There are probably as many ways to measure a company’s success as there are to create it. However, one factor is clear – measuring the impact of HR and people processes on the performance of organisations is still a major challenge for companies.

Organisations know a great deal about, for example, marketing, production, management, information technology, the financing of businesses and he formal governance and organisation of business entities. They know how to measure, evaluate and report on all of these areas, If a Chief Executive wants data and analysis, whether on his own business or on a peer group or on his key competitors, he will receive it.

Why measure HR?

Increasingly, the same demands are being made by excessive management of the HR function. People are often the largest cost in a business and will always be one of the most significant. Regulatory developments indicate that reporting on the value of people may soon be a legal requirement in a number of jurisdictions. Also, in the light of recent corporate scandals, there are increasing shareholder and stakeholder demands for more effective corporate governance and greater disclosure of information. Measuring HR effectiveness was also one of the top three global HR issues in a recent survey which looked at the key challenges facing HR today and in three years’ time.

HR must respond to these demands, but it is made more difficult by the absence of clear and consistent people-related measures. The challenge offered is to bring some rigour and consistency to investment and measurement in the people domain.

A major international study provides insights into the effectiveness of international people strategies over the past three years. This study, one of the most extensive studies of its kind, is based on data collected from over 10,000 organisations across Europe and the US between 2001 and 2004 and represents industry sectors which include banking, financial services, manufacturing, telecommunications, chemicals, IT, utilities, retail and some selected public service operators.

The study provides valuable HR measurement information under a range of categories including financial performance, added value, productivity, remuneration and people behaviour. It also analyses the structure and role of the HR function and gives valuable indications of the measures that companies can take to evaluate the financial contribution of their workforce.

Financial Performance

One of the key findings of the study is that during the economically prosperous years of the late 1990s organisations had generally lost control of their human capital cost base, recruiting wildly and losing essential workforce disciplines.

In the first two years of this decade, the U.S, Europe and elsewhere reported a widespread downturn in economic activity, resulting in recruitment freezes, people downsizing, and the implementation of rigorous cost management. Revenues declined and profits generally plummeted as business was lost more rapidly than organisations were able to adjust their total cost base. However, downsizing and other cost management actions, combined with experienced financial management, meant that deep recession was avoided in most lead markets.

The evidence from the study demonstrates that the US has recovered both revenue generation and bottom line profit growth faster that Europe. The study found that since 2001, revenue per employee increased by 18 per cent in the US and by 11 per cent in Europe. The study would seem to indicate that in times of economic transition, the US is able to move faster and more flexibly than Europe both when responding to adverse economic conditions and subsequently implementing innovative propositions for growth.

Added Value Performance

The study also found that the return that companies make on the investment in their people has also improved since 2001. A Human Capital Return on Investment (ROI) metric measures how many dollars or euro each employee produces for every dollar or euro paid to that employee. The results from this particular study suggest a significant increase to $1.48 in the US in the last full year measured (an increase of almost 13per cent) with a marginal increase in Europe in the same period. Again, the different recovery rates for both markets may be reflective of their ability to respond to change.

Outsourcing and Offshoring

Both of these concepts will affect organisational and structural strategic thinking into the future and although both outsourcing and off shoring are essentially different concepts, they primarily have the same end objective of improving efficiency by reducing operating costs. Most organisations involved in the research, approximately 80%, cited that their main objective of both outsourcing and off shoring is cost reduction.

Consequently we are now witnessing some major organisations in Europe either moving operations to lower cost regions or attempting to negotiate higher productivity deals for the same reward. In the US, the move towards off shoring is both a commercial and political reality. Off shoring in some sectors has more than tripled in the last 12 months, while outsourcing in Western Europe, not surprisingly, has continued to grow in the majority of sectors. Both seem set to have a major influence on human capital structures and thinking in the years ahead, raising major people-related issues.

Leadership

The research also provides insights into a number of other HR issues, with some surprising results. Leadership, for example has been one of the hottest issues in the last two years, with many organisations devoting high resources to this area. It is estimated that European organisations spent some €1.5billion on leadership training and development activities in the most recent full year analysed. In the US, although data on spend is not available, it is thought the figure could run into several billon dollars. Yet, the research findings show little evidence that this investment is currently demonstrating a major return.

Diversity

Another interesting finding from this international research is that the proportion of women in managerial posts in Europe fell by 1.9 per cent to about one in four. In professional posts, the figures have fallen from almost 34per cent to just fewer than 30 per cent. This research suggests that banking has the highest percentage of female managers, at 44 per cent. All indications are that female strength at senior organisational levels lies in functional specialisations and therefore their numerical presence will remain vulnerable whenever functional strengths are downsized.

Training and Development & Talent Management>

Overall, across Europe, up to the most recent full year analysed, the level of formal training activity appears to have reduced. At the same time, many organisations are now either refreshing their approach to talent management, or revising existing policies, systems and processes to ensure they successfully use the talent they employ. For these organisations to be successful in managing their talent, a greater emphasis and investment needs to be placed on training. The study found that, unfortunately, despite this significant growth of interest in talent management, there are no indications that for the majority or organisations this interest has been transferred into action. This is a particularly concerning trend at a time when many businesses in various European countries are claiming critical levels of skill shortages.

Engagement and Commitment

Another hot topic for HR professionals is the level of engagement and commitment demonstrated by employees. The study includes a range of measures to gauge the level of commitment of an organisation’s employees. These measures include resignation rate, absence rate, pay/performance related pay, number of training and development hours, level of staff suggestions and level of grievances. The research found that the organisations that had the highest levels of commitment tend to be dominated by global operators, many of them with American or Japanese parenthood, organisations with multinational coverage and organisations with a record of sustained commercial success.

The Challenge for the HR Function

For many companies, a key HR metric is the proportion of HR staff to full-time staff. Given that the research suggests that the average number of HR practioners to staff is increasing (with a higher increase in the US), combined with the continued emphasis on people issues within organisations, it might be expected that the specialist function responsible for people policy, would have gained considerable influence. Not according to the research which found that, in Europe, there is little evidence that the HR function is playing a more significant role in organisational life. Indeed in Europe, the number of HR Directors operating at the most senior levels in organisations saw something of a decline, whilst the internal drive to create a business partnership with line executives, intended to create a more strategic overall contribution, has not demonstrated any consistent progress.

The HR function is facing a major challenge. HR professionals need to focus their attention on what a business needs from a professional function to promote the highest achievable level of contribution from its people. In doing so, HR needs to be able to demonstrate to the business that the investment, the availability of accurate and appropriate information is the key to making the right decisions. If HR is to move forward and become a strategic partner to business and if business is to get the maximum return on its ‘most important asset’, then the insights provided in this research on the key area of HR measurement will be a crucial business resource in the future.