- Workforce costs can total up to 70% of operating expenses, making it a cost to manage carefully.
- People analytics, a data-driven approach to recruitment and workforce management, has proven popular among large companies, and smaller companies have recently adopted it to help understand and control expenses.
- By focusing on several high-cost areas of human capital and their applicable metrics, finance teams can work with HR partners to identify where there may be room for savings.
Ah, the endless business lessons we glean from "Moneyball." In 2002, the $41 million payroll of the Oakland A's went the distance with the $125 million payroll of the Yankees due largely in part to the analytics initiative involved. To embrace that cost-effective spirit and play above your payroll, consider integrating aspects of people analytics into your overall finance strategy.
Gena Cox, PhD, PCC, founder and CEO of Feels Human,
Sue Marcus, regional president at Randstad Sourceright North
What Is People Analytics?
Also known as workforce analytics, talent or HR analytics, people analytics involves “collecting, analyzing and reporting data to improve people-related decisions and, in turn, improve individual and organizational outcomes,” according to researchers Vicenc Fernandez and Eva Gallardo-Gallardo.
People analytics, and analytics in general, is broken into four types:
- Descriptive: gives insight into past behavior
- Diagnostic: helps define the “why” of behavior
- Predictive: forecasts future behavior
- Prescriptive: provides suggestions on how to influence or address behavior
The applicability of people analytics spans the employee lifecycle, with uses commonly cited in the recruiting, interviewing, development and retention stages. Examples of people analytics include Credit Suisse’s use of diagnostic analytics to decrease attrition of women at the company, IBM’s application of predictive analytics to determine flight risks and Starbucks’s employment of predictive and prescriptive analytics to help combat biases in the promotion process.
We’ve covered how people analytics can improve workforce management and conserve human capital. Now it’s time to see how it can produce savings — that is, how tracking metrics around talent can help finance teams optimize their spend around human capital.
Application of People Analytics
The business case for a finance leader’s participation in people analytics is compelling. Studies link CFOs’ involvement in workforce analytics with higher profit margin and share prices, as well as stronger business performance overall. Finance typically has the most advanced analytics capabilities in a company and can help HR analyze talent data along with revenue, profitability and other operational data.
For finance teams still hesitant to enter the people analytics realm, there is one more draw: the cost control potential. Total human capital costs, or total cost of workforce, can amount to nearly 70% of operating expenses. There are the typical labor costs, like employee wages, benefits, payroll and related taxes. And then there are other HR costs flying under the radar, like cost per hire, that also comprise a significant chunk of change. With human capital ranking as the largest cost in an organization, with a few rare exceptions, the finance team’s involvement in people analytics makes fiscal sense.
A successful people analytics-fueled cost control initiative may seem reserved for large companies with copious amounts of data, people, revenue and other resources. However, the takeaways still apply to smaller organizations.
“Smaller businesses can use these same ideas by making sure they measure and track [HR KPIs] like turnover patterns,” said Gena Cox, PhD, PCC, founder and CEO of Feels Human, Inc. “Then, they should understand how changes in those [KPIs] relate to their revenues and other financial or operational outcomes. In other words, look at the financial data and the human data simultaneously.”
Track HR KPIs, then understand how changes in those KPIs relate to your revenue and other financial or operational outcomes. In other words, look at the financial and human data simultaneously.
Using components of people analytics to hone your talent spend is a matter of compiling the data and then determining where to focus. Companies that outsource aspects of their HR function will likely gain insight into their data and analytics through their partners.
"If companies are working with an outsource provider who is managing their contingent workforce or their full-time hiring, [the provider] should be able to provide [people] analytics," said Sue Marcus, regional president at Randstad Sourceright North America. "Look at your partners and determine how you can team together to create those dashboards for your business. That’s certainly an easy way to [get insights] without having to make investments internally."
If your company conducts hiring and workforce management internally, your current tools may offer insight into HR cost drivers. Many ERP systems have implemented people analytics dashboards to help leaders understand attrition, hiring metrics, employee cost and employee engagement by geography, business unit, and manager. Payroll providers, human resources management systems (HRMS), learning platforms or recruiting platforms are also likely to offer analytics tools to make sense of the data they collect.
"Just leveraging and understanding which data you have available, which systems you're using today, and which capabilities those tools have around visualization are all certainly starting points," said Marcus.
Understanding which HR data you have available, which systems you're using today, and which capabilities those tools have around visualization is a valid starting point.
