hewitt＇s work for the future making a development program for their younger high potential employees known as the ＇highiers＇ and institutionalizing a succession planning process
When Ispat Industries the third largest steel company in India decided to aim for the top position in the industry about two years back it started a change process that touched almost all aspects of its business Led by the vision of its promoters Chairman & Managing Director Pramod Mittal and Managing Director Vinod Mittal the nearly 20yearold company aimed to become a worldclass organization
To realize its vision to double capacity and almost double turnover to Rs 10000 crore in two years and expand presence both in India and abroad the promoters decided the organization needed a complete restructuring Apart from reengineering enhancing presence reworking growth strategy tightening supply chain management and cutting response time to consumers the top leadership realized that mindset was where the change had to begin For that human resource processes culture and competency had to be aligned with the business plan
Says Satyabir Bhattacharyya Director (Strategy & Business Excellence) Transformation of the scale we envisioned could not happen without HR There had to be a strategy for human resources and it had to be implemented We realized it was important to have the right structure empower people put performance measurement systems in place and see that the key performance indicators were in alignment with the company strategy In fact Bhattacharyya says Ispat wants to be in the best employer category in India by bringing in best HR practices and setting up global benchmarks
For a core sector company in India to focus on its people assets itself is quite unusual Quality of manpower here is rarely in focus unlike in the service industries At Ispat this was clearly not the case
The transformation exercise started by putting an organization structure in place This had a twofold impact On the one hand the structure itself was reworked to bring efficiencies and on the other new roles were created to aid in change and growth For example an integrated supply chain management function was put in place instead of purchase and sales functions that worked independent of each other
For change management portfolios that would assist in the process were created While President HR itself was a new portfolio created to signal the change from its limitation to personnel separate cells were created specifically for roles like recruitment performance measurement rollout and competency management Bhattacharyya himself was brought in as director in charge of strategy and business excellence to implement the transformation exercise
Bhattacharyya says when the transformation started organization readiness was a question mark After attempts to bring about changes through primarily new systems and processes the organization realized that the change could only be felt by ensuring that people saw the impact in a tangible form To do this Ispat has embarked on an integrated implementation focused exercise Aspects like training compensation and performance management now have only one barometer — has the change been felt
Bhattacharyya says We have ventured through uncharted territory We have worked on details for example in our efforts to train and develop the entire company We have now tied up with Indian School of Business (India＇s premier business school) for developing a leadership program for us We constantly seek inputs from our consulting partner Hewitt Associates They have been working with us as a part of the organization team in ensuring that the details and implementation have a grounding in robust principles In fact the revamped HR committee at Ispat that takes all key decisions and comprises its line function directors also has Hewitt consultants on board
Once the organization structure was in place next on the agenda was performance measurement system For this balanced scorecards were made for each division from which the individual scorecards flowed The business scorecards are currently being aligned to individual scorecards and then on to the key result areas The exercise which helps measure individual performance against the target specied on the scorecards and eventually aims to raise capability has meant a satisfactory alignment of HR to business targets says Dr Rakesh Mehta President HR
Going forward Hewitt is also working on competency models assessment centres (complete with role play and group activities) and role definition exercises for Ispat managers and deciding on training programs thereof Mehta says the company finally aims to define roles in line with the vision for the function empower people and bring in greater accountability
Ispat is also adopting benchmarking as a practice For example the salary restructuring this year was done with Hewitt based on these benchmarks says Mehta In their bid to value human capital Mehta says the compensation was introduced with market correction this time Not only that the HR head went out to the employees before increments were declared and gave them an explanation as to how the figures were arrived at addressing over 500 people The idea was to bring transparency in the system says Mehta
Ispat is also focusing on driving the transformation through leadership interventions It is undertaking a leadership study to enhance the leadership capability and bring about a cultural change within the organization It is currently studying the leadership style and subsequently there will be coaching and grooming of the top team helping it interact with other leaders in the corporate sector and developing a succession plan
At the factory level satisfaction surveys are being undertaken with the bluecollar workers too Their areas of concern are being identified a skill inventory being undertaken people practices being noted and a formal role document being prepared A simpler performance measurement system is also being evolved for them Mehta says work is already being done on the issues voiced by the workers Developmental work is also on to improve the skill and knowledge levels of workers that is directly relevant to business and would increase productivity
How are people at Ispat responding to these host of changes The response has been more than enthusiastic says Mehta People are very happy as it has made their processes simpler and added value in the way they work he says The crossfunctional initiatives have also helped build bonds among employees This was particularly important as nearly 20 of the Ispat employees have come aboard in the last year as part of the restructuring exercise
Says Mehta When people get impacted by positive changes they put their weight behind the effort to make it successful This is precisely what is happening at Ispat
Theirs was a brand name an entire generation of postindependence Indians grew up with Part of a wellknown familyowned group in India the product portfolio of this consumer durables company included fans sewing machines and domestic appliances making it literally a household name
Market realities changed rapidly about a decade back The homegrown contender for the top slot in almost all appliances and durables across the 16 states it was present in found itself facing stiff competition from either cheaper Chinese imports or from multinational brand names
Employee morale crumbled as the sales graph held flat Most of the sales force failed to meet targets attrition rates of the front line sales people were high and incentive plans failed to motivate The company was also emerging as a happy hunting ground of front line sales people for competition The result corporate performance suffered
The company decided to bring in Hewitt Associates to deal with its human capital management and align it with the business goals The key issues were sales force performance and motivation Top management admitted target setting was unscientific and most divisions were left grappling with unrealistic targets that had historically been forced down Needless to say at the end of the year incentives were distributed among a small fraction of employees who had been able to meet the targets The result low motivation levels To make matters worse the company’s pay structure was not competitive either
The key focus of the exercise was therefore tailormaking an effective targetsetting process It was also to be aligned with the performance measurement system (PMS) and the incentive pay plan Hewitt was to eventually design implement and train the company’s HR function on target setting toolsprocess It also aimed to measure the impact PMS and target setting had on the top line of the firm as well as employee costs in terms of incentive payout
Various options were studied instead of the existing topdown approach for arriving at an effective targetsetting formula Balance stretch vertical alignment accountability and shared responsibility flexibility and SMART goals were all looked at And instead of targets being forced from above a bottom up as well as a combination of the topdown and bottomup approach was contemplated
Owing to the company’s vast product portfolio that it sold in a variety of markets each product was analyzed separately A set of five criteria was defined to select an appropriate process for each
² Nature of the product (trade versus nontrade)
² Nature of the market it catered to (predictive versus volatile)
² Availability of information and data
² Desired degree of centralization and
² Benchmark to be used for the process (historical versus marketcompetition)
Considering the market realities of the various product lines two models were shortlisted
² Time seriesanalysis taking into account four kinds of changes namely secular trends cyclical fluctuations seasonal variations and irregular variations and
² Econometric mode taking into account economic factors such as market size number of competitors and the number of frontline sales people
Finally a targetsetting template was created which trackedrejected the organization＇s performance on a regular basis Simultaneously a costbenefit analysis was completed especially for the incremental cost incurred through the incentive route visàvis benefits accrued through a structured and scientific targetsetting mechanism
At the end of the entire exercise sales targets were forecast for the next fiscal year with a deviation of + 4 for each product category Thereafter targets were cascaded from the corporate level to the division and subsequently to the frontline sales force
The approach whether top down or bottom up or a mix of both was decided for each product category Once that was done the relevant forecasting tool (time series or econometric model) was used to set the sales target for the ensuing year The figures that emerged for fans for example (in ＇000s) were the following
Details were then worked out as to how the total incentives would be impacted under the new system Around 40 cases (frontline sales people) were tested to see the impact on individuals with varying levels of past performance
The table above illustrates the impact of the new PMS and target setting under varying levels of performance that were defined on a scale of one to five with a rating of four taken as the target level
The organization had paid Rs 7943 lakh in incentives in 200203 a year when the performance level was much below target This was based on the ratings given to employees according to the company＇s existing systems The new ratings (see table) represent the expected ratings of employees for the same fiscal year had the PMS and incentive system recommended by Hewitt been in place In this exercise if the company were to have paid around Rs 50 lakh more it would impact the bottom line to grow by at least Rs 90 lakh for the following year
Hewitt’s performance measurement system will soon be put in place and should be steering the business performance in the desired direction
THERE WAS A TIME WHEN IMPROVING THE BOTTOM LINE WAS RELATIVELY EASY COMPANIES SIMPLY RAISED THE PRODUCT PRICES THIS OPTION IS NO LONGER VIABLE PROVIDING A SHORTTERM IMPACT AT BEST ORGANIZATIONS NOW FACE INTENSE AND INCREASING COMPETITION DEMANDING BUT FICKLE CUSTOMERS AND PAPERTHIN MARGINS IN THIS HIGHLY COMPETITIVE GLOBAL ENVIRONMENT MAINTAINING AND IMPROVING BOTH THE TOP AND THE BOTTOM LINE HAS BECOME A CONSTANT CHALLENGE
Centralization restructuring mergers and acquisitions have become the new tools to improve efficiency reduce costs and raise profitability These exercises however set off alarms across the organization Department heads find themselves buried in paperwork preparing dockets and detailing value they add to the organization Fear and apprehension grip employees and productivity drops
In these scenarios most function heads are able to quantify their contribution to the organization The human resource function too feels the pressure to distance itself and the current staffing levels from being viewed merely as costs The pressure on HR is higher While most companies recognize that human resources is a key asset and the HR function a strategic partner in their growth in practice human resources has difficulty justifying value and continues to be viewed as a cost and the HR function a corporate expense
To help HR departments in this exercise Hewitt has developed a tool that identifies costsaving opportunities and improves efficiency Hewitt’s HR Analyzer allows an organization to rapidly create
Starting with a vision of where it is headed HR must also work with key stakeholders to improve the HR model and efficiencies in order to maximize the return on HR investments The pressure on HR to demonstrate value has never been greater
Recent Hewitt Associates research shows that a majority of HR departments are being pressured to cut operating budgets and headcounts Too much focus on shortterm reductions without appropriate measurements of return on investment (ROI) can create a vicious and neverending cycle of cost cuts for HR departments which ultimately undermines its effectiveness
To add to the pressure most HR departments don’t expect costcutting pressures to end A recent survey conducted by Hewitt of more than 100 companies in North America indicated that 76 of organizations are under significant pressure to reduce costs now and through 2005 The situation is similar in other parts of the world The need to formulate effective and value adding measures for cost cutting continues to grow
The HR heads therefore have little option but to identify and understand all costs overcome organizational resistance to change and measure the effectiveness and impact of HR cost Starting with a vision of where it is headed HR must also work with key stakeholders to improve the HR model and efficiencies in order to maximize the return on HR investments The pressure on HR to demonstrate value has never been greater
² A baseline of HR expenditures and resource allocations by functional area
² Clear understanding of process costs and areas of efficiency
² A comparison of how HR performance stacks up against national and international benchmarks (including technology and delivery model comparisons)
² A factual basis for making decisions about how to best align expenditures and resources to support the business strategy and meet the needs of internal customers
² A cost and process data needed to develop a business case for centralization or outsourcing and
² Cost reduction recommendations
Representing a new generation of workforce management tools the HR Analyzer helps HR professionals identify and prioritise areas within HR to improve efficiency For example the tool allows for a fragmentation analysis to identify the areas the HR people are involved in and the percentage of their time that is committed to each Such specific data allows the HR head to identify areas that can be streamlined through either process reengineering or other means
The customized system integrates internal and external data from various sources to provide a complete uptodate picture of workforce issues It supports decisionmaking with builtin data analysis and modelling capabilities as well as access to externally published best practices information The HR Analyzer includes a growing comparator database of US Fortune 500 companies to help clients evaluate how they compare with similar organizations in HR cost areas
The tool captures not only HR labor costs but also includes data on outside expenditures utilization of technology and selfservice tools
Finally the HR Analyzer provides a seamless link to the experts when additional support is needed with online access to Hewitt’s consulting knowledge and expertise
With its objective fact base the HR Analyzer can guide decisionmaking and help overcome resistance to change clarify HR structure and roles and clearly define delivery channels For organizations that do not know where to begin it points out target areas for process redesign And it rounds up the exercise by measuring the operational and financial impact of HR transformation
The picture that emerges helps the organization drive decisionmaking in five areas
² Financial performance
² Organizational design
² Process efficiency
² Technology utilization and
² Strategy alignment
In its work with over 25 companies in the past year Hewitt has noticed some commonalities in companies that pursue HR transformation successfully They are building virtual centres of excellence have shared regional services aggregate transactions across geographies digitise routine transactions and outsource noncritical HR
Part of their success also lies in the fact that they do not lose focus on managing remaining HR staff These companies instead focus on justifying their investment in a new HR delivery model which can range from 1 million to 7 million and make known to senior management that ROI on new HR investment may take twothree years to show results
There is one question that every one of us in business really wants to know the answer to is doubledigit growth possible year after year in any industry under any market condition A recent book by Michael Treacy entitled DoubleDigit Growth How Great Companies Achieve It – No Matter What studies a number of companies that prove it is However the clear message coming out of Treacy’s work is that it does not happen by chance
