Show Me the Money Jack J. Phillips, Ph.D.

AgendaAgenda Explore implementation of a balanced set of human capital measures Examine the various ways to place value on human capital Identify five strategies for determining the human capital investment level Describe a comprehensive process to measure ROI Identify key issues surrounding ROI utilization

Human Capital Perspectives Traditional View Emerging View Expenses are considered costs Expenditures are viewed as a source of value Function is perceived as a support staff Functions is perceived as a strategic partner Involved in setting HR budget Top executives involved in budget Metrics focus on cost and activities Metrics focus on results Metrics created and maintained by HR alone Top executives involved in metrics design and use... and

Human Capital Perspectives Traditional View Emerging View Little effort to understand the ROI in HC ROI has become an important tool Measurement focuses on the data at hand Measurement focuses on the data needed Measurement is based on what others measure Measurement is based on organization needs Programs initiated without a business need Programs linked to specific business needs Reporting is input-focused Reporting is output- focused

Increased Interest in the Value of Human Capital DRIVERS:  The increasing cost of human capital  Consequences of improper or ineffective HR practices  Linkage of human capital to strategic initiatives  Increased accountability of all functions  Top executive requirement for HR contribution, and human capital ROI

Profitability PROGRAM IMPACT Strategic Accountability Evaluation BOTTOM LINE CONTRIBUTION Effectiveness Vital Signs Benefits vs Costs ECONOMIC VALUE ADDED PERFORMANCE STANDARDS Shareholder Value Balanced Scorecard Value Based ROI

Three Journeys 1. The need to change the HR measurement mix 2. Setting the investment level for human capital 3. Valuing human capital

HR Accountability Progress Leading Edge Approaches Solid Value- Added Approaches Early Approaches ROI Methodology HR Macro Studies Human Capital Measurement HR Profit Center Competitive HR Benchmarking HR Satisfaction Surveys HR Cost Monitoring HR Key Indicators HR Auditing HR Case Studies Feedback Surveys MBO in Personnel HR Accountability 1960’s1970’s1980’s1990’s2000 Balanced Scorecard

Leading Edge Approaches to Measuring the HR Contribution Balanced Scorecard Balanced Scorecard HR Profit Center HR Profit Center Human Capital Measures Human Capital Measures HR Macro Studies HR Macro Studies ROI Process ROI Process Most promise as an immediate tool

Measurement Categories Attitudinal Data Comparative Data Human Capital Measures Benefit/Cost Analysis (ROI) Select an approach in each of these categories

Setting the Investment Level Let Others Do It! 1

Motivating Forces Cost control Lack of infrastructure Instability Access to expertise Short-term focus Survival Approaches 1.Hire fully competent employees 2.Use contract employees 3.Outsource major functions

Setting the Investment Level Invest the Minimum! 2

Motivating Forces Low cost industry High labor use Strong competition Employees are dispensable Approaches 1.Pay minimum wages 2.Provide few benefits 3.Keep training simple 4.Expect turnover and address it

Setting the Investment Level Invest with the Rest! 3

Motivating Forces Desire to have best practices Benchmarking is acceptable Benchmarking is used in all parts of organization Benchmarking can be low cost Benchmarking is low risk Approaches 1.Locate existing reports 2.Participate in existing projects 3.Create a custom project 4.Search the literature

Setting the Investment Level Invest Until it Hurts! 4

Motivating Forces Fad chasing Happy employee dilemma Quick fixes Retention concerns Competitive strategy Union demands We can afford it! Approaches 1.Pay above-market wages 2.Provide above- market employee benefits 3.Implement most new fads/ programs 4.Provide all types of employee services

Setting the Investment Level Invest as Long as There is a Payoff! 5

Motivating Forces Need to show HR contribution Increasing cost of human capital Secure funding Business partner Improve processes Approaches 1.Measure success of each HR program 2.Collect up to six types of data 3.Use ROI routinely 4.Involve stakeholders 5.Use the data

Valuing Human Capital: Three Approaches 1. What we know from Logic and Intuition 2. What we know from Macro Level Research 3. What we know from ROI Analysis

1. Logic and Intuition Automation has limitations Automation has limitations People are necessary People are necessary Stock market mystery Stock market mystery Accounting dilemma Accounting dilemma Last source of competitive advantage Last source of competitive advantage Superstar Phenomena Superstar Phenomena

2. Macro Level Research HR Effectiveness Index HR Effectiveness Index Gallup Studies Gallup Studies The Service Profit Chain The Service Profit Chain Watson-Wyatt Studies Watson-Wyatt Studies Deloitte & Touche Studies Deloitte & Touche Studies.... and many others

3. ROI Analysis Micro Analysis Tool Micro Analysis Tool 3-5,000 studies per year 3-5,000 studies per year 41 Countries / 25 Languages 41 Countries / 25 Languages Variety of Applications Variety of Applications ROI Certification (2,500) ROI Certification (2,500) ROI Networks ROI Networks ROI Standards ROI Standards ROI Best Practices ROI Best Practices

