This is a supplement to a recent Ezine article of mine called "Creating a Leadership Development Blueprint for Your Organization." In that previous article, I said our Human Resource (HR) department provided the "life" of our program. What that meant is their encouragement to create a work performance measurement model within the operations division that would fit within the bank-wide performance assessment process already in place provided us with a great learning tool.
HR gained much by that encouragement because of the increased credibility of the leaders when making recommendations for promotions, salary increases, bonus, or simply annual wage increases. As the credibility of the operations leaders increased, the "defensibility" of any actions they took increased which made Human Resources very happy!
Other valuable contributions of HR to this program were:
- Leading the "Ask HR" segment of every monthly leadership meeting. They also made sure they sat in the front row and were highly visible and accessible.
- They assisted first-level supervisors with interviews of applicants.
- They made an effort to attend every presentation made by participants within the existing Leadership Development (LD) program such as project results and financial proposals as well as quarterly meetings with the participants in the Future Leaders program.
Their very active support for the program was explained one day by one of their key people:"As our division gains more high quality leaders and we have fewer remaining 'bosses', our headaches diminish. So actually we are being very selfish: it's in our best interests to help you make our jobs easier!"
Useful Metrics
Progress in any successful business environment depends on the presence of reliable and meaningful metrics. Without some method of measuring progress toward predetermined goals, we will have no method of knowing if we are making progress or even going in the right direction.
Your organization should already have some meaningful metrics in place through which they monitor their progress. Many of these can be used to measure the impact of your LD program. We suggest that you preserve as many scores as possible that coincide with the introduction of your LD initiative. This way, you have a benchmark against which to measure the impact of what you are doing.
First a caution. Look back at prior business performance trends so you will have some indication of an expected baseline of performance that will occur during the same time period forward from the introduction of your initiative.
In other words, you still want to know what levels of performance are forecast without the LD program so that anything above those expected levels are probably attributed to your leadership initiative. (Results should begin to show about 3 months in if you're diligent with metrics.)
Another warning is something called the Hawthorne Effect. Briefly, this came from a work study which was conducted in the early days of management science at a production plant near Chicago. The intent was to study the impact of various amounts of illumination on productivity.
Strangely, regardless of how the light levels were manipulated, production kept rising until it become so dark that workers literally could not see what they were doing well enough to continue and production finally fell. After much analysis, it was determined that they workers were simply responding to the attention they were getting being studied, not to the amount of illumination.
All of that to say this: Any early improvement in performance at the beginning of the program may just be the attention they are getting and the novelty of the situation. Do not put too much stock into the early positive numbers until they have created a trend of perhaps three to four months. Long enough for the novelty to wear off.
If you do not have as many metrics as you would like, here are some things to consider.
There is an old management saying that typifies the perceived value of measuring things: "What gets measured gets done."
Since long-and short range goals are built around metrics, as well as our methods of tracking progress toward them, it is very desirable that someone considering the installation of a leadership development program - this is probably someone from Human Resources - become more familiar with them.
Unfortunately, there are no HR profession-wide agreements on what to measure and how to do it. Unlike established professions like CPAs, Financial Planners, or scientists, where there are universally agreed-upon methods for measuring nearly everything as well as the reasons to measure those things, there are no such standards yet for HR Professionals.
The evolving profession of Human Resources is not that far away from its roots as the Personnel Department whose primary functions were to recruit, hire, and fire. As it matures, those universally understood and applied metrics will begin to appear and solidify as part of the body of knowledge.
So if you (may we call you a HR Strategic Partner?) are considering the installation of a program like this, you may wonder, "What metrics should we use?" There is a simple and obvious answer here. It's from Alice in Wonderland" and involves the whimsical philosopher, the Cheshire Cat.
"One day Alice came to a fork in the road and saw a Cheshire cat in a tree. 'Which road do I take?' she asked. 'Where do you want to go?' was his response. 'I don't know', Alice answered. 'Then', said the cat, 'it doesn't matter. When you don't know where you are going, any road will take you there.' (Lewis Carroll, Through the Looking Glass or the Adventures of Alice in Wonderland)
The question, "what metrics should we use" is basically the same as Alice asking, "which road do I take?" And, like the Cheshire Cat, our answer is basically the same: "When you don't know what you're measuring, any metric will work."
A very critical thinking process that is essential for a HR Strategic Partner is to consider the cause-and-effect sequence of events that lead to any outcome. Always ask yourself, "What led to the outcome we saw?" or "What needs to happen to lead to the desired outcome?"
The reason we mention the "cause-and-effect sequence" is this: we determine which metrics we should use by asking, "what outcomes are we talking about?" ("If you don't know where you're going, any road will take you there.") In other words, just because we CAN measure something doesn't mean we SHOULD!
