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As Published in Business
2 Business, May 2007
Profit Per Employee
Can HR Be Trusted to Get the Job Done?
By Ira S Wolfe
Can HR be trusted by management to get the job done?
Whether you are the executive of a large cap company, the head of a family owned business, or a staffing executive you must be asking yourself: “Is the Sky falling?”
“The talent shortage is real and getting worse,” says Lou Adler, president of the Adler Group and noted recruiting industry expert.
For those skeptics who feel all the commotion about worker shortages is mostly hype, there is way too much wind in the Perfect Labor Storm sails to ignore what is happening. The numbers speak for themselves. The real-life situation is that unemployment is down. Wages are exploding for skilled workers.
For instance, last year a professor in machine tool and computer-aided manufacturing at Thaddeus Stevens College of Technology in Lancaster had 13 graduating students in his program. Fifty-four firms contacted him. Students were offered as much as $80,000 plus benefits. Several firms offered signing bonuses of $2,500. In another program, nineteen firms want to hire machinists from a program that will graduate six students. In HVAC, 17 firms were competing to hire six students. In mechanical engineering, 21 firms and eight graduates. In metals fabrication, it was 22 firms and 12 grads. Job opportunities in many of the hardest hit businesses hoping to hire students exceeded the number of students graduating by a 3-to-1 margin.
Where art thou HR?
As a result of the increasing pressure to find qualified candidates and cope with rising wage demands, recruiting and staffing costs are rising at a rapid clip. Human resources practices are being tested like never before. Unfortunately, when senior management goes to the HR cupboard looking for outcomes-based data, the cupboards are bare.
HR should be looking at total labor cost per productivity, according to Ed Krow, Senior HR Consultant with Beard Miller and Co. “When production goals are missed and backlogs increase, the typical response is to hire more people,” say Krow. “Before posting that new job, HR should be looking at what appropriate staffing is for maximum productivity and looking for deviations before throwing more bodies at the problem.”
“Should be” is the key. Are they? Only 15 percent of companies have determined the return on investment of their recruiting/staffing investment. “That means only 15% of billions of dollars spent each year on recruiting/staffing can be linked to a financial or business outcome,” says Joseph P. Murphy, Principal and Vice President of Shaker Consulting Group, Inc.
During my interview with Murphy, he was bewildered “why human resources and management hold themselves so unaccountable for a business process so critical to the bottom line?”
When companies do measure HR functions, the metrics are rarely financial and tied to outcomes based on the needs of the industrial age, when workers were in abundant supply and at a time when who ever owned the most equipment and factories won the game. Murphy insists that HR outcomes must be measured in real dollars, not percentages and anecdotes.
Manufacturing is held accountable for waste and re-work, why not HR?
Today, companies create wealth by converting “raw” intangibles into products, services, brands, intellectual capital and networks, not acquiring tangible assets (equipment and buildings). The most valuable intangibles are employee skills, reputation and relationships. They represent competitive advantage in today’s business environment and are now the true source of corporate wealth. As a result, one new metric of business performance is profit per employee.
Murphy then asks if individual productivity is the new metric, “why do HR and senior executives continue to use accounting principles instead of finance when measuring the effectiveness of HR?” He offered up this real case scenario.
Accounting principles track income and expense. Finance applications track productivity and profitability. A sales organization he consulted with averaged sales per territory in the neighborhood of $1 million. The average sales for the top 80% of the sales force was $1.5 million. The bottom 20% reduced the average sale by $.5M; the bottom 20% of the salespeople averaged only $300,000. Accounting reports showed a profit. Financial reports would reveal gross inefficiencies and waste.
In a recent survey sponsored by B21 Publishing and Success Performance Solutions, less than 32 percent of the 162 respondents (HR executives and managers) reported that their company tracked the cost to hire a new employee. (As you will read shortly, even this metric is now considered to be an ineffective measure.) In a survey of Lancaster County HR professionals, less than 12 percent of the companies were monitoring cost-per-hire. A few tracked total recruiting costs but most respondents weren’t tracking anything but turnover and vacancies. One respondent commented “it takes too much trouble to track this stuff.” Another said, “the turnover rate is very high in this type of business so we are very happy our average turnover is much, much lower.”
