HR Metrics:Speaking the Language of Your CFO

HR.com Presentation

December 12, 2011

Presented by:Robert J. Buckley, MBARO Buckley Consulting

Agenda

Why Are We Here? Characteristics of High Credibility HR Metrics Generic Examples Case Studies

Recruiting Metrics Benefits Metrics

The Future of HR Metrics Q&A

Compensation Tie-In

Why Are We Here Today?

We are here to learn ways to communicate better with our CFO’s

Communication courses for HR Professionals Finance is the language of business HR needs to step up and be a business partner

HR Metrics: The HR “dialect” to communicate in Finance

Finance HRGAAP ?

Characteristics of QualityHR Metrics

Accurate Consistently engineered

There are no GAAP or FASB Rules for HR Metrics Fully integrated into the business Driven by business strategy Impact measured in $dollars (Finance) Enabled by technology The level of HR metric used is driven by the

needs of both client and provider

HR Metrics Orientation

HR Service Provider

Corporate/

Business

Manager

Metrics which track transactions

Time To Fill

Number of Positions Filled

EEOC Applicant

Tracking

HR Metrics Orientation

HR Business Partner

Business

Leader

(Major Business)

Metrics which have $dollar Impact

% Increases in Health Care

HR Expense Ratio

Turnover Costs per Employee

HR Metrics Orientation

HR Trusted Advisor

Enterprise Leader

CEO

Board

Metrics having $dollar impact on

Income Statement

Revenue & Net Income by FTE•Salaries as Percentage of Operating Expenses•Turnover Costs

Generic Examples

COST PER HIRE

Advertising + Agency Fee + Employee Referrals + Travel Costs (applicants & staff) + Relocation Costs +Recruiter Compensation and Benefits

÷

Number of Hires

$25,000 + $50,000 + $10,000 + $5,000 +

$20,000 + $150,000 = $260,000

÷

100 Hires = $2600 per hire

HEALTHCARE COSTS PER EMPLOYEE

Total Costs of Healthcare

÷

Total Number of Employees

$15,000,000

÷

1000 employees =

$!5,000 per employee

Generic Examples

REVENUE PER EMPLOYEE (or FTE’s)

Revenue

÷

Total Number of Employees (or FTE’s)

$120,000,000

÷

1000 (1037) = $120,000

TIME TO FILL Total Days Elapsed to Fill Requisition

÷

Number of Employees Hired

3347

÷

100 = 33.47 (Average number of days to fill a requisition)

Generic Examples

TRAINING INVESTMENT PER EMPLOYEE

Total Training Costs + (Opportunity Costs)

÷

Headcount

$6,000,000 + ($50,000,000/220 working days = $227,273 daily payroll costs X 5 days of training) $1,136,365 = $7,136,365

÷

1000 employees = $7,136 Training Investment per Employee

TURNOVER RATE

Number of separations during month

÷

Number of employees on payroll during the month X100

167

÷

1000 employees = 16.7% Turnover Rate

Generic Examples

TURNOVER COSTS PER EMPLOYEE

Total cost of separation + replacement costs + training costs + vacancy costs (contingency worker costs - wages and benefits not paid because of vacancy)

÷

Number of employees

$8,800,000

÷

1000 = $88,000 Turnover costs per employee

Recruiting Metrics

Case Study

Company Situation

Cost per Hire is too High 28% of base salary Industry benchmark: 17% of base salary

Time to fill is too long 57 Days Industry benchmark: 44 days

Hiring managers upset Hiring costs are soaring Extensive opportunity costs Increased workload for existing staff

Intervention

Hiring Past Practices• 65% - Agencies (retained and contingent)• 35% - Other (internet, referrals, university)

New Hiring Strategy• Leverage Internet (46%)

• Targeted: Specialized skills and Director + positions• General: All other positions

• Company website/internet, Monster.com, HotJobs.com, etc.• Enhance Employee Referral Program (11%)

• Increase bonus from $500 to $3,000• Increase university sourcing (15%)• Agencies used only for C-level of niche positions (25%)

