HR departments are not showing their business value to executives

While HR departments are coming under growing scrutiny to demonstrate their value added to the business as pressure to increase value is mounting, new research shows that HR managers are leaving large gaps in how they are measuring and showcasing the value they add to a company’s strategy. Making better use of analytics to support HR metrics and KPIs is key to achieving their position as a true business partner.

Workplaces across the world are facing an era of change, as talent scarcity and organisational restructuring relating to digitalisation sit high on the agendas of most businesses. In this atmosphere, an effective human capital strategy is integral to the success of any firm, and in its slipstream, sufficient integration between business objectives and human resources (HR) department’s activities.

Reflecting this, for years HR departments themselves have been talking about the need to become a more strategic player to the business. One of the main discussions on this is how the HR function needs to adapt to better embrace the HR business partner role, working together with business stakeholders to begin the process of planning what is needed from human capital to realise objectives. In addition, this should see HR moving to become a more board-related role – and while HR has traditionally been seen as operational, in order for businesses to survive the human capital issues of the day, it will be key to transition HR professionals into a role which can add strategic insights to the long term performance of a company.

The business case for HR

However, while a great deal of emphasis is placed by HR experts on how they believe departments should change to become a business partner (i.e. change of processes, introduction of new systems, cultural change, etc.), comparatively little attention is devoted to how HR managers might demonstrate their value added – pushing forward their case for partnership in the process. In other words, boosting a company’s performance will not inherently aid their case, unless they can enable the broader business to see the HR department’s role in the success.

This is exactly what the researchers of Top Employers Institute and Bright & Company conclude in a white paper they released titled ‘Measuring HR Impact’. In the study, the authors surveyed HR experts from over 200 companies, finding that HR executives are simply not making their own business case strongly enough to their key stakeholders; the CEO, CFO or COO.

HR professionals were asked to identify which Key Performance Indicators (KPIs) they run metrics on to help provide concrete figure relating to the performance of the business. They then were asked to what extent they are actually analysing that effect. Strikingly, across the board, the most measured HR driver – Engagement Effect – was only analysed in 33% of the cases. This came in spite of 54% of HR professionals identifying this KPI as one they ran metrics on, second only to Turnover, on 64%. The execution of measuring Turnover as a driver was even worse, meanwhile, at just 17%. This suggests that should HR departments be correct about their estimated impact on business performance, that up to two thirds of value potentially created by HR is left unseen, or at least, left without substantial analysis.

Of the potential KPI areas HR teams could apply, the research finds that Leadership is the category with the most wasted potential. Almost 7 out of 10 organisations identify Leadership in their top five most impactful HR drivers, yet, only 38% keep track of their leadership development rate and 36% measure the prevalence of leadership. “As the HR driver with the highest perceived business impact, measurement in the Leadership domain is not at a level one would expect,” state the authors. Moreover, just 17% of the respondents said they measure the effects of Leadership on business outcomes, missing an opportunity to change the minds of executives on the role HR policy plays.

Where this gap is even larger is in the area of Performance Management and Engagement. Both aspects are among the most used HR KPI metrics, but despite this, their impact on business outcomes is measured in a mere 33% of the cases (Engagement) and 19% (Performance Management).

Data analytics

The outcome of the survey shows that the majority of organisations hardly use metrics or effect measures for key HR domains that are known to be crucial endavours for business impact. In other words, the most important factors are not being measured by most organisations. In a time where new technology is creating huge opportuntiies for creating better insights, however, the researchers highlight that HR should embrace analytics in order to shed more light on their business impact.

The use of data and analytics is rising exponentially in both the public and private sector. Data has become the key component in delivering instant, accurate and useful knowledge, thereby improving decision making abilities of executives in important areas of an organisation such as business strategy, finance, marketing and operations. For HR departments, data and analytics have the potential for organisations to make well-informed decisions about the best ways to organise their people for business success. HR processes can contribute more clearly to business objectives by predicting the possible effects of decisions, in the HR domain, on overall business outcomes.

In conclusion, the authors contend; “They used to say that ‘money makes the world go round’. These days it’s ‘data’… Nowadays, we have a common understanding that human capital drives a large part (if not the most) of business success. Being able to gain insights about people, and about what and how they are performing, could be the key to increase future business performance.”

Related: Four success factors for the adoption of HR analytics and reporting.