Driving Strategy with Human Capital Analytics

1. Driving Strategy with Human Capital Analytics Shane Douthitt, Ph.D. Scott Mondore, Ph.D.

2. About SMD

3. Learning Objectives • Understand the process for linking employee data to critical business outcomes – our Business Partner RoadMapTM • How to use analytics to determine where to cut and where to invest in your HR strategy • How to calculate an expected ROI for initiatives • Understand practical tips for driving the process

4. Agenda • The State of HR – Economic Impact • Business Partner RoadMapTM • Using Structural Equations Modeling • Case Study • Calculating ROI • Practical Tips for Implementing the Process • Q&A

5. The State of HR in Today’s Economy Making the Tough Choices

6. Organizational Impact www.metrus.com

7. What Our Clients Are Saying… • “I am being asked to cut my budget by 30%.” • “How can I create an HR strategy with budget cuts and have an impact on the business?” • “I don’t want to just cut my most expensive programs. I want to cut the costs with the least impact on the business.” • “I have programs that seem like ‘nice-to-haves’, but they may have real ROI. How can I determine their ROI?” (e.g., work-life balance programs)

8. The Typical Approach to HR Cuts • Lay-offs • Hiring freezes • Cutting expensive programs (e.g., leadership development) • Cutting training programs • Reducing benefits • Delaying employee surveys and other high-cost initiatives

9. The Opportunity • To discover the impact of various HR initiatives • To cut costs and still make a strong impact on the business with the strategy • To make strategy decisions based on expected ROI instead of other factors (e.g., perceived impact, business partner opinion, cost) • The goal is to run with a lean strategy…but still have significant impact!!

10. Ten Guiding Principles • Organizations already spend significant amounts of money on their people….they just don’t spend it on the right things. • Organizations make investments in people without any data or with the wrong data. • Employee engagement in itself is not a business outcome. • People and organizations are complex. The linkages between attitudes and outcomes have to be understood within your organization using your data. • The people data and outcome data do exist—you just have to go and get it. • The organization’s data exist in silos. • There will be obstacles and barriers to obtaining the data (e.g. politics, turf battles). • Once a connection/linkage is made with the data—accountability is unavoidable (and that’s a good thing). • Don’t assume a link between employee data and business outcomes—define it and understand why or why not. • Perceptions alone do not show up on the profit and loss statement.

11. Linking People Investments to Business Outcomes The Business Partner RoadMapTM

12. HR and Measurement • HR Measurement has increased in quantity and somewhat in quality • Internal HR efficiency metrics (e.g. time to hire; profit per employee) are limited in impact • HR is still one of the first expenditures to get cut when business gets lean (like right now!) • While business leaders view HR as an investment, it is still a significant cost with only assumed benefits

13. Business Partner RoadMapTM

14. Business Partner RoadMapTM • Organizations and HR functions are comfortable with executing every step of the process in some form • In the Data Analysis step: • Structural Equations Modeling (SEM) has some major advantages over traditional data analysis techniques • Using SEM for data analysis is a barrier in many organizations

15. Structural Equations Modeling • Traditional data analysis includes: • Qualitative analysis or gap analysis (strengths/weaknesses) • Correlation • Regression • Advantages of Structural Equations Modeling (SEM) • Consider multiple independent & dependent measures concurrently • Imply causality • Calculate ROI • Correct for measurement errors • SEM is commonly used in other industries (e.g., econometrics, market research)

16. Case Study Prioritizing Where to Invest in Your Strategy

17. Business Partner RoadMapTM

18. Our Proposal – Large Retail Organization • Create a business-focused HR Strategy: • Empirically link employee data to meaningful business outcomes • Identify ‘invisible levers’ in employee attitudes, skills and behaviors that will drive outcomes • Leverage existing data to create the strategic framework • Prioritize employee-focused interventions to drive business outcomes • Provide customized solutions to drive business outcomes

19. Data Utilized in the Study Shrink data at store level—as an example (used multiple business outcomes in the full study) Employee opinion survey results Management competency ratings LMS training data HRIS data – dishonesty terminations Store turnover data Customer satisfaction results

20. Dimensions of the Employee Survey Engagement Resources Available Job-Person Match Policies Hours Worked Regard for Employees Customer Focus Manager Effectiveness Work Environment Career Development Benefits Recognition & Perf. Mgmt. Scales range from 2-5 items. Alphas range from .79-.91.

21. Salaried Employee Competencies Employee Development Leadership Strategic Decision Making Cross-Organizational Collaboration & Teamwork Execute With Excellence Achieve Extraordinary Results Individual Ratings for the Store Manager and Assistant Mangers were used.

22. Drivers of Shrink Job-Person Match 1a Engagement Manager Effectiveness 1b 3 Ethics Course Participation 2 2 Shrink Shrink Course Participation 2 Dishonesty Terminations Legend Employee Survey Training Participation Terminations Competency Ratings 1 Achieve Results Numbers in paths indicate the intervention priority based on the magnitude of the relationship with shrink.

