Predictive management: how to optimize human capital

Dr. Fitz-enz

Article reprinted with the permission of Dr. Fitz-enz for the Drake Business Review (Vol. #1, No.1), a semi-annual publication that helps high performing managers and executives meet the challenges in their businesses now. Dr. Fitz-enz has led the development of human capital metrics for 30 years. He is known throughout the world as the father of human capital strategic analysis and measurement. Copyright © 2008 Human Capital Source. All rights reserved.

Changing the Game to Lead Your Industry

What do Amazon, USA Today, Avon Cosmetics and McDonald’s have in common? They are examples of what Harvard Professor Clay Christensen described as disruptive technologies.

These leaders spawned new and innovative ideas that transformed an industry. Amazon changed book selling, USA Today launched a national newspaper, Avon reinvented cosmetics marketing and McDonald’s changed food service. In the face of today’s dismal markets the CEO’s mandate is to grab competitive advantage. The focus has shifted from cost reduction to top line growth, excellence in execution and acquiring top talent.1 To accomplish this, executives are struggling to anticipate the next cycle’s growth opportunities. The central question has become, is your company preparing to be the market leader when the upturn comes? Leaders rarely wait for market recovery to seek new opportunities. Instead, leaders prefer to capture opportunities regardless of the stage of the market.

The More Things Change

Despite recent market transformations very little has changed the “people game”. HR still operates in its silo, distinct from and largely disconnected from other corporate functions. Although computer technology has made HR’s job more efficient, it has not delivered strategic value because HR has not changed its management model.There has been no seminal shift in the way people are managed.We desperately need a disruptive technology in human capital management. At last there is an opportunity to make a quantum leap. It’s called HCM:21®;Human Capital Management for the 21st Century. This breakthrough was enabled by the Predictive Initiative, a consortium of major organizations committed to transforming HR into a strategic function.2 HCM:21; is both a strategic model and an operating system. The model (Figure 1) identifies the organizational entities and then operationalizes how they interact and need to be managed.

Strategic Capacity Scan

Typically, HR starts with workforce planning. It matches business plan staffing requirements with the labor pool and from there designs a strategy for filling gaps. Quite often there is no change from past practices although the marketplace has and is continually changing radically.

Yet, before you can plan, you need to know what is coming. HCM:21 starts with a strategic scan of external forces and internal factors that may affect the three fundamentals of the organization: structural, relational and human capital. Figure 2 tells you where you can expect to feel the effects on your organization. Only after this critical step can you begin to plan, otherwise you are operating in a vacuum.

Plans naturally carry with them risk. Today, more than ever, human capital planning includes risk assessment. Unquestionably, human resource management is essentially risk management. Risk management has three elements:

First, in your scan you will have listed every factor that can potentially have an impact on your organization. Cut the list down to those issues that could have the biggest negative effect on your people, organizational structure and external relations.

Second, note by each one the likelihood that it might occur on a scale of say, 1 to 3. You have some control over some factors but little or no control of others; especially those outside your organization.

Third, apply risk analysis. From importance and likelihood decide how to mitigate the effect. Can you:

• Avoid risk by postponing or not implementing something?
• Transfer the risk to a third party?
• Reduce risk by introducing controls?
• Accept the risk if the cost outweighs the benefit?

Develop a risk mitigation plan that prepares you ahead of the problem. It is similar to a disaster recovery plan. If the worst happens, you can deal with it in the most expeditious manner. This reduces damage and confusion and helps you move ahead with a minimum of distraction. Once the scan and risk assessment is completed, you have the foundation for an advanced workforce planning process. Rather than continuing to apply an industrial model of filling holes with interchangeable bodies (gap analysis), think in terms of building capability for the intelligence age. The scan told you who and what you have to compete with and where your internal factors need recalibration. Now you can make plans to build capabilities across mission critical functions.

Capability Planning

Start by subdividing the workforce into four categories in terms of valued capabilities. The four are: mission critical, unique, important and movable. Build out your plan for acquiring, deploying, developing and retaining the capabilities needed tomorrow. Follow this with an advanced succession planning system. When you have at least 75 percent of your high potential (Hi-Pos) candidates’ development programs fully operational and their replacements ready, you should see a rise in revenue growth per FTE.3 because your Hi-Pos are the key people who drive overall performance.

Process Optimization

Periodic process analysis can greatly increase both efficiency and effectiveness. It can be applied to hiring, compensation, development and retention. A sample application is staffing. In any process there are inputs, throughputs and outputs. In staffing the inputs are job applicants that come through a variety of sources such as advertising, job boards, agencies and employee referrals. The throughputs are the selection and orientation methods: individual and group interviews, testing, assessment and onboarding. The outputs are new hires who can be evaluated in terms of performance, salary progression, growth potential and tenure. The end goal is to find out which combination of sources and methods yields the best hires for mission critical jobs. This knowledge will allow you to cut your sourcing cost and improve your hit rate of exceptional hires.

