How Effective is your HR Department?

How Effective is your HR Department?

Human Resources

There is little question that all sectors of a business need to be evaluated on a regular basis. Human Resources is no exception. However, recognizing the need does not always produce the reality. While there have been considerable advancements in evaluation, it is still far from being widely practiced, particularly in smaller companies. This article outlines some of the approaches, both positive and negative, to evaluating HR.

Cost/Benefit Analysis

The cost/benefit approach compares the cost of HR programs and services to the benefits derived from them. While overall program costs are usually easy to identify, it is difficult to determine the program benefits. In most cases, subjective input is used to assign a dollar value. Unfortunately, this tends to decrease the credibility of the process. This approach is most effective with individual programs, rather than evaluating the entire HR function.

Goals and Objectives

Under this approach, personnel departments develop specific objectives which are then measured against the predetermined goals. The objectives are set based on what management wants accomplished. They must be quantifiable, trackable, dated, challenging, and achievable. All measures selected must correspond with organization performance standards to be useful for evaluation.

Process-Oriented Approach

Some companies evaluate their HR departments on the efficiency of their internal functioning. The process-oriented approach focuses on the types of activities performed by the department and the degree of efficiency in administering those activities (i.e., how quickly or how frequently an activity is done). The main criticism of this approach is that performing these functions efficiently may not directly relate to the overall performance of the organization.

Human Resource Auditing

An HR audit is an investigative, analytical, and comparative process that attempts to measure the effectiveness of the HR function. Like financial auditing, it involves compiling and analyzing data for an extended period (usually a year) to reveal how well or how poorly HR is performing. It also provides base-line data to improve the performance and productivity of the organization. The use of HR auditing has increased in recent years with the commitment to move HR from a support to a strategic function. HR auditing is vital to the importance of the HR function, but there is little correlation between the information in the audit and the overall effectiveness of the organization.

Attitude Survey Approach

Attitude surveys are used in an attempt to link employee attitudes to organization performance. Some organizations have developed a human resource index (HRI) to compare progress over time with other organizations. The HRI is said to be effective for measuring attitudes, overall satisfaction, and commitment to organization goals. One flaw with the use of the HRI is that its validity is based on content validity, not predictive validity.

Track HR Costs

Another way to evaluate HR costs is to compare them to other units within the company or with outside units. Comparing with outsiders will highlight the best industry practice. These cost comparisons can be used for internal management, and to develop HR costs per employee. Tracking costs alone, however, does not guarantee a direct link with organizational performance.

HR Accounting

HR accounting has always been the process of identifying, measuring, and communicating information about the costs and revenues of HR. The process accounts for the condition of human capabilities and their value as provided by the measurement tools of the behavioral sciences. Problems arise when determining: whether humans are assets; what costs should be capitalized; and what methods are most appropriate for establishing a value for the employees. HR accounting reflects the value and contribution of all employees. As intellectual capital is increasingly recognized as a corporate asset, the demand for, and use of HR accounting will have increased relevance.

Performance Measures

There are many examples of how companies are linking evaluation with organizational performance. One company developed a study with three measures reflecting the contribution of the HR department: productivity as reflected in cost; employee relations as reflected in absenteeism; and quality as reflected in repair rates. The problem with this method is there are few appropriate databases. It may be easy to examine one firm’s HR practices and compare them with organizational success, but it is difficult to secure standardized information across several organizations. Progress by researchers is being made in developing these databases and in linking key measures to organizational performance.

Profit Center Approach

This approach requires a shift in perspective from perceiving HR as a cost center, to an investment that can achieve a bottom-line contribution. The profit center arrangement involves charging for the services and programs offered by the HR department. Competitive rates are established for services like training and program development. In some cases, outside firms may be competing with internal HR services for projects. In effect, the HR department either makes a profit, breaks even, or experiences a loss. Adoption of this approach requires the HR department to become client-oriented and quality conscious in delivering services and programs. Some organizations have even expanded this concept to include selling HR services to outside firms, thus generating additional income. The profit center approach allows management to effectively measure return on the resources invested in the HR department.

Case Study Approach

The case study approach evaluates the success of individual programs, policies, or practices. Case studies are developed using data on HR performance and interviews with participants. This approach has been used to gain support for HR and justify additional resources for the HR function. The main criticism is it does not represent an ongoing evaluation of the program or the overall function, but rather a one shot examination. Unfortunately, there is little comprehensive research being done on HR evaluation programs. The trend is moving toward HR accountability, but no one approach has been proven. Until one is, management will continue to demand new ways to show the contribution of the HR function to an organization’s effectiveness.

Resources: This is a summary of an article in Personnel Administrator written by Jack J. Phillips and Anson Seers. This article is reprinted with permission from Haley Marketing Group.

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