Hewitt has recently partnered with Michael Treacy to examine the growth strategies organizational levers and people practices of the doubledigit growth (DDG) companies that can help your company craft and fuel your growth agenda In essence what are the human capital characteristics of fastgrowing organizations
Companies that achieve these stellar growth rates year after year are constantly challenging themselves on three fundamental questions
Research shows there are distinct differences between companies that show consistent doubledigit growth and the rest They do most things differently especially with regard to their people They approach their human capital differently measure its performance differently and help it excel differently
² Where can we achieve growth
² Where are we in our growth cycle
² What are the organizational and talent characteristics we need in order to grow
The DDG companies definitely treat human capital very differently from singledigit growth companies Jason Jeffay North American Leader for Talent and Organizational Consulting at Hewitt says the DDG companies pay their executives differently use incentives and rewards differently set their goals differently have higher standards have distinctly different kinds of leaders outsource more frequently and strategically and have more engaged and confident employees The DDG companies excel at four overlapping disciplines
Performance
DDG companies set high standards and expectations for their employees and hold people accountable for achieving highperformance levels Leaders set the bar higher They have less tolerance for mediocrity and set their targets higher Rigorous goal setting and performance measures are key to success at DDG companies Goal setting is more top down than bottom up These companies utilize structured goal cascades and business education to ensure people are focusing their efforts on the right things This translates into their measures for incentive pay
DDG companies also pay more for courage than caution They are more likely to deny incentive eligibility to poor performers and more likely to have minimum performance thresholds in their incentive plans At the same time they are more likely to recognize the degree of stretch in a person’s goals One way they do this is to lengthen the time horizon for performance They also take a more holistic view of performance using organizationwide triggers or thresholds in their plans rather than individual or business unit triggers On an average DDG companies budget 30 more per eligible employee for variable compensation than slower growing companies
In turn DDG companies work hard to help employees achieve targets Leaders have more frequent contact with employees and their markets and know when to pull back and change priorities and resources in order to get the right things done
Talent and Leadership
DDG companies know the value of continuously acquiring and maintaining talent They have a relentless focus on hiring developing and retaining great talent Their selection processes are rigorous They use sophisticated testing to ensure they get the best applicants And they look beyond the current job requirements keeping potential needs and culture fit in mind Most importantly perhaps they look for people who have the inclination and capability to grow a business rather than merely maintain it Of course these days all leaders talk about their focus on their talent The difference is that at DDG companies they back up their words with focused investment and action to go well beyond the rhetoric and deliver on their promise
As you would expect the leaders at DDG companies are personally more engaged They are committed excited and passionate about their organizations and have a drive to succeed that is simply burning much brighter than the fire in the belly of leaders in other companies DDG companies move their leaders much more regularly putting their best people on their best opportunities Their evaluation techniques are finer too DDG companies are more likely to have a formal high potential program that they use for both performance measurement and succession planning They are also more likely to communicate to people their high potential status that is further developed using rotational assignments and onthejob experience The result is more engaged employees that in turn contribute more to business performance
The study shows employees at highgrowth companies are more connected to the business its performance and its leadership They are also more likely to have confidence in their organization’s future business direction and to feel that the company is positioning itself for future growth They are more likely to feel that their company’s products and services provide value and benefit to customers and are more likely to recommend the company’s products to potential users
Organization and Culture
DDG companies are more agile more decisive and more focused on their core competencies They drive accountability to smaller units within their business to create an entrepreneurial smallcompany feel within the context of a large business To support this they outsource more noncore activities and are more likely to establish joint ventures or internal service centres to free up resources to focus on growth
This more agile more networked organizational structure of DDG companies is held together by strong organizational values that emphasize teams collaboration and winning The culture is externally oriented or customer centric This keeps the focus on what is happening in the market and promotes and celebrates customer value creation They also foster healthy competition between units or groups to spur levels of performance without letting it get divisive or counter productive
Another hallmark of DDG culture is communication At DDG companies employees receive the information they need to do their job well understand the company’s goals and how they can contribute to those goals This communication is the foundation for the strong sense of collective will and focus on winning These companies exude a singleminded determination to reach their goals to be successful
Metrics
DDG companies know the value of continuously acquiring and maintaining talent They have a relentless focus on hiring developing and retaining great talent
The fourth overlapping discipline of DDG companies is their focus on metrics Leaders in DDG companies are more analytical about their markets their business performance and their people DDG companies understand the impact of investments in HR programs – the return on their investment in performance bonuses or training the sales force about their competitors or more rigorous recruitment and selection processes They do not operate on hunches they make decisions based on probabilities that are rooted in a deeply analytical approach to the key numbers in their business
These management and organizational disciplines in DDG companies result in higher employee engagement DDG companies have 39 more employees who are highly engaged thus contributing even more to the company’s success Conversely DDG companies also have fewer highly disengaged employees who drain any company’s ability to perform effectively
What limits companies from growing at sustained double digit rates is that they lack sufficient management capacity – the human capital — required to grow concludes Jason Jeffay This puts the issue of business growth and success squarely in the realm of Human Resources It also presents us with an interesting paradox Every HR department and most business leaders will say they believe that their people are a critical enabler of strong growth What about you Would you agree Is HR therefore the most important function in your business
Capturing the value from the human capital in your organisation is possible Only it does not happen by accident
This article focuses on the third of these questions For more information on the double digit growth research please request our Research Report Building the Management and Organizational Disciplines to Grow (2004) from your local Hewitt office
In a talentscarce scenario companies cannot afford to go wrong in the areas of salaries and benefits The Hewitt Benefit Index® ensures that companies distribute maximum value to employees through their spending on benefits
What attracts talent to an organization A challenging assignment prospects for growth a chance to contribute or an attractive compensation package Smart companies around the world know the correct answer is a mix of all four And in a competitive talent landscape companies cannot afford to stumble on any of the above
China right now is the hot playing field and for organizations operating here this means that the talent war is very real Despite best efforts companies complain that even attractive career paths and expensive compensation packages don’t always seem to be enough to retain key talent One issue is does all that spending on cash and benefits translate into real value for employees
Companies in China spend a disproportionate amount on benefits compared to those in other countries around the world As much as 45 of base salary can go towards the mandatory social benefits scheme which unfortunately is known to be insufficient by a significant margin Most thus spend an additional 415 on supplemental benefits schemes
which are emerging with government encouragement as an important piece of the compensation puzzle Add to that underlying costs of the various worklife plans and other HR programs and the depth of a company’s investment in benefits arrangements for employees in China is clear To help companies juggle the value versus cost challenge that plagues the current benefits landscape Hewitt’s benefits team in China has recently introduced one of its trademark benefits valuation tools the Benefit Index®Clients were constantly coming to us questioning the money they were channeling into benefits and whether employees could appreciate the company’s investment on their behalf says Lucy Liu Actuary and Benefits Consultant in Shanghai We realized that companies here are ready and very eager to have tools that will help them make educated decisions about the competitiveness of their benefits programs
Capturing the Value
Where Benefit Index® makes its impact is by comparing the value not just the cost of a company’s benefits package on an applestoapples basis with a group of comparators as well as illustrating the fit of the overall package to organizational objectives Applied as a comparative and analytical tool Benefit Index® provides the basis for supplemental benefits review and design if appropriate Comparison is really the first thing companies care about Second is evaluating the distribution of benefits spending says Liu
In the case of a multinational pharmaceutical client in Beijing who conducted a Benefit Index® trial earlier this year the results identified several areas of misalignment with an industry peer group In fact the company was overspending on one particular benefit item without adding comparable value to employees This company took those findings back with recommendations for adjustments and they have since redistributed their benefits budget to ensure that they are delivering superior value in areas that are important to their competitive strategy
The Tool
The Benefit Index® uses a quantitative objective methodology for analysis and benchmarking to report benefits comparisons in all the key benefits areas specific to China including
² Wealth accumulation (retirement housing savings plan etc)
² Group assurance (life accidental death and disability travel employer liability etc)
² Health care (employee medical dependent medical checkups etc)
² Timeoff with pay (holidays and vacation) and
² Sick leave (100 and partial salary continuation)
The index ranks each benefit in comparison with the group average and shows how the organization’s total benefits package stacks up against peer organizations Benefit Index® also serves as an auditing tool not only pin pointing the similarities and differences in company and comparator group programs but also the reasons for the value differences For organizations with multiple operations Benefit Index® is an excellent way to facilitate harmonization across entities
We realized that companies here are ready and very eager to have tools that will help them make educated decisions about the competitiveness of their benefits programs
One Step Closer
Liu’s benefits team in Shanghai has currently compiled a database of over 100 leading companies in China to form the basis of its future Benefit Index® analysis pool When data collection is complete this summer organizations will be able to compare and evaluate their benefits and benchmark best benefits practices Over and above the basic index companies will also be able to choose to receive an employee demographic analysis which provides valuable insight into deriving the most value at the least cost Another option is a retirement income analysis which uses assumed salary increase and investment return rates (in the case of defined contribution plans) to demonstrate real benefits accrual levels in addition to ranking the overall plan visàvis prevalent market practices
Additional products in Hewitt’s line of benefit products will also be available Benefit SpecSelectTM allows companies the flexibility of forming a customized comparison group based on specified industries geographic areas sales and number of employees and SpecSummaryTM condenses the data into an easytouse guide on typical company practices giving prevalent benefit programs and their key design elements
An efficient and effective supplemental benefits program is best designed to synchronize with mandatory benefits the company’s business strategy compensation philosophy and demographic situation With these tools and expertise Hewitt is armed to assist companies in China design programs that provide value for cost and enable their achievement of desired business results Let the benefits battle begin
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Chances are you first think about your balance sheet measures how much revenue did we generate last quarter how much was our growth in sales and profits or what gains did we make in our market share Next you may think about the costs equipment material travel and so on Or perhaps it is your customer measures that come up for consideration have complaints increased are they repurchasing our products These key performance indicators (KPIs) are important and you consider them on a weekly monthly and quarterly basis
What is often missing from this list is an area that accounts for one of your largest expenses and perhaps creates the most value your people or what many now call Human Capital People are one of the most important indicators of an organization’s ability to create and sustain value they come up with the ideas for new innovations they delight your customers and they produce your products In spite of this many organizations have difficulty demonstrating how spending on people and people programs produce a return on investment
Human Capital Measurement (HCM) bridges this gap by helping organizations focus on people measures to better understand and predict how employees contribute to their success It allows companies to quantify how employees are impacted by programs such as training and development recognition and worklife balance It also assesses how employees react to organizational changes such as mergers or major restructuring Most importantly it can provide the same level of rigor that other areas of your business apply to evaluate their investments
Hewitt Associates has developed a leadership position in the use of Human Capital Measurement Our Best Employers research supports a growing amount of evidence connecting effective people management with longterm organizational performance Similarly we have a number of HCM approaches that we have applied to help organizations sharpen their people investment strategies In this issue of HQ we give you some insight into our approach to HCM and describe several specific client situations where this approach has helped them achieve their strategic goals and realize tangible results Our philosophy toward HCM is to align the approach to your specific situation We illustrate a wide range of approaches that describe how people scorecards and key organizational performance metrics are developed optimal people behaviors identified and predictive models framed
HCM can appear daunting and complex but our consultants can work with you from wherever you are starting and to whatever level of sophistication you desire to help you understand and realize the value of your human capital HCM is fun challenging and a leadingedge work It provides our consultants with a feeling of success and it produces great value for our clients
Mick Bennett
Managing Director Asia Pacific
Hewitt Associates LLC
The average human life span has risen dramatically from a life expectancy of 40 in the early 1900s to 75 years at the turn of the millennium The human race has learned what factors need to be monitored to increase longevity a balanced diet regular exercise monitoring key measures such as blood pressure cholesterol etc Identifying monitoring and acting on the right measures has doubled the human life span in one century
Company life expectancy has not fared as well In the late 1920s and 1930s the average company life span was over 60 years Now the average life span of companies is 1215 years So many companies will die in their teens and only a handful will survive into the next century
To complicate the situation the world as a marketplace is shrinking and competitors straddle the globe A new service offering is duplicated within hours a product launch sees competitors＇‚ reply on the shop shelves within days and a technical breakthrough is copied
within weeks The sourcing of raw material and talent spans the globe So does the supply