The ROI Process … Generates six types of data: 1.Reaction to an HC project or program 2.Learning skills/knowledge 3.Application/Implementation progress 4.Business impact related to the project or program 5.Return on Investment 6.Intangible Benefits …..and includes a technique to isolate the effects of the program

ROI Dilemma 70-80% of organizations want to use ROI 15-20% of organizations are currently using ROI Wish List ROI Use List ROI Why the gap? HIGH LOW

Why Use ROI? Reactive Show contributions of selected HR programs Show contributions of selected HR programs Justify/defend budgets Justify/defend budgets Identify inefficient programs that need to be redesigned or eliminated Identify inefficient programs that need to be redesigned or eliminated

Why Use ROI? Proactive Aligns HR to business needs Aligns HR to business needs Earn respect of senior management/ administrators Earn respect of senior management/ administrators Improve support for HR Improve support for HR Enhance design and implementation processes Enhance design and implementation processes Identify successful HR programs Identify successful HR programs

ApplicationsApplications Employee Relations Programs Career Development Programs Competency Systems Diversity Programs E-Learning Executive Coaching Executive Education Gain Sharing Programs Global Leadership Organization Development Orientation Systems Recruiting Strategies Safety & Health Programs Self-Directed Teams Skill-Based/Knowledge-Based Compensation Technology Implementation Total Quality Management Wellness/Fitness Initiatives

Private Sector Organizations

Government Organizations  US Department of Defense  US Department of Labor  US Department of Veteran Affairs  US General Accountability Office  US Office of Personnel Management  NASA  European Patent Office  Government of New Zealand  Singapore  Italy  Australia  Canada  England

Basic Elements An Evaluation Framework Case Applications and Practice A Process Model Operating Standards and Philosophy Implementation

HC Evaluation Levels Level Measurement Focus 1.Reaction & Planned Action Measures participant satisfaction with the HC project and captures planned actions, if appropriate 2.Learning Measures changes in knowledge, skills, and attitudes related to the HC project 3.Application Measures changes in on-the-job behavior or actions as the HC project is applied, implemented, or utilized 4.Business Impact Measures changes in business impact variables 5.Return on Investment Compares project benefits to the costs

The ROI Process Develop Evaluation Plans and Baseline Data Develop Evaluation Plans and Baseline Data Evaluation Planning Data Collection Collect Data During Solution Implementation Collect Data During Solution Implementation LEVEL 1: REACTION, SATISFACTION, AND PLANNED ACTIONS LEVEL 2: LEARNING Collect Data After Implementation Collect Data After Implementation LEVEL 3: APPLICATION/ IMPLEMENTATION LEVEL 4: BUSINESS IMPACT Develop Objective of Solution(s) Develop Objective of Solution(s)

Tabulate Costs of Solution Tabulate Costs of Solution Isolate the Effects Isolate the Effects Convert Data To Monetary Value Convert Data To Monetary Value Calculate the Return On Investment Calculate the Return On Investment Generate Impact Study Generate Impact Study Data Analysis Identify Intangible Measures Identify Intangible Measures LEVEL 5: ROI Reporting INTANGIBLE BENEFITS

Intangible Benefits Complaints Conflicts Stres s Job Satisfaction Commitment Teamwork Customer Service Engagement

Cost-Saving Approaches Plan for evaluation early in the process Build evaluation into the training process Share the responsibilities for evaluation Require participants to conduct major steps Use short-cut methods for major steps Use sampling to select the most appropriate programs for ROI analysis... and

Use estimates in the collection and analysis of data Develop internal capability to implement the ROI process Utilize web-based software to reduce time Streamline the reporting process Cost-Saving Approaches

Evaluation Profile οοοοοοοooooooooooooooooοoοοοοοοο οοοοοοoooooooooooooooooοοοοοοοοο οοοοοοοoooooooooooooooooοοοοοοοο οοοοοοοoooooooooooooooooοο οοοοοοooooooooooooooοοοοοο οοοοοooooooooooooooοοοοοοο οοooooooooooooooοοοο oooooooooooooooooooo oooooooooooooo oooooooo LevelTarget % 75% 30% 20% 10%5

Criteria for Selecting Programs for Levels 4 and 5 Evaluation Criteria for Selecting Programs for Levels 4 and 5 Evaluation Expected life cycle of the HC project The importance of the project to strategic objectives The cost of the project Visibility of the project The size of the target audience Extent of management interest

What Happens If We Maintain the Status Quo?  Budget?  Influence?  Support?  Other Issues?

ROI Reality ROI is desired by clients/executives ROI is desired by clients/executives The ROI methodology provides a balanced, credible approach with six types of data The ROI methodology provides a balanced, credible approach with six types of data All types of organizations are routinely using ROI All types of organizations are routinely using ROI The ROI methodology can be implemented without draining resources The ROI methodology can be implemented without draining resources The ROI methodology is a long-term goal for many organizations The ROI methodology is a long-term goal for many organizations

What Next? Action Items to Implement a Comprehensive ROI Process

Supplemental Materials Additional Resources and Information