How to Integrate Financials into Workforce Metrics for HRBP and OD. January 25, 2016

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1 How to Integrate Financials into Workforce Metrics for HRBP and OD January 25, 2016

2 About Drake International At Drake, we understand that your employees are your most valuable asset and your biggest competitive differentiator. Drake International is a profit improvement company focused on enhancing the productivity and performance of your human capital. Built on a culture of measurable results and outperformance, Drake has evolved into an international leader in the expanding field of Workforce Analytics and Planning. At Drake, we recognise that each organisation is unique. Therefore, our extensive suite of innovative Human Resource solutions enables us to customise our services based on your particular staff requirements, organisational culture, business objectives, and key value drivers. We are proud of our global reach, experience and mission to help companies outperform by improving their Productivity, Performance and Profit through their People. 2

3 About Human Capital Management Institute The Human Capital Management Institute (HCMI) was founded on the belief that organizations can and must, find better ways of measuring their investments in human capital. Our vision of the future is one in which human capital measurement and data is as integral to business decision making as financial information is today. - We Bring Financial Discipline, Standards and Rigor to the HR Function - HCMI Background: Specialized in HR analysis and measurement Deep expertise in Workforce Analytics and Planning Board made up of CFOs and HR heads What We Do: Measure the immeasurable in human capital Transform workforce data into business intelligence Provide support, tools and training so HR can partner with Finance SOLVE Workforce Intelligence Software Strategic Consulting Training Best Practices Workforce Analytics and Planning Benchmarking 3

4 Turnover, Headcount, Hiring Initial Reports & Analysis HRIS system data Data Gathering HR Data Warehouse Drill-down, standard reports Scenario Analysis First Good Metrics Data Errors HR Analytics Mandate Lost HR Credibility 1 st Analytics Study External Benchmarking Context for decisions HR Standards Established HR data/systems Assessed COE Formation Advanced Analytic Studies Integrated HR Databases COE Launches Training Courses HR Data Cleansed historical data scrubbed Data Errors Historical data still bad Data Driven Decision Making! Bus. Units Reject Analysis HR Analysis Validated Analytics journey steps Setbacks along the way Journey path and goal Bus. Units Demand more Turnover, Headcount, Hiring Initial Reports & Analysis HRIS system data Data Gathering HR Data Warehouse Drill-down, standard reports Scenario Analysis First Good Metrics Data Errors HR Analytics Mandate Lost HR Credibility 1 st Analytics Study External Benchmarking Context for decisions HR Standards Established HR data/systems Assessed COE Formation Advanced Analytic Studies Integrated HR Databases COE Launches Training HR Data Cleansed historical data scrubbed Data Errors Historical data still bad Courses Data Driven Decision Bus. Units Reject Analysis HR Analysis Validated Making! Analytics journey steps Setbacks along the way Journey path and goal Bus. Units Demand more Focus & Resources (Center of Excellence) Reporting, Scorecards & Accountability Business Complexity & Structure en Business, Workforce & HR Strategy Linkage Workforce Cost and Productivity Measurement & Analytic Capability Workforce Knowledge Speed, Systems Integration & Automation Standards, Processes & Data Quality HCMI Products and Services Full-Service Workforce Analytics and Planning Provider Training and Advisory Support + Analytics Center of Excellence Training Workforce Analytics Training Workforce Planning Training Custom onsite training Consulting Services Specialize in Workforce Analytics and Planning Assessments Data Integration Blueprint Building a Business Case Workforce Analytics and Planning Roadmap, Assessment and Business Case Advanced Workforce Analytics and Planning Consulting Advanced Technology Solutions SOLVE Dashboards Measure Metrics that Matter Quantify Financial Impact of Talent SOLVE Pro Advanced Workforce Analytics and Planning Predictive Modeling and Forecasting Talent Management Dashboards Metrics, Training and Research Human Capital Financial Statements Workforce ROI Calculator Workforce Planning and Career Path Location Optimization 4

5 Presenter Information Moun Peterson, PhD Director of Workforce Planning & Research Moun Peterson has over a decade of experience working in Human Resources specializing in workforce analytics and planning and organizational development. In her current role at HCMI, Moun leads client engagements and product development. She has helped many clients start workforce analytics and planning initiatives and transition to a data driven decision model. Moun earned her doctorate in Industrial Organizational Psychology while working in HR for Nokia and Pfizer in areas of Training and Employee Engagement after earning her BA at UC Berkeley in Cognitive Science. 5

6 HR Business Partner & OD Webinar Series 1. Getting Started with Workforce Analytics for HR BP & OD Professionals 2. Top Metrics that HR Should be tracking 3. Linking Metrics to Business Results 6

7 Agenda 1. Why Workforce Analytics is Relevant Now 2. Strategically Driven Workforce Analytics 3. Integrating Financials 4. Benchmarks 7

