Communicating metrics to boards of directors

Workforce data in the boardroom

SUCCESSFACTORS / WHITE PAPERWORKFORCE DATA IN THE BOARDROOM

Workforce data in the boardroomCommunicating metrics to boards of directors

In 2004, the government of the UK established an “Accounting for People” taskforce, which sought to establish a standard set of human capital metrics to be published in public companies’ financial reports. The group’s rationale seemed relatively straightforward, i.e., “firms should be held to a standard of human capital metrics that can enable greater visibility into, and comparability across, measures of workforce performance and productivity, just as standard accounting metrics offer insights into a firm’s financial standing.” Despite vociferous support from numerous companies, financial analysts and accounting firms, the taskforce was disbanded prior to publishing its findings – the Chancellor of the Exchequer, Gordon Brown, claimed that the standards would result in stifling, bureaucratic burdens for public companies. What hampered the taskforce most, however, was its inability to determine which metrics should be reported out to shareholders and how to establish metric validity and reliability (through the use of predefined standards, for example).1

Fast-forward to 2011 – in the past 12 months, several high-profile articles have been published in the Harvard Business Review and McKinsey Quarterly2 that have spurred debate on the role of workforce data in establishing a competitive advantage in talent management, and how such data should be made available to senior executives – HR chiefs, CEOs and boards of directors.

The last group poses the most intriguing questions. While CEO scorecards have become de rigueur in how HR leaders present updates on “the state of human capital,” less is known about what type of data should be shared with the board of directors, a collective body possessing unique information needs by virtue of its charter as conduit to shareholders, rather than an internal management team.

Here, we ask three questions for the boards of directors:

• What challenges lie in the way of the effective use of workforce data?• Is there a “right” set of metrics to periodically share?• How should those metrics be presented?

1 “Human Capital Evaluation – Getting Started,” Chartered Institute of Public Directors, Spring 2006; and, “Accounting for People” A report of the Task Force on Human Capital Management,” October 2003.

2 “Competing on Talent Analytics,” Harvard Business Review, October 2010; and, “Question For Your HR Chief – Are We Using Our ‘People Data’ to Create Value?” McKinsey Quarterly, March 2011.

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SUCCESSFACTORS / WHITE PAPERWORKFORCE DATA IN THE BOARDROOM

What challenges could potentially limit how the board utilizes workforce data? The role of the board of directors in corporate oversight has changed significantly in the last five years, due in no small part to regulations instituted by the U.S. Sarbanes-Oxley Act. In many organizations, the board directors’ commitment (as measured by the number of hours devoted to board meetings – on average, 20 hours per month3), engagement, and involvement in key organizational decisions have been amplified. That said, the primary role of the board is to protect the long-term interests of shareholders with specific responsibilities, including selecting, compensating, and evaluating the CEO, advising on matters of strategic and financial importance, and suggesting courses of action. In so much that they do not possess full knowledge of day-today business operations, boards of directors will seek out different information to help them fulfill that role.

Our hypothesis is that while boards are now more sophisticated in their understanding of non-financial data, significant inconsistencies remain in how boards receive, consume, and apply workforce data to strategic oversight activities.

Reasons for this include:

1. Human Resources is viewed as a administrative rather than a strategic function In situations where HR is seen primarily as a service provider, administering the basic blocking and tackling of personnel management, boards may not be conditioned to expect quantitative analysis from the HR function.

2. Board meetings feature a crowded agenda Given the extremely broad oversight role played by boards, meeting agendas can cover a host of operational reviews, risk assessments, marketing plans, and strategies for new products. Human Resources may be fortunate to own 10 to 20 percent of the agenda and be asked to provide operational updates in conjunction with other support functions. Consequently, this situation limits the opportunity to present extensive workforce metrics, many of which will require additional explanation.

3. Human Resources lacks definitive metrics standards As we saw in the preceding discussion of the UK’s Accounting for People taskforce, no clear consensus exists on the most appropriate metrics to report out. While our perspective is that metrics should be closely tied to organizational strategy, and will, therefore, differ from company to company, the absence of generally accepted accounting principles (GAAP) (and associated benchmarks), certainly inhibits some HR functions from confidently presenting metrics to the board.

4. Firms offer lagging, not leading indicators Human Resources should be in a position to provide board-level analytics at the same level as those offered by Marketing or Finance. However, much of the data (termination rates, exit surveys, etc.) captured in HR systems is backward-looking, requiring significant analytical effort to position for predictive modeling. Compounding the problem is the shifting nature of board agendas. According to Walter Skowronski, former president of Boeing Capital Corporation,

“The issue facing HR when providing regular board updates is that the metrics chosen depend heavily on that year’s strategic objectives. Some are unique to the current year while others are holdovers from prior year agendas, with ongoing adjustments to meet present goals. Whether it’s cost reduction, productivity, or other objectives – setting metrics to measure these are the challenge.”4

3 “What Directors Think,” Corporate Board Member Magazine and PricewaterhouseCoopers, 2009.4 Research interview, April 27, 2011.

