Sunday, 16 March 2008

People and the Bottom Line

While I'm on the metrics theme, I may as well catch up my reporting on some other recent research and suggestions for HR metrics. Let's begin with the new study, People and the Bottom Line, produced by the Work Foundation and the Institute for Employment Studies (IES), supported by Investors in People UK.

This research developed in-part out of the Human Capital Standards Group, set up by FT journalist, Richard Donkin to take forward the work of Denise Kinsgmill's Accounting for People taskforce. I was briefly associated with this group, although I made clear that my own interests focused (and still focus) on how organisations can measure their own bespoke strategy (and even more so, raise the level of value created in this strategy) rather than basic minimum standards of management and measurement that could apply for all organisations.

The group put out a tender to provide 'recommendations of agreed measures and indicative relationships to organisational performance'. I tendered for this but didn't win the work and I'm not sure that it ever took place, but the group did produce 36 metrics they felt were important in addition to 40 that had previously been identified by the IES. It is these 76 metrics which have been reviewed in the current research that involved a survey of almost 3,000 employers.

The table shows the 12 metrics which were found to have the greatest impact on organisational performance (using the categories from the IES' '4A' model: access, ability, attitudes and application).

I agree that these are generally sound metrics, that organisations may want to consider using when thinking about value for money /efficiency metrics (at least for internal use). However, like just about any metrics associated with something as broad as people management, they do suffer from impreciseness, and therefore inability to compare like with like (which is important when thinking about external benchmarking or reporting - which after all was the driver for this research).

For instance, if you take the metric: 'Proportion of new appointees tested on recruitment' (in the 'access' category of the table), how do you know there is any consistency in the type or appropriateness of testing used? Even if you refine this further, for example by using the question asked in the actual research: 'How many of the new appointments were subject to a test on recruitment ie the use of some kind of psychometric or written or practical test to help determine candidates' suitability for the job?', it is still not possible to understand how extensive this testing was, or whether the actual test or the way it was used was appropriate.

Another important problem with the list is highlighted by Richard Donkin himself:

"The list of measures is limited in this respect: it does not include measures where employers had no supporting data or where there was hardly any variation in responses, giving little scope for differentiating employers. There was little that the researchers could do about this. It is important, however, to stress that the exercise was being carried out where some aspects of workforce development are exposed to very little in the way of effective performance measuring. Most companies would agree, for example, that leadership is vital for their success but very few companies have any useful measures of leadership. That is not to say it does not matter."

This the main issue. One major areas of agreements in the HR metrics movement over the last couple of years has been that organisations need to measure what's important, rather then what's easy to measure. The list of metrics produced as an output of this research is in many ways therefore, a rather unfortunate step backwards.

I feel rather more positive about the other outputs of the research, and in particular, the correlations (and they were correlations, not causations) found between performance in the metrics and performance of the organisation. I don't believe these conclusions are substantially impacted by questions over the metrics used. After all, if metrics on leadership or other higher value measures had been used, we would expect higher rather than lower correlations with business performance.

One conclusion of the research was that businesses with good people management practices enjoy higher profit margins and productivity than those without. And according to the research, there is no levelling off in this - good companies obtain the same benefit from increasing their investment as bad (although this obviously can't be true for ever). The study concluded that if an organisation increased its investment in people management by just 10% it would boost gross profits by £1,500 per employee per year.

The research also found that it is the intensity of the people management practice that makes a difference - "for example, not just whether companies do employee engagement, but how much and how often".

A further conclusion was that there is no one-size-fits-all approach to investment in people management. Organisations need to create bundles of people management practices that meet their own business strategies and contexts (or even better, their organisational capabilities). As Richard Donkin explains:

"The IES found very little evidence to link any single human resources practice to overall business success. When a number of practices were taken together to create an index, however, researchers found that they were capable of making a measurable impact on performance... this supports the theory that applying bundles of HR practices is more effective than focusing on specific practices."

The research doesn't seem to have had much coverage, other than a front page story, 100% proof: Good human resources will boost your company profits, in Personnel Today and some rather more critical pieces by the usual suspects: Paul Kearns and Nick Higgins.

To me, this new study is a good piece of research (and is certainly much more robust than what I proposed to do!) which although far from being conclusive (certainly not 100% proof), when put together with all the other reports on this subject (see my book for a summary of these - and of course, much more!), which all say broadly the same thing, amounts to substantial evidence of the impact of effective people management.

More on the same theme in my next post...