“Without data, you’re just another person with an opinion”, is arguably the best-known quote of Dr. William Edwards Deming, an influential American statistician, and management consultant. Certainly, KPIs in HR – key performance indicators – are crucial to making the most out of data about personnel, and the workforce as a whole. Show It is impossible to improve at managing people if you do not measure the results of your work. If you do not define what ‘good performance’ looks like and how you can measure it, how will you find out if you’re doing well? So in business, if you don’t measure your HR performance, how will you know how successful you are? To measure success, you need performance indicators. In this blog, we will dive into the nitty-gritty of KPIs in HR, which you can also explore in-depth in our HR Metrics & Dashboarding Certificate Program. We will discuss what they are, how you can use them, and provide a framework for creating them yourself! Contents What are HR KPIs?To answer this question, we should first look at key performance indicators (KPIs). KPIs are strategic metrics. A KPI is a quantifiable measure used to evaluate how effective a company is in achieving key business objectives. This doesn’t mean that everything that you can measure is a KPI in HR. Only metrics that have a direct link with the organizational strategy can be called KPIs.
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Download our list of key HR Analytics resources (90+) that will help you improve your expertise and initiatives. Your one-stop-shop for People Analytics! Human Resources key performance indicators (HR KPIs) are HR metrics that are used to see how HR is contributing to the rest of the organization. This means that a KPI in HR measures how successful HR is in realizing the organization’s HR strategy. The HR strategy follows the organizational strategy. In other words, HR KPIs mirror organizational performance for HR, as they are defined based on the HR outcomes that are relevant to achieve business goals. These business goals are often formulated in the Balanced Scorecard. Let’s use an example to illustrate how this works. Dodgers is an organization trying to innovate in a very competitive landscape. For this reason, the board of directors decided that they will cut costs everywhere, except in the product innovation department. The question is, how will this goal be translated into HR KPIs?
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People Analytics The entire organization needs to save money, including HR. This reduction could apply to recruitment cost, for example. The cost is currently at $500,000 and needs to be reduced to $400,000. In this case ‘Recruitment cost in Dollars’ is the KPI, the current score is $500,000 and the target for this KPI is $400,000. A second HR KPI could be ‘innovative behavior’ which is measured in the annual engagement survey. Its score on a 10-point scale is currently 6.2. The target is set at 7.5 or higher. Achieving this will require quite some work! The HR KPI template could look as follows. HR can add multiple KPIs to reach a specific business goal. Each of these KPIs can be broken down into smaller goals. To realize the HR strategy, it’s best if these KPIs align. However, sometimes, they conflict. For instance, if you have to cut costs in your learning & development budget, while also trying to stimulate innovation, you are facing a difficult choice. The strategic challenge is to stimulate innovation while reducing your training budget. This is a good example of how HR KPIs help HR to realize its strategic goals and contribute to the objectives of the rest of the organization. List of HR KPIsA lot of articles that you’ll find online will list tens, sometimes close to a hundred KPIs. Don’t be fooled: most of these are simple HR metrics that are not important to track, as they usually don’t align with organizational strategy. Below are a few examples of what HR KPIs are NOT:
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Why are these not KPIs? Because they tell us nothing about effectiveness. For example, do we need 1 HR staff per 100 employees, or 1.5? Simply measuring HR-to-FTE ratio doesn’t answer that question. In short, none of these metrics will directly contribute to reaching the organization’s strategy. The KPIs used in an organization are unique. Every organization is different – and the KPIs should reflect that uniqueness. Here is a list of example KPIs to put on your HR dashboard:
Characteristics of good HR KPIsNow you know the difference between metrics and KPIs, and you know how to come up with Human Resources key performance indicators. The question that remains is “What are the characteristics of good HR KPIs?” In a 2009 paper, Eckerson describes a number of characteristics of “good” KPIs.