Results Cost per Hire decreased*

16% of base salary $7,296 less per hire

Time to Fill decreased 19 day decrease (54 to 35) 6 days less than benchmark (44 days)

Vacancy Costs decreased Saved over $1.3M Better able to capitalize on new business opportunities

Total savings over $2.3M per year

Includes cost of 1 additional recruiter

Formulas

Cost per Hire = (Advertising + Agency fees + Referral fees + Travel costs + Relocation costs + Recruiter pay/benefits, etc.) ÷ Number of Hires

Time to Fill = Total days elapsed to fill requisitions +Number Hired

Vacancy Costs = Contingency worker costs + OT for employees + Lost opportunities - Vacancy salary and benefits

Financial Impact

Expense Type 2009 2010 HR Metric Applied 2009 2010Hire 135 135 Cost per Hire 17,234 9,938Agency Fees % Base Salary 28% 16%

Retainer 400,000 73,000 Time to Fill 57 38Contingent 1,350,078 496,831 Days Vacant 7,685 5,139

Vacancy/OpportunityUniversity 128,000 162,000 Cost per Day 559 582

Internet 157,998 162,000 Vacancy/OpportunityCost per year 4,305,143 2,984,914

Employee Referrals 3,000 45,000 Savings 1,320,229

Other (Relocation,travel, recruiter salaries, etc.) 287,514 353,280

TOTAL 2,326,590 353,280Savings 984,935 Overall Savings 2,305,163

42%

Impact on Income StatementRecruiting Metrics

Income StatementNumbers inThousands

12/ 30/ 2010 12/ 30/ 2009 12/ 30/ 2008

Total Revenue 52,516,000 45,188,000 32,373,000Cost of Goods Sold 7,541,000 9,832,000 4,045,000

Gross Profit 44,875,000 35,356,000 28,328,000Research & Development 6,783,857 6,131,000 6,830,294Selling General &Administrative 8,993,296 9,267,136 6,301,653Others 2,264,009 6,110,000 510,000

Total Operating Expenses 26,933,838 13,847,864 14,686,054

Interest & TaxExpense 5,386,768 2,769,573 2,937,211

Net Income 21,547,071 11,078,291 11,748,843

Benefits Metrics

Case Study

Company Situation

2009 Employee benefits skyrocketed 32%• Average US medical benefit increased 9.2% for same

year*• Rising benefit costs undermine product cost

competitiveness

Competitive pressure from China• Competitor sells product for 75% less• Market share decreased 40% as a result

*Source:www.benefitsnew.com

Intervention

Decrease Costs Join a consortium to increase buying power and reduce

fees Transition from fully-insured to self-insured

Redeploy Headcount Move manufacturing team offshore to increase product

cost competitiveness by lowering benefits costs

Decrease Administrative Costs Implement an employee self-service system Decrease benefit administrator headcount

Results Decrease key benefits costs

US: Monthly benefit cost per head Before: $255/head; After: $214/head

Redeploy headcount US: (decrease headcount) Benefit savings = $36M-$10M=$26M decrease Asia: (increase headcount) benefit costs = $42M inc. $46M=$4M

increase. US benefit savings ($26M)-Asian Benefit Cost ($4M) = ($22) Total Benefit

savings (increased cash in balance sheet)

Decrease administrative costs Previous salaries 400K-New Salaries 50K = $350K savings New self service cost 200K - Previous IT cost 52K = 148K IT cost 350K-148K = 202K Total Savings

Formulas

Savings Cost Increase

Benefit Savings:

US benefit cost per head X Benefit Savings per head = Reduced benefit cost per head

Headcount Reduction:

US: The average cost per head X Decrease in headcount* = Total Savings (Comp & Benefits)

* Includes the 7 Ben Admin RIFs

Headcount Increase:

Asia: The average benefit cost per Asian local national X Increase in headcount = Benefit costs

Employee Self Service:

Cost of self service administrative service (IT costs)