Along with these changes the days of a lone entrepreneur who performed all functions singlehandedly or with a couple of apprentices are long gone Today worldclass factories that house nonstop assembly lines work with hundreds of employees Products processes and technology are easily available or duplicated So why do some companies survive and others fail in a short period of time
The company’s workforce has emerged as a key asset and is often described as the only competitive advantage that a company possesses Employee behavior the knowledge and experience they bring together with their commitment to the organization are key drivers for sustainability and growth
Squeezing savings in the supply chain ensuring higher capacity utilization at the shop floor continuously upgrading the product and delighting customers with efficient
service models are all efforts that are steered by employees Every business needs workers who take ownership of their work and the workplace They need to be bargain buyers effective salespeople have unfaltering faith in their products zealously guard their customers painstakingly track the competition and above all have an uncompromising commitment loyalty and honesty towards the organization and its stakeholders
To survive sustain and grow in this context where employee excellence is required more than ever before to achieve sustainable growth the role of the corporation has been changing too The old systems of training monitoring and awarding employees are inadequate The sheer size of businesses deems that impractical Businesses now need to focus on attracting retaining and harnessing the best talent in a more holistic and strategic manner
To be successful in all this companies need to measure the value that employees bring to the organization evaluate their impact on business performance and then align them with the business results Companies have always measured their investments in more tangible assets such as buildings equipment and even new products Yet many still pay less attention to their employees Companies continue to focus on physical assets that were crucial historically or whose productivity is easily measurable financially
What gets measured gets done may have described the dynamics of the factory floor but did not have much to do with the human resource department Moreover measuring the soft stuff or the human capital has been difficult if not impossible That is till now
Considerable evidence already exists both in academic research and in work done by Hewitt Associates that successful companies know the value that people can bring to the organization invest appropriately in their talent and measure the impact their investment has on the bottom line The notion of the employeecustomer value chain was first made broadly popular in the January 1998 issue of the Harvard Business Review which detailed a value driver model at Sears in the United States (See Figure 1)
Today many similar models exist in organisations around the world Hewitt’s Best Employer studies have shown that these companies have higher revenue growth and greater profitability than other organizations These numbers vary considerably across regions but what is common and
consistent is better business performance
These organizations create an environment that enables employee engagement capturing the hearts and minds of employees to deliver extraordinary performance An engaged employee is one who consistently speaks positively about the organization stays with the organization despite opportunities to work elsewhere and exerts extra effort in work and behavior that contributes to business success Hewitt’s Best Employer studies for example clearly demonstrate that The Best have much higher employee engagement (73 vs 52) and lower turnover (10 vs 15) on an average This global research has conclusively established the high correlation between employee engagement and business performance gauged through key business measures It has shown that organizations that improved the employee engagement levels simultaneously produced rises in productivity employee retention customer satisfaction total shareholder return (TSR) and sales growth Using a database of over 100 public corporations that completed an engagement study over a fiveyear period Hewitt Associates has demonstrated the following
² High performing companies have an engagement score that is 2025 higher than average
² The correlation between employee engagement and a company’s average fiveyear TSR is 054 This means the level of employee engagement explains 29 of the variation in TSR and
² A similar relationship exists between engagement and fiveyear sales growth The correlation measured here was 046 again indicating a strong relationship
On a micro level Hewitt’s consulting work with specific organizations has also identified a strong and consistent link between engagement and a variety of measures like financial performance customer satisfaction and employee and customer retention
As you will see in a later article a Hewitt study involving companies that show doubledigit growth (DDG showing cumulative 10+ growth over a fiveyear period) also exhibited a much higher level of engagement in the organization As many as 93 of executives at DDG companies are engaged compared to 52 for all employees in all companies (see Figure 2)
All this research allows us to suggest a generic highlevel model for the important role that employee engagement has in outperforming your competitors This notion of employee engagement is we believe certainly not the only but without doubt the core and fundamental building block of human capital
A giant step forward from attitude and satisfaction measures of the past HCM delivers invaluable data regarding employee engagement And organizations that are following through on strategies to boost their employee engagement are not only improving their short and mediumterm business results but are also solving the talent dilemma and driving longterm value for their shareholders customers and employees
For a detailed discussion of the Best Employers research see Hewitt’s best selling Leadership and Talent in Asia How the Best Employers deliver extraordinary performance
Organizations are beginning to look at their human capital investments with interest HCM helps them understand the return on this investment as well as evaluate its impact on business performance
Today it is rare that an organization should not have employees as one of its top three or four expense categories Salaries benefits training and development recruiting employee communication lost productivity due to turnover … it all adds up to a huge investment While organizations apply rigorous scrutiny to the investments they make in capital equipment acquisitions of business and similar investment decisions few apply equivalent rigour to question the multimillion dollar investment they make each year in their employees Fewer understand their employee investments beyond the cost of salary and benefits and fewer still understand the return on their investment in employees This is the information that Human Capital Measurement (HCM) provides to help you run your business efficiently
Employees are not just a cost Like any other investment they provide a return
Employees are not just a cost Like any other investment they provide a return Increasingly the contribution of employees accounts for more of an organization’s ability to compete grow and produce value We all know that there is a large gap between the market value of most organizations and what appears on their balance sheets
Hopefully for your business that gap is a positive difference — things are serious when it’s negative In today’s economy it’s estimated that on average the market value stands at 450 for every 1 that appears on the balance sheet While this number has dropped from the heady highs of 750 in March 2000 this 451 ratio still accounts for a large portion of your organization’s value Figure 1 shows the results from Baruch Lev’s study of markettobook ratios – it clearly demonstrates the growth in this ratio since the late 70s
So what accounts for the difference Typically these are the organization’s intangible assets Intangibles include a variety of factors such as brand strength and reputation relationships with customers patents and a variety of factors that we call human capital these include quality of leadership employee creativity productivity loyalty passion and knowledge management Scarcity in one or more of these areas or suboptimal productivity in them is often more constraining for businesses than financial capital At times businesses have been taken over merely to acquire their intellectual or human capital
As the correlation between quality of human capital and business performance becomes clearer the notion of human capital being represented on financial statements has surfaced says Mark C Ubelhart ValueBased Management Practice Leader with Hewitt Associates Ubelhart has been working on developing methods that can help measure the contribution of human capital and drive decisions to invest in people He says The new frontiers of measuring human value are being developed in financial metrics similar to those being used in everyday investment processes
HCM describes a variety of people measurement practices that help organizations understand and quantify their people investments As an approach it also helps HR build credibility with the line functions as HR measures now become more performance focused and demonstrate an understanding of value creation
It would be wrong to think of HCM as a unified body of practice There are numerous approaches models offers and conceptual frameworks A simple way to try and get an understanding of HCM no matter how evolved the thinking in your organization is illustrated in Figure 2
As organizations begin to adopt these frameworks HCM is evolving very quickly Until recently there were few robust cases or methods for demonstrating the relationships that exist between investments in people and business outcomes HCM consisted of measuring and benchmarking for which the measures in vogue were focused on either efficiency or accuracy (for example the ratio of HR staff to employees number of payroll errors time to fill vacant posts etc)
For evaluation these productivity metrics were then benchmarked against best practices and were not focused on the results they produce – a 101 or 201 employee to HR staff ratio does not necessarily produce a tangible result The majority of organizations continue to follow this approach that focuses mostly on performance of policies These costfocused approaches often restrict the HR’s role in the organization To become a strategic partner some HR departments are using more sophisticated HCM approaches (see figure 3) A small number are also measuring how human capital impacts strategic outcomes
This change in philosophy to more sophisticated HC measures is precisely where Hewitt has focused We have developed a variety of approaches and measures for organizations at various stages in their development Hewitt’s measurement solutions range from HR benchmarking and metrics to HR scorecards and from there to human capital modelling (see articles on National Australia Group and Cargill) At all times our goal is to match and align the nature and depth of HCM with the organization’s needs and level of sophistication An overview of our general approach is outlined below
Benchmarking and Metrics
Hewitt’s approach to understanding the efficiency and effectiveness of the HR function is detailed in a subsequent article (see HR Analyzer article) Developing better benchmarking and metrics can provide an easy starting point and entry into HCM Appropriate and wellselected benchmarks and metrics can help companies analyze and review HR data to outline improvements and
benchmark opportunities
The scorecard ensures alignment of HR strategy with overall business strategy focuses HR initiatives on meeting strategic goals and evaluates the impact of diverse HR activities on an organization’s longterm business objectives
This allows companies to review their existing HR measures understand benchmarks or innovatively measure a particular aspect of their programs polices etc
This approach will often identify functions processes or systems that are not performing as well as possible (relative to other companies) and identify opportunities for improvement It will not provide a measure of how effective your human capital investments are on your business
Hewitt aims to move organizations away from measurement processes that focus predominantly on costs efficiency and accuracy or solely on benchmarking Such an approach is only valid in a paradigm that views HR and employees as costs to be managed While simple to understand and calculate today these measures provide little linkage to a company＇s business strategy This places many HR functions at risk in a number of ways
² Measures reported are often lagging There are no indicative signs of future performance for management to take action in time
² It can often reinforce a dysfunctional leadership behaviour that sees the HR function as a corporate expense — a prime candidate for downsizing elimination or outsourcing and
² Benchmarking focuses on what others are doing and can inhibit outsidethebox thinking or refocus on new people strategies
Building HR Scorecards
The HR Balanced Scorecard is an effective tool to illustrate the contribution of HR to achieving longterm value generation It is based on the business measurement framework provided by Robert S Kaplan and David P Norton Besides providing a framework for measuring the effectiveness of HR strategy a Hewitt HR scorecard serves as a communication and planning tool
The scorecard ensures alignment of HR strategy with overall business strategy focuses HR initiatives on meeting strategic goals and evaluates the impact of diverse HR activities on an organization’s longterm business objectives A Hewitt HR scorecard uses four components to define and measure the effectiveness of peoplemanagement activities and how they contribute to longterm value creation for an organization
Financial This area of the scorecard focuses on the shorterterm financial impact of people management and HR practices on business results
Customer This area of the scorecard focuses on the perceptions key stakeholders have about HR effectiveness and peoplemanagement programs such as customer satisfaction and retention
Operational This area of the scorecard focuses on the internal efficiencies of critical HR processes — for example productivity quality cost and cycle time
Strategic Capability This area of the scorecard takes a broader view of the development of critical people capabilities that can help the organization achieve and maintain competitive success
Details on this topic can be found in the People Scorecards article
Human Capital Modelling
Human Capital Modelling (HCM) is a more sophisticated approach to determining the impact of your employees on business performance guiding potential investment decisions focusing your strategic planning and measuring the return on your investment
It works by identifying your organization’s strategies and the talent requirements to achieve these strategies It then incorporates the HR strategies and the people leverage points in the business value chain It identifies how HR impacts these leverage points and then builds a fully developed value chain that measures the impact of human capital and HR activities on business outcomes
One such model used by Hewitt with some clients is to look at the relationships between employee engagement capability utilization and business performance (see National Australia Group article)
Engagement is the state of emotional and intellectual involvement that an employee has in the organization Engaged employees are those individuals that want to and do actually take action to improve the business results of their organization
Capability measures the extent of knowledge and skills It is impacted by the organization’s ability to attract talent training learning and development opportunities as well as employee experience levels
Utilization indicates the extent to which employees are able to apply their skills for the organization’s benefit Organizational structure policies and procedures technology and clarity in the organization’s objectives and direction impact the level of utilization
By understanding the relationship between these higherlevel levers and business outcomes such as customer loyalty or revenue generation organizations can direct effort into the areas of greatest impact For example identifying how investments in specific people programs (like leadership and career development) impact business results through improvements in organizational capability and employee engagement is a powerful strategic weapon in the battle for differentiation and competitive advantage It also sends a very clear message to senior leaders in the business about where to focus their attention
Details on this topic can be found in the Predictive Modelling article
As more companies move towards adopting sophisticated peoplemeasurement tools it needs to be made clear that understanding people value is the starting point not the endpoint HCM is not about proving that people add value to the business Good leaders already have this fundamental philosophy It is also about guiding investment decisions and understanding the tradeoffs among HR programs between capital and people investments and in people decisions
With the human resource function being considered a strategic partner sophisticated measures that gauge its effectiveness and impact on business are being thought of formulated and applied
We see an interesting paradox when it comes to the reporting of people measures In many organizations while HR continues to build its strategic capability and leaders look for ways to build value through their people HR measurement activities continue to remain focused on evaluating efficiency or accuracy Calculating the ratio of HR staff to employees absenteeism employee turnover number of payroll errors and the like and benchmarking them against best practice competitors still account for a lot of HR time