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SUCCESSFACTORS / WHITE PAPERWORKFORCE DATA IN THE BOARDROOM

5. There is measurement overload As a corollary to the last point, and given advances in technology to aggregate and publish workforce data, HR functions are certainly not short of measures to provide to the board. In fact, we have seen clients put together 50-page “briefing books” that continue to expand as new, desired metrics are added. It is difficult, therefore, to know which measures matter the most.

Is there a right set of workforce metrics to present to the board?Before any discussion of the “right” metrics proceeds, it is critical to understand that no two companies will be similar in the measures they report out. Metrics have to be tailored to the firm’s corporate and/or business strategy, economic and competitive climate, and talent management priorities.

For example, several years ago, we ran a metrics selection workshop at a major retailer, the purpose of which was to identify the 10 to 15 most important workforce metrics that the firm would focus upon in the coming year. As we began to illustrate the breadth of measures commonly used by Fortune 1000 firms, a participant asked, “Why don’t you just save us a lot of time and tell me what should be my number one metric?” This participant clearly preferred that we just simply (and blindly) apply the most popular key performance indicator to his firm.

While every organization’s number one metric should be different – based on the criteria listed above – we believe that there are several groups of metrics that HR leaders should contemplate when deciding what data to provide to the board. This concept was reflected in the comments made by one local government workforce analyst we spoke to: “I think there is value in taking a standard set of workforce measures to the board of directors each month, but not in isolation to the other disciplines. There should be a balanced scorecard approach in which the workforce measures are just one component of the overall scorecard.”

Group #1: Core workforce facts: These metrics are important for understanding basic attributes of the current workforce and may also cover significant changes to workforce structure (through a merger, for example):

• Head count/full-time equivalent (FTE),• Terminations,• Diversity, by gender and ethnic background, and• Workforce age profile.

Group #2: Financial workforce metrics: With the assistance of analytical tools and models, quantifying the financial impact of workforce data has become significantly easier and crucial for senior management reporting. Examples of such metrics might include:

• Operating revenue per FTE,• Operating profit per FTE,• Return on human capital investment ratio, and• Cost of turnover.

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SUCCESSFACTORS / WHITE PAPERWORKFORCE DATA IN THE BOARDROOM

2008 2009 2010 2012 2014

Financial Profile Profit Per FTE$2b

$1.5b

$1b

$500m

$0

Operating Revenue Operating Income Operating Expense (Other) Total Cost of Workforce Operating ExpenseProfit per FTE

Operating RevenueTotal Operating Expense

2008 2009 2010 2012 2014

$2b

$1.5b

$1b

$500m

$0

$80k

$60k

$40k

$20k

$0

Example 1. Financial metrics included in board of directors’ reports.

Group #3: Productivity and performance: Ultimately, every HR process, system, program, and intervention is designed to maximize performance for the duration of the employee life cycle, and in an era marked by doing more with less, measures of choice include:

• Workforce productivity (measured in outputs relevant to the specific firm),• Workforce availability/absenteeism, and• Executive compensation/pay comparison.

Group #4: Talent development and succession: A perennial feature of board responsibility is ensuring leadership performance and succession; extending that to other talent pools ensures a more robust discussion of key talent:

• Leadership quality (current and bench),• Staffing rate – high performers, and• Staffing rate – high potentials.

Group #5: Human capital risk: While other metrics might surface as potential risks to strategy execution, the following are examples of risk-specific measures. More so than any other category, this group will be heavily dependent on the type of firm publishing the data (software start-ups will likely face very different human capital risks compared to manufacturing powerhouses):

• Succession risk (absence of ready-now successors),• Staffing shortages in critical roles,• Current versus future competency gaps,• Churn (hires versus terminations) rates, and• Knowledge & transition risk (of an aging workforce).

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Termination Rate vs. Termination Rate – High Performers

How does the Termination Rate of all of my employees compare to the Termination Rate of my High Potential Employees?

Termination Rate Termination Rate – High Potential Pool

2009 Dec 2010 Jan 2010 Feb 2010 Mar 2010 Apr 2010 May 2010 Jun 2010 Jul 2010 Aug 2010 Sep 2010 Oct 2010 Nov 2010 Dec

8%

6%

4%

2%

0%

Example 2. Succession planning data.

As examples of tailoring metrics to specific organizations, let’s briefly contrast two organizations and their board-level metrics:

1. High-growth global financial services firm Profitability metrics, an indicator of a high-performance work culture, are of paramount impor-tance to the board, reflecting the firm’s focus on driving performance improvements.

2. SuccessFactors At our own company, the Board Compensation Committee has been renamed the Compensation and Leadership Development Committee, elevating the status of talent management and signaling the board’s commitment to talent development. In this capacity, the board examines the extent to which the firm has the right executives in place, maintains a strong succession plan, and monitors executive attrition and performance.

