Part Three of the series Thou Shalt Manage Human Capital Better

Some might argue that HCM revolves around better performance management and employee compensation. As the economy continues to rebound and talent wars intensify, companies have been increasingly leveraging traditionally elusive "pay-for-performance" technologies that successfully automate and link compensation planning with business and employee performance. Practically every organization regularly reviews the performance of its employees, which most managers confess to be a chore that is ironically the centerpiece of their existence. In other words, most managers hate personnel reviews, and many procrastinate until the HR department or the employees "scream." Since no employees can get a pay raise until they get a review, HR departments implement systems to automate and force the review process as a means to address this.

The aim of performance management systems is to both automate the employee review process and link reviews to organizational performance. The aim is to ascertain whether employees are taking definitive steps to achieve their determined performance goals; whether there are succession plans in place for top managers; what kinds of skills the organization will need in the next few years; and so on. Those are the kinds of questions (and hopefully appropriate answers) that performance management systems should put on the desktops of both managers and employees.

Performance management systems often include or feed into compensation (sometimes also called employee incentive management [EIM]) systems in order to more justly distribute merit-based pay increases. Before deploying such a system, managers would customarily review employees annually around their date of hiring, often with the result that well-deserving employees would not get the increase they deserved simply because the pool of available money had already been spent by the time they received their reviews. Surprising or not, compensation represents more than 60 percent of total corporate expenditures, yet most Global 2000 firms are still not properly rewarding their highest-performing workers. The aim is now to complete employee reviews at the end of the fiscal year, and also manage the merit expense budget by reviewing all performance scores before distributing the pay increases. Additionally, such systems are useful for obtaining a twelve-month view of employee performance, versus focusing too closely on the period that immediately precedes the review. The customary "defeat the purpose of performance review" experience of many managers has been that the company would set the parameters for pay raises and salary ranges at "budget time," and then expect managers to predict the percentage raises individuals would receive, so that the money would be in the budget when time came to review the employee.

More comprehensive performance management systems nowadays include a stronger link to upstream business goals and objectives, as well as a tighter connection to rewards, including merit pay, short-term variable incentives such as bonus or commission awards, and longer-term incentives such as stock grants. Some vendors offer succession-planning software that builds on performance and training systems to identify likely candidates for jobs further up the food chain. Again, the aim is to turn people into a competitive advantage and to ensure that there are programs that pay for performance and reward people for achieving goals that move the enterprise forward. These outlined capabilities should help users not only hire a higher-quality employee, but also better track that employee's performance, and establish a stronger link between the employee's performance and compensation. Enterprises want to be able to raise the bar for high performers while placing low performers on a performance improvement plan.

One illustration could be at an apparel retailer that often fell short of expectations with the launch of a new line of jeans, which prompted it to decide to test market jeans fitters who had been trained through e-learning about the products, how to fit jeans on women, and how to give the best advice. The project purportedly returned a 75 percent increase in revenue, since the fitters began receiving an incentive every time a pair of jeans was sold. There was a performance management solution in the background telling them how they were doing according to their goals, whereby learning, performance, and incentives were all tied together in an integrated way to drive corporate revenue and performance.
Leading vendors in this space include Authoria (which recently acquired Advanced Information Management [AIM], a provider of compensation management), SuccessFactors, Halogen Software, Workscape (including recently acquired Performaworks), FirstDoor.com, Callidus Software, Centive, Ceridian, HRsmart, Kadiri, ProAlt Technologies (now both part of Workstream Software), Softscape, Kenexa, and enterprise resource planning (ERP) giants SAP, Oracle, and Lawson Software.

In July, Lawson announced the acquisition of Competency Assessment Solutions (CAS), a provider of performance management solutions for the health care industry to comply with reporting standards set by the Joint Commission on Accreditation of Healthcare Organizations (JCAHO). Compensation management aligned with individual performance management creates a true pay-for-performance environment, and leaders in this realm are tying the workforce to organizational goals and productivity, such as revenue per full-time equivalent employee (FTE). Developing competency models for each work position can be time-consuming and costly, but once conducted, these models can be leveraged across the entire HCM realm to improve the quality of new hires, compel desired employee performance, facilitate employee development, and assist in the development of succession plans. In other words, the entire employee life cycle (acquiring, developing, managing, and measuring performance) can be facilitated.

