MCBASSI & COMPANY

Why HR Analytics? A Look at the Numbers

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There’s a lot of buzz around HR analytics.  Advances in software, newly-available data sources, and how-to manuals have made it easier than ever to dive right into HR analytics.

This month, we thought we’d take a step back and ask “Why?”  Why should organizations care about this?  Why should executives be devoting more time to people matters than they’ve ever done before?  And why should HR professionals be learning the necessary new analytic skills?  Looking at a few numbers helps to answer those questions.

Let’s start with intangibles – organizational assets that are not physical in nature.  Intangibles include intellectual property, knowledge, reputation, etc.  These sorts of assets represent an ever-growing percentage of the average organization’s market value, increasing dramatically from 9 percent of market value in 1980 to 65 percent today.

And what do all forms of intangibles have in common?  They’re created by people.  A few decades ago, if you wanted to increase your company’s value, you focused on managing your physical assets – plants, equipment, etc.  Today, if you want to increase value, you need to manage your people – your human capital.

This, more than anything else, explains why analytics is now an essential HR competence.  Executives and boards of directors are always focused on company value.  Today, that means they need to be focused on their people.

Some companies recognized this earlier than others, and some companies have done a better job managing their people.  How have those companies fared?

Extraordinarily well.

A Boston Consulting Group study from 2012 found that companies appearing on the Fortune “100 Best Companies to Work For” list at least three times in a ten-year period cumulatively outperformed the market by an average of over seven percentage points per year for ten straight years.

And our own live portfolios, through which we’ve invested in a basket of companies that invest in their employees and/or embrace Good Company principles, have outperformed the market by an average of almost eight percentage points per year for twelve years running.

All told, the numbers certainly support the world’s current fascination with HR analytics – and suggest that focus will continue to intensify in the years to come.  Are you on board?

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4 Axioms of HR Analytics

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HR analytics is a hot topic these days.  With new conferences, books, and software emerging at a dizzying pace, it’s easy to feel like you’re scrambling not to fall behind.  And with all the hype, it’s easy to lose sight of what’s really important in this realm.  What can HR analytics really do for your organization, and what traps do you need to avoid?

Here are McBassi’s 4 axioms of HR analytics:

1.  HR analytics is more than predicting turnover.

Multiple times, we’ve asked for a show of hands at conferences on who’s using HR analytics in their organization.  Many hands always go up.  Then we ask who’s using it for something other than analyzing and predicting turnover.  Almost all the hands go down.

Don’t get us wrong — predicting turnover is a worthy goal and a fantastic use of the principles and tools of HR analytics.  But it’s far from the only thing to look at.  Try using the same concepts to assess differences in sales across offices, or safety records across plants, or how to identify key issues to address after a merger/acquisition, or how to report to the board of directors.  The list goes on and on.

2. The importance of a problem is inversely related to the sophistication of the statistics available.

Sad but true: multivariate regressions, factor analysis, simultaneous equations, complex neural networks – all impressive quantitative techniques, but rarely the right tools to answer the most important questions facing a business. For example, what do we need to do to become more innovative?  How can we increase sales?  What would make our stock price grow sustainably faster than our competitors’?

The problem is that the most sophisticated statistical methods also need lots of comparable units for analysis.  They might work well if you have the necessary data on a million consumers or a thousand plant locations, but they’re much less likely to work on big questions, where the data’s usually a lot more limited.  But other, more basic, methods can still provide key insights.  Don’t shy away from comparison of means or correlations just because other methods look more impressive.

3. Risk sells better than value creation.

HR analytics can provide key insights into both risk and value creation in your organization.  But which one is much more likely to get the attention of your executives?  Risk.  Executives are keenly aware of the multiple types of risk faced by your organization, and anything that can help them quantify it – especially in a not-typically-quantified area like your organization’s people – is going to be welcomed enthusiastically.

4. Don’t forget about the forest.

Data analysts are masterful at drilling into big data sets and identifying all sorts of relationships and other interesting findings.  But that should be just the start.  More important is the next step: sorting through all those findings to determine what’s really going on.  What’s the big picture or pattern that emerges from all of these smaller pieces?  Remember that’s what your ultimate goal is, and don’t let yourself miss the forest because you’re distracted by all the interesting trees.

 

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3 Mantras for the New Year

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Happy New Year!  We hope it’s off to a good start for you.

Do you live in the world of big data and analytics?  Or are you fascinated or even mystified by the current buzz around these topics?  If so, we’d like to share three mantras we use at McBassi to guide our work in those areas:

  1. My 15-minute Board of Directors report should be filled with insights worthy of their attention.
  2. It is much more important to be helpful than it is to be smart.
  3. Let not the perfect be the enemy of the good.