8 Value Creation in Today s Market Are we managing the right things or just measuring what we know how to measure? Tangible Assets/Value Measures are well established for modern Finance as a Decision Support Science Easy to Measure vs. Hard to Measure Intangible Capital Value Market value driven by factors not on a balance sheet Intellectual or Human Capital Human Capital = employee knowledge, training, productivity, experience, culture, leadership, development, performance, creativity, etc. 8

9 Policies & Workforce Practices Talent Management & Practices Building a House for Data-Driven Decisions Predictive Workforce Management Tools Excellence Workforce Planning and Analytics Linked Business and Workforce Strategy (HR Value Creation & Workforce Optimization Model) 2 PATHS, 1 HOUSE Analytics & Workforce Planning Capabilities Clean Data + Standards = Reports & Measures Workforce Planning Demand & Supply Critical Roles & Skills Cost Modeling Measures + Metrics Predictive Modeling Human Capital Analytics Data- Driven Decisions Measuring & Reporting Benchmarks Root Cause Analysis Reports Metrics to Recruit, Train & Retain One Foundation for Analytics & Planning Awareness Standards Data Quality Strategic Plan data by unit Employee basic data Temp & contractor data Foundation Compensation data Recruiting data Geographic data Performance mgmt data Employee career path / succession data Classification Tools Job/Position data Turnover data Manager data Analytic Framework Foundation to Roof Excludes systems considerations 11

10 Analytics Adoption Over Time Analytics Are No Longer a Nice-to-Have Source: Gartner

11 Different Ways to Start Analytics 1. Driven by Crisis, Change, or Need A major company crisis occurs, mergers, acquisitions, and/or reorganization 2. Pilot program Start with a test group 3. Data Driven What data is currently available 4. Strategically Driven Align workforce strategies with business strategies 11

12 A Guide to the World of Workforce Metrics A comprehensive guide of over 600 human capital metrics 100 best-in-class and critical metrics to quantify and manage the workforce Definitions and descriptions showing most common and best use Detailed formulas and explanations 12

13 Strategically Driven Align workforce strategies with business strategies - When the workforce transitions from just being a cost to an asset - Precise workforce decisions are made based on business strategies Important Considerations: - This is the most challenging approach, but has a higher long term success rate - Financials are essentials - Industry benchmarks will add value 13

14 Tips on Integrating Financials into Analytics 1. Make new friends in Finance 2. It s alright to use estimates 3. Trends and change rates will strengthen your analysis 4. Benchmarks identify how your organization compares to peers, external benchmarks are usually better, but internal benchmarks will work too 5. Use productivity metrics to align workforce and business strategies 14

15 Advanced HC Productivity Metrics Return on Human Capital Investment Return on Human Capital Investment = Total Operating Profit Total Cost of Workforce Description: ROI of workforce costs relative to profit. Expressed as a percentage of TCOW. Best use: Return on Human Capital Investment is a strongly linked leading indicator of growth. Organizations measuring or tracking this metric can effectively measure the linkage of overall or large scale workforce changes to trends in the organization's market value over time. Human Capital ROI Ratio Human Capital ROI Ratio = Total Operating Revenue (Total Expenses Total Cost of Workforce) Total Cost of Workforce Description: Net operating profit impact of each dollar invested in human capital (or TCOW). Best use: Human Capital ROI Ratio can effectively measure the linkage of overall workforce changes to trends in the organization s market value over time. This metric is optimized when analyzed by employee productivity, performance, turnover, and future workforce changes in support of driving overall market capitalization along with value provided per FTE employee or worker. 15

16 Productivity Metrics & Market Performance Financial Services Industry Change Rates (CAGR) % 28.0% 25.4% 26.2% 25% 19.9% 20% 14.8% 15% 12.9% 10.9% 9.8% 10% 5.7% 5% 0.4% 0% -5% -2.7% -10% -7.0% Low-Performers Mid-Performers Top Performers Human Capital ROI Ratio Stock Price Return on Human Capital Investment Market Value (Capitalization) Top quartile companies improved workforce productivity 9.8% & 25.4% annually, seeing 26.2% annual stock price gains, double the market average improvement Human Capital and Market Capitalization, Financial Services, October,

17 Productivity Dashboard Example Index Metric Score One score that summarizes how your organization is doing along with its quantified impacts. Index Metric in Graph Analyze the change rate of your index metric and the industry average and plan with SOLVE s built-in predictive tools. Scenario Manager Detailed scores and benchmarks of the components that made up the index metric. Critical Insights & Predictions Control workforce dynamics that impact the business down to the job-level details. 17

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19 Human Capital Financial Statement (HCFS) 19

