Balanced Scorecard

What gets measured gets done: developing a HR scorecard*

By Nicholas Higgins who can be contacted at www.watsonwyatt.com/europe/

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1. Introduction

There is increasing interest in measuring HR and initial efforts have made use of a HR scorecard to provide a framework within which to measure. However, experience of HR scorecard implementation has been mixed. In this article we provide insights into the reasons why, and outline several key steps that must be undertaken for HR measurement to be effective.

Traditionally, HR functions have struggled with appropriate and meaningful measures to quantify their value, or that of the people engaged within the business. The emergence of the HR scorecard concept has tried to address this point, taking its core design from the established balanced scorecard measurement framework applied in businesses. In short, the balanced scorecard is essentially a framework that attempts to collate measures across four areas: financial, internal process, customer and (people) learning, and growth rather than just the traditional financial measures (hence the term ‘balanced’).

2. How to approach a HR scorecard

Rather than immediately compiling a list of HR measurables that are easy to quantify, it is worth taking a step back and thinking through a checklist of points to address.

A. UNDERSTANDING THE REASON FOR IMPLEMENTING THE HR SCORECARD

First of all, one needs to understand the reason for developing a scorecard. For example, does a wider corporate scorecard necessitate this implementation be spun-off? Or the requirement of operating metrics on a newly established HR shared service centre? Is it a means of prioritising and reporting an existing collection of HR metrics? Or, a result of the new ERP software providing a range of HR analytics?

Asking these questions focuses on the type of measures required, from basic data to operating efficiency measures through to corporate value-based metrics – each perspective having a different focus.

It is not unusual to find that there is potentially more than one layer of metrics. A common error is to try and package all relevant measures in one scorecard, rather than a pyramid-layered structure. The HR scorecard – metrics hierarchy consists of:

# Values based HR metrics linked to corporate based metrics that reflect value-based measures

# HR outcome measures that focus on business outcomes

# Operational HR metrics that focus on efficiencies

# HR analytics that focus on workforce data

B UNDERSTANDING THE BUSINESS CONTEXT OF HR

Having understood the context of the HR scorecard rationale it is important to recognise the business context within which HR operates by asking questions such as:

# What are the value drivers of the business (units)?

# What is HR’s value proposition to the business?

# Where are HR’s biggest value points?

# Where is HR’s contribution recognised – by senior management, the line, employees, HR itself and/or investors?

# What does the HR function currently measure?

# Are the metrics activity driven or value driven?

# What human capital metrics are included in the general business reporting?

These questions will define the relevance of certain measures in terms of impact before the next step of defining HR value.

C. DEFINING HR VALUE

Unfortunately most current HR metric examples are operational in nature (efficiency metrics) and are of limited or no value.

In contrast, deriving HR metrics that relate to outcomes or contribute to value creation are of much more significance. HR value (or contribution to) can be seen and ultimately measured from three different perspectives:

# The value of the HR function to the business as a whole

# The value of HR processes as practised throughout the organisation, for example, performance management, and its fit with core fundamentals, such as culture, structure, strategy and so on

# The quantification of people value to the organisation, and their input to strategic decision-making.

However, jumping from efficiency metrics to value-based metrics in one leap can be too much and thus a progressive move over time may be the optimum solution.

D. DEVELOPING THE HR VALUE MAP AND CONSTRUCTING HR METRIC TREES

This is potentially the most difficult step in terms of mapping the touch points – those where HR involvement or intervention has impact on business performance. This map provides the base for constructing a hierarchical link of HR metrics with business metrics (financial/process/customer).

E. SELECTING THE RELEVANT MEASURES AND METRICS

This step is unfortunately the one in which most scorecard enthusiasts begin! The trick here is to construct a set of relevant metrics that meet with the initial rationale for the HR scorecard design. The outcome of this stage should result in some form of draft scorecard framework.

