Measuring the Business Value of Hr

MEASURING THE BUSINESS VALUE OF HR

“Today’s human Introduction resource departments Human resources departments have evolved over the past several decades from can help improve mainly serving transactional business functions, like overseeing compensation and corporate performance benefits, to contributing heavily toward strategic planning and overall business efficiency through activities like talent recruitment, retention and development. As while also building industries become more driven by technology and innovation, competition for top competitive advantage.” talent is becoming ever steeper, and new employment standards and regulations continue to emerge. It’s critical for businesses to invest appropriately in HR to remain competitive and compliant. But how much should a business spend on its HR function?

It depends on several factors, including industry, number of employees and overall business objectives.

This article explores how and why HR evolved over the last century, what transactional and strategic functions are covered by HR and how to benchmark and evaluate HR costs.

How and Why has HR Evolved? During the industrial revolution and through the middle part of the 20th century, when companies relied more heavily on manual, labor-intensive processes, HR departments emerged to manage employee welfare and compensation and to ensure compliance with new labor laws and guidelines. Today, as advancements in technology help to automate manual processes, industries are becoming more knowledge-based, so identifying, recruiting and retaining top talent is critical for business success.

In addition to overseeing traditional functions like staffing, compensation, benefits, safety and legal compliance, HR departments are now also charged with employee retention as well as ongoing training and development. By reducing turnover, growing in-house capabilities and ensuring a steady pipeline of talent to meet projected needs, today’s HR departments can help improve corporate performance while also building competitive advantage. Evolution of Human Resource Management (HRM)

M T M MTT M

M T B T

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Adapted from hrdictionaryblog.com, “Evolution of Human Resource Management,” October 2012

What Functions Are Covered by HR? HR processes can be broadly categorized into transactional activities (e.g., traditional HR services and day-to-day operations) and strategic functions, which align closely to overall firm objectives and performance (Exhibit 2).

High-level HR Process Classifications

Transactional Strategic

▪▪Manage employee on-boarding, development and training ▪▪Develop HR strategy based on current, projected needs ▪▪Manage compensation and benefits ▪▪Recruit, source and select employees ▪▪Manage employee information and analytics ▪▪Develop, implement and maintain workforce policies ▪▪Redeploy and retire employees ▪▪Develop competency management models ▪▪Ensure ongoing compliance with labor laws, regulations ▪▪Deliver ongoing training, development opportunities ▪▪Plan, implement employee retention strategies ▪▪Manage employee relations, communications

How Can You Evaluate HR Costs? While HR departments are like other G&A departments in delivering important transactional and strategic support, there is some debate about the best way to evaluate HR costs. Measuring costs as a percentage of revenue is a common benchmarking method for other G&A functions and even SG&A as a whole. However, it has the potential to be misleading when used to evaluate HR because it doesn’t factor in the number of employees served.

For example, some industries have disproportionately high revenues relative to the number of employees required to conduct business. Benchmarking HR costs as a percentage of revenue in those situations could result in a recommendation to effectively overstaff the HR department. As an alternative, evaluating HR costs per employee served may be the more reliable method. Exhibits 3 and 4 show a comparison of the two benchmarking methods – cost as a percentage of revenue and cost per employee served – for several industry sectors. The oil and gas industry is a good example of the possible variance described above. As a percentage of revenue, HR costs for the oil and gas industry appear relatively low, with a median of 0.32 percent which is 0.4 points below the cross-industry median of 0.36 percent. However, when measured as cost per employee served, HR costs in the oil and gas industry are among the highest with a median of $2,299 per employee served, second only to the commercial and professional services industry and more than two times the cross-industry median of $1,075 per employee served.

Exhibit 3: HR Cost as a % of Revenue

4.0% P25 P75 3.5%

3.0%

2.5%

2.0%

1.5% 1.0% 0.5% 0.0% Oil & Gas Manufacturing Capital Goods/ Retail Healthcare Banking/ Technology Telecom Commercial & Cross-Industry Industrials Finance Professional Svcs

Source: A&M Insight Center, FY2016

Exhibit 4: HR Cost per Employee Served

$8000 P25 P75 $7000

$6000

$5000

$4000 $3000 $2000 $1000 $0 Oil & Gas Manufacturing Capital Goods/ Retail Healthcare Banking/ Technology Telecom Commercial & Cross-Industry Industrials Finance Professional Svcs

Source: A&M Insight Center, FY2016 HR costs generally comprise between 4 and 5 percent of total SG&A costs, and as a typical “rule of thumb,” there is a $70 million SG&A savings opportunity for every $1 billion in revenue a company earns. Therefore, a billion-dollar company has a potential savings opportunity of $2.8 - $3.5 million within the HR function alone.

Whether choosing to evaluate functional costs by revenue, employees served or other normalizing factors, A&M has the proprietary tools to help you perform rapid benchmark assessments. Through a membership with the American Productivity and Quality Center (APQC), A&M can deliver even deeper diagnostics of HR and other SG&A functions. This toolkit of performance metrics can help you gauge the overall health of your business and pinpoint your greatest opportunities for improvement.

This article was produced with support from the A&M Insight Center, which serves to provide A&M professionals and clients with relevant, industry-specific, actionable insights derived through proprietary studies and research.

Benchmark performance. Maximize improvement. Contact A&M Corporate Performance Improvement to get started.

MARC DETAMPEL KEVIN MCMAHON CLAYTON GAMMILL MANAGING DIRECTOR MANAGING DIRECTOR MANAGING DIRECTOR +1 312 601 4220 +1 713 547 3614 +1 214 438 1220 [email protected] [email protected] [email protected]

CONTRIBUTOR: SANDEIP KHANVILKAR, SENIOR DIRECTOR, A&M INSIGHT CENTER

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