Despite his disappointment in HR’s effectiveness, Murphy is quite sensitive about “not slamming HR” for the lack of outcome based metrics. He squarely places much of the blame “at the feet of executives who haven’t recognized the importance of HR metrics, for allowing the continuation of measuring the wrong factors and rewarding wrong behaviors.
Unlike Murphy’s diplomatic response to HR’s failure for holding up their financial responsibilities to the organization, John Sullivan writes in Workforce Management (March 26, 2007), most HR generalists are “little more than hand-holding, silo-building, no-change agents who serve as barriers to HR having a measurable business impact.”
Sullivan, a professor of management at San Francisco State University, adds “for the most part they are genuinely nice people but they do more damage within an organization than any negative article about HR could ever do…….they resist measurement. If you look within your firm, you’ll find that your generalists have no output or results metrics of any kind.” According to Sullivan, HR generalists have elevated excuses to an art form.
Murphy offers a recommendation: apply lean and Six Sigma practices to HR. Human resources managers must begin to focus on the following: How do I move candidates through the recruitment process quickly, with a minimum of resources, and without waste and errors? How can I correlate pre-employment screening to job performance, reduce waste (terminations) and re-work (re-hires)? Executives need to demand that HR provides these metrics and hold them to the same financial accountability as they do accounting, sales and manufacturing.
“Let’s assume you own a manufacturing plant,” says Murphy. You track only the total cost of raw materials. You don’t track the cost of individual materials or variations in cost throughout the year. When material arrives, you don’t track inventory, where it is stored or when it is used. You don’t keep track of how many mistakes are made nor the cost of these mistakes which end up in customer returns and those that require re-work. You don’t track the time it takes to produce a product from start to finish. Production and delivery employees don’t coordinate schedules resulting in completed products sitting in the warehouse or in trucks.
Many of you are likely thinking that it will just be a matter of time before this company shutters its doors, if it hasn’t already.
But before jumping to conclusions, remember that people in glass houses shouldn’t throw stones.
Like the plant manager who reports dollars associated with raw material waste, HR managers must be held accountable for reducing dollar loss as a result of turnover, the HR equivalent of waste. When you replace the employee, you need to start the process all over again – you start with raw goods and transform it into a value-added product. Manufacturing reports this as re-work. HR must report and be held accountable for terminations – voluntary and involuntary – as costs of re-work. Employee terminations are similar to a company shipping out a line of defective product, a pharmaceutical plant shipping out contaminated drugs. They can’t be re-used and in addition to the morale and service problems, you need to pay for more raw material and the time and resources to produce new product. Human resource managers and hiring managers must agree to agree and work together to create shared goals that benefit the organization, not their personal or department agendas.
Turnover reported as a percentage is an irrelevant and outdated metric, says Murphy. Ed Krow agrees: “Turnover doesn’t improve productivity if a company retains employees who under perform.” One major mistake management makes is incentivizing HR and department managers to lower turnover without performance metrics in place. “A lot of bonus dollars have been handed out for lower turnover when what really happened is managers worked hard to retain mediocrity. The penalty for not assigning dollars to HR metrics is rewarding HR to monitor and fix problems that might have little or no effect on profitability.
Unfortunately, in 85 percent of companies no economic data exists to justify how HR decisions impact the bottom line.
A Solution Hot Off the Press
An oft-quoted quality statement, purportedly handed down from Lord Kelvin and later adopted by W. Edwards Deming, goes something like this:
"When you can measure what you are speaking about, and express it in numbers, you know something about it; but when you cannot measure it, when you cannot express it in numbers, your knowledge is of a meager and unsatisfactory kind."
Identifying and monitoring metrics that link HR performance to company productivity is the perfect starting point to put HR where it belongs – at the highest level of any organization.
In a report released in early April 2007 by Staffing.org, a compelling case is made for controlling runaway recruiting and staffing costs.
(2007 Recruiting Metrics and Performance Benchmark Report is the analysis of collected financial data from nearly 4,800 organizations spanning 60 different industries and representing more than 487, 000 job seekers and 120, 800 employees.)
