2016-06-17

Top five metrics for workforce analytics — data-driven formulas to improve your profitability

Drake Editorial Team

In restructuring, retrenching, or downsizing, organizations often react without thinking, planning, or considering the optimal workforce size and structure.

Human capital metrics give companies the visual tools to understand and analyze their workforce and enable data-driven decision making. In an economic crisis, organizations that use key metrics are better prepared to handle changes, move rapidly with agility, and make precise surgical cuts rather than ineffectively cutting across the board.

The most advanced organizations use human capital metrics and analytics tools to manage their workforce. With a defined human capital strategy and advanced metrics to measure success, organizations can build a lean and highly productive workforce and be prepared to quickly outperform competitors when opportunities arise.

Use these five key human capital metrics to make sense out of the challenges and confusion of economic downturns and growth cycles.

1. Total cost of workforce

Total cost of workforce is the sum of all workforce-related costs, including compensation and benefits, over a specified time.

The workforce — employees plus contingent (contract and temporary) workers — is usually the largest single cost for organizations. Measuring its total costs, rather than only employee costs, enables organizations to thoroughly understand their workforce spend for reporting and analysis and make better workforce strategy decisions.

For maximum value and insights, analyze total cost of workforce as a percentage of expenses or revenue, and across multiple dimensions such as business unit, job group, and tenure. The ability to identify and execute specific workforce cuts, re-organizations, and acquisitions and divestitures enables thorough and thoughtful risk management and identification of unrealized opportunities for cost savings.

2. Management of span of control

Management span of control is the best tool to address cost and structure of the management staff. Organizations looking to optimize productivity and efficiency can use this metric to evaluate the overall organization as well as individual regions or business units. This metric is calculated by dividing the total population, including management, by the total management population to yield a ratio (e.g., 3:1 or 5.5:1). By understanding management span of control and tracking it over time, organizations gain insight into workforce trends and mix. For example, is the workforce top heavy, or is management stretched too thin?

Three mistakes organizations make related to span of control are: (1) promoting people to management even if they may not be the best managers; (2) including managers who manage not people but projects, which may be their core competency; (3) managing span of control for distinct groups to an organization average or benchmark instead of optimizing span of control for each group.

Using span of control, especially in large organizations, can uncover significant opportunities for cost savings, increased efficiency, and productivity improvements over time.

3. High-performer turnover rate

High-performer turnover rate indicates the value of your employee turnover. The real key, in good times or bad, is how many high-performing employees are leaving the company. This can be calculated by dividing the total number of high-performing employees terminated in a given period by your average high-performer population over the same period.

Without accurate calculations to identify the true cost of turnover and how it varies between performance levels across segments of the workforce, companies don’t have the right information for data-driven decision making and launching intervention strategies. Your turnover may be only 4 to 6%, but what is your high-performer turnover rate? What percentage of your best people are you losing? If your overall turnover rate is only 4% but your high-performer rate is 8%, you’re bleeding talent. Over time, you will no longer have a productive workforce with high-performance capability. It often takes more than one person to replace the high performers you lose, which significantly increases your costs over time.

In addition to turnover, organizations can also measure high-performer retention.

4. Career path ratio

Career path ratio shows the rate of upward versus lateral movement in an organization. This is important because an organization has a limited amount of ‘up’ but almost unlimited ‘over’, transfer capability for many different professional and executive roles. This is a very low-cost way to enhance and build workforce capability over time. It’s also a way to renew and expand experience by giving workers new jobs that stretch and challenge them with a minimal increase in workforce costs. Many leading organizations have developed a spiral staircase with more lateral movement than upward movement.

Career path ratio is calculated by dividing total promotions by total movement in the organization. This metric combines two important measures that reflect mobility into one metric that is more meaningful: total promotions and total transfers. If the result is close to 1, the organization is either doing too many promotions or not doing enough transfers. Career path ratio can be calculated at an aggregate level for the entire company, business unit, or position group. It adds a power dimension for measuring career path mobility and internal movement throughout the organization.

By analyzing the career path ratio in combination with employee retention and performance, an organization can identify linkages between mobility and drivers of critical workforce issues.

5. Talent management index

Talent management index combines metrics that work across the entire employee lifecycle. This metric enables organizations to evaluate and analyze talent management practices for recruiting, mobility, performance management, training and development, and turnover and retention. It also allows organizations to hold all levels of management accountable for management practices and quality by measuring effectiveness of hiring practices, success of training and development efforts, and cost efficiency.

While many metrics could potentially be included in an organization’s talent management index, these are recommended:

1. New-hire high-performer rate: the percentage of new hires rated as high-quality, high-potential, or high-performing employees by the organization
2. Percent of high performers: the percentage of the population that is rated as high performing in a particular workforce segment, business unit, or overall organization
3. Career path ratio: the relative upward and lateral mobility at the company, best calculated by individual managers
4. Total cost of workforce: the best managers achieving better results while reducing overall workforce costs
5. High performer turnover rate: measure of management effectiveness in retaining top talent at the company, calculated on an individual basis

The potential of these top five metrics is significant, and the greatest value can be achieved when they are linked to financial metrics, such as revenue or profit or FTE. By leveraging key metrics to predict future outcomes, organizations can identify potential issues before they become problematic, calculate the financial impact, and formulate a strategy for intervention.