HR metrics through the prism of business planning process Mo Sattar Do

HR metrics through the prism of business planning process Mo Sattar Do not copy or distribute-Connect The Dots - Strategic education : [email protected]

Functional / departmental metrics should be view through multiple perspectives Value chain, Key stake holders , and their expectations Business planning process Business and Financial goals Organization structure The “importance” of metrics will vary “depending on the business environment”. Do not copy or distribute-Connect The Dots - Strategic education

Few takeaways How is a annual business plan developed in an organization How does it tie in with metrics discussions ? Steps to assess metrics Ways to make metrics more “effective” Alignment Address relative stress Synergy via linkage between two metrics This will help in becoming HR professional more sought after. Do not copy or distribute-Connect The Dots - Strategic education : [email protected]

Is HR in your organization sought after ? Are you sought after and why for each question ? Operations Sales & marketing General Manager (GM) Finance & accounting Human Resources Engineering 1. Sought after by “GM” for “tactical / compliance stuff” ? 2. Sought after by “GM” also for “strategic stuff” ? 3. Sought after by “Other departments ” for “strategic stuff” ? Do not copy or distribute-Connect The Dots - Strategic education : [email protected] Other G &A departments

What three things you ( HR )can do to become sought after ? General Manager (GM) Operations Sales & marketing Finance & accounting Human Resources 1. Actions to become sought after 2. What is holding you back? Do not copy or distribute-Connect The Dots - Strategic education : [email protected] Engineering Other G &A departments

How often are “HR metrics “ presented or discussed or questioned by investors during quarterly earning announcement ? Do not copy or distribute-Connect The Dots - Strategic education

If business is not doing well what metrics are : Share holders focused on ? Banks and Lenders focused on ? Senior Management focused on ? Do not copy or distribute-Connect The Dots - Strategic education

Dominant General Manager (GM) Operations Sales & marketing Finance & accounting Human Resources Do not copy or distribute-Connect The Dots - Strategic education Engineering Other G &A departments

Lets take a pause Before I start : 1. Write down three “Financial level metrics” in your organization that are consistently used 2. Three “HR metrics” that are also consistently used 3. Identify alignment -3 rt ic e m M m ial ial ial c c c an an an n n n Fi Fi Fi ric et HR- Metrics -1 ric et -2 HR- Metric-1 HR- Metric-2 HR- Metric -3 Do not copy or distribute-Connect The Dots - Strategic education : [email protected] Knowledge / Learning gaps ?

Bringing HR and Finance Together with Analytics By Jeff Higgins, Human Capital Management Institute If the overwhelming majority of management teams across the business world, including those at nonprofits and in the public sector, all speak the financial language of business, then is it the 95 percent in most organizations that should stop and learn the language of HR? Or is it the 5 percent in HR who need to learn the language of finance? Do not copy or distribute-Connect The Dots - Strategic education

Benefits for Balanced scorecard Clarify and gain consensus Communicate strategy throughout the organization Align departmental and personal goals to the strategy Link strategic objectives to long-term targets and budgets Identify and align strategic initiatives Perform periodic and systemic strategic reviews Obtain feedback about and improve strategy Reference : Page 19, The balance scorecard, Kaplan and Norton Do not copy or distribute-Connect The Dots - Strategic education : [email protected]

Benefits for Balanced scorecard Clarify and gain consensus Themes Communicate strategy throughout the organization Align departmental and personal goals to the strategy Link strategic objectives to long-term targets and budgets Identify and align strategic initiatives Perform periodic and systemic strategic reviews Obtain feedback about and improve strategy Reference : Page 19, The balance scorecard, Kaplan and Norton Do not copy or distribute-Connect The Dots - Strategic education : [email protected] Strategy Alignment Monitoring

Paradigm Shift for results base approach Traditional Approach Results based approach Human Resource is viewed as a cost center Human Resource is viewed a an investment in employees The HR staff is unfamiliar with operations issues The HR staff is very knowledgeable about operations The HR staff lacks knowledge of finance and business approach The HR staff is versed in basic finance and business concepts. Reference : page 22, Proving the Value of HR, Phillips and Phillips Do not copy or distribute-Connect The Dots - Strategic education : [email protected]

Value added ? Executives want to believe that "people are our most important asset," but they just cannot understand how the HR function makes that vision a reality For measurement to matter, you have to measure only what matters. HR metrics that cannot be tied directly to your firm strategy map should not be included in the HR Score card Lagging Indicators, such as financial metrics, typically reflect what has happened in the past .won't help in making decisions Reference : Creating an HR score card. Becker, Huslid, Ulrich Do not copy or distribute-Connect The Dots - Strategic education : [email protected]