The staffing.org annual report, published since 2000, shows that the cost-per-hire is an outdated and inaccurate metric. Despite that, cost per hire remains the standard staffing metric for the few companies doing any measurement at all.
Like cost-per-hire, time-to-fill/time-to-start metrics are flawed too. Krow warns, “the time-to-fill metric motivates recruiters to “throw bodies at problems.” Another problem is ambiguous definitions. When does recruiting begin? HR might start the recruiting clock from the date the first ad hits the media, while managers may flip the switch as soon as the position becomes vacant. And when does recruiting end? Recruiters often stop the clock as soon as the candidate says yes, while managers don’t see recruitment ending until the candidate actually shows up for work.
Traditional metrics for customer satisfaction and new hire quality are generally anecdotal at best if measured at all. For starters hiring managers don’t hold an exclusive on being the customers. New hires, candidates who were not selected and candidates who declined offers are customers too. Even so, only 18 percent of organizations ascertain hiring manager satisfaction for most of their positions.
And measuring quality is more vaporware than substance in HR circles. To quote the staffing.org report, “although it is talked about often, quality in staffing practices has not been clearly defined.” When quality is not pre-defined, research shows it takes longer to fill the position. When a recruiter – internal or external – tells you that he or she “will know it when I see it,” beware to wait longer or receive lower quality hires.
Despite the high correlation of new hire quality with recruiting efficiency, less than 2 percent of U.S. employers addressed any aspect of quality as recent as 1999. Today, over 30% of the participants in the staffing.org study, define quality before initiating the recruiting process – a dramatic improvement but still reflecting a poor performance from the guardians of an organization’s most precious assets. That should be an embarrassment to the 70 percent of the companies not defining quality and a far cry from the level of control that companies need to win a few battles fighting the war for talent. Based on empirical data, the number of small and mid-sized businesses tracking new hire quality is still stuck in the industrial age.
Without good data to track customer satisfaction and new hire quality, how is HR performing? Richard Swanson, Professor of Human Resources Development at the University of Minnesota summed it up when he wrote, “If you put a good person in a bad system, the system will win every time.”
The Ultimate Management Metric
The much more accurate alternative metric to cost-per-hire and time-to-fill is Recruiting Cost Ratio (RCR). RCR is now considered the ultimate management tool for budgeting and resource allocation, complemented by four other metrics: new hire quality, actual/contracted time-to-start, hiring manager satisfaction, and recruiting efficiency.
Simply put, RCR takes total staffing costs for all employees hired in a time period and divides it by the total compensation costs for all those recruited. Multiply by 100 and the result is your RCR percentage, or how many recruiting dollars an organization spends for every dollar in new hire compensation. Efficiencies are evaluated by comparing efficiency ratios for different positions within an organization, against peers and across industries.
(For more information about the specific criteria used to evaluate these metrics, you may order the full report at www.staffing.org or contact Success Performance Solutions.)
The Revenge of the Bell Curve
Murphy offers still another solution. He dismisses the popular idea of “cloning” the top 20 percent of employees. “In today’s market,” he concludes, “finding and recruiting only top performers is too hard and too expensive, especially if you keep hiring and retaining the bottom 20 percent, the under-performers.” Recall his analysis above that demonstrated how eliminating only the bottom 20 percent, improved the average of the top 80 percent of salespeople by $500,000. Think about that: by focusing recruitment and retention efforts on mostly average performers, you can dramatically improve productivity per employee.
Here lies the rub. Without quality metrics companies don’t really know what differentiates between the top 16 percent high potentials, the 68 percent middle performers and the lowest 16 percent. By trying to clone top performers companies limit their recruiting market to 16 percent of the population without knowing what the lowest 16 percent look like, the biggest drain on profits and expenses.
But current hiring processes hire both the best and the worst. A more effective goal for HR should be to eliminate the worst hires and only focus recruitment efforts on finding candidates who match the characteristics, skills and abilities of the average and top performers.