20 International Integrated Reporting Council OMERS Ontario Municipal Employees Retirement System Sustainable Accounting Standards Board, SASB IRRC Institute-HBS, Materiality of Human Capital to Fin. Perf. GRI Global Reporting Initiative Accounting for People Task Force 2003 Smarter Annual Report 2015, Creelman, Bassi Dow Jones Sustainability Index ANSI-SHRM Investor Guidelines for Reporting HC 2012 CIPD Valuing Your Talent NAPF National Association of Pension Funds ISO:NWIP N-141, HC Reporting for Int. & Ext. stakeholders TOTAL HC Disclosure Statement Disclosure Statement Research Human Capital Disclosure Requirements MatrixI = Included in Management's Human Capital Discussion Category, Element, Metric or Dimension Workforce Composition Workforce Headcount 10 Workforce Cost 9 Workforce Productivity 9 Return on Workforce or People 9 Workforce Composition-Breakdown 9 - Contingent Labor Cost 6 - Contingent Labor Force Size 6 - Benefits (i.e. full-time v part-time) 6 - Geographic-Global Workforce Distribution 5 - Revenue per Employee or FTE 4 - Demographics, Diversity (i.e. Age, Gender) 3 I - EBITDA per employee or FTE 3 - Full-time v part-time 3 - Job Level 3 - Talent Efficiency/Effectiveness 2 - Proportion Professional qualified employees 2 - Work Hours 1 Workforce Skills and Capabilities - Total Training Investment 9 - Leadership Depth/Career devpmt/succession 8 - Talent Management 6 - Competencies and Skills 6 - Internal Hire Rate 6 - Average training hours per employee 3 - Leadership Quality/ Effectiveness 3 - Training Types (formal/informal, technical, apprentice) 2 I - Training by Job Group 2 I - Number of Courses Taken 1 I - Number of PhD's (or total # of Patents) 1 I Overarching HC Disclosure Objectives Human Capital Performance, Productivity 11 Comparable across entities/industries 11 20

21 Disclosure Statement Research Overarching HC Disclosure Objectives Human Capital Performance, Productivity 11 Comparable across entities/industries 11 Transparancy (clear, complete, reliable, simple) 10 Validity (Useful, link to financial results) 10 Consistency over time (measure over time) 9 Material, Auditable Information 9 Sustainabiltiy of Human Capital 8 Business and Management Governance 8 Comprehensive (Complete/Talent lifecycle) 8 Human Capital Risks 7 Strategic, Future Directional Focus 7 Connectivity of Information 6 Superior Human Capital Talent Decisions 5 Workforce Stability Workforce Turnover (i.e. terminations) 8 - Regrettable or Voluntary turnover 7 - Pay policies & ratios (mgmt, gender equiity) 7 - Turnover by Category or level (EEO) 2 - Recruitment Costs 2 - Applicants per position/ Brand Awareness 2 I - Offer/acceptance statistics 2 I - Retention rates (demographic) 2 I - Levels of skill shortages 2 I - Pension/Retirement program (cost, % eligible) 1 I - Industrial relations issues 1 I - New Hire Retention Rate (12 month retention) 1 I Workforce Culture - Employee Engagement Score 6 - Absentee Rates, (i.e. % or Cost) 5 - Lost Days, Accident Rates, Fatalities 5 I Other - Human capital discussion & analysis 2 - HR Cost or Investment 1 - HR Return on Investment 1 TOTAL RECOMMENDATIONS % of Requirements Met 78% 78% 21

22 Overall Disclosure Statement Vision Allow organizations to measure workforce value creation Link metrics to business results & drive company business strategies Create a bridge between the Workforce and Traditional Financial Measures 22

23 Data What s in the HCDS #1 Human Capital Disclosure Statement 1. Human Capital Impact Examples: Total Cost of Workforce (TCOW) Productivity Impact Human Capital ROI Ratio Traditional Financial Statements 1. Income Statement #2 2. Human Capital Flow Examples: Inflows, Outflows, number of Contingent Staff, Transfers and Promotions 2. Cash Flow Statement #3 #4 3. Human Capital Cost Examples: Employee Salary Cost, Contingent Workforce Cost, Recruiting Cost 4. Management Discussion Examples: Overall workforce growth, critical and non-critical job roles, etc. 3. Balance Sheet Key Step: Align Human Capital to Finance 23

24 A Resource: Human Capital Disclosure Statement Human Capital Impact B Human Capital Flow C Human Capital Cost D Management Discussion 24

25 Keys to Human Capital Impact Revenue per FTE is up Revenue increased 10.0% while headcount increased 9.3%, resulting in a revenue per FTE increase of.6% Total Cost of Workforce (TCOW) increasing more than Revenue TCOW was up year-over-year 10.4% above the 10.0% Revenue increase, negatively affecting workforce productivity. Profit per FTE Operating Profit increased 10.9%, and profit per FTE 1.4%, partly offsetting the negative impact of higher TCOW. Further profit gains vs. peers seem unsustainable without further productivity gains. Workforce Productivity Both workforce productivity metrics improved, however the rate of growth is minimal and well below the 3% productivity gains of competitors. 25