Lets take a pause 1. How do you feel about the comment “ HR should be well versed in business and finance”. ? 2. How do you feel about comment that financial metrics are not useful in making decisions Do not copy or distribute-Connect The Dots - Strategic education : [email protected]

Metrics measure progress Question : Are we are measuring the right things ? Alignment Value added Foundation: Value Chain (Business process) Strategy Top level metric Lower level metrics Do not copy or distribute-Connect The Dots - Strategic education : [email protected]

Demystifying Strategic planning Demystifying metrics Demystifying Finance Effective leadership and management Do not copy or distribute-Connect The Dots - Strategic education : [email protected]

ROS : Return On Sales ( also called Profit Margin) Sales cost Profit Profit Margin (ROS) 2014 120.00 109.00 11.00 9.2% Total Sales generated by the business Total cost to run the business Total profit : net Income Profit generated for very dollar of sales Examples of financial metrics ROS, ROA, ROE Oper. Margin, Gross margin WC turns Inventory turns A.R. turns A. P. turns CCC Do not copy or distribute-Connect The Dots - Strategic education : [email protected]

Value Chain Do not copy or distribute-Connect The Dots - Strategic education : [email protected]

Harvard Business School Publishing Article : Expanding HR’s Strategic role ( Interview with Dave Ulrich) “Successful HR professions must be business literate and customer savvy” “For HR to deliver value, it needs to define its “receivers” and how to create value Do not copy or distribute-Connect The Dots - Strategic education : [email protected]

HR Metrics and Analytics : Use and Impact. Lawler, Levenson, Boudreau. (Human Resources Planning) Three functions of Metrics: Efficiency : How well the HR function performs its basic administrative function Effectiveness : Whether HR programs and practices have the intended effect . Example : How well “pivotal” jobs are filled Impact : Means demonstrating a link between what HR does and tangible effects on the organization’s ability to gain and sustain competitive advantage. Your Metrics ? Do not copy or distribute-Connect The Dots - Strategic education : [email protected]

Value chain concept and what is direct versus “indirect” Accounting & Finance Design Human Resources Operations After market support Do not copy or distribute-Connect The Dots - Strategic education : [email protected]

Important to understand the alignment between Organization structure and value chain General Manager (GM) Operations Sales & marketing Value -1 Finance & accounting Value-2 Human Resources Engineering Value-3 Do not copy or distribute-Connect The Dots - Strategic education : [email protected] Other G &A departments

Linkage Do not copy or distribute-Connect The Dots - Strategic education : [email protected]

Business planning process Purpose of this review All organization ( profit or non-profit) go through this process Financial metrics play an important role Setting budgets for departments Reorientation during mid year Short term and long term Thus “all non-financial managers and supervision” in an organization should be have some “financial literacy” Helps in alignment of metrics and overall business performance Do not copy or distribute-Connect The Dots - Strategic education : [email protected]

Price Sales Quantity labor Purchased Manufacturing & quality Cost of Good sold EBIT Overhead Administration H&R Interest expense SG&A Sales and marketing Taxes Finance /accounting Engineering EBT R&D Do not copy or distribute-Connect The Dots - Strategic education : [email protected] Net Income EPS : EARNINGS PER SHARE

Inventory Acct . Rec. Acct . Payable Dividend Capital exp. . Net Income Do not copy or distribute-Connect The Dots - Strategic education : [email protected] Avoid the need to borrow Cash flow

If business is not doing well what metrics are : Share holders focused on ? Banks and Lenders focused on ? Senior Management focused on ? Do not copy or distribute-Connect The Dots - Strategic education

Key Financials M an uf ac tu Pr rin oc g ur Qu eme n al ity t M ar ke ti Fin ng & an Sa ce le Hu & ac s m ct an Re . En gin so ee urc es er Ot he ing rs ta ff fu nc tio ns Organization structure Sales Manufacturing cost SG&A R&D Inventory Accounts Recievable Accounts Payables Do not copy or distribute-Connect The Dots - Strategic education : [email protected]

M an uf ac tu Pr rin oc g ur Qu eme n al ity t M ar ke ti Fin ng & an Sa ce le Hu & ac s m ct an Re . En gin so ee urc es er Ot i ng he rs ta ff fu nc tio Va ns lu ec on te nt Value content effectiveness P Manufacturing cost P Sales P P P P P S P SG&A P P P R&D S S S P Inventory P P P S P Accounts Recievable Accounts Payables P P S Value providers Do not copy or distribute-Connect The Dots - Strategic education : [email protected]