To recap, HCM has evolved beyond the simple automation of business tasks to the more complex streamlining of traditional HR processes and increasing of efficiencies in the broad management of human capital. Strategic HCM solutions can help organizations transform their people into a competitive advantage by aligning managers and employees with corporate goals of driving business value. Authoria reportedly recently spoke to more than 200 senior HR executives and asked them about their top "pain points." Leading this list was aligning employee goals and corporate goals, paying for performance, and developing top talent. Trying to accomplish these important objectives in a pedestrian way has proven to be equal to finding the fountain of youth or the holy grail. Conversely, well-devised HCM strategies and methods should help execute these priorities and make these initiatives successful.

Moreover, Genesys recently released the results of its HCM trends survey. The vendor's web-based suite PeopleComeFirst streamlines HR, benefit administration and payments, payroll processing, self-service, competency-based learning management, performance management, recruitment, and time and attendance (T&A), and it can be implemented as either human resources outsourcing (HRO) services or as licensed software. According to respondents of the survey, the top HCM priorities for 2006 included talent and leadership development, combined with talent acquisition and retention (45 percent), performance management (21 percent), and streamlining processes (18 percent). In addition, 18 percent of respondents also indicated that aligning people and business goals would be an important priority in the coming year, which shows that the attention of HR departments is increasingly centered upon becoming process experts and improving business processes, focusing on talent acquisitions and subsequent management, and providing better data for decision making. Moreover, 38 percent of respondents indicated that budget expectations over the next 12 months for HR technology and outsourced solutions would increase, by as much as 9 percent in some cases, thereby enabling funding of the services and tools required to support these top priorities.

Tactical Human Resources Evolves into Strategic Human Capital Management

This brings us to the notion of human capital management (HCM), or talent management, which Gartner defines as a set of HR practices that focus on acquisition, management, and optimization of the enterprise workforce. These practices include such processes as competency and skills management, succession planning, and team management. The key tenet of HCM is that companies must change the mind-set of viewing employees as an administrative cost, and instead see them as a strategic investment and a key enterprise asset, with a resulting focus on aligning workforce capabilities with business strategy. This more strategic view of the workforce will gradually become less an HR function and more a management discipline.

HCM should be about value and not cost, since people should be regarded as value-adders, and not overheads and liability. It should measure organizational outputs (such as profit, revenue, and service levels) related to better management of people rather than focusing on input measures (such as recruitment costs) and the HR “best practices” of earlier days.

According to studies by the Brookings Institute, in the early 1980s, tangible assets amounted to over 60 percent of firms' total assets. This ratio has now been reversed, with over 80 percent of assets being intangible, most of which is represented by human capital. Yet, while decades have been spent investing in automation technologies for better use of tangible assets, only recently have enterprises begun to invest in optimizing human capital.

Moreover, many non-HR business processes can benefit from leveraging HCM strategies, such as project portfolio management (PPM) processes (see Project Portfolio Management for Service Organizations: Bridging the Gap between Project Management and Operations), which can be improved via incorporating competency and skills data and by leveraging the team management capabilities of HCM applications. Similar examples of business processes that should benefit from “picking the HCM brains” include production planning, job costing, scheduling, training, compliance, budgeting, and field service. In fact, any people-centric business process should benefit from integration to HCM, whereas traditional administrative HR applications and processes will hardly support this integration at all.

This leads us to a broader notion of employee relationship management (ERM), business-to-employee (B2E) management, or whatever the three-letter acronym (TLA) du jour might be (see BLM—Buzzword Lifecycle Management). In any case, these acronyms try to depict a business discipline that focuses on optimizing the employee's total employment experience—including both the human and technology aspects of that experience.

