Providing Irrefutable Proof Of The Bottom-Line Business Impact Of Recruiting, Retention And Development Proving that HR programs work to get full funding BPI October 4, 2013 © Dr John Sullivan www.drjohnsullivan.com

4 goals for today To get you to rethink your current business case approach To reveal the criteria that executives use to increase funding To provide examples of how you can effectively show the business impacts of major TM functions To answer your questions

I’m from the Silicon Valley, so I’ll move fast today For live participants, please submit questions at any time during the webinar

The foundation of this approach I was happy with our HR approach, but now, “I want that one” CEO of General Mills

Begin with the premise that: Step I Begin with the premise that: Executives might not be confident in the metrics and business case approaches that you currently use

CEO’s do not have faith in our metrics Only 12% of CEO’s are confident on the quality of Human Capital metrics AICPA survey 2012 6

How do executive’s rate HR effectiveness on “business case” and metrics? (KPMG)

Most HR metrics are weak Turnover % Time to Fill Diversity % Number of developed leaders % of engaged employees They tell about “last year” and they prove no $ impact

Step II Next… find out if your executives have already determined that your function has a high impact

How can you know ? Percentage of budget increase – what is your percentage of budget increase… compared to well-funded functions (i.e. sales, product development)? Percentage of headcount increase – what is your percentage of a headcount increase compared to the very best functions? Exemptions – is your function made exempt from layoffs or hiring, promotion and budget freezes? Executive’s speeches – are you mentioned in the CEO’s speeches as a high focus area?

The best way to know for sure is… Where does the firm write up and report it’s major business accomplishments /impacts for the past year? How many lines does your TM function get?

Shareholders should hear about TM’s impact The CEO of this bank saw the connection between great recruiting and business growth… So he invited the Head of Talent Acquisition to give a presentation at the annual shareholders meeting… on the $ impact of TA

Partner with the King of metrics Step III Partner with the King of metrics The CFO is the indisputable determiner of credible metrics and assessing bottom-line impacts

The smartest thing I ever did in HR… “I hired the assistant comptroller to do my HR metrics” I had zero funding arguments after that because: The metrics were credible because the CFO and others trusted the person who did them The metrics used the language and the format that the senior leadership could understand They included no “soft” metrics or language P. Wilson, Former VP of HR Oracle

Let the CFO guide your metric actions Involve the CFO’s office from the very beginning Let them explain “the rules”… including what is (and is not) an acceptable approach for proving bottom-line impact Let the CFO select your strategic bottom line metrics (3x5 cards) and business case approaches, so that you avoid “so what” metrics Consider letting the CFO present / report your metrics 15

CFO’s care about… CFO funding decision criteria An ROI of above 15% A payback period of 18 months or less A low initial investment Immediate start up No new headcount A high success rate/ low risk of project failure Project reassessment points built-in It reduces overhead costs Accurate results metrics and counting process Consequences for failure built in (individual accountability)

COO’s must also be influenced COO key support criteria It directly impacts key business goals (profit, growth and revenue) It helps to resolve major business problems It reduces time-to-market It provides a competitive advantage It directly increases innovation

Note: The 11 are listed from least to most powerful Step IV Use one of these 11 proven business case methods to show your business impact Note: The 11 are listed from least to most powerful

Business case method # 1 Use external data to prove the impact of talent management Weakness: Our firm is not comparable

Investing in HC gives WOW ROI returns $100 spent on _____ Produces what ___% returns Financial investment 2% Capital Improvements* 3.9% Developing human capital* 8.5% *A study of 3,000 companies by the University of Pennsylvania cited in Fast Company Aug 1, 2003

Employees at top TM firms produce amazing results Comparing employee performance in the top 25% performing firms versus… the bottom 25% Employees at top TM firms produce amazing results The average profit per employee at top firms is $240,000 versus $16K at bottom performing firms To produce the same $1 of profit, bottom firms need 15 times more employees Top-performing firms produce 7X more profit Source: simmethod.com 2013

Having strong HR… increases rev & profit BCG found that firms that are highly skilled in core HR practices outperform firms with less capable HR. They… Experience up to 3.5 times the revenue growth And as much as 2.1 times the profit margins Source: BCG - From Capability to Profitability: Realizing the Value of People Management, 2012

Which TM functions have the highest impact on profit? A compelling business case requires that you focus your resources on activities that increase profit (BCG) Which TM functions have the highest impact on profit? Source: BCG/WFPMA - From Capability to Profitability: Realizing the Value of People Management, 2012

Mid and lower impact HR functions Source: BCG/WFPMA - From Capability to Profitability: Realizing the Value of People Management, 2012

BCG found that frequent “best place to work” placement influences stock market returns by 10x S&P Made Fortune list 3 out of 10 yrs. (109%) vs. S&P (10%) - BCG 2012