Eventually, as the company grows and your people analytics program and technology advance, it might be worthwhile to look into next-generation tools, like survey tools that automatically compute correlation between employee satisfaction surveys and standard HR data like salaries and promotion rates or analyze the sentiment behind an employee's written responses. But for now, start with what you have while keeping an eye on the future.
"One of the recommendations we always have as we're working with new customers is, first and foremost, you want to start with the end in mind," said Marcus. "If, for example, you're setting up your applicant tracking system (ATS), vendor management system (VMS) or human resource information system (HRIS), understanding the data points that you're looking for and what you want to be able to measure [in advance] is critically important."
You can then set up technologies and their workflows in a way that will provide access to your desired reporting, dashboards and visualizations.
For those with previously-implemented systems, the flood of unfiltered data may seem overwhelming, but the advice remains the same: Start small. Consider asking leaders to name two or three people-related issues at the company, like retention or engagement. Choose one project that will bring business value to focus on first, and build from there.
More Resources from NetSuite
Download our free spreadsheet template to calculate metrics like new hire turnover and absenteeism rate, then get a visualization of your workforce data.
Instead of using a template, automate the creation of workforce analytics dashboards with systems like NetSuite’s human capital management tool.
Tracking High-Cost Areas of HR
Common issues to start with:
Replacing an individual employee costs one-half to two times their annual salary, according to a conservative estimate from Gallup. Companies’ average turnover rate is 18%, according to the Society for Human Resource Management (SHRM)’s conservative estimate. So, a 100-person organization paying its employees an average of $50,000 per year could lose $450,000 to $1.8 million due to lost productivity, new hire training and recruiting.
Employee turnover breaks down into several subsets:
- Voluntary turnover, which refers to employees who willingly choose to leave.
- Involuntary turnover, which refers to employees who are terminated due to poor performance, behavioral issues, a reduction in headcount or changing business needs.
- New hire turnover, which refers to new hires leaving the company. Unfortunately, it’s not uncommon: Ten times as many employees quit at the one-year mark compared to five years in, professional services firm O.C. Tanner estimates.
Look at company records and determine your turnover numbers from years past. If any of the current numbers seem high in comparison, identify root causes. A high voluntary turnover rate among employees and new hires can indicate issues like problematic culture, a lack of opportunities, poor management or onboarding flaws. Involuntary turnover can be productive when it eliminates low performers or “bad fits.” However, consistently high involuntary turnover implies expensive hiring mistakes. Tracking these metrics and having HR work to pinpoint the causes through measures like exit surveys can cut down the oftentimes exorbitant expenditures and other detrimental effects of turnover.
Turnover Metrics to Track
Overall turnover rate
(Number of separations / Average number of employees) x 100
Voluntary turnover rate
(Number of voluntary employee separations/ Average total number of employees) x 100
Involuntary turnover rate
(Number of involuntary employee separations / Average total number of employees) x 100
New hire turnover rate
(Number of new hires who left during the period / Number of new hires at the beginning the beginning of the period) x 100
Inefficient recruitment processes are frustrating for candidates and a major drain on a company’s finances. The average cost-per-hire for each recruit is $4,425, according to SHRM. The average cost-per-hire for executives is $14,936. With labor and skill shortages a major issue now, efficiency in hiring plays an even bigger role from a financial standpoint in terms of both recruitment cost and costs associated with short staffing.
Unusually high recruitment metrics — like cost per hire, time to hire and interviews per hire — significantly impact the bottom line.
“There is revenue loss by having roles unfilled, and it can impact the efficiency of your workforce,” said Marcus. “Your hiring manager community [might be spending too much time] on the hiring process, which you can identify if you're measuring how long it takes for roles to be filled and how many interviews are taking place. It’s also important to understand and have visibility into your cost-per-hire, whether it be contingent or permanent, and be able to drill down to understand what goes into that and where there’s opportunities for better efficiency to reduce spend.”
In one instance, a Randstand client was struggling to fill roles quickly, racking up costs and reducing productivity. Looking more closely at the recruiting process, Marcus’s team concluded the hiring managers were evaluating 18 applications to make one offer. To improve efficiency, they identified the suppliers that were providing quality talent and worked directly with them on a clear profile of the ideal individual for the role. Through that process, the client reduced resume review from 18:1 to 9:1, reduced the percentage of jobs open for 30+ days from 50% to 10% and improved time-to-fill by seven days.