HR Metrics and Analytics : Use and Impact. Lawler, Levenson, Boudreau. (Human Resources Planning) Three functions of Metrics: Efficiency : How well the HR function performs its basic administrative function Effectiveness : Whether HR programs and practices have the intended effect . Example : How well “pivotal” jobs are filled Impact : Means demonstrating a link between what HR does and tangible effects on the organization’s ability to gain and sustain competitive advantage. Do not copy or distribute-Connect The Dots - Strategic education : [email protected]

Filter the HR metrics Do not copy or distribute-Connect The Dots - Strategic education : [email protected]

Run it through a filter process H R cost per FTE Benefits as Overtime % H R expense related % H R FTE H R cost per ratio employee Health care Diversity Average cost % comp. ratios Span of Workers H R cost per Absenteeism control comp FTE related OSHA Hiring related Training related Do not copy or distribute-Connect The Dots - Strategic education : [email protected]

I like to test metrics for “purpose, value added, and connectivity ” This applies to any metrics ( HR, operations, financial, procurement, etc.) Compliance & or for “defensive purposes”. Tactical – value added Strategic Connectivity – overall business goals Tactical, in concert with “relative risk factors”. Strategic Elimination process what will happen if we stop tracking Gap analysis are we missing any “gauges”. Do not copy or distribute-Connect The Dots - Strategic education : [email protected]

Metric 2 Metric 3 Metric 4 Metric 5 Do not copy or distribute-Connect The Dots - Strategic education : [email protected] Va lu e nt co nt e fu nc tio ns aff st Ot he r HR- Metrics Metric 1 Co m pl ain ce Ta cti ca Ta l bu cti sin ca es l bu s g Ta cti sin oa l-1 ca e s lb sg us in oales 2 sg oa l-3 Check for alignment – for near term goals

Address relative risk factors Attrition rate Relative Risk factor Department/ Department/ Department/ Department/ Function -1 Function -2 Function -3 Function -4 Total Actual Total target 5.00% 7.00% 5.00% 5.00% 5.50% 5.00% low low low high Do not copy or distribute-Connect The Dots - Strategic education : [email protected]

Intersection of two metrics Attrition rate Hiring - time Department/ Department/ Department/ Department/ Function -1 Function -2 Function -3 Function -4 Total Actual Total target 5.00% 4.00% 5.00% 7.00% 5.25% 5.00% 45 days 50 days Relative Risk factor low low low high Best ROI Do not copy or distribute-Connect The Dots - Strategic education : [email protected]

Check for alignment – for longer term goals HR- Metrics tied to strategies Metric 1 Metric 2 Metric 3 Metric 4 Metric 5 Do not copy or distribute-Connect The Dots - Strategic education : [email protected]

Harvard Business School Publishing Article : Expanding HR’s Strategic role ( Interview with Dave Ulrich) CF : “How do you create an outstanding strategy “. DU : “ What are the business challenges ?” Do not copy or distribute-Connect The Dots - Strategic education : [email protected]

This is how I test goals and strategies (business level, department level or personal)? 1. What are you trying to accomplish ( your goal) , testing for clarity ? We need clarity for alignment 2. Why ? If Why is not strong enough ( clarity and commitment) , go back to # 1. 3. “How” will you achieve your goal ( “what”) Fast forward, assume you can successfully implement your “how” Will you accomplish your “what” ? Test for alignment ( or misalignment) 4. What are the “measures” to monitor “progress” Test for alignment, clarity, ownership, leading, lagging, tactical, strategic Overall test for value added ( to monitor how and what) 5. Test for alignment and connectivity within the “relevant organization / system ”. Do not copy or distribute-Connect The Dots - Strategic education

Closing comments / Recommendations Re –think your training programs in your company Add “basic management financial literacy” , across the organization Test the metrics for “ purpose, valued added and connectivity” Test for “relative risk factors” and “alignment” Employee performance and compensation in line with “value added metrics”. For HR staff/managers . Enhance your knowledge in the areas of Finance Strategic planning Leadership Do not copy or distribute-Connect The Dots - Strategic education : [email protected]

Is HR (you) in your organization sought after ? Are you sought after and why for each question ? Operations Sales & marketing General Manager (GM) Finance & accounting Human Resources Engineering 1. Sought after by “GM” for “tactical / compliance stuff” ? 2. Sought after by “GM” also for “strategic stuff” ? 3. Sought after by “Other departments ” for “strategic stuff” ? Do not copy or distribute-Connect The Dots - Strategic education : [email protected] Other G &A departments

What three things you ( HR )can do to become sought after ? General Manager (GM) Operations Sales & marketing Finance & accounting Human Resources 1. Actions to become sought after 2. What is holding you back? Do not copy or distribute-Connect The Dots - Strategic education : [email protected] Engineering Other G &A departments

Q&A Do not copy or distribute-Connect The Dots - Strategic education : [email protected]