23. Further Prioritizing the Levers • While all of the ‘levers’ identified in the model significantly impact shrink, the ‘levers’ can be prioritized even further based on the magnitude of their relationship with shrink • Further Prioritization: • Achieving Extraordinary Results • Ethics Course • Shrink Course • Dishonesty Terminations • Job-Person Match

24. Intervention Framework People Process Technology

25. Planned Interventions & Cost

26. Defining the Priority Levers MANAGER COMPETENCY: • Achieving Extraordinary Results • “Meets or exceeds challenging goals and strives for continuous improvement.” • “Holds self and direct reports accountable for achieving challenging results in sales, profitability, cost controls and shrink.” • “Constantly raises the bar by pushing self and coaching others toward higher levels of achievement.” • “Constantly focuses on solutions that contribute to driving sales, reducing cost and improving the bottom line.” • “Uses knowledge of operational policies, procedures and standard practices to achieve outstanding results.” If 360 tool measures individual behaviors, further analysis could determine which behaviors most directly lead to reduction in shrink.

27. Recommended Actions to Reduce Shrink MANAGER COMPETENCY: • Achieving Extraordinary Results • Onsite ‘Best Practice’ Assessments of the Top 10 Shrink Managers with High Competency Rating • Focus groups with employees & interviews with managers • Typical approaches/competencies & best practices • “How/Why are managers achieving results?” • “How/Why are employees achieving results?” • Onsite ‘Help-Needed’ Assessments of the Bottom 10 Shrink Managers with Low Competency Rating • Focus groups with employees & interviews with managers • Typical approaches/competencies • “Why aren’t managers executing?” • “Why aren’t employees executing?”

28. Recommended Actions to Reduce Shrink MANAGER COMPETENCY: • Shrink Partnering Program • Top shrink managers partner with help-needed shrink managers for coaching/mentoring • Regular meetings to share best practices • Build a management routine to continually focus on shrink and share best practices

29. Recommended Actions to Reduce Shrink TRAINING: • Code of Ethics Course • Has a direct, significant impact on shrink • Opportunity to re-train or conduct refresher courses with managers and employees • Senior leaders regularly re-communicate the key messages from the Code of Ethics • Sales and Shrink Course • Has a direct, significant impact on shrink • Currently not mandatory • Opportunity to make the course mandatory and re-train managers and employees

30. Recommended Actions to Reduce Shrink HRIS DATA: • Dishonesty Terminations • Communicate to managers the impact of poor hiring (e.g., cost of dishonesty terminations) • Re-assess hiring practices • Think beyond background checks • Biodata assessments • Integrity testing • Warm-bodies vs. employees with integrity • Re-think labor pools and recruitment strategies

31. Revised Interventions & Cost

32. Actions Taken and Actions Cut • Initial budget was $5.55 million • Revised budget was $2.1 million • Cut incentive plan • Cut major training build • Cut “shrink focused” customer experience programs • Data analysis • Did not identify pay/benefits as a major driver of shrink • Showed the existing training courses were having an impact • Did not identify “customer focus” as a major driver of shrink • Showed that “dishonesty terminations” were a significant driver of shrink • Created an HR Strategy with a known impact on shrink

33. Calculating ROI Linking Employees to the Bottom-Line

34. Drivers of Shrink Job-Person Match 1a Engagement Manager Effectiveness 1b 3 Ethics Course Participation 2 2 Shrink Shrink Course Participation 2 Dishonesty Terminations Legend Employee Survey Training Participation Terminations Competency Ratings 1 Achieve Results Numbers in paths indicate the intervention priority based on the magnitude of the relationship with shrink.

35. Calculating Impact & ROI • $93 million in annualized shrink • Example – currently 65% participation in Ethics Course • 95% participation could result in additional savings of $4.3 million • Approximate cost of $1,100,000 (employee time, communication) • Expected ROI: 390%

36. Timing Strategic Planning Begins Business Partner RoadMapTM Process Ends Financial Planning Begins Beginning of 4th Quarter End of Fiscal Year; Beginning of 1st Quarter

37. Practical Tips for Implementing the Process Overcoming Barriers and Driving Results

38. Practical Tips • The data already exists…you just have to get access to it • Engage stakeholders early in the process • Stakeholders identify the critical business outcomes • Use stakeholder interviews to engage leaders across functions • Get senior-level advocates to build cross-functional buy-in • Although the analysis is complicated – make the results practical and action-oriented • “Low hanging fruit” can be a priority in a slow economy – look for big returns with little investment • Outsource the analysis • Analysis with recommendations can be delivered in 3-4 weeks

39. What We Have Covered • The process for linking employee data to critical business outcomes – the Business Partner RoadMapTM • How to use analytics to create your HR Strategy • How to calculate an expected ROI for initiatives • Practical tips for using analytics to drive strategy

40. To Contact Us: Shane Douthitt, Ph.D. Executive Consultant sdouthitt@smdhr.com (704) 975-6820 www.smdhr.com Scott Mondore, Ph.D. Executive Consultant smondore@smdhr.com (404) 808-4730 www.smdhr.com