To be fair to the bottom 20 percenters, employers should consider the aging factor before handing out pink slips. One group might include the experienced, older worker. When these workers leave, so does knowledge about customers, products and the market. Special consideration should also be given to the younger, inexperienced worker who may be climbing the learning curve and just hasn’t hit full stride yet. This scenario creates a unique opportunity for the experienced worker to mentor the new employee. But like the hiring process, criteria must be in place to identify the ability of older workers to mentor and the newer hires to become more productive.
Yogi Berra once said, “If you don't know where you're going, you'll wind up somewhere else.” It’s time for businesses to stop the crap shoot when it comes to managing “their most valuable assets” and to expect the same level of economic data and fiscal responsibility from HR as they do from manufacturing and sales. With predictive metrics, good financial decisions can be made in determining the cost/benefit of adding staff, increasing wages, and increasing benefits.
Sidebar #1
Jim Carchidi of JFC Staffing stares deep into the talent gap every day. “Finding qualified workers over the past few months is like “pulling people out of the woodwork,” he told me during a recent interview. With unemployment low, qualified workers are few and far between, says Carchidi, Vice President of Sales. In fact, “hiring the right person takes four times the effort it took in 2001.”
Since last summer, JFC has hired 12 additional people to find candidates and still his recruiters are busier than ever. He attributes this increased workload to “hiring and human resource managers getting tired of banging their heads against the wall trying to recruit workers.” (For more about challenging workforce trends, read “The Eye of the Perfect Storm,” Business2Business, January 2007.)
Carchidi reported that JFC interviewed over 15,600 applicants in 2006. Only 6,408 were approved as hirable! Most of these rejected candidates were screened out as a result of convictions or retail theft, unexplained absences, poor face-to-face interviews, and a lack of professionalism.
Carchidi didn’t have an exact number available but noted that in addition to increased stress, worker shortages are costing his firm “hundreds of thousands of dollars in increased advertising and labor costs. The biggest expense is time: for every three interviews we get only one employable worker.”
Carchidi is not alone.
A Harrisburg area land developer has been looking to fill a key position for nearly a year. The increased workload on current staffing is taking its physical and mental toll on the owner and rest of the team and as a result, the firm is turning away work. A Lancaster County hospital is recruiting for two program manager positions but no qualified candidates apply. The opening of a new health service is postponed for months diverting patients to other facilities and costing the hospital millions in budgeted revenues. A small manufacturer in the Berks/Lebanon area recruits for a very specialized engineering position but barely gets a handful of qualified candidates. They hire what they feel is the best of what’s available only to terminate the employee several months later after the new employee costs them hundreds of thousands of dollars in re-work. Their search for a replacement goes on.
Scott Fiore, Vice President of TriStarr Staffing, agrees with Carchidi. “A lot of clients are at wit’s end. They are so busy that internal recruiters are taking shortcuts before hiring, like checking only one of three references to save time.” Reference checking is so time-consuming but an essential part of their service that TriStarr added an employee recently specifically to check references. Like JFC, TriStarr interviews a lot more candidates than people they hire. Fiore estimates his hiring ratio is less than 50 percent and falling.
TriStarr may be fighting an even more difficult battle for skilled workers than many of its staffing competitors. TriStarr specializes in the administrative market, working with many professional offices. In addition to characteristics like dependability and honesty being important, employable candidates must have technical skills as well as “soft skills.” To represent TriStarr a candidate often needs to complete skill tests like typing, filing, MS Office, and business writing in addition to a personality job fit assessment. “In placing a candidate in an accounting or law office,” Fiore emphasizes, “our employee also must display a high degree of confidentiality since they will be opening envelopes containing tax returns and legal documents. Finding candidates who have the technical skills, interpersonal skills and behaves professionally is increasingly difficult.”
Sidebar #2
Circuit City in late March announced the layoff of 3,400 of its most experienced, and therefore its highest paid, salesclerks. “This ‘wage management initiative’,” writes Stephen Meyer, B21 Publisher and author of HR Cafe – “which replaces the experienced clerks with cheap, inexperienced ones -- will save the company up to $250 million over two years.”
What it will cost them in the long run is anyone’s guess. But you have to ask: what were Circuit City executives thinking when they approved this strategy? Where was HR, purportedly the advocates and protectors of the employees?
