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Peopleworks24 and Equity-Skill Development News have agreed to support The Resolve Group in their endeavour to benchmark people productivity across industry sectors in South Africa.
The measures that you will be introduced to in the study were developed by one of the leading gurus of HR measurement, Jacques Fitz-Enz who is the founder of the Saratoga Group in the USA.
Part 2 of the article presents you with a checklist of HR measures and actions for use in benchmarking HR productivity. In part 6 you are invited to take part in a confidential survey. By completing the short questionnaire The Resolve Group will provide you with hard numbers that you will be able to use to understand and report on your human resources productivity. You will also receive an indication of how you perform against the consolidated results for a sample of other companies. There are no costs involved in participating. Both Resolve and Peopleworks24 and Equity-Skill Development News guarantee the confidentiality of all information submitted.
2. You live or die by the numbers
It is not too far fetched to argue that managers live and die by the numbers. Income statements, balance sheets, and financial ratios are all scrutinized to better understand how an organization performs. Providing information forms the basis for future activities, planning and budgeting.
We know that people (as labour or employees) play a vital role in businesses and organizations. They create and/or deliver the products and services that are the cornerstone of businesses and it is therefore intuitive that the productivity of a business’s human resources will have an impact on overall performance. Yet we never see people reflected on the income statement or balance sheet.
The motivation for measuring human resource productivity is therefore quite simple. Firstly given that people or ‘human resources’ play such a fundamental role for businesses you should understand their performance, for it has implications for the performance of the business. Secondly by measuring your business’s human resources you can build a picture of how they perform. Understanding how they perform will enable you to identify problems and take actions thereby enabling you to better manage your people. So measuring human resource productivity is critical to determining how your human resources drive your business performance.
What follows is a guide to what you should cover in measuring human resource productivity, measures you can look at, and an approach you can use.
3. What to consider when measuring people productivity
Here are the key points you should ensure you have covered when you set out to measure human resource productivity:
The most important thing is to use or design measures that reflect on the performance of people or that reflect on how the performance of people relates to that of the business. After all, that is what you are concerned with demonstrating and that is what you will focus on managing in order to improve the performance of both your people and your business. Therefore you should approach measuring human resource productivity by considering 3 different types of measures:
>> Input measures: these consider what it is that you put in to applying your human resources/people for productive use, and how you structure your human resource input. So for example typical input measures might include your investment in training (because you are investing in your input thereby seeking to achieve more productive use of it), remuneration (because it is a direct measure of the cost of your input and you want to be able to see that you are getting a return from that investment), and mix of staffing (e.g. mix of professional/sales/labour staff because this will impact on how your human resources are structured to perform in the business).
>> Output measures: these describe the outputs attributable to your human resources and should therefore always reflect people as a variable in the measure (for example profit per employee). Output measures can be considered in two ways. Firstly, in relation to actual goods and services produced (for example number of clients serviced per employee or number of units produced per employee), and secondly by considering people relative to key financial performance areas (for example profit per employee, revenue per employee). This is a very useful technique; it immediately focuses attention on human resource productivity by considering the relationship between key financial performance variables and people (for example profit per employee looks at the amount of profit generated per employee).
>> Outcome measures: these aren’t the same as output measures. Human resources aren’t simply inputs that when applied produce outputs. Human resources interact and respond to what they are required to do, how they do it, and how they are managed. Therefore outcomes measures consider how people respond. The resignation rate (number of employees who voluntarily leave the organisation) is a good example of an outcome measure; it describes a response of human resources to a set of conditions that may be internal to the company (example dissatisfaction with working conditions) or external to the company (example higher remuneration elsewhere). The point is that the outcome being measured has implications for productivity – a high resignation rate points to a loss of skills and expertise and a need to incur costs by hiring new staff.
4. A checklist of measures
Listed below is a set of commonly used HR productivity measures (and accompanying brief definitions) that you could apply. These measures are used in the free survey that you are encouraged to take part in once you have read the definition of each measure and appreciate the impact and importance of each measure.
# Average revenue per employee
(The turnover generated per employee in the business; an indication of how much revenue people produce. Human resource productivity would drive performance on this measure up).
# Average cost per employee
(Organisational costs expressed per employee. Employee productivity can act to reduce organisational costs).
# Average profit per employee
(Given that profit is the difference between revenue and costs, this is where human resource productivity will be very clearly reflected. Human resource productivity will act to broaden the gap between revenue and costs. Profit per employee therefore indicates how well your human resources are managing to do this).
# Return on human investment ratio
(The return on human investment measure appears quite complex but is a core human resource productivity measure. It is defined as (revenue - (costs - total remuneration)) ¸ total remuneration. The ratio indicates for every Rand invested in paying people, the return in profit generated on a Rand for Rand basis. So a ratio of 3:1 would indicate that for every Rand invested in paying people, three Rand is generated in profit).
(Spend on remuneration expressed as a percentage of turnover produced. A productivity measure that indicates how much of revenue generated is consumed by pay to people. The more productive employees, the smaller the ratio).
(Spend on remuneration expressed as a percentage of costs. A productivity measure that should be considered together with remuneration/revenue. Remuneration/costs would give an indication of the significance of human resources as an input in the business; remuneration/revenue would give an indication of how productive those human resources are).
# Average remuneration per employee
(People are paid and in return there is an expectation that they provide the company with value. Average remuneration per employee allows you to consider with the productivity measures identified above, the return you derive from your human resources).
# Absence rate
(The absence rate is an outcome measure; it indicates the level of employee misbehaviour in the organisation and may indicate a degree of staff dissatisfaction. Absenteeism impacts on human resource productivity, and high results should be investigated further in order to understand the reasons why).
# Resignation rate
(Like absenteeism the resignation rate is an outcome measure. The voluntary loss of staff implies a loss of resources, which in turn has implications for continued productivity. The need to hire new staff and train them up to required levels has both a cost implication and a productivity implication).
# Training spend/compensation
(This is an input measure. Training implies an input into developing your human resources to be more effective and productive and therefore this measure should be considered with other productivity measures).
5. A checklist for applying and using the measures
The measures above represent just some of the many measures that can be applied. Develop or use measures that are most appropriate for your business. To understand your human resource productivity, read the measures together. A low profit per employee, high resignation rate and low average remuneration tells you more about human resource productivity than just looking at profit per employee. To understand your human resource productivity, track performance over a period of time. Re-measure periodically to understand how any changes you make to manage your human resources impact on productivity and performance. To understand how much value your human resources are creating, measure yourself against others. This will give you an indication of comparative human resource productivity – how effectively other similar businesses are using their human resources and therefore the potential to increase your own human resources productivity and effectiveness.
2nd July 2006 From India, Hyderabad
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