The metrics we use in business should always be in support of our organizational goals. If the organizational goal next year is an increase in profits by 5%, then the HR Strategic Partner should ask, "what activities and their included measurements can lead to a 5% increase in profits?"
(A public sector organization's goal may be to reduce expenses by 5% next year. Since the public sector does not measure profit, they can and should measure efficiency which can lead to a reduction in expenses.)
Typical areas for improvement can be those monitored by the bank in our earlier article:
- Wage expense dropped by 18%
- Overtime expense from 8.34% to 2.3%
- Productivity increased by more than 20%
- Accuracy increased by 3%
- Corrections and adjustments ("rework" in non-bank jargon) dropped 51.5% and 8.2% respectively.
It is easy to see how that much of a reduction in expenses would go directly to the profit line in a business.
If you feel there are not enough metrics to help you document the impact of improving leadership in the organization, here are a few that may be useful to build a business case for the program. These are some common HR metrics that are used in different places for different reasons. You can decide which works best in your situation.
Remember two key criteria here:
1. Only measure what we NEED, not what's easy. This is a variation on saying just because we can measure it doesn't mean we should. (99% of the time the data we need supports decision making. The remaining 1% of data collection is for government data which doesn't necessarily support business decisions.)
2. Only collect data that helps make decisions toward business goals.
Measurements that may be useful for you are:
- Human Capital Return On Investment [we will refer to it as "HR ROI"]
- Revenue per Employee [RPE]
- Workforce Development Ratio [WD ratio]
- Profit per Employee [PPE]
- Labor Cost as a Percentage of Revenue
Please remember that trends in scores tell you much more than just a single measurement. These metrics are useful only to determine trends of things getting better, worse, or not changing at all.
Human Capital ROI (HC ROI)
The rationale for this is to illustrate the relationship between human capital investment, productivity, and profitability. HC ROI is the pre-tax profit an organization generates for each dollar invested in regular employee pay and benefits after non-human expenses are removed. Also note the organization must separate compensation and benefit expenses from normal operating expenses for this calculation to work.
HC ROI = (Revenue - operating expenses - (compensation + benefits costs))/ (Compensation + benefits costs)
Sample:
Revenue = $23,432,819 Operating expenses = $13,587,952
Compensation = $2,975,218 Benefit costs = 32% of compensation costs
HC ROI = ($23,432,819 - $13,587,952 - ($2,975,218 x 1.32))/($2,975,218 x 1.32)
HC ROI = ($23,432,819 - $13,587,952 - ($3,927,288)) / $3,927,288
HC ROI = $5,917,579 / $3,927,288 = 1.506
You may ask: "So what does the 1.506 mean?"
The answer is, "Nothing by itself. It's just a data point for reference. We will need many more to create a trend so we can tell if it is changing in a way that helps the business or harms the business."
Revenue per Employee [RPE]
This metric allows a company to determine its revenue per employee (full time equivalent abbreviated as FTE). This is widely considered a basic measure of a company's productivity. When combined with the Workforce Development Ratio (the next measurement), it allows a company to determine the impact of Workforce Development initiatives on the bottom line.
For example, if your company's RPE increased by 8.3% while the WD ratio has increased only 2.25%, it would indicate that you are getting a good return on your WD efforts.
Sample: RPE = Revenue/FTE There are 147 FTE employees and revenue is $23,432,819
RPE = $23,432,819 (revenue) / 147 (FTE employees) = $159,407 per employee
Executive question to the HR Strategic Partner: What is the easiest way to increase the RPE ratio?
HR Strategic Partner answer: If there are fewer employees across which to spread the revenue, the RPE will increase. (Note: Although it may be the best business answer, it may not be the best "human" answer. This takes a lot of careful consideration.)
A warning here is that the RPE can be manipulated to produce favorable outcomes by reducing the number of FTE. Although managing the size of the work force is a business obligation, a HR Strategic Partner will caution the executives about cutting "too close to the workforce bone" because there is a critical mass of employees that must be present to sustain the revenues.
As you become more skilled at measuring work efficiency and the productivity of employees using the measurement examples we have present in this manual, it will become easier for you to define that necessary critical mass of employees.
Additionally, as your Leadership Development program begins to gain root in the culture, you should start seeing the RPE number getting better without a reduction in workforce.
Workforce Development Ratio (WDR)
This identifies the ratio of the entire budget that is invested in workforce development. It is more important that the factors a company uses to determine the WD factors be consistent than "philosophically pure".
For example, whether a day spent in training class should be broken out as a WD expense or remain as a wage expense is less important than we consistently calculate it the same way every time!
