Feb 27, 2004

Leading corporations will be increasing their investment over the next three years to measure how people practices such as low turnover, diversity and the engagement of their employees contribute to the bottom line, concludes a report from The Conference Board released today.

The report is the result of a working group of leading companies and is co-sponsored by PeopleSoft, a leading provider of application software for business. It is based on a survey of 110 human resource managers in major companies based in the United States and Europe.

While 40 percent of survey participants consider senior management support to have been high for human capital measures during the past three years, 76 percent predict an increase in top-level backing during the next three

The report defines human capital measures as including employee engagement, turnover, diversity, leadership, and productivity among others.

"The major reason that management lends increasing support to people metrics projects is that they help lower costs and improve the return on people investments while helping align these investments with business strategy," says Dr. Stephen Gates, author of the report and principal researcher at The Conference Board. "Human resources leaders need to determine how to link people measures to business processes. They should involve line managers at all stages of the
human capital metrics process, seek advice and input from finance and strategy colleagues, and eventually embed people metrics in managers' bonus plans."

"This study illustrates the importance of human capital management to every business' bottom line," said Mark Frost, General Manager of the Human Capital Management division of PeopleSoft. "As the service-based economy
continues to grow, companies must be more rigorous in how they measure and engage with their employees. PeopleSoft continues to lead the market in providing solutions that leverage these kinds of employee metrics to increase employee productivity and overall performance."

To gain their support from top executives, HR specialists must demonstrate that people metrics can be successfully aligned with business strategy. According to the results of a recent exercise by The Conference Board's Human Capital Measurement Working Group, this process is still in its earliest stages at many companies. Although many people measures are cited as currently being used by working group companies, few firms feel confident about how metrics relate directly to business strategy.

Human resource directors are still the primary sponsors of people metrics in most organizations, although 36% of surveyed companies report that business unit leaders are also involved.

Other study findings:

* Survey data suggest that managers become less involved in the selection and execution of people measures as the size of a company grows.

* Utilizing metrics in bonus plans is growing, but is still a minority practice. Only 39% of surveyed companies reward managers based on people measures.

* The financial measures of cost reduction and revenue growth are more commonly linked to people metrics than intermediate performance drivers such as process and product innovation and globalization. However, the
survey results suggest that people measures are more successfully linked with intermediate performance drivers than financial measures.

The study cites the following top lessons for managers:

* Involve HR professionals in the development of overall business strategy.

* Enlist leaders from outside the HR department to help develop and back human capital metrics.

* Collaborate with business managers to ensure that people measures link to the strategic goals of business units.

* Focus more attention on the links between people measures and major performance drivers (customer satisfaction, innovation, etc.) and place less emphasis on their connection to cost reduction, revenue growth, and other financial outcomes.

* Include human capital metrics in bonus plans.

* Audit metrics (internally and externally).

* Develop ad hoc analytical reports that detail how people investments can deliver business results.

Gautam's Views:

I think the better way to go forward is to utilise the HR Scorecard that Ulrich et al have tried to evolve.

I think it encompasses the best way to go forward.

Measures need to be chosen very carefully, and that has to be done by senior management, not functional HR...!