Developing HR strategy: What a performance

In the third part of our series on developing an HR strategy, Keith Rodgers
explores the four core areas that really make or break a performance management
programme

Given the yawning gulf in perception between line managers and HR
practitioners, it is hardly surprising that performance management is one of
the hardest components of HR strategy to execute. For many managers, the whole
concept means little more than meeting monthly sales targets or the annual
inconvenience of carrying out employee appraisals.

For many in HR, by contrast, the biggest problem is actually managing the
complexity of a process that theoretically touches every single employee.

In reality, effective performance measurement does not need to be either
simplistic or overly involved. From setting goals and defining metrics to
measuring how effectively they are being met, the best results come when
organisations take a pragmatic approach.

1. Understand business objectives

One of the biggest problems in performance management is that HR tends to be
self-obsessed, adopting metrics that monitor its own operational performance
rather than metrics that help drive the business. While it is important to
track traditional HR metrics such as time-to-hire, they are not the most
meaningful measures for business managers – to an extent, all they do is
provide evidence that HR is doing its job efficiently, which most CEOs will
assume is happening anyway.

The real value comes when HR focuses on how employees can drive
organisational strategy and business success – or in other words, when HR looks
beyond its own department to examine employees throughout the enterprise.

Cheryl Fields Tyler, vice-president of consulting at the Concours Group,
points out that organisations often don’t talk about the ‘people’ part of their
business with the same clarity as they do in areas like the supply chain. She
recommends that HR should attempt to articulate how its people strategy either
makes or loses money: the more specifically HR activities are tied to the business
outcome, the better. This blunt process allows companies to define critical
success factors, which, in turn, offers an insight into where metrics should be
targeted.

Once the process moves beyond HR-specific goals, it becomes apparent that
performance management permeates every part of every business and applies to
every employee. It is not surprising, therefore, that implementing effective
systems can be a daunting task. But the key is to think big and act small. As
Fields Tyler remarks: "The biggest challenge is the sense that we have got
to measure everything to measure anything – and that is paralysing people. It
is about being clear on two, three, four or five things that really matter to
the business."

What that means, in theory, is that the performance management process
starts with an understanding of an organisation’s five or six key corporate
objectives, which are then cascaded down through the company to set
departmental and individual employee goals.

That is the theory – but in practice, of course, there’s often a big
disconnect between individual and overall objectives. Part of the problem is
that employee performance appraisals tend to be viewed purely from a localised
perspective, and are carried out primarily to monitor an individual’s progress
and meet specific needs in areas such as training and development. Although
there is no easy answer, Fields Tyler suggests that companies could focus on
the top 20 per cent of their executives, ensuring they can clearly articulate
how they contribute, at an individual level, to business performance. If they
can link personal and corporate objectives in this way, it is more likely that
they will be able to drive that through the rest of the business.

From a practical perspective, organisations are advised to pilot any new
performance management initiatives before applying them across the
organisation, and to roll them out initially in areas where they will see the
fastest return. They should also bear in mind that corporate objectives will be
reviewed on a regular basis, so local goals will need to be reviewed at the
same time.

2. Define the metrics

Having mapped out the measurement framework, organisations should turn their
attention to developing the best metrics. This is effectively about adding
detail to corporate strategy — if one of the five main goals of the company is
to increase market share, for example, the metrics define by how much and over
what period of time. As the responsibilities of each department in meeting that
goal are defined, so suitable measures can be put into place.

While this process seems simple on the surface, Monica Barron, senior
analyst at AMR Research, says organisations need to be aware of a number of
pitfalls. To begin with, they must ensure the objectives are achievable. Are
the right resources in place? Do people need to be retrained, or should new
skills be hired? And are line managers geared up to manage the process?
"Employees are going to need help, tools and resources, coaching, feedback
– key things that managers should be doing," she says. "So part of
performance management has to be developing metrics for line managers."
Above all, employees must be able to achieve the goals – even if they are
stretched in doing so – and the objectives must be within their control.

"The other important piece of this,’ says Barron, "is that there
should be no conflict between metrics." If one department is charged with
increasing market share and the other with cutting costs, for example, at some
point they will clash. This is a particular concern when HR analytics are
primarily focused on the operational performance of the HR department itself.

"That’s when you can have goals that conflict – HR may want to cut
costs in terms of hiring, but that may mean line managers can’t get the skills
they need to meet their own goals," she said.

Finally, Field Tyler warns companies to keep tight control over the both the
quality and volume of metrics. "HR organisations have a tendency to think
more metrics are better, and they tend to focus on what is easier to measure.
But often those things do not add up to business success – if I’m tracking 30
metrics, often 25 would not tell me anything about contribution to business
performance."