WDR = WD Expenses / Total Expenses
Sample:
Operating expense budget for this year = $13,587,952
Compensation + benefits costs = $3,927,288
Workforce Development budget = $478,500
WDR = $478,500 / ($13,587,952 + $3,927,288)
WDR = $478,500 / $17,515,240
WDR = 2.73
I caution against the use of this unless you have a strong training program that:
- Allows you to document how the training supports the business goals
- Has a secure learning assessment (test) at the end of each training segment (Note: our website can provide this for you) with results documented
- Implements a method of reinforcing the training back on the job.
If you cannot show evidence of a consistent and competent training design, you will have handed the executives a big budget cutting target.
They may see this money spent as a wasted expense, not an investment in their workforce.
Profit Per Employee (PPE)
This takes the pretax profit an organization generates and attributes this to each FTE. This metric provides an integrated picture of productivity and expense control efforts.
Like the previous metric, combining this with the WDR is another way of determining if WD efforts are having the desired results.
Sample:
PPE = Pre-tax Revenue / FTE
Pre-tax revenue = $23,432,819
FTE = 147 employees
Operating expense for this year = $13,587,952
Compensation + benefits costs = $3,927,288
Profit = Pre-tax revenue - operating expenses - (compensation + benefits costs)
Profit = $23,432,819 - $13,587,952 - $3,927,288
Profit = $5,917,579
Profit per Employee (FTE) = $5,917,579/147 = $40,256
Executive question to the HR Strategic Partner: "If our WDR has increased from 2.73 to 3.41 while our PPE has increased by 9.74%, is that good news, bad news, or no big deal?"
HR Strategic Partner answer #1:
A WDR increase from 2.73 to 3.41 is an increase of 26.3% [(3.41-2.73)/2.73]. If the PPE grew by 9.74%, I would want to know how much the PPE could have grown if the WDR number wasn't so high since I do not have much faith in our workforce development (training) capabilities.
Since I have little faith in them, that's BAD NEWS!
Or HR Strategic Partner answer #2:
Since I think we are on the right track in developing our training capabilities, I think that by sharpening our workforce development skills, we can get that number lower which should lift our PPE slightly.
Since I like the way the training is evolving for the better, it's GOOD NEWS for now and I think it will get better quickly.
This should also help you see how valuable a strong workforce development resource can be.
Labor Costs as a Percentage of Revenue
This looks at the percentage of revenue dedicated to compensation and benefits costs for regular employees. It provides insight into an organization's benefits and compensation programs.
Over time, this measurement can show if the organization is obtaining a higher or lower return on dollars invested in the workforce. Combining this with the WDR, the RPE, and PPE is another way to determine if WD activities are positively affecting your organization.
Sample:
Given these conditions:
- Our WDR has increased from 2.73 to 3.41
- Our PPE has increased by 9.74%
- RPE has increased 12.76%
- Labor costs $3,927,288
Executive question to the HR Strategic Partner: If our labor cost as a % of revenue has remained relatively steady, is that great news, good news, or no big deal?
HR Strategic Partner answer: If labor costs are staying steady with revenue - the percentage of revenue, we are not making much business progress.
The best situation is when we develop our workforce and work processes to maximum efficiency and productivity so revenues will grow at a FASTER RATE than labor costs. That way, the % of labor costs are declining.
Sample
Labor Cost as a % of Revenue = Compensation + Benefits Costs
Revenue
Labor Cost as a % of Revenue = $3, 927,288 / $23,432,819 = 16.7%
Lessons Learned
Every meaningful project should include a "Lessons Learned" segment in its wrap up. We will do the same here in a stream-of-consciousness mode which is one of the easiest methods of conveying information.
These items are in no particular order but are important to mention within the context of creating a Leadership Development blueprint.
- "You can't do things the way you always have and expect different results"
- Attributed to Albert Einstein as a definition of insanity, it makes a lot of sense here. Many organizational cultures are deeply rooted in the past and it will not be easy to install a program like this too widely at first.
- Try it in a smaller unit with a very strong executive champion who will support the new ideas that you are hoping will lead to new results.
- Training without a leader's involvement before and after the event is a waste of time and money
There is simply no way this program could have succeeded without the weight of our executive sponsor behind us. He made sure that "What have you done to develop your people since our last meeting?" was asked at every staff meeting he had and insisted that his direct reports include it as a fixed part of their agenda, too.
- Information and knowledge are not the same: we can speed information gathering but cannot speed getting the experience that leads to knowledge
- The fact that a participant can get them easily, study them intently, take an online test, and receive a certificate of completion in a matter of hours does not mean they have knowledge of the subject.
- That only comes from experience gained by applying the concepts taught. Please do not allow someone to create artificially early expectations of results.
- Patience - it may take at least 6-12 months to see improvements in the participants
It may take a while for people to feel safe enough in their understanding of the material and their trust in their leaders to begin applying what they have been taught. (The presence of a strong executive leader will speed this transition.)