These measurements work in a situation where HR and employees are seen as a cost to be managed Today when HR is being viewed as a strategic partner these measures provide little insight into the value HR adds its linkage to a company’s business strategy and the areas it needs to focus on to impact business further
Moreover this places many HR functions at risk in a number of ways These are typically lag measures — providing no indication of future performance for the management to take action They can of course also reinforce a pattern of leadership behaviour which views the HR function as a cost Further benchmarking focuses on what others are doing and can inhibit innovation and creativity
An alternative model of HR measurement is beginning to emerge in which organizations are focusing on the effectiveness of their HR function and not just its efficiency This emerging measurement mindset is illustrated in the table below
The starting place for any modern HR measurement needs to be a strategy that makes explicit the role that the HR function plays in the achievement of business objectives Many businesses are turning to the development of HR Balanced Scorecards to begin their measurement transformation
Some Sample Balanced Scorecard Measures
The Balanced Scorecard is a strategic business measurement methodology developed by Robert S Kaplan and David P Norton It is on their framework that Hewitt Associates has evolved the HR Balanced Scorecard It provides business leaders with a tool and a process to measure the performance of people practices and the HR function from multiple perspectives
Strategic Perspective — the results of strategic initiatives managed by the HR group The strategic perspective focuses on the measurement of the effectiveness of major strategylinked people goals In the example overleaf for instance the business strategy called for major organizational change programs as the business faced major restructuring and multiple mergers and acquisitions In this context the organization’s change management capability will be a key factor in the success or failure of its execution Therefore measuring the ability of the business to manage change effectively is the core measure of the effectiveness of HR and will be a key strategic contribution to the future success of the business
Operational Perspective — the operational tasks at which HR must excel This piece of the Balanced Scorecard provides answers to queries about the effectiveness and efficiency in running HR processes that are vital to the organization Examples include measuring HR processes in terms of cost quality and cycle time such as time to fill vacancies
Financial Perspective — this perspective tries to answer questions relating to the financial measures that demonstrate how people and the HR function add value to the organization This might include arriving at the value of the human assets and total people expenses for the company
Customer Perspective — this focuses on the effectiveness of HR from the internal customer viewpoint Are the customers of HR satisfied with their service are service level agreements met do the customers think they can get better service elsewhere Conducting an HR customer survey might typically arrive at this
All four components of the scorecard are used to define and measure the effectiveness of peoplemanagement activities and how the HR function executes them This provides a strategic measurement and management process to show the connection between a company’s business strategies and goals and its HR strategies activities and results The Balanced Scorecard can provide an ideal approach to measure the contribution that human resource management makes to business success
With the HR Balanced Scorecard in place Hewitt can assist organizations in selecting designing and implementing scorecard and analytic software which allows them to easily monitor the workforce indicators that are key to their business success Such solutions enhance HR’s ability to provide counsel to line management and deliver results that make a difference to the achievement of their goals and strategy and thereby to shareholders
The apparent and inherent values that the HR Balanced Scorecard brings include
² Measurement provides the data and facts to support business decisions giving credibility to HR recommendations and initiatives
² Collecting and using data to make decisions regarding retaining and motivating the workforce giving the organization a competitive advantage in the marketplace
² The right mix of lead and lag measures helps the business assess its strategic alignment and progress towards its objectives
² HR will be proactive in identifying potential improvements and bringing suggestions to the business that improve bottomline results and
² A business and linked measurement framework focuses activity on those tasks that contribute to organizational success This process lifts the role of HR from being viewed purely as a cost centre to that as strategic business partner
Traditional Measurement Focus
Emerging Measurement Focus
Single framework based on accounting rules
Multiple measures and performance categories
Simple linear causal relationship between measures
Multiple complex nonlinear relationships
Shortterm perspective
Longterm perspective
Focus on past performance a snapshot looking backwards at performance indicators
Multiple timeframes including forward looking indicators
View people as costs to the organization
People as assets investments
Financial measures dominate in reports and information systems
Financial and other perspectives measures tracked reported and evaluated regularly
The HR Balanced Scorecard is also consistent with the initiatives many organizations are introducing to their peoplemanagement practices like crossfunctional staffing variable pay team and individual accountability and multiple feedback sources The measure would eventually help the organization understand the effectiveness of HR policies and processes
As Kaplan and Norton note the Balanced Scorecard has enabled companies to track financial results while simultaneously monitoring progress in building the capabilities and acquiring the intangible assets they would need for future growth The scorecard wasn’t a replacement for financial measures it was their complement
It is difficult to overstate the power of measurement as a tool for change and strategic impact As we have all heard before What gets measured gets done Measuring the contribution of HR to business success is the foundation to its becoming a strategic business partner
HCM Trends In Europe
Organizations across Europe are becoming world leaders in their application of people measurement Human Capital Measurement (HCM) is gaining both clarity and popularity within Europe as an approach to monitoring and building value The adoption of more sophisticated HCM techniques is predominantly being driven by their ability to enhance the way organizations manage their HC to grow value for the business
A recent study of Europe’s Fortune 500 found that 86 of organizations that used HCM improved unit or company bottom line performance Other motivations for adopting HCM included
² Direct HC resource allocation
² Win business cases for HC investment
² Track HC activities to develop HC predictions
² Link variable compensation to HC best practice
² Deliver HC information required by law and
² Provide investors with information on HC performance
Increasingly governments academics industry groups and policy advisors are also realising the benefits and are taking steps to ensure the inclusion of HC measures within regulatory reporting frameworks The EU’s Modernisation Directive which comes into effect in 2005 will require organizations to report nonfinancial performance indicators such as employee retention and development Similarly the Kingsmill report published by the UK government in 2001 urges that company reports should make clear links between the company’s business strategy and its HCM policies and practices
Deutsche Bahn’s Human Capital Scorecard
Deutsche Bahn AG the national German railway company has found increasing benefits from human capital measurement In 2003 Deutsche Bahn partnered with Hewitt to implement their human capital model developed in cooperation with The Boston Consulting Group This model provides concrete key performance indicators for managing the organization’s people resources and capabilities In a joint effort three quantitative measures were identified as critical to the Deutsche Bahn success These were employee engagement employee competencies and leadership quality Hewitt and Deutsche Bahn operationalized the qualitative measures and designed the engagement portion of this study for about 250000 Germanybased employees For this Hewitt’s global engagement product was modified to fit the specific needs of Deutsche Bahn Employee and leadership quality measures were developed to link to the existing Deutsche Bahn competencies models
After designing the measurement tools they were tested in one of the Deutsche Bahn’s subsidiaries the Deutsche Bahn Energie The results provided concrete measures for assessing how Deutsche Bahn’s employees and leaders are contributing to the business The data has informed their decisions about specific people investments and using the scorecard leaders will be able to base their people decisions on solid premises
A DIVERSE GLOBAL COMPANY IMPROVES ITS PERFORMANCE THROUGH A COMMITMENT TO AN INVESTMENT IN HUMAN CAPITAL CASE STUDY
FACTS ABOUT CARGILL
No of Employees
101000
Total Revenue (USD)
60 billion
Services
Processor marketer and distributor agricultural food financial and industrial products and services
Others Interesting Facts
Cargill has over 90 business units in 60 countries across a number of food industries Cargill is privately owned
It currently provides solutions for many large and successful companies such as CocaCola General Mills NestlePepsiCo and McDonalds
Human Capital is viewed as a business strategy at Cargill and not an HR program says Ben Redshaw Team Leader of Employee Engagement at Cargill Inc To put human capital in perspective Cargill is an international provider of agricultural food and risk management products and services It has 101000 employees in 60 countries This privately — held company comprises approximately 90 business units with annual sales of 60 billion To complicate the situation Cargill has a diverse population of employees across a wide range of countries The work varies from high intellectual capital positions such as commodity and debt traders to high sweat equity positions such as plantation workers and slaughterhouse employees In this diverse and challenging environment has found a way to invest in its people and produce a tangible and quantifiable outcome in performance
Five years ago Cargill began a corporate transformation centered on changing from a commodityproducts supplier to an integrated food products and food services company — from a supplier of ingredients to a provider of solutions We want to provide expertise that helps our customers succeed says Redshaw While Cargill primarily solves businesstobusiness issues they offer a wide range of products that consumers use every dayoil in foods starch in napkins beef for burgers and many other products such as salt sweeteners and flour The end goal of this transformation is to become the global leader in nourishing people
Convinced of the importance that people have in helping the organization succeed Cargill made human capital measurement one of four corporatewide performance measures along with satisfied customers enriched communities and profitable growth In 2000 Cargill took the first formal step in the journey of measuring and acting on human capital information
Convinced of the importance that people have in helping the organization succeed Cargill made human capital measurement one of four corporatewide performance measures
They partnered with Hewitt Associates to pilot an employee engagement study in four separate business units comprising 7500 employees Following the successful pilot Cargill then worked with Hewitt in 2001 to conduct an engagement study of 25000 salaried and some hourly employees around the world This was a benchmarking year for Cargill — it was the year they obtained their first picture of engagement across all business units and the year they committed to annual global engagement surveys We want all employees to know that their opinion and their engagement matters says Redshaw
The results from these initial studies solidified the position that to achieve its goals Cargill needs to focus on its people Nancy Siska Corporate Vice President of Human Resources at Cargill explained We benchmarked a group of companies and ended up with compelling evidence that to succeed as a customer solutions provider we have to excel at employee engagement Research from Hewitt supports Siska’s assessment Analysis of more than 1500 companies shows that organizations with engagement scores above 60 deliver higher total shareholder return than those with lower scores
Cargill has also used this information to drive the business forward The initial focus was on three areas
1 Strong commitment from leadership to employee engagement — Leadership visibly demonstrated their commitment to engagement by following up with their direct reports on engagement actions and making the engagement measure part of the business performance contract each business unit had with the CEO
2 Development of action plans to improve engagement — This was done at the location department and workgroup level to drive employee engagement and behaviors The data prompted some Cargill business units to redesign their compensation discussions with employees and establish individual recognition systems Others have made changes to daytoday work activities or enhanced their career development programs and several have improved communication between senior management and employees
3 Demonstrating a link between engagement and business results — Established a positive directional relationship between their key financial measures return on gross investment and employee engagement
Throughout this journey Cargill’s view and use of human capital measures continued to evolve and its thinking progressed well beyond measurement to actions and results During this process they have learned some valuable lessons on how to create a competitive advantage through their focus on people As Redshaw says Cargill believed in the concept of engagement but was lacking a framework Hewitt was able to help in three areas First they provided a model of employee engagement that was both applicable and understandable Second they provided administrative support to a large complex and diverse population Third they helped Cargill understand engagement results and how this could help improve business results
There were certainly surprises during the process Employees were skeptical at first As Redshaw points out They did not believe that their feedback carried any weight or that the organization would act on the information With concrete action planning and communication of results Cargill was able to build employee trust This was helped by the actions of managers and leadership Managers embraced the notion strongly and there was support from senior leadership
One key to success was the deemphasizing of a single score such as engagement and focusing more on action planning and intended results As Redshaw summarizes We focused on measuring behaviors not attitudes Action planning is tangible and the right actions will motivate our people People who are properly motivated will correctly mix feed and minimize the amount of red meat that hits the floor reducing shrink To succeed action planning was carried out at a granular level thus addressing the fairly specific needs of employees Based on this success Cargill is building a pool of committed engaged employees that will help grow the business
Cargill was not satisfied to stop here It moved to the next level of human capital measurement — quantifying the return on investment Working in Cargill’s favor was a strong and inherent belief in people measures and their importance to the business In 2004 with Hewitt’s assistance they undertook an analysis of how employees impact key performance indicators
To succeed it was necessary to develop an approach that was both practical and rigorous The approach that Cargill and Hewitt used included the following
² Focusing on a single business unit in North America to control and minimize variables (like geography and industry) that would impact both their people and business performance
² Focusing on a unit with a relatively large number of locations to provide a sufficient data set
² Utilizing a set of consistent financial and nonfinancial business performance metrics across locations
² Selecting a unit where employees have a good understanding of how they fit and why they matter and
² Utilizing three years of employee engagement data at the location level
The results of this analysis were quite compelling As Redshaw says We were able to demonstrate that engaged employees can make a big difference They impact the company operations in many areas These focus on efficiency turnover and reducing shrink and on satisfying Cargill’s customers Retention in this group of employees is higher resulting in an experienced and highperforming workforce The net result goes to the bottom line with a higher Return on Gross Investment (ROGI)
So how did Cargill get here so quickly Siska explains We believed from the start that human capital was critical and that engaging our workforce would help us achieve sustained business results lower turnover and increase retention of the right people Now we are able to maintain a ready pool of qualified people to promote as the company grows We also know that it improves employee’s alignment and understanding of how their work impacts the company’s business results
