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Phillips' Edge

How Human Resources Departments and Organizations at Large Can Convert Measurement Data into Money

Jack and Patti  Phillips
Posted: 03/31/2009

In today’s economy, a very frequent request (or sometimes ultimatum) is "show me the money." This request often comes from those who support or fund our projects, a key stakeholder who is concerned about the results. Delivering value has been assumed, but is now almost a requirement. Figure 1 shows how this requirement has evolved from a simple request to show the data to a request to show the money and ensure that it’s a great investment.

Show me! Collect input data
Show me the money! And convert data to money
Show me the real money! And isolate the effects of the project
Show me the real money, and make me believe it! And compare the money to the costs of the project

Figure 1

At first glance, this request seems like an impossible task for many business leaders and human resources executives. Finding the monetary value appears to be a mystery. In most cases, human resources programs specifically are influencing a measure in the organization somewhere. human resources programs are improving employee turnover, productivity, quality, job satisfaction, accidents, etc. So, how do we convert these human resources measures to money? Well, there’s some good news, and some even better news, with this issue. The good news is that most of these human resources measures have already been converted to money. If it’s a measure that matters to the organization at large, it has probably already been converted to a monetary value. That’s the good news. The even better news is there are easy ways to find values these days, either in the human resources department or the organization at large. Here are four basic approaches to this issue.

Human Resources and the Standard Value

A standard value is defined as a value that is known by those individuals who work with the measure. The most common standard value in business is the profit margin. When a specific human resources program is improving sales in some way (e.g. sales training, incentive compensation), the profit margin of that human resources program is the value add. That’s the additional money business and human resources leaders want to see. If we only present human resources leaders with the sales data, they will have to do the math and convert it to profit margin. There are many other standard values in human resources and the overall organization, thanks to many processes that have moved through the organization. Total quality management, Six Sigma, Lean Six Sigma, re-engineering, activity-based costing and many other processes have involved placing monetary values on human resources measures. For example, in a quality movement, the first task is to show the cost of poor quality. Mistakes of all types are monetized (converted to money) to show the impact of the problem—to get attention if nothing else. We’re constantly amazed at the number of standard values already calculated. To our estimate, at least 80 percent of the measures that matter in an organization have already been converted to a cost savings, a cost avoidance number, or profit. This monetary value of a human resources program will always be either profit gain through an additional sale, or money saved through improved productivity, quality, efficiency and cycle times.

Leveraging Expert Input to Maximize Measurement

A relatively easy approach is to find an expert. Ideally, this person is inside the organization but can also be external. For example, if a safety program is lowering the number of loss time accidents, the monetary value would actually be the cost of the accidents avoided. The average cost of a lost time accident is something that should be known by the safety department. It may not be a standard value (unknown by all those involved in the process), but certainly known to the people who collect, report and work with the measures every day. Certainly, they will know something about the value. They should be credible. At other times, the expert is external to the organization. For example, a worker’s comp insurance carrier may be able to provide the average cost of a lost-time accident. While both are great options, the internal experts are generally more credible because they are more relevant to the organization.

Calculating the Value of Human Resources Programs and Organizational Initiatives Via the Internet

A tremendous amount of data is available via the Internet. In fact, there’s probably too much data for the issue we are addressing. If it’s important, someone has placed monetary value on it. Research, industry and government databases often contain the cost or value of items. Even search engines, such as Google or Yahoo, provide monetary values for certain measures. One of the most extensive sources is "Google Scholar." This is accessed by going to the Google homepage and clicking on "Google Scholar." There’s an amazing amount of data available. For example, type in "monetary value for teamwork" and see how many results are returned.

This process is an excellent way for an human resources department to find an acceptable value for the cost of employee turnover. A variety of databases include data on the cost of turnover, which is a fully loaded to include the direct cost of recruiting, employment and training for the new employee, and also the indirect costs such as lost productivity, bottlenecks, customer dissatisfaction and other factors often associated with a departing employee. Some human resources departments or organizations at large don’t take the time to calculate the cost of employee turnover, but there are many studies that do that for us. This approach to human resources measurement tells us that the cost of turnover for a nurse, for example, is about 1.5 times the annual pay of the nurse.

Human Resources and Estimating Data Costs

In some cases, it may be helpful to estimate the cost of the data item. After all, if it’s important enough to have a human resources program connected to it, and it’s a measure that matters to someone in the organization, then it might be helpful to estimate the value. Estimates should be adjusted for the error of the estimate (Guiding principle #7 in the ROI Methodology), and they should always come from the most credible source (Guiding Principle #3). A word of caution should be offered here: If the measure cannot be converted to money credibly with minimal resources, it is best to leave it as data not converted, defined as an intangible. But the good news is, many of those data items have been converted to money and will continue to be because they’re so important to human resources and the overall organization.

Leadership and Development–An Example of Using the Data

Converting data to money is an important issue for organizations and human resources programs. It is absolutely essential to see the value of the human resources programs. For example, consider a leadership and development program designed to improve leadership and development skills across the organization. When those leadership and development skills are improved and the new leader behaviors are applied throughout the organization, there are usually consequences. The consequences are the impact measures driven by the leadership and development program. These are very specific to the work unit, department or division where the leader is functioning. In a given leadership and development program with 25 people, for example, the new leader behaviors could be driving as many as 25 or more measures. And if an evaluation is conducted to show the impact of the leadership and development program, without the conversion to data, it would just show that there are many different measures that have changed in the organization. It’s a table listing the measures and the extent to which they’ve changed. For most business and human resources leaders, that would not be complete. We would need to take an extra step to convert it all to money using first year values, for example (Guiding Principle #9). In this case, converting to money is necessary to see the value. But it’s also required for an ROI analysis. Monetary values must be compared to cost to generate the ROI calculation. Most business and human resources leaders would need for the monetary benefits to be compared to the costs to see the ultimate evaluation. While every ROI study will have to take the step of converting data to money, this same step may be required even if the ROI is not calculated, as in the leadership and development example above.

So, there you have it. This is a relatively easy process but an important step in the ROI Methodology for human resources and organizations at large. If you need more about the complete methodology, drop us a note. In our next entry, we will focus on the importance of intangibles. We had a glimpse of them in this column and will explore them in more detail later.

Jack and Patti  Phillips
Posted: 03/31/2009