Once they begin to apply it, it may take some time for the changes to ripple far enough, long enough, and strong enough to become measurable.
Think of this like planting a flower garden. You place the seeds in the ground, water it and nurture the area as much as you can and have faith that you have done it right and the shoots of new plants will soon begin to appear. You do not dig it up to see if it's growing!
- Many parts of this program are simultaneous, not sequential. Don't expect nor always insist on a linear pathway.
- As participants moved farther into the program, some seemed to grasp material faster than they had earlier. Their questions began to become more relevant and work specific.
- And as much as we wanted to control the growth and direction of the program, it began to have a life of its own and we were getting requests for participation from areas outside of Deposit Operations.
- There must be a "visible" structural component and an "invisible" cultural component for this to succeed.
The visible component was the structured sequence of progression through the freshman - senior levels with specific milestones along the way. This provided participants with a sense of accomplishment and could measure their progress against friends in the program.
The invisible cultural component was the belief that a leader could try something new, that making a mistake trying to improve a situation would not be a career killer (see Leadership Principle #7 in the previous article), that managers were being asked by their superiors "what have you done to develop your employees?", that a legitimate climate of change for the better was sweeping the division.
- You must be willing to allow participants to fail as part of their learning process. Could your organization tolerate temporary failure?
- If your organization's first reaction to an employee mistake is to launch a search for the guilty, you will never become better than you are today.
- Developing leaders requires pushing decision making as low as possible; are you willing to allow them to...
- Prepare and manage their part of the budget?
- Authorize expenditures up to an amount?
- Learn how to forecast market demand and capacity in relation to their productivity?
- There IS NO CORRELATION between the cost of your LD program and the results you should get!
Results vary DIRECTLY with the amount of training application, discussion, feedback, and management support within the organization. Do not let some high pressure sales person with a big corporate training name behind them make you believe it.
- You must roll out the program from the top down.
Although the most senior levels probably will not be willing to go through an entire course, you can give them the course outcomes and show them what to expect as a result. It is important they understand what is in the courses and what their subordinates will be learning. (If they don't know what's in the material, how can they reinforce it?)
Mid-level managers must go complete all of the courses but may balk at being awarded the freshman-senior levels of completion. Try to help them understand they are the role models for the lower leadership levels and it is an inconsistent message to show "do as I say, but not as I do."
The more examples that the lower leadership sees of the higher levels "buying into" the program, showing up in monthly meetings, and asking what they have learned lately will speed the emergence of a leadership culture in your organization.
Then, as current leaders in the program move upward and their slots are filled by graduates of the Future Leaders program, you will a constant improvement in your profit numbers.
- A strong HR REPRESENTATIVE to provide the 'life" of the program
This is what a strong HR presence did for our program:
- Allowed modification of the existing performance assessment process within our division to include locally-developed measurable standards and self-monitoring opportunities for employees.
- Added requirement for employee development evidence by leaders and employees as core performance elements within our division.
- Required and enforced quarterly progress meetings with LD program participants and their leaders within our division.
- We devised a series of minimum questions to ask at quarterly performance progress meetings with employees. The emphasis was to put the responsibility for their goals on the employee's shoulders.
The first quarterly performance meeting of the year had a minimum of two questions:
o "What are your goals for this quarter?"
o "How can I help?"
All subsequent quarterly meetings had a minimum of five questions that must be asked:
o "What were your goals for this quarter?"
o "How did you do?"
o "How do you account for the results?" (Whether above, at, or below expectations... simply explain how you arrived there. This gave the supervisor a chance to reinforce the good behavior resulting in exceeding the goals, or coaching or counseling about the behavior for lower results. In all cases, there was an analysis with the leader of what led to the results per Leadership Principle #6.)
o "What are your goals for the next quarter?"
o "How can I help?"
Being able to make the correct leadership choice requires that your participants:
- Understand the "big picture".
- Have the latitude to make a decision.
- Have sufficient resources available to support their decision.
- Do not fear retaliation for being wrong.
- Have a leader who has learned how to coach and counsel effectively for feedback on their decision.
- You CAN build a program like this yourself as long as you recognize your organization's limitations.
- Make it as good as you can and get started - you can adjust along the way!
- On line, self-study, and live classes are only as effective as the opportunity to reinforce the learning.
- The money you spend on professional help (if you choose to use a consultant for some of the more complex areas) can be recovered in the improved leadership.
- Strong management support can make lower-priced training content very effective.
- High-priced training content (alone) CANNOT make up for lack of management support.
- High tech delivery does not mean greater comprehension ("information" is not "knowledge").
Thank you for reading this article (and its predecessor, we hope) and wish you the best of luck if you're using this to research an actual Leadership Development initiative.
Please don't hesitate to contact me through our website if you need some clarification or help along the way.
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