The employee engagement concept enjoys tremendous support from Cargill senior management starting with Chairman and CEO Warren Staley Engagement is synonymous with high performance at Cargill Redshaw says Our CEO talks about it in virtually every speech he gives This support encourages cooperation from HR managers around the world Clearly employee engagement at Cargill is not only viewed but also practiced as a business strategy and not an HR program
The impact of employee behavior on organizational performance has been a subject of study for quite some time Human capital measurements and the models developed unravel this relationship and help guide people investment
OUR CLIENTS ARE INCREASINGLY ASKING TWO QUESTIONS ONE CAN THEY QUANTIFY THE IMPACT THAT PEOPLE HAVE ON THEIR ORGANIZATION’S PERFORMANCE TWO WHICH COMES FIRST CHANGES IN EMPLOYEE BEHAVIOR THAT LEADS TO FINANCIAL AND MARKET PERFORMANCE OR PERFORMANCE THAT IMPACTS EMPLOYEE ATTITUDE
IT IS THE OLD CHICKEN AND EGG PROBLEM IN THIS CASE HOWEVER THE ANSWER IS MORE THAN A PHILOSOPHICAL EXERCISE NO DOUBT THE QUESTIONS ARE INTERRELATED STUDIES ON THE PREDICTABILITY OF EMPLOYEE ATTITUDES ON PERFORMANCE HAVE A LONG HISTORY IN ORGANIZATIONAL RESEARCH THE RESEARCH SUGGESTS THAT WHILE THE RELATIONSHIP BETWEEN HUMAN CAPITAL AND ORGANIZATIONAL PERFORMANCE IS COMPLEX IT CAN BE QUANTIFIED AND THERE ARE METHODS TO ESTABLISH THE DIRECTION OF THE RELATIONSHIP
HEWITT ASSOCIATES HAS DONE A NUMBER OF STUDIES ON THIS TOPIC AND THERE IS SUPPORT FROM ACADEMIC RESEARCH THAT INDICATES CHANGES IN EMPLOYEE ATTITUDES AND BEHAVIOUR PRECEDE CHANGES IN PERFORMANCE THE ANSWER HOWEVER IS NOT 100 CLEAR OUR VIEW WHICH IS SUPPORTED BY A RECENT ACADEMIC STUDY CONDUCTED OVER AN EIGHTYEAR PERIOD SUGGESTS A MORE RECIPROCAL RELATIONSHIP — A VIRTUOUS CYCLE SO WHILE THERE IS SOME INCONSISTENCY EXAMINING THE RESEARCH IN MORE DETAIL PROVIDES A MORE COHERENT PICTURE
BUILDING HUMAN CAPITAL MODELS
Understanding the links between people and business performance is just the beginning It is not the endpoint for organizations interested in improving their performance Human Capital (HC) Modelling is not only about proving the value people add to the business Good leaders already have this fundamental philosophy It goes further to allow organizations to
² Quantify the relationship between people attitudes behaviours and performance
² Identify areas of focus to improve employee performance
² Quantify the benefits and tradeoffs in people decisions to guide investment decisions and
² Increase understanding of inter relationships which allows for better performance management of particular areas
Just as marketing departments collect and use data on consumer behaviour and resulting sales or customer satisfaction to guide decision making Human Resources can develop similar predictive models of employee behaviour and resulting performance This supports decisions regarding people investments such as pay communications training and development and even merger and acquisition activity Such models offer organizations more insight and allow them to allocate funds efficiently for the greatest financial benefit
Just as there are unique models for customer segments in marketing organizations will have HC Models unique to their employee environment Our research and experience already shows that HC Models will vary depending on an organization’s value proposition business strategy and employee demographics (See the National Australia Group Experience in this issue of HQ)
How do we Build HC Models
Having collected a significant amount of data on employee behaviour and performance there are a number of approaches for using data to build HC Models This article outlines four of the methods we have used and what we can learn from each approach Our philosophy is not to rely on a single method but to link the analysis to the type of issues faced by an organization and the type of information available Our basic approach is to focus on both key people measures along with key performance indicators (KPIs) These measures often vary across organizations but we have identified a set of KPIs that are measured by most companies
² Employee engagement — emotional and intellectual commitment to the organization
² Employee opinions — employee perceptions of opportunities communication worklife balance management how HR programs affect productivity
² Employee skills utilization & alignment — do employees have the skills needed to complete their work Are all of their skills being utilized and are they aligned to support company goals and strategy
² Employee behaviors (eg innovation customer service absenteeism) — are employees engaging in the behaviors you need to be successful
² Nonfinancial measures (eg retention productivity work processes) — do employees remain with the organization and are they productive Do the work processes support company products and services
² Customer measures (eg satisfaction quality churn) — are customers satisfied and loyal
² Financial measures (eg revenue profitability return on investment) — are you realizing appropriate increases in revenues and profitability
Depending on the amount and level of detail of data structure of the organization and number of time periods among other things there are a number of analytic approaches we use to study the relationship between attitudes and performance They can be classified into four major categories
² Relationship assessments (correlation or regression approaches)
² Experiments (test & control group)
² Time series and
² Value mapping
Relationship assessment
This is perhaps the most popular and easiest to execute approach It involves collecting attitude and performance data from a number of independent groups These groups can consist of individuals locationsstores or business units Once we have these two pieces of information (people measures and business performance) we can do a number of analyses (eg correlations regressions structural equations) to demonstrate the relationship between employee attitudes and performance An example of this type of analysis is shown in Figure 1
Experiments
In the strictest sense an experiment would consist of two units (stores locations business units plants) that are identical on all or more realistically the most important variables We would then manipulate employee attitudes in one or a subset of the locations (test) but not in other locations (control) The next step is to measure the difference between test and control and attribute the change to engagement (the manipulated variable)
This is an ideal but often not a realistic or practical approach to demonstrate how changes in employee attitudes impact performance Companies that believe in the relationship between human capital and performance would not want to implement programs to improve performance in only a few of their locations In addition it would have the potential to impact some employees negatively (why is the company experimenting with my unit or conversely why is my unit being ignored)
Another way to approach this is to examine historical data In the example in Figure 2 we have identified two locations that are identical or similar on number of employees region age etc They do however differ in engagement This allows us to attribute the difference in revenue to the different engagement levels
Time Series
This is a more time intensive approach but also an approach that provides a clearer answer For this approach to be successful we need to collect multiple measures of both variables — people and business performance over a period of time This allows us to determine the lead and lag time for changes in both employee attitudes and performance In other words do changes in engagement precede or lag changes in performance and by how much An example of this approach is shown in Figure 3
ValueDriver Mapping
This approach requires the highest level of involvement from our clients and a deeper understanding of the organization Much of the information for this approach would be based on indepth interviews with key individuals in the organization such as their finance operations and business unit leaders Due to the involvement of these key individuals it requires a high level of commitment from both Hewitt and the client to be successful
Basically in this approach we work with the client to identify their key outcome variables Depending on the company objectives these could be growth measures such as revenue sales job creation or earning or they could be return measures such as return on investment (ROI) or total shareholder return (TSR)
Once this step is accomplished we then identify the business strategy objectives actions and employee behaviour that influence these measures This would include an exhaustive set of variables (like competitors marketing) We continue to work backwards in this manner until we can isolate the specific employee behaviours that influence the client’s key measures This allows us to identify key employee attitudes and behaviours that drive performance
You have the Relationship Now what
Having defined the relationship and identified the strength of the relationship you are able to better plan HR resources and spending First you can determine where to focus your efforts – recruiting training on knowledge training on behaviors retention and so on Second you can identify the type and amount of return you should anticipate for your investment This allows HR to be a part of the financial planning process and the company’s success measurement
The predictive nature of models is managed like any other modelling process A number of assumptions should be created based on the data and a level of tolerance around the predicted value helps to build the model’s creditability Continuing to collect the same data over time allows these models to be tested and updated as the business grows and changes
Conclusion
Our experience with organizations such as National Australia Group (National) and Cargill demonstrate the power of understanding these relationships At the National this process identified areas where employees were not adding value in the way expected It also identified what the key people drivers were for longerserving sales employees The National will continue to refine the predictive models to narrow tolerance levels and increase their decision support capability Cargill was able to demonstrate how developing and implementing action plans from their employee engagement survey led to improvement in safety less waste and an increase in ROGI We also have many examples of how organizations decreased turnover resulting in a large reduction in recruiting and training costs and no loss of productivity which goes right to the bottom line
Developing Predictive Models with Singapore Economic Development Board
Late in 2003 the Singapore Economic Development Board (EBD) engaged Hewitt Associates and AC Nielsen to undertake a study to investigate the relationship between their employee engagement and customer satisfaction levels The hypothesis being that employees who are more engaged will have higher customer satisfaction scores The first round of data gathering took place in November 2003 and pulse surveys are scheduled for Q3 of 2004 and Q2 of 2005 By adopting such a longitudinal approach and partnering with a reputable research house such as AC Nielsen the intent is to create a causal pathway model to identify what are the right areas to focus on in the employee engagement model to drive up customer satisfaction
Work on this project is still in progress
HC Foresight
Employee valuation continues to challenge organizations Hiring and retaining talent is time consuming and expensive Aligning your talent to business goals engaging your workforces to optimize results and providing training in the latest skills and knowledge takes resources and funding How can you justify this spending and how do you know its impact
To address this question Hewitt has developed Human Capital Foresight (HCF) a service that will turn a company’s HR data into actionable insights HCF was developed based on data from over 900 clients and 17 million employees and allows organizations to analyze people investments and their impact on business
HCF is an array of sophisticated predictive measurement techniques that evaluate the present and future impact of their human capital on business results Organizations are working with Hewitt to pilot and refine HCF Says Mark Ubelhart Hewitt’s ValueBased Management Practice Leader These new metrics will lead to insights on how key
characteristics of human capital such as talent attraction motivation and retention impact shareholder value and what can be changed to enhance the ROI
How does it work Let’s take differential pay packages as an example Companies are using differential pay packages to retain their best talent To assess the impact of pay differential HCF uses a variety of measures and techniques For example we calculate a Gini Coefficient to assess pay uniformity across the organization and compare it to other companies We then determine its impact on attracting and retaining top talent by calculating a Transition Quality Measure which refers to the flow of employees into and out of the company and is used to determine if the inflow of high performers exceeds their outflow Using these and other tools we can determine what factors drive these flows
While circumstances vary by function and business units within an organization the analysis of pay differential packages indicates that application is critical While attractive in theory organizations can apply them inappropriately which results in a loss of good employees The predictive analytics of HCF will identify the actual gain and loss of employees from various HR applications and investments In the variable pay example poor transition quality can be improved by actualtarget bonus distributions that are more uniform or team based as opposed to individually determined
Findings from transition quality in combination with other metrics and employee data will create linkages to economic value drivers of the business These include cash flow return on investment (CFROI®1) as well as customary financial metrics The predictive analytics employed focus on the human capital characteristics that enable a company to beat the fade – that is sustain performance in spite of competitive pressure
Ubelhart predicts this is just the beginning of decisive measurement tools for human capital This is just the tip of the iceberg as we evolve strategyshaping benchmarking of labor costs the related implications for business performance and shareholder value and the ROI on HR programs he says
The immeasurable will soon become measurable
Following a pilot of the Human Capital Foresight the service will be added to Hewitt HR outsourcing (Workforce Management Benefits and Payroll) engagements at no charge by early 2005 at which time we expect to provide clients with an initial customized Human Capital Foresight report
Registered trademark of CSFB HOLT
The National always knew that people were its key assets In its HCM pilot with Hewitt the National sought to further understand the nature of relationships between people value drivers and business results to take decisions that would mean substantially better outcomes for all stakeholders
When the National Australia Group (the National) a listed bank with over 42000 employees partnered with Hewitt Associates to pilot a Human Capital Measurement (HCM) Model it never doubted that people were one of the key drivers of its competitive advantage The bank however was seeking to go deeper to quantify and finetune its people investment decisions An interview with three of the National’s line finance and people & culture executives highlights many of the benefits and learnings from their twoyear quest
The National focused on developing an HCM approach with Hewitt to be piloted in two business areas – a business banking area (a revenue centre) and a shared service provider (a cost centre) The goal was to understand Human Capital Measurement’s applicability and implications in different operating environments Specifically how it could enhance decision making about investments in people Jennifer Jones the National’s Strategy Principal for People & Culture says Our motivation was to be able to drill down so that we could understand the nature of the relationships between the people value drivers and business outcomes This would help us make more informed decisions and better aligned effort for greater return on our people investments
The HCM pilot identified relationships between specific people measures and the bank’s performance It confirmed the academic research in the employeecustomer profit chain research (Rucci Kirn and Quinn 1988 Guest et al 2000) The results were specific recommendations for future people measures and predictive tools to assess the business impact While these were very positive outcomes the most notable learnings for the National came from the many surprises along the way These had a dramatic impact on the dialogue among senior leaders as they explored how their people create value for the business As David Thompson Head of Finance for Business Financial Services reflected The HCM Pilot has been an interesting journey to say the least It has changed my perspective as I understand that building Human Capital Models is a complex art form that requires a very flexible approach to understand surmounting data issues The quality of the conversation has been very rich
The Journey
In both the profit and cost centres key people measures were tested to explore the impact they had on financial and customer measures Determining which people measures to use was the first source of discussion among the project team
As most readers of Human Capital research are aware the construct of Human Capital Measures can be defined in many ways
Our motivation was to be able to drill down so that we could understand the nature of the relationships between the people value drivers and business outcomes This would help us make more informed decisions and better aligned effort for greater return on our people investments