ERM espouses a comprehensive and unified view of the processes and technologies that support the workforce and their workplace, including manager-employee interactions, the formal business tasks required to manage employee relationships, and the technology used to manage the employee experience. To that end, ERM encompasses the full suite of B2E services needed by employees, managers, and others, including knowledge management, e-learning, self-services, community and collaboration support, travel and expense (T&E) management, indirect procurement, and so on. Thus, ERM is most closely aligned with the HCM focus area of workforce management.

While traditional HR and payroll management may not seem to provide a significant competitive advantage in the same respect that the aforementioned emerging technologies do, some ERM systems, like Extensity or Apptricity, help reduce cost, simplify administration, and promote a more connected company-employee relationship. What customer relationship management (CRM) solutions do for customer intimacy, today's ERM packages (replete with employee self-service and manager self-service functions) do for employee intimacy—provide all concerned parties (executives, managers, employees, government, and so forth) with immediate access to a wide array of vital information.

Best-of-breed HR Technologies

The most progressive of companies have been using best-of-breed HR technologies for attracting, hiring, training, motivating, and managing their people. Software applications are becoming more and more sophisticated to help companies with these tasks, and as these solutions continue to evolve and communicate with one another, user companies will have a more seamless access to methods and data for managing their employees throughout the employee life cycle.

On the other hand, the laggard companies that do not embrace these technologies will likely fall behind in their quest for market dominance. For instance, by implementing a holistic employee performance management process across the enterprise, corporate strategy can be aligned (and properly communicated) with individual goals and objectives, whereby actual performance against those goals can have ramifications for individual compensation and rewards. This should drive behavior and attitude toward executing on the corporate strategy, with improved employee satisfaction and loyalty as a result.

This certainly comes in handy when the economic downturn ends, when employees begin to feel that they have more employment choices. Enterprises will again need clear, credible, and reliable strategic sourcing strategies and management in order to plan for and engage the competencies (people and companies) needed to accomplish their business strategy (by building the required effectiveness and increasing efficiency). For instance, with the economy improving and IT budgets rising, competition for IT talent—especially in key skill areas—is bound to intensify. At the same time, an improved hiring picture in IT will most likely mean higher turnover, as many unhappy IT staffers who saw workloads increase while compensation and benefits stagnated (during the economic downturn of the early 2000s) will put even more pressure on IT management.

Hence, there is a true need for much tighter integration between performance management and compensation (regardless of the economic milieu), so that exemplary employees can be rewarded more often (and feel truly special to the enterprise), as opposed to the outmoded, blanket-regulated, across-the-board annual basis (which typically produces mediocrity).

Analyzing the workforce and strategically managing the company's human capital has become the focus of human resource management systems (HRMS), as a way to transform these from dull functions to those that greatly affect corporate performance. Integrated business information warehouses, to that end, enable multidimensional analysis on information aggregated from internal and external resources (salary survey, for example), performance indicators (as in turnover), and views on strategic HR information with powerful drill-down features. Some surveys indicate that almost a third of businesses are already using data warehouses, a quarter of them are using workforce performance management or analytics, and one-eighth of them are using workforce planning.

Workforce analytics have become a core of talent management systems. This is because they focus not just on "time" (or who has clocked in and who has not), but also on such strategic business issues as overtime and turnover trends that impact a business's bottom line profit, equal employment opportunity (EEO) or ethnicity-based hiring trends, compensation patterns, relative recruitment effectiveness and sourcing costs, cost per hire, etc..

Tactical Human Resources Evolves into Strategic Human Capital Management

Given the examples of the changes in human resource (HR) management discussed in Thou Shalt Manage Human Capital Better, and the mushrooming number of point solution providers, many enterprises have realized the significant shortcomings of traditional HR (in terms of technology, beliefs, processes, and practices) that require a strategic-level mind-set change. This is particularly relevant during times of economic sluggishness and low investment capacity (which typically translates into layoffs or hire freezes, cost containment, and stalled innovation), when most enterprises and their employees are left wondering if they can (or should) rely on each other for their future.

Part two of the series Thou Shalt Manage Human Capital Better.