26 Human Capital Costs Benefit Costs The largest rapidly rising cost is benefit costs for employees. What is the plan to better manage these costs? How does the organization compare to peers in this area? Absence Lost Days and Cost These costs are increasing rapidly, was this due to one time events or longer term trends? Are Training & Development costs aligned with the company growth strategy? Is the organization Building, Buying or Renting its best current and future talent? Total Cost of Workforce is increasing as a higher rate than revenue, a long term predictor of declining workforce productivity. How will the company better manage these costs as they execute on their growth plans? 26

27 Thousands Industry Sector Productivity Revenue and Profit per FTE Highlights Profit per FTE and Revenue per FTE are traditional productivity measures Utilities outperforms most other industries, but is behind Transportation and Finance in Profit per FTE and Oil & Gas in Revenue per FTE $80 $60 $40 $20 $- $(20) Profit Per FTE Correlation coefficient r 2 =.86 (Revenue per FTE to Profit per FTE) $- $200 $400 $600 $800 $1,000 $1,200 $1,400 Revenue Per FTE Thousands From 1996, Utilities saw an increase in Revenue per FTE but a loss in Profits Both Revenue per FTE and Profit per FTE fell from 2014 $(40) Accomodation & Food Services Admin Support & Waste Mgmt Svcs Arts & Entertainment Finance and Insurance Health Care and Social Assistance Information Manufacturing Mining Oil & Gas Professional & Tech Services Real Estate, Rental, Leasing Retail Trade Transportation and Warehousing Utilities Wholesale Trade 27

28 Industry Sector Productivity Human Capital ROI Ratio and Return on Human Capital Investment Highlights 4.00 Human Capital ROI Correlation coefficient =.83 (HC ROI Ratio to Return on HCI) Human Capital ROI and Return on HCI are advanced productivity measures that takes into consideration workforce costs Utilities outperforms other industries in advanced metrics, but has lost productivity from 1996 and from 2014 The use of advanced productivity metrics makes it easier to identify the difference in performance across industries % 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% Return on HCI. Accomodation & Food Services Admin Support & Waste Mgmt Svcs Arts & Entertainment Finance and Insurance Health Care and Social Assistance Information Manufacturing Mining Oil & Gas Professional & Tech Services Real Estate, Rental, Leasing Retail Trade Transportation and Warehousing Utilities Wholesale Trade 28

29 Thousands Finance Sector Breakdown Revenue and Profit per FTE Highlights $140 Profit Per FTE Headcount show Insurance Industry ahead in Revenue per FTE $120 $100 The largest category, Depository Credit Intermediation, improved from 1996 $80 $60 $40 Revenue per FTE improved 27% Profit per FTE improved 101% $20 $- Revenue Per FTE $- $200 $400 $600 $800 $1,000 Activities Related to Credit Intermediation Thousands Agencies, Brokerages, and Other Insurance Productivity on average was; Depository Credit Intermediation $442,996 Revenue per FTE $72,345 Profit per FTE Insurance Carriers Nondepository Credit Intermediation Other Financial Investment Activities Securities,Commodity Contracts, Intermediation, Brokerage 29

30 Finance Sector Breakdown Human Capital ROI Ratio, Return on Human Capital Investment Highlights HCMI s Productivity Metrics tell a different, more predictive story Human Capital ROI Insurance is ahead in Return on HCI, but in the middle for Human Capital ROI Depository Credit Intermediation lost productivity from 1996 HC ROI Ratio fell by 7% % 20% 40% 60% 80% 100% Return on HCI. Return on HCI fell by 2% Productivity on average was; 2.64 Human Capital ROI Ratio 68.1% Return on Human Capital Investment Activities Related to Credit Intermediation Agencies, Brokerages, and Other Insurance Depository Credit Intermediation Insurance Carriers Nondepository Credit Intermediation Other Financial Investment Activities Securities,Commodity Contracts, Intermediation, Brokerage 30

31 Key Ideas 1. Workforce Analytics is relevant NOW 2. There are different ways to get started and many resources available 3. Use Workforce Analytics to show the value of HR & OD initiatives 4. Integrate Financials to align workforce and business strategies 31

32 Contact Information Moun Peterson, PhD Director of Workforce Planning & Analytics - SOLVE Pro HCFS SOLVE Metrics Productivity Benchmarks Pasadena, CA: Workforce Analytics & KPI Reporting February 8-9, 2017 Workforce Intelligence Software Workforce Intelligence Consortium