These definitions vary from an output orientation using measures like turnover performance ratings and tenure (Brown 1999) to value addition using productivity measures (Monti Belkaoui 1995) or even emotional intellectual and structural equity dimensions (Kaplan 1992 Gratton & Ghoshal 2002) With this in mind the model chosen focussed on measures of engagement capability and utilization
Engagement is the state of emotional and intellectual involvement that an employee has in the organization Engaged employees are those individuals that want to and do actually take action to improve the business results of their organisation Engagement was measured through an employee survey
Capability measures extent of knowledge and skill It is impacted by the organization’s ability to attract talent learning and development opportunity and employee skill (competence) and experience levels Technical and behavioural capabilities were measured through a manager assessment and selfassessment questionnaires for each individual
Utilization indicates the extent to which employees are able to apply their skills for the organization’s benefit Organizational structure policies and procedures technology and the clarity in the organization’s objectives and direction impact the level of utilisation Utilization was measured through timesheet data and through an employee opinion survey where timesheet data was not available
These people measures were then correlated to business measures In the Shared Services (cost) centre people measures were linked to internal customer measures of value In the profit centre people measures were linked to financial outcomes such as income and customer outcomes such as satisfaction intention to stay and intention to recommend to others (see diagram above)
Unlike many previous studies linking people and performance the National took a unique approach that focused on understanding these relationships for each individual employee Employees who scored highly in terms of engagement capability or utilization were expected to perform more strongly in terms of their customer and financial outcomes Having the analysis at an individual level raised some challenges but had the advantage of creating a significant number of data points with which to conduct regression and multivariate regression analysis In many cases expected relationships were identified
In both pilot areas a neutral to strong relationship was identified between engagement and business outcomes This suggests that the strength of relationships between engagement and business outcomes will vary across business units depending on their specific circumstances For example employee demographics the nature of the work the business model and the amount of change all impacted the strength of these relationships in different areas of the business
It was found that capability had a strong relationship with business outcomes It was found that capability improvements must be directed at the customer for a positive effect to occur in the short term Using multivariant analysis it was shown that specific capabilities drove revenue growth through increased customer satisfaction
There was also a relationship between utilization and business outcomes in the shared service area It was also identified that employees with high utilisation also have high engagement And employees with high engagement have little variation in their utilization While not a proxy engagement could be used as an indicator of utilization
The Learnings
The pilot has provided a rich source of learnings for all involved On reflection some of these learning for the National have included
1 Know the reasons for adopting an approach to HCM
HCM is not about proving to the business that people matter This was considered a fundamental philosophy and one critical to effective leadership Greg HydeHead of Finance Shared Service Centre AsiaPacific said Intrinsically I have always had a sense that there are linkages between people behaviours and business outcomes I’ve therefore operated on the assumption that if you understand the people drivers and then manage them well you’ll get the outcome you’re looking for The National were focused on adopting a HCM toSupport people investment decisions with more qualitative data andFocus measures on those that are the most critical to business success
2 HCM is a great tool for crossfunctional discussions about people and value generation
The HCM process built a platform to facilitate people discussions across various functions in the business about what the key people drivers of success are Jennifer describes the values of these exchanges Finance Line managers and P&C came together on this project to enable us to look more specifically at the business and to explore the key drivers in a people sense The project process the dialogue between project members during the life of the project and ultimately the outcomes have enabled us to hold more specific conversations around how to align people investments with outcomes
3 Multiple HC Models are needed
We realised that building one HC model would not suffice for the whole organization Whilst in both business units relationships between people measures and business outcomes were identified the relative strength of these relationships were different in each part of businessdepending on such dimensions as type of work business model and strategy and employee demographics This reinforces the importance of building human capital frameworks that are business unit specific and aligned to their particular strategy
4 Garbage ingarbage out
Having good data to start with is a critical success factor Whilst the team knew going into the pilot that the data points would not be as clean as we would like we underestimated the work that would be required to have meaningful data to use This included things as simple as access to historical data isolating individual data sets definition of constructs etc Given the importance of trend analysis and multiple data points for bivariant analysis this required considerable effort to ensure data integrity This was also exacerbated by the amount of change going on within the organisation David describes this In hindsight the task was a tough one given the amount of change that a large organization typically experiences I absolutely think it’s worthwhile but I do think that securing a relatively stable base of data is a challenge
5 HC Measurement tests the quality of measures
Having good measures to start with was a critical success factor In some areas the team overestimated the robustness of existing measurement constructs such as customer service and revenue growth at an individual level While these measures did exist there were significant differences in aspects such as interpretation of the constructs and how the data was collected which resulted in reworking data analysis in line with agreed interpretations It also resulted in redefining and tightening some of the existing constructs For example Greg describes how the process helped them develop a stronger measure of customer value We saw some good correlations which made sense In other areas where there weren’t correlations we didn’t think it was proving our philosophy wrong Often there was a reason which helped us learn how we could or should measure the feedback from customers in the future which I think will provide stronger correlations next time around
6 The value of surprises
The journey had its own fair share of surprises As Jennifer summed it up the greatest benefit came in unexpected ways In trying to wrestle with data sets that didn’t fall the way we expected we gained an enormous amount of value For example the process helped to deepen our understanding of the human capitalrevenue growth relationship in particular business segments We had made a couple of assumptions within this project that subsequently proved to be incorrect The result of this is that we have needed to take a deeper look at how we construct our measures of success so we focus on the right issues This reinforces the view of many in this field that just focusing on quantitative relationships only provides partial evaluation of the value of this field of study Adding qualitative understanding to the data was critical
7 Get started and keep it going
Like any new field of study it takes time to build the frameworks and data sets that eventually provide the most beneficial outcomes Time will also build stronger predictive modelling capability as well as differentiate lead and lag indicators David concluded Human Capital Measurement offers the potential to build leading indicators rather than lagging outcomes as ways of driving the business and is a process worth pursuing Many of the measures we have previously focused on are outcome driven and therefore lag indicators External reporting requirements and current data systems reinforce the way we currently use measures and it may take many years of refinement to completely integrate leading human capital models into the way we do things
Wrapping Up
The pilot has provided a great opportunity for the National Group to keep building its Human Capital Framework The value of the work is best summarized by each of the steering committee members
Greg Knowing there’s a relationship between business performance and leading your people well has always been about confidence and faith that the concept works What the pilot has brought to the table is some empirical way of trying to test that out through the identification of some strong correlations
David Human Capital models will bring greater clarity and precision to the soft metrics we use around people This will allow us to better allocate scarce resources My experience in this pilot has increased my desire to get there
Jennifer It’s about enabling meaningful dialogue to understand the nature of relationships between people value drivers and business outcomes Ultimately then it’s about how this enables more effective decision making and enhanced outcomes for our customers shareholders employees and other stakeholders
The National is continuing to explore ways in which it can enhance it HCM to develop more sophisticated people measurement It is also developing a process to roll out the learnings of the pilot across its subsidiary groups
Most organizations use some measures of human capital – headcount turnover productivity – or make some assessment of the value produced These measures vary in their complexity in the amount of information they provide and the value they contribute to the company’s decisionmaking process Clearly there is no single measurement formula that works for all organizations that have different goals strategies and people practices Our work in HCM however has shown that there are certain principles you need to consider to maximize the benefit you receive from using HCM
1 Measurement is a starting point
The power of measurement is not the metrics or data you collect Rather the benefit comes from your ability to use the information to diagnose your organizational situation and make better decisions to move the business towards its strategic goals Organizations should review current measures in the light of their use for decisionmaking
2 HCM supports but does not replace good people management
HCM helps you identify where to focus your efforts People managers still need to develop HR programs and implement them effectively
3 Understanding the value of people is a starting point
HCM is not about proving the value people add to the business good leaders already have this fundamental philosophy It is about guiding investment decisions and understanding the benet and tradeoffs in people decisions
4 HCM includes a wide range of approaches
HCM ranges from basic metrics to comparative information from scorecards to predictive models To succeed with HCM organizations need to select the HCM approach that aligns with their context and needs This need could be developing or identifying key metrics setting performance levels or measuring the ROI of HR practices
5 Think about people value and not only about people costs
Many organizations understand their people costs quite well However not all of them consider how people help the organization achieve its goals Consider the person who works late to check the accuracy of a customer order or the person that comes up with efficiency improvement ideas Both of them add value well beyond their costs
6 HCM brings HR closer to the line
HR is often viewed as the softer side of the business It often struggles to demonstrate its value As HCM takes root in an organization soft measures become performance focused and demonstrate value creation this buys HR credibility with the line and a place at the decisionmakers table
7 Use measurement to identify where you will get the biggest return
A variety of tools are available to help your organization focus on growing and maintaining performance through your employees It is well established that motivated or engaged employees contribute more to a company＇s bottom line Hewitt＇s approach is unique in that our engagement approach not only helps you motivate employees but also helps you maintain and grow the performance of high performing employees
8 Understand the ROI of your investment in people
By using predictive models to help you understand how much and where to invest your people dollars you can understand the return on each investment whether it is recruiting or training new employees motivating or increasing skills among existing employees or implementing new procedures and processes
9 Adapt your approach and innovate to meet your evolving needs
Your organization will have different HCM needs as you modify you goals and strategies to compete in the marketplace This will include modifying your strategies to attract set expectations retain motivate and maximize performance of your employees It will also include optimizing utilisation of limited HR resources Some of the approaches we use in this area are described in subsequent sections (see HC Foresight and HR Analyzer)
10 If you ignore HCM you will be at a competitive disadvantage
Organizations are expanding their use of HCM Some are using sophisticated tools to identify and implement people programs that impact business results directly and dramatically These organizations produce significant return on investment and revenue growth The longer you wait to implement HCM the more ground you need to make up Can you afford that expense
With Malaysia entering the Asian Free Trade Agreement in 2005 market realities for most organizations in the country are all set to change The same is true for Perodua Sales Sdn Berhad Malaysia＇s second largest car company With almost its entire focus on pushing sales volume thus far the company had been growing rapidly in size However Perodua recognised that in the new increasingly competitive scenario a sales focus alone may not work The company needed to have worldclass practices in many areas It needed to be closer to the customer focus on product improvements have a creative market positioning increase employee engagement enhance leadership strength and bring about a culture of accountability and excellence
To consolidate and grow its position in the Malaysian car market Perodua decided to undergo a business transformation through a leadership development program and assessment of human capital throughout the organization
Perodua began working on the transformation with Hewitt Associates in October 2002 and has since developed performance metrics cascaded new measures through the performance management system connected leaders to its new business model and focused its employees through more effective measures With the transformation of its sales model Perodua continues to be the leader in the small car market in Malaysia maintaining a third of the local market share
In August 2003 Hewitt conducted a detailed review of their measurement system A key recommendation was to adopt a more comprehensive and balanced framework for setting key performance indicators in the form of a balanced scorecard
Starting at the top
The transformation needed to start at the top Hewitt Associates initiated work with Perodua with a Leadership Development Program for the top management group and a review of the Perodua Sales Performance Management System While the leadership team at Perodua Sales had successfully led the business through rapid growth they recognised the need to strengthen competencies to meet the challenges of the manifold rise in competition For this 360degree assessments were done to reveal the strengths and development needs of senior leaders and individual and team development activities were conducted to address the gaps A leadership competency model was developed to preface these activities
Individual coaching sessions and a series of leadership workshops to address business and people management issues and facilitate individual and team development followed The process is now in place and the final outcome will be a reassessment of the leadership team＇s competencies in October 2004 to measure specific improvements and changes in individuals and the team
As part of the leadership assessment exercise Hewitt and Perodua identified several organizational performance opportunities
² Expand focus to sales and service as opposed to sales alone
² Focus on service and spare parts to increase share in a more competitive environment
² Drive product improvements evolve a creative market position and understand customer needs by enhancing synergies between the sales marketing and manufacturing arms and
² Create a culture of accountability for performance and excellence
Using measurement to drive performance
The leadership team agreed on the need to review and revamp their performance management system and introduce more tangible measures that were aligned to the new business model and strategies
In August 2003 Hewitt conducted a detailed review of their measurement system A key recommendation was to adopt a more comprehensive and balanced framework for setting key performance indicators in the form of a balanced scorecard Hewitt led the team through a series of discussions on their business model and plans for 2004 and facilitated the process of designing a corporate balanced scorecard for Perodua Sales This was subsequently cascaded down to all the leadersmembers of the management team in the form of individual scorecards