There is plenty of external proof that you should focus on top performers

Are top performers worth all of the effort? "The secret of my success is that we have gone to exceptional lengths to hire the best people in the world… boy, does it pay off." “The difference between the average programmer and a great one”… it's at least 25 (times) Steve Jobs

Not all employees produce equal output The 80/20 rule applies to employees A U of Indiana study (O’Boyle and Aguinis) found... The top 1% produce 10% of the output The top 5% produce 26% of the output Robert Half found that Poor performers are expensive because their managers spend nearly one day a week dealing with them (17% of their working hours)

Business case method # 2 Show that users are satisfied or that you are highly rated Weakness: Satisfaction may come from low expectations

Satisfaction surveys may indicate results Having satisfied users may be enough If a survey shows that the users of a program or process are highly satisfied, executives may accept that as proof that the program is producing results

Example - Of a business case based on satisfaction Manager satisfaction with the quality of hire Last year’s satisfaction percentage 78% This year’s satisfaction rate 88% Value added (for each % point of improvement) $100k Historically the best ever within the firm 78% The industry average 69%

Another example Forced ranked assessment of the impact of OH functions on a surveyed manager’s business results Recruiting Finance Supply chain Retention Advertising Market research Product branding Security IT Performance appraisal

Business case method # 3 Show the unintended “other pocket losses” that result from excessive cost cutting Weakness: It does not help to justify budget increases

Demonstrate the damage that cost-cutting can do Demonstrating “other pocket” losses may keep your budget from being cut Work with the CFO to calculate the “unintended consequences” that will result from cutting TM budgets Show when “out-of-pocket losses” may overcome any “perceived savings” from reduced TM spending

An “other pocket” costs example Pocket #1 – Froze safety hiring (Saved $10,000) But look at “other pocket” costs… Pocket #2 – Accident rates doubled (+$400,000) Pocket #3 – Insurance rates up 23% (+$187,000) P. #4 – Turnover of safety ee’s +15% (+$89,000) Other pocket costs = - $676,000 >

Example - “Other pocket sourcing costs” We used the “cheapest source of hire” to select 5 new salespeople (We saved $7,500 in hiring costs) But the 5 salespeople that we hired sold on average $60,000 less during their 1st year than the hires from the more expensive source! $7,500 savings - $300,000 in lost sales = $292,500

Business case method # 4 Use charts and graphs as an alternative Weakness: Some demand a deep dive into data

Sometimes a chart is all that is needed to convince! % of sales target met Performance after training Performance before training

Example - Turnover rate change after implementing personal retention plans Hockey stick approach Steady turnover of 9 % What happened here? Personal retention plans were implemented Time October 2013

Sometimes a simple comparison table can be a powerful way to demonstrate performance Using the #1 most important overall talent metric… Workforce productivity

Demonstrating your workforce productivity using a comparison chart Comparing employee productivity (rev. per employee) Average $208,000 IBM $221,100 (22% above the average) HP $348,300 (66% above the average) Amazon $756,200 (3.5 times the average) Microsoft $808,600 (4 times the average) Google $1,014,600 (5 times the average) Facebook $1,325,000 (6 times the average) Apple $2,327,000 (11 times the average) Key learning - It takes 5 X more employees at IBM… to produce the same revenue as Facebook (Calculated using 7/2013 data from http:// www.wolframalpha.com/input/?i=apple+revenue+per+employee )

Business case method # 5 Show statistical correlations Weakness: Correlations can’t prove cause and effect

Some CFO’s will accept correlations Training correlates with performance – when the average training hours of the team exceeds 60 hours per year… the odds of them exceeding their performance goals increase to 92% (from 70%) Leader development and performance – when a team leader completes the leadership development course, during the next year, the performance of their team increases by an average of 31% Diversity and performance – there is a .76 (Max 1.0) correlation between the diversity % in customer service and design teams… and a 10% improvement in product/service quality

Business case method # 6 Get the CFO to help you to convert your standard HR metrics to show… their dollar impact on business results Weakness: The wrong HR metrics may be presented

Let the CFO count Because of the CFOs superior credibility Let them convert standard HR metrics into their dollar impact on revenue

Example - Quantify the $ impact of vacant positions This Midwest bank was losing revenue every day that a loan officer position was vacant ($5,000 per day). Obviously, with no loan officer, a branch can't make or close any revenue generating loans They asked recruiting to apply their speed hiring techniques and they cut the number of vacancy days nearly in half (from 60 to 30) At $5,000 per eliminated vacancy day (x 30) and over dozens of requisitions, they increased the bank’s revenue by millions

Conclusion – Perf. management has a low ROI Example - Let the CFO calculate the… $ impact of performance management The firm went back 2 years and identified that they had 1,019 people rated #3, “needs improvement” They calculated that they spent an average of $13,090 per year… on improving their performance (training, coaching, counseling and manager time) They identified 2 years later… the number that had improved to #1’s That number was Conclusion – Perf. management has a low ROI Cisco

