In this article, we will look beyond the scope of traditional HR KPIs. We will show that financial KPIs are not the end-goal – rather HR should step up its game and report on the leading indicators of organizational effectiveness. We will end the article with a list of recommended KPIs to focus on.
Are financial KPIs enough to describe organizational effectiveness?
Nowadays organizations develop their activities in VUCA contexts. In this environment, the main driver for developing their capabilities probably is the workforce (Gamerschlag & Moeller, 2011; Gamerschlag, 2013). In an increasingly knowledge-intensive economy, employees are the main differentiating factor. Today’s VUCA context requires fast and creative answers from organizations to adapt efficiently to the new environment.
In this sense, organizational adaptation depends on:
- Employee behavior,
- in interaction with the proper technology,
- flexible and empowering work processes,
- and a culture of innovation and intrapreneurship.
The previous decades have confirmed that financial information is not enough to describe organizational capabilities for creating value (Lev & Zarowin, 1999, Francis & Schipper, 1999; Balachandran & Mohanram, 2004). In fact, different recommendations and directions have been developed from the institutional arena (Directive 2013/34/EU; Directive 2014/95/EU). These norms push organizations to be transparent with non-financial information so that citizens make informed decisions about their interaction with companies.
The objective of developing this non-financial information is to identify organizational risks to improve sustainability and consumer, investors, and societal trust. More than this, non-financial information related to Social Corporate Responsibility contributes to measure, supervise, and manage organizational performance and social impact.
The necessity of developing shared standards about the workforce is clear. Organizations need comparable measures to describe their capabilities related to the workforce and their management.
Are HR KPIs enough to carry out strategic workforce management?
Measuring the impact of the workforce on organizational results is not an easy task. The difficulty lies in measuring “intangible” assets. This has not led to obtaining more high-impact measures but to an emphasis on measuring what is possible versus what is necessary.
However, organizations (and society) require a strategic HR function capable to connect the workforce and organizational effectiveness. Organizations that don’t develop this strategic vision of the workforce will not be able to compete in the talent era. So, for this objective, HR usually looks to its own HR KPIs. But HR KPIs have important limitations that must be overcome in order to achieve the promise of strategic value.
Let’s take a look at the reasons:
- Silo HR. The first limitation is that HR KPIs usually are focused on describing HR processes using efficacy and/or efficiency. These types of measures don’t connect the workforce with the results produced by organizations. We need KPIs that give information about the connection (Becker, Huselid, & Ulrich, 2001). Related with this we have the problem that HR KPIs describe HR processes but not the results of this process in terms of employee behaviors.
- Strategic Value. The second limitation is related to the difficulty of measuring the intangible aspects of the workforce. Too many times HR professionals decide to measure what is possible versus what is important. However, measuring these important aspects is what makes HR’s role strategic.
- Organizational Effectiveness. The third limitation is HR’s limited vision about organizational performance. A modern vision of (a) the degree to which organizations carry out their mission and (b) the necessary capabilities to do so in a sustainable way include an analysis of how the organization satisfies the needs of their different stakeholders. A wide conception of organizational performance is necessary to add strategic value.
So, what’s new in the HR metrics field?
First, a new look at the “what”. As we’ve shown previously, focusing only on processes is a narrow way to describe organizational capabilities based on the workforce (and its management). Instead, we can resort to measuring the strategic aspects that the literature has identified as relevant to the success of the organization.
In a recent systematic review of scientific literature, we have been able to re-affirm the vitality of the previous elements in the connection between the workforce and its management with the effectiveness of organizations.
Specifically, we are talking about: Employee Characteristics; Leadership; Teams; HR processes; Innovation Culture; and Wellness at work.
Second, there is the issue of developing new metrics. We need to properly measure these classical dimensions at the organizational level. For example, we need to express our organizational capacities related to leadership as a whole, not at an individual level. The organizational level is of interest due to its strategic value. An example is the CAMTO Project (https://camto.iic.uam.es/), which makes a set of more than 200 organization-level metrics available to HR professionals.
As examples, we could consider:
- Employees with high performance. Percentage of “high performers” by total employees (or FTE). (Employee Characteristics)
- Scope of Leadership Programs. Percentage of managers in leadership skills development programs. (Leadership)
- Excellence in Leadership Developed. Percentage of managers who are in the performance evaluation in the upper categories of the measurement scale (20% higher). (Leadership)
- Rotation impact on teams. Percentage of teams for which the rotation exceeds the established threshold value of Standard Deviation. (Teams)
- High-Performance System. The number of critical HR processes designed under the High-Performance System perspective. (HR Processes)
- Scope and use of technology platforms as a source of innovation. Percentage of employees who actively use technology platforms. (Innovation Culture)
- Innovation training hours per employee (intrapreneurship). Training hours related to courses with content on creativity, innovation, new methodologies, cutting-edge technologies, etc., per employee. (Innovation Culture)
- Positive assessment of the work characteristics. Percentage of employees who in the climate survey positively value (in the upper categories of the measurement scale: 20% higher) the items related to the characteristics of their work: meaning, responsibility, control, importance, complexity, and workload. (Wellness at work)
- Positive assessment of the organization’s methodologies, procedures, and technologies. Percentage of employees who in the climate survey value positively (in the upper categories of the measurement scale: 20% higher) the items related to the methodologies, procedures, and technologies to be used positively. (Wellness at work)
The strategic impact of HR function currently depends on at least two key factors related to data and measures. The first is the choice of the appropriate dimensions to be able to describe the capabilities of the organization that connect with its effectiveness. The second is the development of adequate metrics that allow us to appreciate the previous dimensions in a valid and reliable way.