MI’s introductory guide to meaningful, mindful, human capital metrics

MI’s policy of offering a professional critique of existing human capital management practices, especially the metrics used, is only valid if we can offer a better alternative. Better in terms of value, simplicity and practicality. This is becoming much more important now that regulatory bodies’, such as the SEC in the US, are having to consider rules for reporting. One comment, on the Coalition petition to the SEC, comes from the ISO, which is several years into its programme of developing HR standards. Let us consider some of their standard metrics, in the light of MI’s methodology, and consider what advice might help to develop better metrics with more meaning and value. We’ll start with the very first HR standard produced under ISO’s programme, ‘Cost per hire’; the purpose of which is “to measure the economic value of the effort taken to fill an open position in an organization.”

MI’s first, standard test of any metric is whether it actually measures the “value” that it claims to measure. MI’s definition of value is crystal clear. Value is the net result from a combination of 4 variables of company Output, Cost, Revenue & Quality (of product or service). The ‘cost per hire’ metric fails this test.

ISO seems to have recognised this problem of ‘partial metrics’ as it is now in the process of developing other standards/metrics that are very closely related to ‘Cost per hire’. These include “Impact of Hire Metric”, “Quality of Hire”, “Retention Metric” and “Turnover metric”. But there are also other ISO standards that are likely to have a direct, causal impact on ‘cost per hire’, such as “Workforce planning” and “Workforce management”.

Our critique always starts from a whole system perspective. Having a series of separate metrics is not the best way to set a standard for the whole system. For example, poor “workforce management” would probably lead to higher “turnover” of staff and cause the total cost of hiring to increase. However, the hiring process itself might be efficient enough to keep the average cost at the same level, or even lower. This would mean the ‘cost per hire’ standard would be achieved while the economic value of the business is declining. This deconstructed approach to the issue of human capital reporting is questionable and can be misleading. So how can ISO develop better human capital metrics?

MI would describe any ‘single variable’ metric as immature because it misses the overall, economic impact. More important, such metrics can encourage different parts of the organization to work against each other. For example, ‘workforce planners’ might aim to ensure the company has the right number of workers in place, while the workforce manager has to ensure the right quality of work and level of output (productivity).

A better solution for the company would be to raise the level of maturity, very simply, by combining the cost of hire with other value variables; such as a measure of the quality of the worker. This could start with a very simple score out of 10, by the workforce manager, for each new recruit. Metrics can always be further developed and refined as their use takes hold. That is all part of what MI calls the maturity journey (well recognised in highly mature organizations). It does not need two separate metrics.

Except that we have to consider not only the maturity level of the metric, itself, but the maturity level of the people using it and the culture and managerial context in which it is used. A mature organization will produce the most mature metrics and know how to get the best out of them. In an immature organization, our suggestion for a ‘simple score out of 10’ could cause serious disruption if employee relations are poor. This consideration of maturity context should be a standard proviso on all human capital reporting rules, including ISO standards and metrics.

Introducing human capital metrics to an organization is more likely to succeed if the people we are measuring willingly engage with the methods by which they will be measured. If two of the performance measures for the workforce manager are ‘cost per hire’ and ‘retention’, without also measuring output (productivity), the manager is incentivised to retain workers who might not be that productive. To use immature metrics as performance measures is dangerous, unless the person being measured can see the net value of their behaviour and accepts responsibility for it. This would require a sum total score for all the metrics combined and an agreement on what constitutes net value. It would be along the lines of maintaining a score on quality and output without incurring a rise in average hiring cost. Everyone who might impact on this score should be involved in developing it.

Immature metrics get in the way of maturity development and value improvement. They are meaningless in themselves, can be divisive and therefore counter-productive. The more metrics we apply in the workplace, the more complex the equations become and the higher probability that the metrics could be confusing and self-defeating. The only way to resolve this problem is to develop a workforce which is constantly mindful of current operational priorities, aware of how their work has to dovetail with everyone else, be willing to work in harmony and capable of deciding on the best options. In principle, the ones actually doing the work are best placed to choose the right metrics. But only if they are committed to the purpose of the company, schooled in the value that is required and willing to contribute their best to Total Stakeholder Value.

From MI’s whole system perspective, predicated on measuring value (and reducing risk), human capital metrics have to be formulated and applied intelligently. In the wrong hands, minds and maturity level; even apparently obvious, human capital metrics can be highly problematic, destroy value and increase risk. The main advice from this introductory guide is that the current drive towards human capital reporting should bear these cautionary notes in mind. Done well, human capital metrics will add enormous amounts of economic value in those organizations that introduce them as part of a conscious journey towards higher levels of maturity.

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