How to Measure an HR Initiative’s Business Impact

HR departments that utilize analytics for measuring and improving upon their initiatives have an advantage over the competition and make better decisions.  This is the root of what it means to make data-driven decisions.  Using data for both measuring business impact and implementing HR initiatives will provide HR leaders, CEOs, CFOs, proper data, and evidence that their initiatives have a return on investment and are working as planned.  This allows HR leaders to make a business case for their initiatives as well as improve an HR department’s efficiency.  However, only about 10% of organizations have a strong HR analytics team in place, and unfortunately, development towards improving an HR analytics function is often slow.  In this article, we will discuss how to measure business impact and the data that needs to be collected and analyzed. 

Measuring Business Impact

What does a business impact mean? In basic terms, the business impact is primarily operational and financial impact of processes and functions.  A business impact could be about potential loss or gains, but when spoken of as a loss scenario it is in the realm of risk assessment. It does not need to be only about loss or disruption scenarios, however for HR these loss scenarios also important to consider when creating mitigation strategies (one such scenario is adjusting operations to mitigate issues associated with Covid-19). For determining business impact, it is important to have financial and operational data associated with certain HR initiatives.  

Productivity Example

For example, you want to measure whether productivity was improved by some HR initiative “x”, a metric you would want to begin with would be a productivity metric.  Here is the basic metric formula:

Productivity=Revenue / Labor Hour

Now, you may want to do some null and alternate hypothesis testing, but you will need to constrain your data a bit by either quarter or prior year, or averages for more sophisticated analysis, but it might be asking too much to demonstrate some sort of correlation with a potentially small data set.  However, if analyzed over a course of a year or months, it might be worthwhile to conduct a more sophisticated test.  However, if an HR professional found that productivity did improve by 5-10% based on initiative “x”, it might indicate that the initiative had a modest impact on productivity, or at least on the surface demonstrates some sort of productivity improvement.  However, to increase one’s confidence in the analysis it does require some hypothesis testing, mostly due to other factors or trends that might counter the impact of initiative “x” (a quick example would be a general trend of increasing productivity over time, prior to initiative “x”, or some other explanation for an increase in productivity).  

Employee Engagement Example

Employee engagement is one of the major items almost every HR professional wants to keep tabs on that directly has a business impact.  The HR professionals must look for ways to measure employee engagement within their organizations, here are a few metrics to consider.  One of the key indicators for employee engagement is the turnover rate.  Generally, the overall annual turnover rate should be 10% or less.  Higher turnover rates limit ROI, with the general break-even point for hiring an employee is roughly five months to a year depending on the role and organization.  Here are two formulas to consider for turnover:

Turnover Rate= Number of separations per time period / Average number of employees during the time period

This is a basic turnover rate, there are other considerations for a deeper dive, like turnover of new hires, turnovers based on performance, or even failure to start rates.  High turnover rates are a reason to look at employee engagement, and then implementing initiatives to improve them.  The second formulas are the costs of turnover and cost per turnover:

Cost of Turnover=Total costs of separation+vacancy+replacement
Cost per Turnover=Cost of Turnover / Number of positions due to separation

Turnover costs and rates help make a business case to improve employee engagement and the potential financial impact it has on organizations. To measure the impact of an employee engagement initiative using the cost per turnover and cost of turnover would be key.  If an employee engagement initiative “x” led to a reduction of turnover rates and produced an over savings of “y” over a year, would be a rather good indicator that it was working.  Of course, it would require more statistical analysis to improve overall confidence that “x” was working.  

A Seat at the Table

Measuring the business impact of an HR department is important, one to help justify the costs of HR departments, to help manage the workforce strategically, providing HR a seat at the shareholders’ table, and more.  Proving and demonstrating the financial impact of HR for organizations make the HR partners in business rather than a cost of doing business.  

beepnow is dedicated to assisting HR through the use of IT and digital transformation.  We believe in improving work through the use of data.  For help with improving employee engagement, productivity, performance management, and more, please contact us to schedule a conversation. 

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