There are a whole lot of data flying around these days. As our capacity to measure just about everything increases, a new HR metric emerges to describe what’s measured. Meanwhile, the rest of the business is focused on revenue, expenses and growth, and is wondering why they should care about measures that don’t directly drive quantifiable business outcomes.
In the relentless move to a more data-driven HR function, we’re starting to drown in statistical mumbo jumbo. Most of us can’t give our leadership answers to questions like:
- If everyone in the department were a five-star performer, how much money would we make?
- If we improved the quality of our hiring process (thereby reducing first-year churn), how much faster could we grow?
- If we spent 20 percent more on employment branding, how much market share could we capture?
So far, HR can’t tell you how engagement affects the bottom line, just that it probably does because engagement can correlate to retention, and we know that hiring and training new employees is more expensive than keeping the ones we have. We might even be able to say, “There is a 70 percent chance that engagement is somehow responsible for some part of the recent shift in profitability.” But we’re still looking for a better understanding of how HR functions affect revenue.
Where the rest of the business focuses on enterprise-level ROI, HR is often in the position of counting nickels to save pennies. So far, the people-analytics movement has done little to shift the perception that HR is just a cost center. This is not to say that people analytics aren’t important. Understanding how people arrive, leave and move through an organization is essential to the business. It’s that the rest of the organization is playing a different game in a bigger arena with more relevant and well-defined stakes.
A few years back, I did a little consulting for Atlanta-based Strategic Management Decisions. Using an approach built on structural equation modeling, the company links HR and operations data to find the levers of business outcomes. In non-consultant speak, that means that SMD delivers the ability to connect HR data directly to business objectives. The result of an engagement with SMD–which includes surveys and deep-data science–is the ability to understand the actual value of HR investments.
If you’re skeptical at this point, then it means you are paying attention.
The inability to directly connect HR investment with marketplace impact has limited the department’s effectiveness since the beginning. As a result, HR is often pigeonholed as a cost center by others, while its practitioners lament the organization’s lack of respect for their contributions. The idea that one could or even should show exactly how HR “moves the needle” is almost heresy, and we are relegated to complaints about seats and tables.
Structural equation modeling is one of the dark arts of advanced statistical analysis. Rather than looking for correlations then applying a theory to explain them, SEM begins with a theory about the way things work. Then, statistical analysis is used to validate or disprove the theory. The process tries different theories until it sees where the connections are. The result of this iterative process is a list of the levers that can be pulled to improve organizational performance along with a prediction of the result.
Over the company’s history, SMD has been able to both show the connection to and guide the improvement of the following kinds of business outcomes: customer satisfaction, wait time, clinical outcomes, product defects, sales and margin growth.
One HR-technology manager at a Fortune 500 company told me that “SMD’s analytics helped us get a better understanding of what was driving our nursing staff turnover and we have seen recent improvements of over five full points in that area.”
SMD represents one of several important ideas in the next steps for the HR department. The buzz in the market is squarely focused on all things AI. We’re getting close to being able to assume that our digital tools will offer us an unlimited supply of opinion and forecast. SMD points to a future where AI investments can be consistently traced to business outcomes.
Imagine when an HR leader can show you the value of a course or the relative returns to be expected from two competing candidates. Imagine an HR Department able to make decisions based on value rather than efficiency. It’s a new world that’s coming.
At a session at this year’s HR Technology Conference in Las Vegas, I’ll be showcasing companies that make the business of turning data into actionable information.