There’s a simpler framework that we are all familiar with that summarizes the above. The alternative, defined by Hursman (2010), is the well-known SMART acronym. This stands for
Knowing these criteria should help you in creating the relevant Human Resources key performance indicators you need for success. Average length of service is not a SMART KPI. Whilst it is easily measurable and attainable, it is not smart, relevant, or time-bound. How long an employee stays at a company in itself, does not reflect on how efficient, productive or innovative they are. It does not link in with the overall needs and aims of the business. In contrast, the internal promotion rate is a SMART KPI. It’s smart as it reflects how employees develop their skills and progress, or not. It is measurable, attainable, relevant, and time-bound. Such a KPI will show how many staff rise through the company. From a costs perspective, it is beneficial to an organization. If a company does not have to externally recruit, they save costs. During my graduate studies, I did an interview series with different HR managers. One of the questions I asked them was: what does good performance for HR look like? I still remember the answer of the first HR manager I asked this question to. She was Head of HR in a top-5 accountancy organization in the Netherlands and her answer was: “we don’t have that in HR”. When I asked her what she meant, she explained that she did her job and ran everything efficiently. When I then asked how her performance as an HR manager was measured, she said: “It’s not”. This surprised me. What surprised me even more, was that she didn’t find this strange at all. On top of that, this was an accountancy organization, numbers-driven should be in their DNA! Leading vs. lagging KPIsA final distinction to dive into is the one between leading and lagging KPIs. Kaplan and Norton (2007), the researchers who came up with the Balanced Scorecard, explain the difference in their paper. A leading indicator refers to future developments and causes. These indicators precede an event. For example, productivity is a leading KPI for labor cost. A lagging indicator refers to past developments and effects. This reflects the past outcomes of KPIs. If productivity is a leading HR KPI for labor cost, sickness rate would be a lagging KPI. An alternative lagging KPI would be the labor cost per employee. What would be the relevant leading and lagging indicator when the business goal would be the support of employees’ qualification? This is, for example, relevant when constant (re)qualification is a must to provide qualified services. In this case, the leading indicator could be time to proficiency – the quicker employees complete training, the quicker knowledge is implemented. This will assist in both productivity and innovation across an organization. The lagging indicator could be the percentage of employees who completed the qualification. As you can see in these examples, the leading indicators are often less precise but do offer interesting insight into the ongoing performance of a KPI. The lagging indicator is more precise, but only after the fact. Including these different kinds of KPIs will help in creating a scorecard that can both predict the future and track historical success. Creating an HR KPI scorecard: A real-life business caseAs we mentioned previously, not all KPIs are relevant. Not all KPIs will assist in understanding HR performance. In this section, we will give an example of how to create an HR KPI template for a recruitment department. This example is based on a real company in the maritime sector. The Western maritime sector is in difficult waters. Where 50 years ago, most ships were being built at home, these days it is much cheaper to build large cargo ships and tankers in East Asia. Competing with cheap labor and steel from China proved to be difficult for this US-based shipbuilding company. A cost-differentiation strategy was therefore not viable. This specific company decided to invest heavily in technology and innovation, knowing that most of their current client portfolio was interested in their high-tech shipbuilding skills (mostly smaller vessels) at a much higher price point. Strategic goals never happen in isolation. This example organization has to cut costs while becoming more innovative through smarter hiring.
The recruitment strategy map is shown in the following picture. The blue arrows in the template show the internal relationships between the different goals. The executive board decides the strategic goals. The HR manager establishes the HR goals. In the next step, we need to create one or more KPIs for each goal. How do you measure a decrease in lead-time? And how about your attractiveness as an employer? After defining KPIs for each goal, you need to identify your current score and your target. The resulting KPI template could look like the following. Human Resources KPI templateAnd there it is, our completed Human Resources KPI template. Based on the organization’s strategy, we’ve defined a number of KPIs that will help us reach our strategic HR goals. We’ve made them concrete by measuring our current score and by setting a target. Creating HR KPIs that are consistent and that add value to the business is a challenging exercise. When it’s done right, they enable HR to add tremendous value to the business in a proven and data-driven way. Setting goals using HR KPIs provides us with a framework that helps to make better decisions and drive strategic business outcomes. A final wordThere’s quite a lot to KPIs, as setting them requires a thorough understanding of the organization’s strategy and goals. HR KPIs are the way in which HR can best contribute to the overall strategy, as effectively as possible. To learn (much) more about how to create KPIs that align with the organization, check out our Strategic HR Metrics online course. In this course, we explore the full depth of HR metrics and provide a lot of examples. The course is taught by three practitioners, René Klep who was HR manager at Philips and teaches HRM, David Creelman, arguably one of the most seasoned experts in this field, and Mark Lawrence, People analytics leader at GlaxoSmithKline. Happy learning! |