F. MAINTAINING A HR SCORECARD FRAMEWORK

The scorecard is an organic design – one that changes with the business. Thus this step is most important in continually updating and reviewing the scorecard framework, ensuring that it continues to report relevant metrics and discontinuing those metrics that are no longer required. This is sometimes the hardest task.

Following the steps outlined above, whilst by no means definitive, will at least ensure a HR scorecard design that will be relevant to the business rather than reflective of a loose collection of HR metrics.

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PART 2: Measuring HR effectiveness - HR scorecard design

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In part 1 of this article we considered why organisations might wish to develop a HR scorecard and the steps to be followed in HR scorecard design. In this article, we turn the theory into practice through a case study. Recently, a client asked us (Watson Wyatt) to run a one-day workshop with a senior HR team to help them develop their HR scorecard. We structured the workshop around five key areas:

1. BUSINESS CONTEXT

The team considered two influences on HR effectiveness:

# External influences - the company's current operating environment

# Internal influences - how the business perceives HR's capability.

This provided an understanding of what type and "depth" of metrics framework would be possible and palatable.

2. CURRENT HR OBJECTIVES

The company’s HR strategy already included a number of qualitative objectives in the following areas – resourcing, performance management, training and development, reward, employee relations, career development and organisation development. This gave us a good initial steer for the areas where measurement is required.

3. APPROPRIATE HR METRICS

This session established certain ground rules about the types of metrics that could or should be reported. The team generated an initial list of potential metrics, which, although comprehensive, focused too heavily on data rather than knowledge-based measures. This is a common flaw in companies’ HR reporting – see the panel on Metrics for more detail.

By considering which HR metrics would provide a valuable measure for the business, the team was able to create a more balanced list.

4. SCORECARD DESIGN FRAMEWORK

As a starting point, the team considered the standard four-box scorecard design of Financial, Process, Internal Customer Focus, and People/Human Capital Management

It was recognised that this should be adapted to meet the company’s specific requirements. Figure 1 below shows the five measurement dimensions that emerged.

The ‘Human Capital interventions’ box was included to address the potential confusion between ongoing reporting metrics (such as sickness absence) and one-off project reporting around specific human capital interventions, for example the introduction of a new appraisal process. The ‘Employer brand’ dimension evolved to meet a gap identified during the following session.

5. POPULATING THE HR SCORECARD

Using the output from sessions 3 and 4, the team began to populate the scorecard with a number of metrics. A number of iterations were required to get to a final agreed version.

Significantly, no one in the team would have acknowledged at the beginning of the day that ‘employer brand’ would be a core measurement area. However, it became evident during this session that a number of brand-related metrics were populating the other boxes. This led to the decision to construct andemployer brand’ cluster, to replace the original ‘process’ cluster. This highlighted the value of an iterative process and demonstrates that there is no ‘one size fits all’ – a HR scorecard design is context-specific and must reflect the company’s needs.

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Figure 1 - Final agreed scorecard

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6. THE END RESULT

At the end of a very full day, the HR team was satisfied that it had achieved a workable scorecard design, which had direct relevance to the business and provided them with a much clearer line of sight for HR performance reporting.

It also became clear during the day that some of the stated HR objectives needed to be reassessed – a task the team has taken away with them.

The next step is to ascribe targets to each of the selected metrics.

7. METRICS

One of the problems for HR is that there is an almost limitless choice of HR metrics, the vast majority of which are meaningless outside the HR function but easy to report.

Experience shows that many scorecards include a large percentage of metrics reporting data – facts or numbers without context, for example ‘training days delivered’. Almost all of the remaining metrics fall into the ‘information’ category, which is an improvement on data but still limited in terms of business value, for example, ‘training days delivered per employee’.

The real aim for HR is to produce a scorecard that contains more knowledge-based metrics that report value or contribution type information. For example, ‘training spend per employee per annum, with a five year trend’. Although still lacking a value connection, this metric at least supplies the business with useful knowledge regarding training in the organisation.

Balanced Scorecard Articles

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