Metrics and Recession: Is There a Connection?
In this column we hope to use a combination of our experiences in business, research and developing and using metrics to dispel some of these myths. Some entries will focus on fundamental issues, others will examine specific applications, and still others will attempt to stretch your thinking beyond today’s uses of metrics to where the future may take us. Although we have an agenda set for the next year, we will respond to your interests and issues. Please let us know what you want to hear and what you want to explore and we will do our best to present it. Also, please provide us with feedback about the issues we are presenting.
Jack and Patti Phillips
Metrics and Recession: Is There a Connection?
While the politicians debate whether or not we are in recession, to most of us it is quite clear—we are in an economic recession—or at least a serious downturn. Slowdowns in the economy, lay-offs in many areas, mergers, consolidations and bankruptcies dominate the news, leaving many human resources departments, and professionals concerned about the future. Today, many human resources professionals are anxious and concerned about their contribution and value.
Four specific challenges will face the human resources function in the next two years. The following list outlines how these challenges are met with the use of metrics.
1. Budget issues. Concerns about budgets and funding come in several varieties, but most involve confronting reductions, justifying requested budgets or maintaining them when other budgets are being reduced.
While it may be reasonable to expect all budgets to be cut proportionally, in reality, they are not. Executives reduce budgets in areas that are considered to be unnecessary or not absolutely essential. This situation sometimes leaves the human resources function as a target. Yes, human resources is essential but several questions emerge: How much budget is needed? Can the essentials be achieved for much less? Can others do it for less? These issues are on the minds of executives. Without an effective metrics program in place, executives may not clearly understand the value of many human resources projects and programs. Studies that show the connection between specific human resources initiatives and outcome measures are very helpful.Examples of these are:
- Job satisfaction compared to turnover
- Employee engagement and productivity (measured by revenue divided by the number of employees)
- Job satisfaction and customer satisfaction
ROI studies can also be very valuable to show the impact of specific human resources projects and initiatives. For example, recent studies that have helped defend or justify budgets include:
- The financial payoff of a wellness and fitness center
- The impact and ROI for a new leadership program for middle-level managers
- The ROI of a business coaching program
- The payoff of a new career enhancement program
- The payoff of a new compensation strategy
- The impact and ROI of a diversity initiative
2. Outsourcing. Over the next two years, the outsourcing issue will intensify from two perspectives. First, should major parts (or even all) of human resources be outsourced? And second, should current outsourcing be reviewed with the possibility of bringing it back into the organization?
Let’s examine these scenarios. A typical executive reaction in a recession is to reduce costs, which often lead to decisions or discussions about outsourcing parts of the human resources function. Most outsourcing is initially pursued with the hope of reducing costs, and in fact, most seem to do this in the early stages of implementation. An effective metrics system can enable this decision in several ways. If the function should be outsourced, the metrics should confirm it. If the function should not be outsourced, the metrics can confirm this as well. Metrics on costs and efficiencies are critical—such as the cost per hire, the time to fill the job, the cost of training, recruiting efficiencies and the cost of administering benefits. When we clearly understand costs and efficiencies then we can compare them to potential outsourcing opportunities. If indeed it can be outsourced with much less costs, then maybe it is a good decision. If it cannot be outsourced with fewer costs, maybe it should be left alone. If you do not have the metrics to show these costs and efficiencies, you are at a disadvantage.Too often, an outsourcing decision produces cost savings in the short-term and customer dissatisfaction in the long-term. If the stakeholders/customers of the outsourcing decision are dissatisfied, it can create serious problems for the organization. If we have excellent levels of satisfaction now (e.g. employees are very happy with the way the benefits are administered or managers are pleased with the way the recruiting is handled), then potential outsourcing might not need to be pursued because there are great levels of satisfaction. Sometimes these functions are not measured very well and become victims of outsourcing. With no clear vision of the accurate costs, efficiencies and effectiveness—including the levels of satisfaction—a function becomes a candidate for outsourcing, even when it should not.
In terms of reviewing outsourcing decisions, an effective metrics system can also help.This system not only tracks the costs, efficiencies and effectiveness of the outsource process, but also captures the levels of satisfaction. This may also include the flexibility of using this system, the integration with other processes and the level of support needed from all stakeholders. Sometimes what appears to be an economic decision in the short-term turns into less flexibility, more cost and less customer satisfaction in the long-term.
Today, we are seeing more of reversals of human resource outsourcing (HRO) contracts. In March, Starbucks announced that it had terminated its outsourcing contract and was bringing human resources back into the organization. In February, Wachovia announced it was taking back the majority of its human resources processes from Hewitt and Associates. In December, NiSource disclosed that it would be taking back its human resources functions from IBM and handling them in-house. UBS has taken a similar approach. There will be more of these reviews of current contracts with various companies over the next two years to see if they are delivering what they are designed to.
3. Employee lay-offs. Unfortunately many organizations, including the most admired, well-respected organizations not normally subjected to layoffs, are being affected by the economic situation. Companies such as Washington Mutual, Macy’s, Lockheed Martin and Starbucks have announced lay-offs. Many others will continue consolidating through mergers and acquisition as the economy declines. When lay-offs occur, there is the question of who should go and who should stay? Here, a great metrics program can pinpoint who the talent is, where the key talent is located, areas where turnover will occur and jobs where retirement packages may be successful. An effective performance metrics system identifies high performers, tracks the performance improvements of average performers and shows the talent movement in the organization. Even the issue of offering buy-out packages to employees often goes astray because of incorrect assumptions. These are sometimes traced back to ineffective metrics.
4. Support and influence. The image and reputation of human resources is critical. Lean times are ahead. The human resource function needs all the support and influence it can deliver.An effective metric system, showing the linkage of human resources to the business and the contribution human resources is making, can go a long way to show the value of this function. Contribution and value translate into commitment, support and respect. Not only does an organization need the most out of everyone, but human resources executives must leverage all of the current projects and programs to make sure they are delivering all the value they can. A metrics program reveals the increased accountability that is necessary to win the influence of executives.
The Good News and the Bad News
The good news is that an effective metrics program can be one of the most helpful processes in tough economic times. It can enable an organization to maintain budgets, build support, prevent unnecessary outsourcing and trim the workforce in a rational, logical way. The bad news is that the time to implement an effective metrics program occurs before these issues are on the table. Waiting for the CEO to ask for the data about the contribution of human resources is too late to address the issue in a rational, logical and efficient way. Consequently, the time to do this is when you don’t have to do it—the proactive approach. The advice we offer our clients is to address the metrics when the value or contribution is not being called into question. Now is the time to start working on this process quickly and deliberately—allocating time to put metrics in place.This often involves building capability and understanding of the team so that they will not only develop the metrics, but use them effectively. As one large, well-known, investment-company human resources executive recently told us, "We are using our total developmental budget for our human resources staff this year on developing our metrics strategy, tactics, tools and successes. Our value is not being questioned now, and this is the time to do this." An effective metrics system will show how well the human resources system is functioning and the contribution of major human resources programs. It will show the impact and contribution and occasionally the actual return on investment in very significant human resources projects.