While HR practitioners should be able to provide drill-down analysis, the
focus should be on the top metrics. "I often find this gets
over-complicated," she says. "It is more important to find fewer,
composite metrics than to have every single aspect of business
measurement."

3. Manage data effectively

The success of any performance management initiative is influenced by how
effectively information can be gathered, analysed and disseminated across the
organisation.

Collating relevant data is a significant task in its own right, since
performance metrics cover a wide range of elements. Call centre staff, for
example, may be measured in part on the basis of customer satisfaction, sales
staff on revenue or profit generated, marketing on the success of specific
campaigns. Data will therefore need to be extracted from a number of different
and often incompatible IT systems, including HR, finance and customer
management applications. Ideally, it will then be stored in a central
repository for easier analysis.

As Fields Tyler points out, this can be an involved process, and one of the
biggest problems practitioners encounter stems from the way that data is
identified within companies. Departments will often have different ways of
describing the same data – even within one global organisation: for example,
country-specific HR departments may have different ways of identifying
leadership potential. These data models need to be cleaned up before effective
analysis can take place.

The conclusions need to be disseminated in a timely and relevant fashion to individual
employees and managers. Web-based employee portals, which provide individual
users with a means of accessing corporate information are a useful tool for
this. The most important point is that the data should be presented in a way
that makes sense to the recipient, so they can act on the conclusions – it is
counter-productive to distribute reams of information and expect employees to
extract what is relevant.

4. Close the loop

Performance management should never be seen as an objective in its own
right. While metrics give managers insight into performance, it is critical to
ensure the outputs are acted upon. Therefore, data should be fed back into the
operating environment, where managers can see if individuals and departments
are taking the findings on board.

At the same time, performance management must be tied to reward if
individuals are to be effectively encouraged to make improvements.

Case study – B& Q
Selling HR measures to the board

For Mike Cutt, HR director at DIY
retailer B&Q, effective measurement is "a Godsend" when it comes
to board meetings. Just as his fellow officers arm themselves with data to
justify their claims for increased spending in areas like marketing or IT, so
HR is able to support its own arguments at board level for major issues like
compensation increases.

The metrics B&Q has developed provide an insight into the
power of HR performance management. Cutt distinguishes between operational
metrics – like sales, profit or cost – and strategic measures. The former
provide important measures of day-to-day activity, while the latter underpin
B&Q’s efforts to develop its business model for the long-term.

By way of example, Cutt says every B&Q store is constrained
by the number of customers it can serve in peak periods. The company will
ultimately reach saturation point in the UK market for the number of new
warehouses it can open, so while there is plenty of room for growth now,
B&Q is examining ways it can increase the average transaction value (or
sales) per customer while keeping its existing cost base static – ie, generate
more revenue from the same number of customers.

While factors such as pricing structures or the range of goods
sold are key to this process, HR also has a direct influence in developing the
strategy. It can, for example, work with stores to help them free-up more
customer advisers to talk with customers in the aisles. It can also increase
the knowledge levels of shopfloor staff, training them to advise customers on
the differences between cheaper and more expensive goods, and it can help
service-oriented customer advisers develop sales techniques. At head office
level, meanwhile, it can work to change the skills mix – for example, by hiring
people to set up new financing options.

"[This is] something we can track in our Balanced
Scorecard," says Cutt, "All organisations will have operational
performance measures, and most will cover strategy. But not all will have
concise measures of how strategy is progressing."

Alongside its strategic measures, B&Q employs a range of
metrics to examine the performance of HR itself. Its business model assumes
that hiring the right people will allow the group to provide appropriate
services, so that customers buy what they are looking for and enjoy the
experience. Each component of that model is monitored. Employee engagement, for
example, is measured twice a year through a census, allowing the group to look
at individual stores, see how their responses have changed and compare them to
others in similar environments.

While its internal processes are run on an SAP HR system,
implemented in partnership with Arinso, it has outsourced part of its analytics
and carries out engagement research through Gallup. The outputs can be measured
against other retailers and non-retail organisations in the UK and the US.

These factors are complemented by a range of employee-specific
metrics (such as absence rates) as well as broader business performance
measures, such as customer satisfaction. As such, B&Q’s experiences reflect
the fact that effective performance management is enterprise-wide.

Mike Catt and his team won the
Deloitte & Touche Award for Innovation in Measuring Human Capital in the
Personnel Today Awards 2002.

Take-home points…

1. Real value comes when HR focuses on how employees can drive organisational
strategy and business success

2. Employees must be bale to achieve the goals set by the organisation

3. It is counter-productive to distribute reams of information and expect
employees to extract what is relevant

4. Performance data must be acted on

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