Service Integration

The greatest leverage opportunity can be found in how HR services are delivered. Almost all HR departments (over 95 percent) deliver in a fragmented manner by operating in their own silos: from planning and staffing through to compensation and benefits. Although there is a general HR plan, each function develops and delivers on its own time schedule without regard for what its sibling functions are doing. Service integration is absolutely essential to high performance. It improves efficiency by synchronizing the activity of various groups within a functional unit. The secret to integrated delivery is leadership on the part of the Chief Human Resource Officer (CHRO). Functional heads may not want to give up their autonomy. They may see it as a loss of discretion and power with little personal value in return. The CHRO, with CEO support, must lead by showing how integrated delivery is best for the customer, managers and employees.

Predictive Metrics

Thirty years ago I introduced quantitative methods to what was known then as the personnel function. After a very slow adoptive rate we now see many HR departments doing some type of performance measurement. The problem is that most of them have not moved past the cost and quantity level. Typical metrics are cost of hire and development, numbers hired and trained, ratios of HR staff to employees and HR budget benchmarks. All of these can be useful as after the fact data for the HR staff. However, they focus on costly activities and not on the value adding results.

Modern analytic tools and behavioral science methods support more sophisticated levels of analysis. With HCM:21 you dig into turnover rates and discover what is causing them to rise or fall. You track the return on investment of many HR services from incentive pay plans, new benefit programs and training offerings, as well as staffing strategies. These address the issues that drive the current business operation.

The latest and most exciting measurements are leading indicators and intangible metrics.These predict what is most likely to happen in the future. With these data points, the C-level can invest strategically while minimizing risks.

Given the uncertainty of the world market today and into the future, risk management is at the core of human capital investment. High degrees of success yesterday do not guarantee similar returns tomorrow. We cannot extrapolate past data into future scenarios. We need to look over the horizon using data that has predictive capability.

Leading Indicators

There are a number of issues that can be turned into leading indicators and lagging indicators can be reverse engineered and turned into leading indicators.

Analytics

Business intelligence tools have largely been adopted by finance and marketing but seldom applied in human capital management. With HCM:21, you are able to statistically analyze connections across various human capital functions and outcomes. In the past, scanning, planning, processing and measuring were distinct functions. Now, with alignment and integration as your foundation, you see key relationships across functions.

For example, market factors such as a depressed economy will drive management to focus on customer service to retain customers. In support of retention, service incentives will be developed (compensation), recruiting service oriented people will become an imperative (staffing) and training in customer service will be required (development). When these responses are monitored, we are able to track the effects on customer retention,which leads to market share.

Likewise, across almost any human capital intervention you should be able to find correlations with operational improvements (QIPS) in production, supply chain management and customer service. Eventually, this leads to cost reductions, shorter time to market, increased sales, higher gross margins, faster response time to customers and quicker resolutions of their problems.

Operationally, the barrier has been weak alignment across functions that either was never truly established or quickly broke down. Also, within units, services have not been integrated. Siloed subdivisions are inherently not only inefficient; they also obscure natural connections and breed parochialism.

There is no longer an excuse for such operational failings. We have the behavioural science knowledge, statistical tools and computer power to make their application cost effective. The time has come when an integrated management program is more than a nice thing to have. It is a competitive disadvantage not to operate in this manner.

Now, with Predictive Management you have a tested,practical,strategic model and operating system. Communicating, sharing data, generating value, and calculating return on investment are central to the HCM:21 operating philosophy.

Changing the Game

Continually working on process improvements and making additional investments in disconnected software can only keep you in the pack. The way to break out, take the lead and drive top line growth is to come up with an entirely new way of managing human capital. It is called HCM:21. The model and strategy are being adopted by organizations around the world.

Footnotes:
1. CEO Challenge 2007, The Conference Board
2. Predictive Initiative Consortium members: American
Management Association, Accenture, Blue Shield, Ceridian,
Fidelity, Future of Work, Jeitosa, Knowledge Advisors,
Leadersphere, Monster, Oracle, Scarlett Surveys, SuccessFactors,
Target
3. Workforce Intelligence Report, 2007, Human Capital Source

Article reprinted with the permission of Dr. Fitz-enz for the Drake Business Review (Vol. #1, No.1), a semi-annual publication that helps high performing managers and executives meet the challenges in their businesses now. Dr. Fitz-enz has led the development of human capital metrics for 30 years. He is known throughout the world as the father of human capital strategic analysis and measurement.Email: [email protected]Web: www.humancapitalsource.comCopyright © 2008 Human Capital Source. All rights reserved.