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Financial Snapshot: 3 Metrics With Insight Into Talent’s Impact
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First of two parts
In a world where it’s easy to get a “snapshot assessment” of your personal physical health or your organization’s financial or IT security effectiveness, what could be more valuable than an easy-to-conduct executive level “snapshot assessment” of talent management and HR?
Unfortunately I have found that most in HR are satisfied with a subjective or low-level tactical assessment, which instead of business impact, covers spending efficiency, lean staffing, and whether managers and employees are satisfied with us.
In order to be considered as credible, this snapshot must instead be strategic, and it should mirror the executive snapshots that are available in finance, customer service, and IT. In order to assess how well you’re doing, a benchmark number must also be provided so that you can compare your results to your direct competitor firms.
I have included six (6) simple measures that by themselves are enough to give you a snapshot but accurate view of talent’s business impact.
A high revenue-per-employee number is as an easy-to-compare indication of a productive and effective workforce. This “revenue per employee” workforce effectiveness measure will give you a quick, uncomplicated assessment of the value of your employee outputs by telling you how much revenue the average employee generates each year.
Obviously the more revenue that the average employee generates, the more productive and effective your workforce is.
Revenue per employee is listed as the first snapshot metric because it is an easy number to compare between competitor firms because financial websites like MarketWatch include it in their standard financial profile for each firm. That makes it incredibly easy to measure the increase in productivity over last year and to quickly compare the productivity of your workforce to your top five industry competitors.
You calculate this ratio by simply dividing the number of employees into the company’s total revenue (company revenue/number of employees). Make comparisons within the same industry, but the top benchmark revenue per employee number to compare yourself is Apple, where the average employee generates an astonishing $2.19 million in revenue every year.
If you really need a rule of thumb, in most industries you would expect above-average firms to produce a revenue per employee that should exceed three times their average employee’s salary (at Apple it exceeds nine times).
A high ROI on workforce expenditures is an indication of efficiency.
The revenue per employee measure listed above has a significant weakness in that it omits “the cost” of an average employee. And since the gold standard of efficiency assessment in any business area is ROI, which compares the cost of an item to the value of its output, if you have time to calculate it, the profit generated per dollar spent on employee costs is the next-most-valuable snapshot metric.
This “ROI on workforce expenditures” is a more complex but more accurate measure because it includes the cost of employees (as opposed to just the number of employees) and it substitutes profit for revenue (a better measure of company success).
You get this ROI ratio by simply dividing the dollars spent on your employees, known as the Total Cost of the Workforce (which includes all salaries, benefits, and HR costs) into the company’s total profit for the year. Obviously the higher the ratio of profit generated per dollar spent, the more efficient you are.
A rough estimate of Apple’s total cost of labor last year is $16 billion ($200,000 spent per employee) and dividing that into its profit of $37 billion gives you an astounding ROI of 2.3 to 1. At other firms, a ratio of .20 to 1 could be considered a minimum target.
Unfortunately because total labor costs are not publicly available, you cannot easily compare your efficiency with other firms, so focus on year-to-year improvement, which means getting more profit from each labor dollar spent.
Once you determine whether your workforce is productive (i.e. effective and efficient), your next concern should be whether it is innovative. This is because innovations can produce up to five times the economic value that results from merely being productive.
Rather than counting the number of ideas or innovations that are generated by the workforce, a superior success measure is to look at the impact of implemented innovations on corporate revenue. The revenue impact of innovation is important because you can’t consider an idea effective unless it is implemented and it has proven to be valuable by the marketplace.
An innovative workforce generally produces high-value innovations, and as a result, a significant portion of corporate revenues will come from those new products. So the metric for assessing the impact of your workforce innovations is the percentage of corporate revenues that come from new products (i.e. products that were introduced or completely revised during the last 18 months).
Once again the benchmark comparison number depends on the industry, but the revenue percentage from new products should be at minimum 33 percent in order to show that your recent innovations are being well received by the marketplace. Obviously the higher the percentage of revenue coming from these new products means that you are effectively pushing out my new products and services but that you are also obsoleting your own current products (which is a good thing).
Tomorrow: 3 more metrics with insight into talent’s financial impact