Hewitt also conducted training workshops for all its managers Simultaneously Perodua＇s HR team also conducted training workshops for the rest of the executives By March 2004 all Perodua executives had aligned performance scorecardsKPIs
The key process steps included
1 Aligning the organization＇s vision with a business model for the shortmedium term
Hewitt worked with Perodua＇s management team to articulate the vision mission and key strategic imperatives This was followed by a gap analysis between the current and desired state Finally the corporate balanced scorecard was established The key metrics included financial measures customer perceptions work processes and organisational capability along with highlevel action plans to achieve the same
2 Cascading the performance metrics to the divisional & departmental levels
Hewitt worked with each of the management team members to develop their divisional scorecards These metrics were subsequently cascaded to the next level
3 Review and redesigning of the new Performance Management System
Hewitt made the performance management system more objective and development focused by incorporating new features like a revised rating scale weights and leadership competencies In addition Hewitt recommended the introduction of formal and informal review sessions during the course of the performance cycle to encourage managers to have regular conversations with their subordinates and avoid endoftheyear surprises Hewitt also shared best practices from other leading organizations
4 Launch of the new Performance Management System and Key Performance Indicators
The revised system along with the corporate and divisional performance metrics was launched through a series of road shows covering the regional and branch of ces Hewitt worked with Perodua＇s HR team to educate managers and executives on the usage of the new system and to develop the skills in setting aligned and SMART Key Performance Indicators
The Results
While the leadership development program is ongoing Perodua is looking forward to tangible results from the exercises conducted so far At a leadership team actionplanning workshop in June 2003 an expectation of seeing a 1520 improvement in the assessment scores owing to leadership development interventions has been articulated This is bound to translate into a positive feedback on the leadership team＇s visionstrategic thinking among other things
There has also been a significant increase in crossteam sharing or learning via crossdivisional action learning projects At a business strategy assessment discussion facilitated by Hewitt for example two core issues were identified for immediate attention — customer segmentation and product reclassification Two actionlearning programs were subsequently initiated that had members of sales service and support functions This provided an opportunity for people from different functions to come together and exchange ideas and information and eventually contribute to improving business performance
In fact communication has become open and interactive on a routine basis The leadership now conducts regular meetings to discuss ongoing business performance involving managers from different function areas Such openhouse discussions have also been cascaded An employee suggestion scheme is now in place at the shop floor level too
Hewitt has also impacted the organization by creating awareness for urgency in action to take on the increasing competition through measurement of progress ongoing monitoring and dialogue As one leader commented No one at Perodua can talk about being taken by surprise any more
Perodua in turn has already cut out Hewitt＇s work for the future making a development program for their younger high potential employees known as the ＇highiers＇ and institutionalizing a succession planning process
When Ispat Industries the third largest steel company in India decided to aim for the top position in the industry about two years back it started a change process that touched almost all aspects of its business Led by the vision of its promoters Chairman & Managing Director Pramod Mittal and Managing Director Vinod Mittal the nearly 20yearold company aimed to become a worldclass organization
To realize its vision to double capacity and almost double turnover to Rs 10000 crore in two years and expand presence both in India and abroad the promoters decided the organization needed a complete restructuring Apart from reengineering enhancing presence reworking growth strategy tightening supply chain management and cutting response time to consumers the top leadership realized that mindset was where the change had to begin For that human resource processes culture and competency had to be aligned with the business plan
Says Satyabir Bhattacharyya Director (Strategy & Business Excellence) Transformation of the scale we envisioned could not happen without HR There had to be a strategy for human resources and it had to be implemented We realized it was important to have the right structure empower people put performance measurement systems in place and see that the key performance indicators were in alignment with the company strategy In fact Bhattacharyya says Ispat wants to be in the best employer category in India by bringing in best HR practices and setting up global benchmarks
For a core sector company in India to focus on its people assets itself is quite unusual Quality of manpower here is rarely in focus unlike in the service industries At Ispat this was clearly not the case
The transformation exercise started by putting an organization structure in place This had a twofold impact On the one hand the structure itself was reworked to bring efficiencies and on the other new roles were created to aid in change and growth For example an integrated supply chain management function was put in place instead of purchase and sales functions that worked independent of each other
For change management portfolios that would assist in the process were created While President HR itself was a new portfolio created to signal the change from its limitation to personnel separate cells were created specifically for roles like recruitment performance measurement rollout and competency management Bhattacharyya himself was brought in as director in charge of strategy and business excellence to implement the transformation exercise
Bhattacharyya says when the transformation started organization readiness was a question mark After attempts to bring about changes through primarily new systems and processes the organization realized that the change could only be felt by ensuring that people saw the impact in a tangible form To do this Ispat has embarked on an integrated implementation focused exercise Aspects like training compensation and performance management now have only one barometer — has the change been felt
Bhattacharyya says We have ventured through uncharted territory We have worked on details for example in our efforts to train and develop the entire company We have now tied up with Indian School of Business (India＇s premier business school) for developing a leadership program for us We constantly seek inputs from our consulting partner Hewitt Associates They have been working with us as a part of the organization team in ensuring that the details and implementation have a grounding in robust principles In fact the revamped HR committee at Ispat that takes all key decisions and comprises its line function directors also has Hewitt consultants on board
Once the organization structure was in place next on the agenda was performance measurement system For this balanced scorecards were made for each division from which the individual scorecards flowed The business scorecards are currently being aligned to individual scorecards and then on to the key result areas The exercise which helps measure individual performance against the target specied on the scorecards and eventually aims to raise capability has meant a satisfactory alignment of HR to business targets says Dr Rakesh Mehta President HR
Going forward Hewitt is also working on competency models assessment centres (complete with role play and group activities) and role definition exercises for Ispat managers and deciding on training programs thereof Mehta says the company finally aims to define roles in line with the vision for the function empower people and bring in greater accountability
Ispat is also adopting benchmarking as a practice For example the salary restructuring this year was done with Hewitt based on these benchmarks says Mehta In their bid to value human capital Mehta says the compensation was introduced with market correction this time Not only that the HR head went out to the employees before increments were declared and gave them an explanation as to how the figures were arrived at addressing over 500 people The idea was to bring transparency in the system says Mehta
Ispat is also focusing on driving the transformation through leadership interventions It is undertaking a leadership study to enhance the leadership capability and bring about a cultural change within the organization It is currently studying the leadership style and subsequently there will be coaching and grooming of the top team helping it interact with other leaders in the corporate sector and developing a succession plan
At the factory level satisfaction surveys are being undertaken with the bluecollar workers too Their areas of concern are being identified a skill inventory being undertaken people practices being noted and a formal role document being prepared A simpler performance measurement system is also being evolved for them Mehta says work is already being done on the issues voiced by the workers Developmental work is also on to improve the skill and knowledge levels of workers that is directly relevant to business and would increase productivity
How are people at Ispat responding to these host of changes The response has been more than enthusiastic says Mehta People are very happy as it has made their processes simpler and added value in the way they work he says The crossfunctional initiatives have also helped build bonds among employees This was particularly important as nearly 20 of the Ispat employees have come aboard in the last year as part of the restructuring exercise
Says Mehta When people get impacted by positive changes they put their weight behind the effort to make it successful This is precisely what is happening at Ispat
Theirs was a brand name an entire generation of postindependence Indians grew up with Part of a wellknown familyowned group in India the product portfolio of this consumer durables company included fans sewing machines and domestic appliances making it literally a household name
Market realities changed rapidly about a decade back The homegrown contender for the top slot in almost all appliances and durables across the 16 states it was present in found itself facing stiff competition from either cheaper Chinese imports or from multinational brand names
Employee morale crumbled as the sales graph held flat Most of the sales force failed to meet targets attrition rates of the front line sales people were high and incentive plans failed to motivate The company was also emerging as a happy hunting ground of front line sales people for competition The result corporate performance suffered
The company decided to bring in Hewitt Associates to deal with its human capital management and align it with the business goals The key issues were sales force performance and motivation Top management admitted target setting was unscientific and most divisions were left grappling with unrealistic targets that had historically been forced down Needless to say at the end of the year incentives were distributed among a small fraction of employees who had been able to meet the targets The result low motivation levels To make matters worse the company’s pay structure was not competitive either
The key focus of the exercise was therefore tailormaking an effective targetsetting process It was also to be aligned with the performance measurement system (PMS) and the incentive pay plan Hewitt was to eventually design implement and train the company’s HR function on target setting toolsprocess It also aimed to measure the impact PMS and target setting had on the top line of the firm as well as employee costs in terms of incentive payout
Various options were studied instead of the existing topdown approach for arriving at an effective targetsetting formula Balance stretch vertical alignment accountability and shared responsibility flexibility and SMART goals were all looked at And instead of targets being forced from above a bottom up as well as a combination of the topdown and bottomup approach was contemplated
Owing to the company’s vast product portfolio that it sold in a variety of markets each product was analyzed separately A set of five criteria was defined to select an appropriate process for each
² Nature of the product (trade versus nontrade)
² Nature of the market it catered to (predictive versus volatile)
² Availability of information and data
² Desired degree of centralization and
² Benchmark to be used for the process (historical versus marketcompetition)
Considering the market realities of the various product lines two models were shortlisted
² Time seriesanalysis taking into account four kinds of changes namely secular trends cyclical fluctuations seasonal variations and irregular variations and
² Econometric mode taking into account economic factors such as market size number of competitors and the number of frontline sales people
Finally a targetsetting template was created which trackedrejected the organization＇s performance on a regular basis Simultaneously a costbenefit analysis was completed especially for the incremental cost incurred through the incentive route visàvis benefits accrued through a structured and scientific targetsetting mechanism
At the end of the entire exercise sales targets were forecast for the next fiscal year with a deviation of + 4 for each product category Thereafter targets were cascaded from the corporate level to the division and subsequently to the frontline sales force
The approach whether top down or bottom up or a mix of both was decided for each product category Once that was done the relevant forecasting tool (time series or econometric model) was used to set the sales target for the ensuing year The figures that emerged for fans for example (in ＇000s) were the following
Details were then worked out as to how the total incentives would be impacted under the new system Around 40 cases (frontline sales people) were tested to see the impact on individuals with varying levels of past performance
The table above illustrates the impact of the new PMS and target setting under varying levels of performance that were defined on a scale of one to five with a rating of four taken as the target level
The organization had paid Rs 7943 lakh in incentives in 200203 a year when the performance level was much below target This was based on the ratings given to employees according to the company＇s existing systems The new ratings (see table) represent the expected ratings of employees for the same fiscal year had the PMS and incentive system recommended by Hewitt been in place In this exercise if the company were to have paid around Rs 50 lakh more it would impact the bottom line to grow by at least Rs 90 lakh for the following year
Hewitt’s performance measurement system will soon be put in place and should be steering the business performance in the desired direction
THERE WAS A TIME WHEN IMPROVING THE BOTTOM LINE WAS RELATIVELY EASY COMPANIES SIMPLY RAISED THE PRODUCT PRICES THIS OPTION IS NO LONGER VIABLE PROVIDING A SHORTTERM IMPACT AT BEST ORGANIZATIONS NOW FACE INTENSE AND INCREASING COMPETITION DEMANDING BUT FICKLE CUSTOMERS AND PAPERTHIN MARGINS IN THIS HIGHLY COMPETITIVE GLOBAL ENVIRONMENT MAINTAINING AND IMPROVING BOTH THE TOP AND THE BOTTOM LINE HAS BECOME A CONSTANT CHALLENGE
Centralization restructuring mergers and acquisitions have become the new tools to improve efficiency reduce costs and raise profitability These exercises however set off alarms across the organization Department heads find themselves buried in paperwork preparing dockets and detailing value they add to the organization Fear and apprehension grip employees and productivity drops
In these scenarios most function heads are able to quantify their contribution to the organization The human resource function too feels the pressure to distance itself and the current staffing levels from being viewed merely as costs The pressure on HR is higher While most companies recognize that human resources is a key asset and the HR function a strategic partner in their growth in practice human resources has difficulty justifying value and continues to be viewed as a cost and the HR function a corporate expense
To help HR departments in this exercise Hewitt has developed a tool that identifies costsaving opportunities and improves efficiency Hewitt’s HR Analyzer allows an organization to rapidly create
Starting with a vision of where it is headed HR must also work with key stakeholders to improve the HR model and efficiencies in order to maximize the return on HR investments The pressure on HR to demonstrate value has never been greater
Recent Hewitt Associates research shows that a majority of HR departments are being pressured to cut operating budgets and headcounts Too much focus on shortterm reductions without appropriate measurements of return on investment (ROI) can create a vicious and neverending cycle of cost cuts for HR departments which ultimately undermines its effectiveness
To add to the pressure most HR departments don’t expect costcutting pressures to end A recent survey conducted by Hewitt of more than 100 companies in North America indicated that 76 of organizations are under significant pressure to reduce costs now and through 2005 The situation is similar in other parts of the world The need to formulate effective and value adding measures for cost cutting continues to grow