Unfilled roles have a ripple effect across an organization, impacting everything from employee morale to productivity to revenue. Tracking the relevant metrics can help diagnose if sluggish recruitment just needs an efficiency boost — or a total overhaul of their scope
Recruitment Metrics to Track
Cost per hire
Total recruiting cost (internal + external) / number of total hires
Time to fill
Number of days job positions are open / total number of job positions open
Time to hire
Number of days elapsed from time job is posted to first day on the job
Source of hire
Number of hires / total number of candidates from a source = percentage of hires from a particular source
Application completion rate
(Total number of completed applications / total number of candidates who started an application, whether they finished it or not) X 100
Interviews per hire
Numbers of interviews conducted by hiring manager / Vacant positions filled
Interview to offer rate
(Number of unique offers extended / total number of applicants interviewed) x 100
Offer acceptance rate
Number of offers made / Number of offers accepted
In larger companies, there is one metric which can provide valuable insight into the recruitment process but isn't necessarily calculated with a set formula: quality of hire. Determining quality of hire requires a bit of creativity from the finance and HR teams. Companies tend to choose their metric based on priorities like performance ranking, time to fill, ramp-up time and hiring manager satisfaction on a numerical scale.
So, for example, the formula may look like:
Quality of hire = (Performance ranking + Hiring manager satisfaction + Time to fill + Ramp-up-time) / Number of indicators
Once you’ve identified your prioritized indicators, keep them the same and use the same scale/units for measurement to ensure consistency.
Here’s a fun yet slightly concerning fact: In 2013, the percentage of Americans who believed there was at least a small chance of a zombie apocalypse was greater than the percentage of individuals worldwide who said they were engaged in their work, at 14% and 13% respectively. Gallup estimates that employee disengagement costs the U.S. economy as much as $350 billion every year. The same research indicates that disengaged employees have a 37% higher rate of absenteeism, 18% lower productivity and 15% lower profitability. A disengaged employee costs an organization approximately $3,400 for every $10,000 in annual salary, according to Gallup.
“Employee engagement is directly related to customer experience and business profitability. Therefore, it should be measured regularly and be used as part of overall business intelligence,” said Cox. “One of my clients observed that gross margins were 2 percentage points higher in the parts of their business where employee engagement was higher than in the rest of the business.”
Understanding employee engagement levels and identifying causes of disengagement can involve a range of metrics gauging happiness, performance, satisfaction and more. To start, look at:
Tracking your overall retention rate, or percentage of workers who remain employed over a specific period, is useful in itself. However, using this formula for various segments of the organization can provide more granular insight. For instance, calculating the retention rate of various teams, groups and departments (i.e., retention rate per manager) can lend insight into the effectiveness of leadership and management.
While absences are normal and some should be encouraged — hello, preventing burnout! — frequent, unexcused absences can cost you. Tracking absenteeism rate can identify disengaged employees, plus shed light on the direct and indirect costs of those absences.
Employee net promoter score (eNPS):
For further insight, have HR institute employee satisfaction surveys like eNPS so you can gauge your proportion of dissatisfied employees and get a quantitative measure of employee satisfaction. With eNPS, employees are asked how likely they are to recommend the organization as a place to work on a scale of zero to 10. The ratings are then categorized: Those with a score of 9-10 are “promoters;” 7-8 are “neutral” or “passives;” and 0-6 are “detractors.”
It may not be as disastrous as a zombie apocalypse, but low employee engagement can be disastrously expensive and inefficient. Involving the finance team in tracking engagement trends and associated expenses can be integral to keeping HR spend low.
Employee Engagement Metrics to Track
Unplanned absences / Total planned workdays
(Employees at end of period / employees at start of period) x 100
% of total promoters – % of total detractors
Similar to quality of hire above, we come to a metric that can provide valuable insight but doesn’t have a universal formula: employee productivity rate. This metric generally uses the formula output / input, however, what constitutes “input” and “output” varies based on job position and key indicators.
For instance, a company might calculate sales revenue generated per salesperson like this:
Employee productivity rate = (Sales revenue (Output) / Number of salespersons (Input)
A salesperson whose individual contribution to sales revenue lags below the average may require some coaching, and those with higher contributions may warrant raises.
The bottom line
People analytics has trended on companies' to-do lists for years — but with more workforces going remote and implementing new tools to succeed in a digital world, now is the time to pull the trigger. You track the metrics around everything in your business to make sure everything is running cohesively. With people being a company's top asset, doesn't it make sense to run the numbers there too?