I can only suppose how the discussion might have gone, the proponents for and opponents against this strategy pleading their case. Imagine yourself as a member of the executive team, listening to the pros and cons of laying off workers. The CFO reports replacing 3,400 salesclerks with lower paid ones will save $250 million. The VP of HR pleads against this strategy by emphasizing how layoffs will have a devastating effect on morale. The CFO responds: Show me how paying someone $15 per hour vs $8 per hour is more productive. The VP answers back: that’s hard to measure.
Which one would you choose? Unfortunately when a business is scrambling to stay competitive, support for cutting expenses over avoiding lower morale wins every time.
But now let’s assume the VP of HR comes to the meeting armed with financial data. He admits the immediate economic effect of layoffs will far exceed the risk of lower productivity, morale, and customer satisfaction. But he deftly argues the value of retaining experienced and productive employees with historical and predictive data. He demonstrates how experienced workers outshine the inexperienced when comparing profit per employee, how recruiting costs and turnover rates soar with untrained, lower skilled employees, how lower morale leads to lower customer satisfaction which adds to customer churn.
Imagine how much more effective a major strategy change like this might end up had the VP of HR (or any other executive for that matter) possessed the data to evaluate the additional direct and indirect costs associated with recruiting costs to hire replacements, training costs to train new employees, the cost of turnover and the higher costs of mistakes, customer returns, and lost customers.
Putting the right financial data in the hands of HR isn’t about them winning every time but helping business make the right decisions. Who knows – maybe the $250 million is the best option for Circuit City but I fear like so many other organizations, they have no idea.
Sidebar #3
Human resource leaders can learn a great deal from lean principles. The most expensive waste is a result of false starts and quick quits. In the HR domain, mis-hires and early terminations mirrors production mistakes and production line shut downs.
A second major source of human resource is performance variation. The current process hires the best and worst. Next year’s goal then becomes hire more “better employees,” less “worst employees. Murphy acknowledges that this sounds simple until businesses try to do it. Without the proper metrics, success is just a shot in the dark if any changes companies make will work.
Wasted information is HR’s third and potentially last nail in the coffin for companies struggling to find workers and keep compensation and benefits under control: the longer companies continue to hire without data capture, the worse the problem will get.
Sidebar #4
Adler, in a recent column posted on Electronic Recruiting Exchange (www.ere.com), explained ten obvious factors why the gap between skilled workers and demand is increasing. Three of his explanations jump shatter old perceptions:
- The hidden job market is no longer hidden. Pre-1995, top people had to find a recruiter to get good jobs quickly. Now most jobs below $250,000 are available for all to find. This is an example of Thomas Friedman's "flatlander" argument that information is now accessible to everyone.
- The passive candidate pool is no longer hidden. Anybody can find the names of just about anyone within an hour or two. People are joining ZoomInfo, LinkedIn, FaceBook, MySpace, and Yahoo! 360° so they can be found.
- The shift to hire more corporate recruiters has worsened the problem. The more recruiters you have, the more turnover you'll get since everyone is stealing from everyone else more often.
Sidebar #5
Both Joseph P. Murphy and Ed Krow say that too many HR professionals are merely compliance cops and not the solution provider. HR managers and generalists should be asking these questions:
What have we given back to the company (in terms of productivity, not “sweat and tears”)?
How are we demonstrating productivity improvements and how is it impacting the bottom line?
Where is the value we add for the dollars we spend on recruitment and retention?
Sidebar #6
The problem with using cost-to-hire an HR effectiveness measure is that the number of hires is not a measure of staffing efficiency due to:
1. Geographic differences - Recruiting costs vary widely from region to region, state to state
2. Industry differences – Industries like high technology and health care have more difficulty attracting candidates than other industries.
3. Functional differences – Certain jobs within industries and regions may be more or less difficult to fill such as a registered nurse for a family practice compared to a critical care nurse.
4. Differences in job levels – compensation may vary by experience, education and skill level therefore taking an average of all salaries with a similar position title may grossly over- or under-estimate the cost to hire an employee.
Instead of cost-per-hire, businesses should be measuring efficiencies and efficiency, the ratio of two measures: cost and productivity.
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