The HR heads therefore have little option but to identify and understand all costs overcome organizational resistance to change and measure the effectiveness and impact of HR cost Starting with a vision of where it is headed HR must also work with key stakeholders to improve the HR model and efficiencies in order to maximize the return on HR investments The pressure on HR to demonstrate value has never been greater
² A baseline of HR expenditures and resource allocations by functional area
² Clear understanding of process costs and areas of efficiency
² A comparison of how HR performance stacks up against national and international benchmarks (including technology and delivery model comparisons)
² A factual basis for making decisions about how to best align expenditures and resources to support the business strategy and meet the needs of internal customers
² A cost and process data needed to develop a business case for centralization or outsourcing and
² Cost reduction recommendations
Representing a new generation of workforce management tools the HR Analyzer helps HR professionals identify and prioritise areas within HR to improve efficiency For example the tool allows for a fragmentation analysis to identify the areas the HR people are involved in and the percentage of their time that is committed to each Such specific data allows the HR head to identify areas that can be streamlined through either process reengineering or other means
The customized system integrates internal and external data from various sources to provide a complete uptodate picture of workforce issues It supports decisionmaking with builtin data analysis and modelling capabilities as well as access to externally published best practices information The HR Analyzer includes a growing comparator database of US Fortune 500 companies to help clients evaluate how they compare with similar organizations in HR cost areas
The tool captures not only HR labor costs but also includes data on outside expenditures utilization of technology and selfservice tools
Finally the HR Analyzer provides a seamless link to the experts when additional support is needed with online access to Hewitt’s consulting knowledge and expertise
With its objective fact base the HR Analyzer can guide decisionmaking and help overcome resistance to change clarify HR structure and roles and clearly define delivery channels For organizations that do not know where to begin it points out target areas for process redesign And it rounds up the exercise by measuring the operational and financial impact of HR transformation
The picture that emerges helps the organization drive decisionmaking in five areas
² Financial performance
² Organizational design
² Process efficiency
² Technology utilization and
² Strategy alignment
In its work with over 25 companies in the past year Hewitt has noticed some commonalities in companies that pursue HR transformation successfully They are building virtual centres of excellence have shared regional services aggregate transactions across geographies digitise routine transactions and outsource noncritical HR
Part of their success also lies in the fact that they do not lose focus on managing remaining HR staff These companies instead focus on justifying their investment in a new HR delivery model which can range from 1 million to 7 million and make known to senior management that ROI on new HR investment may take twothree years to show results
There is one question that every one of us in business really wants to know the answer to is doubledigit growth possible year after year in any industry under any market condition A recent book by Michael Treacy entitled DoubleDigit Growth How Great Companies Achieve It – No Matter What studies a number of companies that prove it is However the clear message coming out of Treacy’s work is that it does not happen by chance
Hewitt has recently partnered with Michael Treacy to examine the growth strategies organizational levers and people practices of the doubledigit growth (DDG) companies that can help your company craft and fuel your growth agenda In essence what are the human capital characteristics of fastgrowing organizations
Companies that achieve these stellar growth rates year after year are constantly challenging themselves on three fundamental questions
Research shows there are distinct differences between companies that show consistent doubledigit growth and the rest They do most things differently especially with regard to their people They approach their human capital differently measure its performance differently and help it excel differently
² Where can we achieve growth
² Where are we in our growth cycle
² What are the organizational and talent characteristics we need in order to grow
The DDG companies definitely treat human capital very differently from singledigit growth companies Jason Jeffay North American Leader for Talent and Organizational Consulting at Hewitt says the DDG companies pay their executives differently use incentives and rewards differently set their goals differently have higher standards have distinctly different kinds of leaders outsource more frequently and strategically and have more engaged and confident employees The DDG companies excel at four overlapping disciplines
Performance
DDG companies set high standards and expectations for their employees and hold people accountable for achieving highperformance levels Leaders set the bar higher They have less tolerance for mediocrity and set their targets higher Rigorous goal setting and performance measures are key to success at DDG companies Goal setting is more top down than bottom up These companies utilize structured goal cascades and business education to ensure people are focusing their efforts on the right things This translates into their measures for incentive pay
DDG companies also pay more for courage than caution They are more likely to deny incentive eligibility to poor performers and more likely to have minimum performance thresholds in their incentive plans At the same time they are more likely to recognize the degree of stretch in a person’s goals One way they do this is to lengthen the time horizon for performance They also take a more holistic view of performance using organizationwide triggers or thresholds in their plans rather than individual or business unit triggers On an average DDG companies budget 30 more per eligible employee for variable compensation than slower growing companies
In turn DDG companies work hard to help employees achieve targets Leaders have more frequent contact with employees and their markets and know when to pull back and change priorities and resources in order to get the right things done
Talent and Leadership
DDG companies know the value of continuously acquiring and maintaining talent They have a relentless focus on hiring developing and retaining great talent Their selection processes are rigorous They use sophisticated testing to ensure they get the best applicants And they look beyond the current job requirements keeping potential needs and culture fit in mind Most importantly perhaps they look for people who have the inclination and capability to grow a business rather than merely maintain it Of course these days all leaders talk about their focus on their talent The difference is that at DDG companies they back up their words with focused investment and action to go well beyond the rhetoric and deliver on their promise
As you would expect the leaders at DDG companies are personally more engaged They are committed excited and passionate about their organizations and have a drive to succeed that is simply burning much brighter than the fire in the belly of leaders in other companies DDG companies move their leaders much more regularly putting their best people on their best opportunities Their evaluation techniques are finer too DDG companies are more likely to have a formal high potential program that they use for both performance measurement and succession planning They are also more likely to communicate to people their high potential status that is further developed using rotational assignments and onthejob experience The result is more engaged employees that in turn contribute more to business performance
The study shows employees at highgrowth companies are more connected to the business its performance and its leadership They are also more likely to have confidence in their organization’s future business direction and to feel that the company is positioning itself for future growth They are more likely to feel that their company’s products and services provide value and benefit to customers and are more likely to recommend the company’s products to potential users
Organization and Culture
DDG companies are more agile more decisive and more focused on their core competencies They drive accountability to smaller units within their business to create an entrepreneurial smallcompany feel within the context of a large business To support this they outsource more noncore activities and are more likely to establish joint ventures or internal service centres to free up resources to focus on growth
This more agile more networked organizational structure of DDG companies is held together by strong organizational values that emphasize teams collaboration and winning The culture is externally oriented or customer centric This keeps the focus on what is happening in the market and promotes and celebrates customer value creation They also foster healthy competition between units or groups to spur levels of performance without letting it get divisive or counter productive
Another hallmark of DDG culture is communication At DDG companies employees receive the information they need to do their job well understand the company’s goals and how they can contribute to those goals This communication is the foundation for the strong sense of collective will and focus on winning These companies exude a singleminded determination to reach their goals to be successful
Metrics
DDG companies know the value of continuously acquiring and maintaining talent They have a relentless focus on hiring developing and retaining great talent
The fourth overlapping discipline of DDG companies is their focus on metrics Leaders in DDG companies are more analytical about their markets their business performance and their people DDG companies understand the impact of investments in HR programs – the return on their investment in performance bonuses or training the sales force about their competitors or more rigorous recruitment and selection processes They do not operate on hunches they make decisions based on probabilities that are rooted in a deeply analytical approach to the key numbers in their business
These management and organizational disciplines in DDG companies result in higher employee engagement DDG companies have 39 more employees who are highly engaged thus contributing even more to the company’s success Conversely DDG companies also have fewer highly disengaged employees who drain any company’s ability to perform effectively
What limits companies from growing at sustained double digit rates is that they lack sufficient management capacity – the human capital — required to grow concludes Jason Jeffay This puts the issue of business growth and success squarely in the realm of Human Resources It also presents us with an interesting paradox Every HR department and most business leaders will say they believe that their people are a critical enabler of strong growth What about you Would you agree Is HR therefore the most important function in your business
Capturing the value from the human capital in your organisation is possible Only it does not happen by accident
This article focuses on the third of these questions For more information on the double digit growth research please request our Research Report Building the Management and Organizational Disciplines to Grow (2004) from your local Hewitt office
In a talentscarce scenario companies cannot afford to go wrong in the areas of salaries and benefits The Hewitt Benefit Index® ensures that companies distribute maximum value to employees through their spending on benefits
What attracts talent to an organization A challenging assignment prospects for growth a chance to contribute or an attractive compensation package Smart companies around the world know the correct answer is a mix of all four And in a competitive talent landscape companies cannot afford to stumble on any of the above
China right now is the hot playing field and for organizations operating here this means that the talent war is very real Despite best efforts companies complain that even attractive career paths and expensive compensation packages don’t always seem to be enough to retain key talent One issue is does all that spending on cash and benefits translate into real value for employees
Companies in China spend a disproportionate amount on benefits compared to those in other countries around the world As much as 45 of base salary can go towards the mandatory social benefits scheme which unfortunately is known to be insufficient by a significant margin Most thus spend an additional 415 on supplemental benefits schemes
which are emerging with government encouragement as an important piece of the compensation puzzle Add to that underlying costs of the various worklife plans and other HR programs and the depth of a company’s investment in benefits arrangements for employees in China is clear To help companies juggle the value versus cost challenge that plagues the current benefits landscape Hewitt’s benefits team in China has recently introduced one of its trademark benefits valuation tools the Benefit Index®Clients were constantly coming to us questioning the money they were channeling into benefits and whether employees could appreciate the company’s investment on their behalf says Lucy Liu Actuary and Benefits Consultant in Shanghai We realized that companies here are ready and very eager to have tools that will help them make educated decisions about the competitiveness of their benefits programs
Capturing the Value
Where Benefit Index® makes its impact is by comparing the value not just the cost of a company’s benefits package on an applestoapples basis with a group of comparators as well as illustrating the fit of the overall package to organizational objectives Applied as a comparative and analytical tool Benefit Index® provides the basis for supplemental benefits review and design if appropriate Comparison is really the first thing companies care about Second is evaluating the distribution of benefits spending says Liu
In the case of a multinational pharmaceutical client in Beijing who conducted a Benefit Index® trial earlier this year the results identified several areas of misalignment with an industry peer group In fact the company was overspending on one particular benefit item without adding comparable value to employees This company took those findings back with recommendations for adjustments and they have since redistributed their benefits budget to ensure that they are delivering superior value in areas that are important to their competitive strategy
The Tool
The Benefit Index® uses a quantitative objective methodology for analysis and benchmarking to report benefits comparisons in all the key benefits areas specific to China including
² Wealth accumulation (retirement housing savings plan etc)
² Group assurance (life accidental death and disability travel employer liability etc)
² Health care (employee medical dependent medical checkups etc)
² Timeoff with pay (holidays and vacation) and
² Sick leave (100 and partial salary continuation)
The index ranks each benefit in comparison with the group average and shows how the organization’s total benefits package stacks up against peer organizations Benefit Index® also serves as an auditing tool not only pin pointing the similarities and differences in company and comparator group programs but also the reasons for the value differences For organizations with multiple operations Benefit Index® is an excellent way to facilitate harmonization across entities
We realized that companies here are ready and very eager to have tools that will help them make educated decisions about the competitiveness of their benefits programs
One Step Closer
Liu’s benefits team in Shanghai has currently compiled a database of over 100 leading companies in China to form the basis of its future Benefit Index® analysis pool When data collection is complete this summer organizations will be able to compare and evaluate their benefits and benchmark best benefits practices Over and above the basic index companies will also be able to choose to receive an employee demographic analysis which provides valuable insight into deriving the most value at the least cost Another option is a retirement income analysis which uses assumed salary increase and investment return rates (in the case of defined contribution plans) to demonstrate real benefits accrual levels in addition to ranking the overall plan visàvis prevalent market practices
Additional products in Hewitt’s line of benefit products will also be available Benefit SpecSelectTM allows companies the flexibility of forming a customized comparison group based on specified industries geographic areas sales and number of employees and SpecSummaryTM condenses the data into an easytouse guide on typical company practices giving prevalent benefit programs and their key design elements
An efficient and effective supplemental benefits program is best designed to synchronize with mandatory benefits the company’s business strategy compensation philosophy and demographic situation With these tools and expertise Hewitt is armed to assist companies in China design programs that provide value for cost and enable their achievement of desired business results Let the benefits battle begin
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