Deciding how to present workforce data to the boardHow should HR leaders convey the insights derived from a set of workforce metrics to their board? Several factors come into play:

1. Regular reporting is a must The socialization of workforce metrics is a slow and steady process, and organizations must often engage in countless debates over formulas, definitions and findings. Avoiding a repeat of challenges to data credibility is significantly improved with consistent, frequent presentations of workforce data.

2. Balancing breadth and depth At the global financial services firm referenced earlier, board-level reporting reflects strong demand for ad-hoc, issue specific reports; in contrast, reports provided to leaders across the rest of the organization tend to offer analysis of perennial trends. With areas of focus changing from board meeting to board meeting, HR’s task is to drive better understanding and complexity of knowledge, then start looking for correlations between workforce issues and operational, financial, and strategic outcomes (a notion consistent with the definition of “workforce analytics”). That said, efforts to present extensive workforce scorecards will not satisfy a board that prefers to see a couple of key metrics tied to a current business problem.

SUCCESSFACTORS / WHITE PAPERSUCCESSFACTORS / WHITE PAPERWORKFORCE DATA IN THE BOARDROOM

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SUCCESSFACTORS / WHITE PAPERWORKFORCE DATA IN THE BOARDROOM

3. Combining data and analysis To avoid the oftseen situation in which boards are presented with extensive reams of data that lack context, the ideal board report combines a set of key performance indicators and issue-specific analysis, with interpretation of the findings, progress towards targets, and possible recommendations of interventions. Context can be gained through comparison to internal and external benchmarks, labor market trends and economic factors. There is certainly nuance in how this data might be presented, according to a director of research at one leading research firm, “In comparison to C-suite presentations, in which HR can be much more concrete in making recommendations, boards should be presented with data and insights, but will independently derive conclusions on how the information will shape their advice.”

Leveraging best-of-breed technologiesWith so many HR systems at organizations’ fingertips, filtering through all of the available data can present a real challenge. Technology can play an integral role in this process, specifically by enabling: (1) the automation of data production, and (2) value-added reporting strategies. For example, the SuccessFactors Workforce Analytics and Planning application integrates multiple data sources (HR, talent, financials, operations, etc.) into a centralized data warehouse, specifically positioned for end-user analytics. Avoiding time-consuming manual “data dumps” – which suffer from inconsistent business logic and the absence of built-in content expertise – analysts can more readily provide boards with holistic insights into the state of their organization’s workforce. An automated workforce reporting process thus offers the potential for more frequent, insightful and actionable scorecards.

That said, and despite advances in such technologies, firms should not overlook the need to develop HR leaders’ capabilities in “telling the story” with data, especially when presenting to such senior audiences. While the modern HR executive is often well-versed in the analysis of data, functions seeking to build a culture of data-driven decision making would be wise to utilize consulting and training when interpreting and communicating workforce data in addition to selecting a technology partner.

ConclusionThe reality is that little consensus exists on what talent data is appropriate for boards of directors to view. While it is tempting to seek to boil down workforce metrics to one or two key questions – such as, “Is our workforce adequately staffed in terms of head count and skills to execute our business strategy?” – the preferred approach is to provide a small set of metrics that are clearly linked to the organization’s strategy, are presented with context and analysis, and offer the opportunity to “go deep” on areas of most interest to the board. Armed with greater transparency into workforce performance, development and financials, boards of directors will be better able than ever to accurately measure the success of their people.

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SUCCESSFACTORS / WHITE PAPERWORKFORCE DATA IN THE BOARDROOM

About the authorsMick Collins is a principal consultant with SuccessFactors responsible for supporting the global sales of the company’s Workforce Analytics and Workforce Planning products. He divides his time between sales strategy/execution, product marketing, and thought leadership. Previously, he served as strategy consultant for several SuccessFactors’ workforce analytics and planning clients, in which he partnered with senior HR leaders to deliver executive presentations, conduct original data analysis, provide change management consulting, and facilitate training sessions. Collins has conducted speaking engagements at events hosted by SuccessFactors (across North America, Europe, and Asia-Pacific), IHRIM, The Wharton School, The Research Board, Institute for HR, and the Talent Management Alliance. He has authored articles for IHRIM, Talent Management, and Workspan magazines. He has a master’s degree in Political Science from Virginia Tech and a B.A. (Honors) in Economics and Politics from the University of Leeds, England. He can be reached at mcollins@successfactors.com.

Regan Klein is a senior consultant with SuccessFactors, responsible for advising clients on how to strategically leverage their workforce analytics and planning programs for maximum impact. Prior to this role, she served as a talent management consultant at Warner Bros., where she analyzed and presented HR data to executive leadership. Similarly, as the workforce planning subject matter expert at Health Net, she was responsible for developing and implementing strategic workforce strategies through research, analysis of data, and talent management processes. Lastly, her previous work experience includes conducting research on the Armed Forces for the U.S. Department of Defense, and she has coauthored and presented several reports on satisfaction, retention, and workforce analytics at numerous conferences. She has a master’s degree in Organizational Sciences from The George Washington University, and a B.A. in Psychology from The Pennsylvania State University. She can be reached at rmklein@successfactors.com.

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