Financial Impact

Before After Before After Delta

US Comp &Benefits 10,041 4,800 639,401,178 298,971,794 340,429,384

Asian Comp & Benefits 57,000 62,241 726,408,000 793,199,304 - 66,791,304

AdministrativeHeadcountReduction 8 1 400,000 50,000 350,000

Employee SelfService (IT) Minimal Full Range 52,378 200,000 - 147,622

Total 67,049 67,042 1,366,261,556 1,092,421,098 273,840,458

Headcount Change Total Benefit Costs

Impact on Income StatementBenefits Metrics

Income StatementNumbers inThousands

12/31/06 12/31/05 12/31/04

Total Revenue 473,117 407,099 291,649

Cost of Goods Sold 67,937 88,577 36,441

Gross Profit 405,180 318,523 255,207Research & Development 61,116 55,234 61,534Selling General &Administrative 81,183 83,488 79,245

Others 20,396 55,045 4,595

Total Operating Expenses 242,485 124,756 109,833

Interest & TaxExpense 48,497 24,951 21,833

Net Income 193,988 99,804 87,867

Compensation Tie-in

Compensation is the alignment mechanism that is most effective in an organization…

Return on Training Expense

TRAINING INVESTMENT PER EMPLOYEE

Total Training Costs + (Opportunity Costs)

÷

Headcount

$6,000,000 + ($50,000,000/220 working days = $227,273 daily payroll costs X 5 ΔΔΔdays of training) $1,136,365 = $7,136,365

÷

1000 employees = $7,136 Training Investment per Employee

ROTE= Avg. Training Investment per EE ÷ Δ in Group Revenue (at a time interval) X Δ in Group Revenue (at a time interval) ÷ Avg Dept Wage

7136 ÷ 20,000,000 X 20,000,000 ÷ 75,000 = 9.5%

ROI = 9.5%

If the WACC is 7% < 9.5

Training is making the company money. Your CFO will approve this EVERY TIME.

The Future of HR MetricsBusiness Intelligence

• PREDICTING THE PRESENT• Harrah’s Entertainment, Citibank, CVS and Dunkin’

Donuts are almost there with an approximately 6 week lag in their business intelligence systems

• Real-time Opportunity reporting + real-time risk detection reporting = real-time enterprise reporting THE ABILITY TO REACT.

• Business intelligence technology firms are currently embedding HR Metrics into their Business Intelligence Dashboards for CEO’s and “C” level execitives (SAP/Business Objects, IBM/Cognos, Oracle/Hyperion)

The Future of HR MetricsBusiness Intelligence

• Do you really want to have technology and finance experts construct the metrics that HR will be judged by?- The time to become involved in HR Metrics is NOW!

• Success stories for HR Metrics• William Clay Ford (Ford) includes the success rate of HR in

recruiting and retaining high performing salespeople as an HR metric in his BI Dashboard

• Jeff Immelt (GE) includes the ratings of the developmental experiences of his high potentials as an HR metric in his BI Dashboard

One of the Most Important HR MetricsAdding Value to Your Personal Bottom Line

What is the value of today’s discussion of HR Metrics for you?

• Formula (Very Conservative)• Annual Compensation X Percentage Productivity Increase -

($Dollar Cost + Opportunity Costs*) = Net Value• Financial Impact Impact

• $75,000 X .005 (.5%) - ($0 + $42.61*) = $332.39 Net Value to You As a Participant

*opportunity cost ($75,000/220 working days/8 per day = $42.61)

Summary• Some Final Thoughts

• HR Metrics are formula-driven and easy to use

• HR Metrics and BI are fast becoming “the way we do things around here” - so catch the wave now! Early adoption is over…

• If you become an HR Metrics user-both you and your HR organization will gain increased respect from CEOs, CFOs and senior managers

• If you don’t use HR Metrics someone who isn’t HR (Finance or IT) will use them and may even imbed them in a BI Dashboard for the CEO or Board - “and the fault will lie not in our stars but in ourselves” (Shakespeare)

Contact Information

Robert J. BuckleyPresident

RO Buckley ConsultingPhone: 908.502.5251Mobile: 646.595.6128Email: robert@robuckley.com