Mantra #1 elicits a variety of reactions from our clients, ranging from “Geez, if I had 15 minutes in front of my company’s Board and had to fill it with insights worthy of their attention, I’d be in deep kimchi” to “We’ve got no discretion: the Board tells us what to report to them.”  Whatever your particular reaction, repeating this mantra frequently will help you focus on creating actionable business intelligence in your work (as opposed to mountains of electronic reports).

Mantra #2 is important because many people who work in this field tend to be really smart – but some of them seem to suffer from the need to prove it again and again.  This can result in impenetrable presentations that are impressively grandiose – yet also ignored.

Mantra #3 is for those who are waiting for their company’s data warehouse to be completed (or perfected) or for a technology tool that will magically produce insight at the press of the button.  That’s not going to happen – so stop waiting and start working with what you’ve currently got available.

Repeat daily for best results.

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The Smarter Annual Report: Part 2

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There is a movement underway to improve annual reporting to stakeholders, and in particular the provision of better human capital information.  (See our November newsletter for a discussion of what’s happening and who’s behind it.  You can download a copy of The Smarter Annual Report here.)

While this development represents a major opportunity for HR, it also creates a danger that HR will be unprepared and have nothing to contribute except a long list of unrelated human capital metrics that don’t tell a coherent story.

We propose a simple model that helps give structure to the story of the role human capital plays in mitigating risk and creating value for an organization:


Steps You Can Take

To benefit from – and avoid being blindsided by – the emerging demands for insightful human capital reporting, you can begin with the following steps:

  • Assemble the right team to work on the report, reflecting different types of performance (non-financial as well as financial); in particular, the CHRO should be involved.
  • Create a rough narrative about how the organization creates value. This can include a strategy map, list of key strategic issues, list of key risks, materiality map, or some combination thereof. The point is to develop the narrative before presenting metrics.
  • Let the value creation narrative guide your selection of which factors to focus on. Be sure to always combine evidence (such as metrics) with insight (“this is what the evidence indicates”).
  • Include the standard metrics that are expected (e.g. by GRI) even if they are not part of the core narrative. (For these it is not essential to interpret the data.)
  • As you move forward, be realistic about whether the metrics you want are available.
  • Work to improve your internal human capital reporting in anticipation of increasing pressure to improve your external reporting.
  • Have a candid discussion on how you will handle bad news, such as falling scores on an important metric.

 

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The Smarter Annual Report

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McBassi & Creelman Lambert is pleased to announce the release of The Smarter Annual Report: How companies are integrating financial and human capital reporting, a report that provides guidance to companies on how to respond to the movement toward improved annual reporting to stakeholders.  The report focuses in particular on the provision of better human capital information.  [We thank Halogen Software, which sponsored the study.]

A receive a free copy of the report, please visit The Smarter Annual Report page of our website.

Here’s a quick primer on what’s been going on in this area:

What is happening?
There is a well-established global movement to improve annual reports to go beyond narrow financial reporting. The intent is to better convey how an organization creates value and meets the needs of varied stakeholders.

  • A core element is the integration of human capital and financial information in a single report.
  • Organizations are starting to grasp that ‘sustainability’ is about both long-term performance and contributing to the planet’s survival – and that people are a critical ingredient of both.

Who is behind this?

  • The big players pushing for smarter annual reports are the Sustainability Accounting Standards Board (SASB) in the US and the International Integrated Reporting Council (IIRC) globally.
  • A well-established player in sustainability reporting is the Global Reporting Initiative (GRI). Their focus is more on corporate responsibility than value creation; nonetheless they play an important role in defining the metrics inserted into smarter annual reports.
  • A variety of other bodies are actively supporting improved corporate reporting. For example, The B-Team is a group of socially-aware leaders pushing corporate responsibility with “True Accounting” being an explicit part of their mission.

Will anything come of this?

  • A sizeable number of large, international companies have followed IIRC guidelines for integrated reporting on a trial basis for three years.
  • Michael Bloomberg and Mary Schapiro are serving as the Chair and Vice Chair of SASB. People of this caliber have the power to drive change in the world.
  • An Association of Chartered Certified Accountants survey of 200 CFOs indicates that half of the firms surveyed anticipate adopting integrated reports within three years.
  • Bottom line? Yes, change is coming.

HR’s opportunity & challenge

  • Human capital reporting offers great opportunities for the HR function to contribute by playing a core role in shaping the organization’s value creation narrative, and in developing better teamwork across functional boundaries.
  • HR may remain a bit player in the corporate reporting process, however, if it is unprepared, with little knowledge of the various emerging standards.  HR information systems and analytics must be integrated and able to demonstrate the cause and effect between human capital investment and business results. Otherwise, HR is unlikely to be able to contribute to — and benefit from — the changing world of corporate reporting.

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