What is the performance differential between an innovator and an average employee? One top-notch engineer is worth “300 times or more… than the average” … “we would rather lose an entire incoming class of engineering graduates than one exceptional technologist.” Alan Eustace Senior Vice President, Engineering and Research

Let the CFO calculate the ROI of top performers Why Google focuses on recruiting purple squirrels The average employee generates $1 million in revenue each year If you hire a single game changer and that game changer produces the expected 300 times the average For every one you hire… you add over $299 million in added revenue every year And if the new hire stays for only 3.5 years… they will generate over $1 billion in revenue The cost per hire is $12,400 and top performers get paid only 27% more

Business case method # 7 Side-by-side comparison of two program variations (aka A/B tests) Weakness: Expensive to run two programs at once

Cost per hire + $919 per hire 0% Offer Accept Rate + 14.5% +1% Using a side by side example – comparing Job boards and employee referrals Bus impacts Referrals - Sales % of improvement Impact over job boards Cost per hire + $919 per hire 0% Offer Accept Rate + 14.5% +1% Voluntary Turn + 2.3 Times +4% Termination rate + 3.6 Times +7% Perform. increase +14.4% +14.4% Total impact on sales +26.4%

Business case method # 8 Before and after comparisons Weakness: Other factors may be causing the success

Before and after impacts… of turnover When a retail manager leaves Impact Their store sales decrease by $1 million Store cust. satisfaction decreases by 13% Stores with a well tenured 23% higher mgmt team (Average is over 7 yrs.) profit

Proving talent programs work Retention before and after childbirth action Data indicated that the attrition rate for postpartum women was twice that for other employees In response, Google lengthened maternity leave to five months from three and changed it from partial pay to full pay Attrition of women decreased by 50 %

Proving talent programs work Before and after action for promoting women Technical women were not being promoted at the same rate as men Employees nominate themselves for promotions at Google, but the data revealed that women were less likely to self nominate So senior women at Google now host workshops to encourage women to nominate themselves Women are now promoted proportionally to men

Business case method # 9 Put it in and take it away Weakness: This is difficult to do

Put it in and take it out comparison Which job matters most in Quick Service Restaurants? Store manager - Counter help - French fry chef

Moving french fry chefs… Great french fry chef removed and “old” chef returned Revenue Bad FF chef is replaced with a top one $1 mil $500k 1st quarter 2nd 3rd 4th Time Conclusion - The quality of the french fry chef… makes little difference!

Moving great store managers… to weak stores Revenue Bad manager returned Bad mgr. replaced with a great one + 35% $1.35 mil minus 35% $1 mil 1st quarter 2nd 3rd 4th Year 2 Time A great store manager does make a difference! 59

Moving top counter help… to weak stores + 25% immediate Improvement in 2 weeks! Revenue Bad counter help replaced with a great team But… within 1 month, the great counter team quit (because of a bad manager). Revenue returned to the base level $1.35 mil $1 mil and the long term impact was 0 1st quarter 2nd 3rd 4th Year 2 Time Great counter help requires a great manager! 60

Business case method # 10 Show split sample control group results Weakness: This is difficult to do

Helping a manager increase sales A manager is complaining about declining sales revenue from “call center” phone sales reps. for a mobile phone company The manager requested that HR try skill training, then perf. management & finally incentives. All programs had no measurable impact on sales HR proposed that the problem was hiring reps. with the wrong capabilities. They proposed improving the candidate assessment process by supplementing the standard interview with an on-line capability assessment test

Can better hiring increase sales HR proposed a split sample where half of the next round of hires were assessed the standard way… while the other half of the candidates were also screened with an additional (vendor supplied) on-line assessment tool designed to weed out people without the right competencies The manager was so happy with the “scientific approach” that she agreed to fund the $50k costs Sales from the on-line assesses candidates were over $800,000 higher than the control group the first month and… over $12 million the first year

Graph depiction - how a split sample can prove that best practice sharing increases sales Monthly sales $1.5 mil $1.4 mil $1.3 mil $1.2 mil $1.0 mil Best practice sharing started Sales up + 22.4% after 1 yr. of best practice sharing Control group .02% change in sales in control group 2nd Quarter 3rd Quarter 4th Quarter 1st Quarter Conclusion – best practice sharing increases revenue by $250,000 per year, at a cost of $50,000, with an ROI of 4 to 1 64 64

Business case method # 11 Predictive analytics warn you of upcoming major problems Weakness: It requires big data

Predictive metrics alert you of upcoming problems Alert: Retirements will triple by 2016 at a cost of $12 mil. in lost productivity 2013 2014 2015 2016

Are there any final questions? Did I make you think? Are there any final questions?