In the early 2000s, with the economy in a downturn, HR administration delivered some organizational value by outsourcing an increasing number of HR business processes, either wholly or in part. In many cases, outsourcing to some trusted technology vendors that have already demonstrated their HR domain expertise may help companies achieve additional efficiencies and functionality, reduce head count, and cut costs.

Of the many solutions in the HR realm, the most predominantly outsourced have been payroll processing, employee assistance programs, payroll tax filing, and background screening. The most appealing and achievable benefits of outsourcing are streamlined operations, access to better HR capabilities and industry expertise (when it is not a core competency of the user enterprise), freeing up of internal staff, reduced labor costs, and accurate and predictable monthly costs.

However, the returns from layoffs (often undertaken without much thought to who should really go, potentially resulting in the hasty release of the lynchpins of the enterprise's ongoing performance) and relentless cost-cutting have proved to have only a limited (if not negative) effect. While some organizations have tried to cut labor costs to be competitive in their markets, the most progressive companies have embraced their labor forces and used them as a strategic differentiator.

As products and technologies become commoditized in this information-based economy, companies are beginning to realize that the best way to differentiate themselves and create long-term strategic advantages over their competitors might be through their people. It is no longer what one owns that counts, but rather what one knows, which is particularly critical in information technology (IT) and similar professional services organizations (PSOs), because it is the technical expertise and experience of knowledgeable staff that means the difference between success and failure.

In fact, according to Forrester Research, more than 85 percent of the market value of a typical Standard & Poor's (S&P) 500 company today is the result of intangible assets. For many companies, the bulk of these intangible assets is their people (or human capital), and such companies spend as much as two-thirds of their overall costs on labor. Thus, they should focus on business processes, using technology to more effectively manage employees and improve their productivity. Combining training, incentive management, and compensation management tools delivered through a role-based dashboard, emerging people-centric software category aims to transform each individual in the workforce into an enterprise asset.

Workforce Analytics – A Blend of Business Intelligence and Human Resources

In a previous blog post, I described how artificial intelligence (AI) can help human resources (HR) in the recruiting process. It is interesting to note that almost half of the people who took our poll would use AI—but not extensively.

Besides being used for recruiting purposes, AI is used more and more in workforce management. By combining business intelligence (BI) with HR processes, business performance management (BPM) for HR is created. Vendors call it workforce analytics—and Infohrm, Aruspex, and Vemo are among the three that specialize and offer really interesting products and services in this combined area of BI and HR.

Of course, there are HR vendors (Kronos, Mercer, etc.) that offer workforce analytics, and BI vendors (IBM, Oracle, etc.) that created modules or versions of their products for this niche. No matter which vendor is offering workforce analytics, it is still used in midsized companies or large corporations.

What Can Workforce Analytics Bring to Your Company?

If you are a HR manager in a company that employs thousands of people, one of your main concerns should be reporting and analytics. Workforce analytics can help your organization determine how efficient its recruiting processes are. It can also help during the hiring process—recruiting the right people at the right costs.

Workforce analytics can give your company a general overview of the activity of the HR department. Depending on the product being used, you can drill down to the next level of detail, build interactive graphs, and export the data to different file formats.

By understanding the demand and supply in HR—as well as the gaps between the two—HR professionals can create and implement better internal procedures for talent management, retention, succession, etc.

This is done by gathering information on your workforce and putting it into a single repository. This information comes from your HR system, enterprise resource planning (ERP) solution, or other business software (e.g. time and attendance, project management, accounting software, etc.).

By using this data, your company can create forecasts and what-if scenarios in order to understand how a change in the activity of the company can impact its HR department and vice-versa. For instance, if you decide to launch a new product line, you can estimate how many people you’ll need and how much it will cost you.

Most of the vendors in this area (HR, BI, or workforce analytics) offer pre-defined key performance indicators (KPIs) that your company can use to measure the efficiency of its workforce, but they can also help build new ones and even implement best practices to improve the way people work.

Finally, these vendors offer consulting services that can be used to define the way you gather and interpret the data, create and use KPIs, define and manage internal work procedures, and review strategies for recruitment, talent management, compensation, or training.