HR Efficiency


HR professionals have access to a wide range of benchmarks and cost standards by which one can measure HR efficiency. All of these metrics encourages cost savings and are the kinds of measures you would find in the first level of our measurement pyramid. But unless you want HR to be treated like a commodity in your organization, you should beware of building your measurement system unthinkingly on these generic benchmarks. Instead, separate out the costs associated with HR commodities such as employee benefits transactions and policy compliance, and the unique investments required to create HR strategic value in the organization. These choices will differ for each organization. A long list of potential metrics are considered and it is important to choose the key metrics carefully. Otherwise, it is possible to become overwhelmed by the potential choices. Benchmarking is fine for the HR commodity activities, but it has no significant influence on your firm’s ability to implement its strategy.

We thus recommend that HR managers divide their key efficiency metrics into two categories: core and strategic. Core efficiency measures represent significant HR expenditures that make no direct contribution the firm’s strategy implementation. Strategic efficiency measures assess the efficiency of HR activities and processes designed to produce HR deliverables. Separating these two helps you evaluate the net benefits of strategic deliverables and guides resources – allocation decisions. To see how this works, consider the following HR efficiency measures:

* Benefit cost as a percentage of payroll.
* Worker’s compensation cost per employee
* Percentage of correct entries on HR information system.
* Cost per hire.
* HR expenses per employee.

The first three measures on the list would typically go in the core efficiency category. While certain benefits costs might give a firm an edge in recruiting high-talent employees, above-average benefits costs or workers’ compensation payments are legitimately considered expenses rather than human –capital investments. Likewise, transactional accuracy marginally improves employees’ work experience, but it has little strategic significance.

Now look at the last three measures. Notice that these expenditures can each be though of as investments that would yield considerable strategic value. To determine their value, you would go through the seven-step process, tracing the links between a strategic efficiency measure and the subsequent elements in the HR value chain. Again, the Hi Tech example of reducing recruiting cycle time applies. Tightening this cycle may well raise �cost per hire� but in fact this practice is the first step in producing an HR enabler (stable staffing in R&D) that is essential to a key performance driver (R&D cycle time) in the firm’s strategy implementation process. This is a good illustration of how a firm might attend to both the benefits and costs of an HR deliverable.

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