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Measuring HR effectiveness, efficiency


Emmanuel Zvada

Employers today expect their human resources managers to build a persuasive case that shows how in specific and measurable terms the firm’s human resource activities can do to create value for the firm. We all know that people and talent are critical to any business’ success, and HR is at the heart of finding, attracting and retaining that talent in any organisation. Knowing how strong your HR team is to your company is a key indicator of how successful your organisation is as well. It is essential to measure how efficient your HR department is at implementing policies, programmes, and initiatives for effectively engaging and managing your employees.

HR’s effectiveness can no longer be measured according to non-quantifiable assessments. Instead HR must be able to clearly validate their effectiveness to the organisations they are in. HR “effectiveness” and “efficiency” are critical if we really want to measure HR departments. Effectiveness is the degree to which carefully established strategic goals are aligned and met. Efficiency on the other hand is a ratio of “outputs” to “inputs.” Alternatively, efficiency is “doing things right,” while effectiveness is “doing the right things.”

It is quite possible, therefore, that HR professionals can be effective without being efficient, or that they can be efficient without being effective. HR measures help to ensure that we will achieve efficiency as well as effectiveness. But how do you know the HR function is delivering everything it needs in the most effective way possible. There are a variety of HR measurement tools with which HR professionals need to be familiar with but before conducting an HR audit organisations need to know if they are doing the right things or if they are doing things right.

Conducting HR Audits

The HR audit is the primary tool that many HR departments utilise in an effort to assess their own effectiveness and efficiency. HR audits have a number of purposes and produce a variety of results. An effective human resources (HR) audit looks into every discipline of the human resources function. HR disciplines include recruitment and selection, workplace safety and risk management, training and development, employee relations, and compensation and benefits. The purpose of an HR audit is to determine if your organisation’s policies are current and if they comply with laws governing the workplace.

More specifically, HR audits will scrutinise and draw conclusions relative to the degree to which the organisation complies with legal requirements, the degree to which HR services are “user friendly”, the degree to which recruiting, selection, and retention and all the legal requirements surrounding HR department and the organisation as a whole are met. You can also look at the levels of consistency, responsiveness, effectiveness, and quality with which HR provides services, as well as how much money your company spends on HR functions. Your measures of effectiveness may include determining how many and what types of issues your HR staff resolve on average, as well as your ratio of HR costs to overall business costs.

Measuring HR outcomes or output

You may also need to measure whether HR is implementing effective policies, practices, and strategies for maximising employee recruitment, engagement, development, output, and retention. Your measure of impact may include the number and ratios of new hires, promotions, and retained employees; or the number and ratios of employees hired against those who left the company. The reason for that is determining whether HR is delivering the outcomes necessary for the business’ success.

Turnover and retention rate

This may involve assessing measuring how happy and satisfied are our employees, how engaged are employees with their work and the organisation as well as assessing the absenteeism rate and its impact on business monetarily. Other metrics for measuring turnover are turnover metrics rates where the turnover rate (including overall, voluntary and involuntary) is calculated as the ratio which represents the number of employees who leave the organisation over a given time period compared to the average number of employees during the same time period. Retention rate also measures the percentage of employees that is still employed at the end of a given period.

Absence analysis and costing

Rates of employee absence or staff absenteeism are great indications of the workplace environment and satisfaction levels of staff and employees. By calculating these different rates, you can determine absence data, as well as enabling external comparisons, can be analysed by department, work-group, occupation, grade and so on. In this way the analysis will throw up problem areas, and additional analysis can be used to try to identify the causes of differing levels of absence in different parts of the organisation.

Measure the ROI of human capital

Human capital is the knowledge, skill sets and intangible assets that add monetary value to an individual. Human capital is not a stationary measure but is an intangible asset.

Employers can use various measures to evaluate the economic value added by his staff in order to measure the return of that human capital.

Human capital may be measured by the number of employees with specific skills and experience, including changes in those numbers; or the monetary value of innovations your employees make for your company. Managers can calculate the total profits a company generates before and after investing on its employees’ capital. The ROI of human capital is calculated by dividing the company’s total profits by its total investment on human capital.

Overtime rate, overtime frequency rate.

Overtime rate represents the number of overtime hours compared to the total number of regular worked hours for a given time period. Overtime pay is the amount of overtime paid to each employee in a pay period. Overtime pay is calculated: as hourly pay rate x 1,5 x overtime hours worked. It is important to know this rate because employees who work overtime hours experience numerous mental, physical, social effects as well as poor work-life balance. Employee performance levels could also be lowered. Long work hours could lead to tiredness, fatigue, and lack of attentiveness.

It is also crucial to calculate overtime expressed as percentage of labour cost. Analysing overtime costs can be an important strategic step in determining when to hire new workers and improve efficiency in operations, labour costs and productivity. Managers should know that overtime analysis plays an important role in making hiring decisions as one will look closely at the costs of overtime compared with the costs of hiring additional employees.

Recruitment indicators/metrics

Recruiting metrics are measurements used to track hiring success and optimise the process of hiring candidates for an organisation. When used correctly, these metrics help to evaluate the recruiting process and whether the company is hiring the right people. Recruiting metrics are an essential part of data-driven hiring and recruitment analytics. Key performance indicators are average cost per placement. Managers’ cost of placement should be measured and tracked on a monthly/quarterly basis. Average cost per hire measures the average amount spent to recruit a new employee.

Training and development indicators

Training and development initiatives are a core function of the organisation, irrespective of its size. Key performance indicators or KPIs for the training and development department, including real-time tracking, average number of training hours per employee, training Investment per employee and other training metrics. It is also important as an organisation to determine and analyse number of successful employees after training as well as analysing training cost expressed as a percentage of total costs.

The need to measure the effectiveness of human resources is related to the need to identify the key drivers of the human potential and to model the effect of its modification.

Management needs to focus on planning, recruiting, stabilising, developing and optimal exploitation of human resources. Measuring of the human resource effectiveness is a means for tracking the achievement of strategic objectives in human resource management and for evaluating of work with human resources.

The results of having HR metrics are important for pre-setting targets, uncovering and exploiting the reserves, comparing suitability of variants for achievement of set target, determining the magnitude and causes of deviations and proposing a way of removing them. It is not possible to manage without measuring.

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