Can you demonstrate the economic value of talent management?
09 February 2009 8:04am
During tough times there is increased pressure on every business function to demonstrate a positive impact on business performance, but HR professionals have generally failed miserably in demonstrating the revenue impact of talent, according to international talent expert, Dr John Sullivan.
Writing recently for US recruitment site ere.net, he points out that HR is one of the business functions that traditionally suffers through endless budget cuts, because - being a cost centre rather than a profit centre - it can only demonstrate its impact on the business through efficiency and cost-cutting initiatives.
He says: "The time has come for talent management executives to abandon their cost-centric approach and their focus on cost metrics, and instead focus on demonstrating how great hiring, succession planning, and other talent management functions directly impact revenue."
Surprisingly, he says, "proving that relationship is easier than you think".
Identify the business impacts that executives care about
There are two broad categories of business impacts that executives focus on: direct revenue and revenue impact, Sullivan says.
Direct revenue includes such things as increase in sales and other revenues; profit margins and profit; and share price.
Revenue impact encompasses business factors that eventually lead to increases in revenue, such as product development and innovation rates; customer satisfaction and response rates; customer attraction and loyalty rates; product brand strength; market share; product quality; first entry and time-to-market; and productivity and capacity.
"Of course, every firm defines different measures of success, but if you can prove that your function directly increases the value of any of these factors, your relative importance will increase within the corporate hierarchy," Sullivan says.
Show them the money
Another problem that needs to be addressed is the way HR professionals report metrics, Sullivan says. "Unfortunately, because the language of business is expressed in dollars, percentages are generally not powerful enough to drive action."
He recommends converting all major metrics into dollar impacts. Instead of reporting 22 per cent turnover, for example, you would convert the percentage into the dollar impact of that turnover on revenue (e.g., "turnover cost us $28 million in lost revenue").
Understand the different ways to prove business impact
It's important to provide "proof" that a particular talent management program works, Sullivan says.
This might take the form of:
Percentage improvement year-to-year. "A side-by-side comparison is made between the performance number last year and the performance number this year."
Direct comparisons between employees. "A direct comparison is made between the performance of 'the last' employee and the current one. For example, comparing the performance of a 'departed employee' and their replacement in order to demonstrate the value of terminating bad employees."
Performance differential. "You contrast the performance of an 'average' employee to the performance of an employee that performs in the top percentile, in order to show the added value of having top performers."
Correlation. "Show a direct correlation (statistical relationship) between the increased usage of a tool or program by employees and an increase in productivity, revenue or profit. In reverse, demonstrate that when the usage goes down, so does their output. For example, when the average dollar amount spent on sales training goes up by five per cent, sales go up by10 per cent."
Focus on the talent management programs that are likely to directly impact revenue
"The final step is to identify the talent management programs or elements that are most likely to produce large impacts," Sullivan says. "In other words, which talent management programs are the easiest to prove (based on past experience) that they actually have a direct and significant impact on revenue?"
His examples, by function area, include:
Productivity differential from great hiring. "Calculate the difference in the on-the-job performance between average performing hires and top performing hires to demonstrate the economic value of hiring and retaining top talent (e.g. there is $100,000 monthly sales difference between an average new-hire salesperson and a top 10% new-hire sales performer)."
Revenue loss due to vacancy. Dollars of revenue lost for every day a position is vacant due to slow hiring processes (in revenue generating and revenue impact jobs).
Time to productivity. The dollar value of the increased employee output as a result of the decreased "time to productivity" because of effective onboarding.
Departmental output and retention rates. The improvement in the dollar value of the department's output as voluntary turnover rates decrease.
Productivity loss due to turnover. The average difference in the value of the employee output between those that left and the replacement employee.
Training and leadership development
Productivity improvement. Average percentage improvement in the "on-the-job performance" after training is completed.
Productivity improvement of leaders. Average percentage improvement in the individual and team "on-the-job performance" after leadership development is completed.
Departmental output and training rates. The improvement in the dollar value of the team's output as the percentage of "trained" employees on the team increases.
Overall HR impact
Average revenue per employee. Percentage improvement between this year and last year of the average revenue per employee calculation (i.e. number of employees divided by total revenue).
Employee productivity. Percentage improvement between this year and last year of the average number of dollars spent on employee cost per dollar of profit generated (i.e. total employee costs divided by total profit).