Talentonomics – Proving the Economic Value of Talent Management

I derived the concept of Talentonomics from the approach heralded in the best-selling book Freakonomics. In this effective and entertaining book, the authors (Levitt & Dubner) demonstrate how a “rogue” approach to economics can be used to explore “the hidden side of everything.”

The premise of the book is simple: use economic concepts and approaches to help explain and understand concepts and relationships that are not normally explored.

I admit that the term “economics” is often an immediate turnoff to those in HR and the field of talent management. In this case, however, there are important lessons.

One primary lesson is that by using a nontraditional approach, any talent management leader can effectively demonstrate the huge business impact of the talent management function.

In fact, it’s my contention that a superior talent management function can have a higher impact on company success than any other single business function, bar none.

Despite the potential for large impact, the talent management function still suffers from relatively low corporate status because too many in the profession lack understanding of the most effective ways to “prove” revenue impact to senior executives.

Definition of Talentonomics: using economic, scientific and statistical approaches to clearly demonstrate the revenue impact of excellent talent management programs.

Impacting Business Results Makes You a Hero

During tough times, there is increased pressure on every business function to demonstrate a direct (positive) impact on business performance. The functions that successfully demonstrate business measures like revenue, time-to-market, market share, and profit receive the majority of the attention and available resources.

Functions that cannot demonstrate such impacts suffer through endless budget cuts, outsourcing evaluations, and budget freezes. In most organizations, there is a relatively clear dividing line between “the haves” and the “have-nots,” and unfortunately, HR is generally on the side of the “have-nots.”

Revenue Versus Costs

The “have-not” business units and functions are generally those that can only demonstrate their impact on the business through efficiency and cost-cutting initiatives (i.e., cost centers as opposed to profit centers).

Take accounting, for example, which focuses on cost-cutting and analyzing “what happened last year,” and as a result suffer from much lower status than the finance function, despite both dealing with numbers and dollars.

Finance is considered more strategic and impactful because it focuses on the revenue side of the profit equation and the future as opposed to the past. The lesson to be learned by talent management and HR professionals is that they need to focus their metrics and “business case” efforts on demonstrating to senior management how “superior” (versus average) hiring, development, and retention actually increases a firm’s revenue and profit.

Incidentally, the costs of talent management are so low (as a percentage of corporate spending) that even major cost-reductions will have almost no noticeable impact on overall corporate costs.

Generally speaking, talent management leaders have failed miserably in demonstrating the revenue impact of talent, but in two industries, the connection has clearly been made.

In professional sports, for example, executives have clearly demonstrated the direct revenue impact of hiring great players and managers. No one would doubt the revenue impact of replacing Homer Simpson on a golf team with Tiger Woods. The best-selling book Money Ball clearly demonstrated the direct impact that having the “right talent” has on winning in sports.

In the entertainment industry, they have also made this revenue connection and are now able to predict the box-office impact of adding an actor like Angelina Jolie, Will Smith, or George Clooney.

In both industries, leaders have done the math in order to demonstrate that the added revenue will surpass any added costs related to hiring top talent.

Those of us who work in talent management and HR intuitively know that great talent management makes a huge difference. In fact, many CEOs have publicly stated that talent is the most important asset.

Unfortunately, their words rarely match their budget priorities! The time has come for talent management executives to abandon their cost-centric approach and their focus on cost metrics, and instead focus on demonstrating how great hiring, succession planning, and other talent management functions directly impact revenue. Surprisingly, proving that relationship is easier than you think.

The Four Steps of Talentonomics

Step 1 — Identify the business impacts that executives care about

Understand which business impact factors executives care the most about. There are two broad categories of business impacts that executives focus on: direct revenue and revenue impact.

Direct revenue/value – these business factors are the most critical to impact.

Increase in sales
Increase in other revenues
Profit margins
Profit
Share price

Revenue impact – because these business factors eventually lead to increases in revenue, profit and value, it’s also important to demonstrate that you impact them.

Product development and innovation rates
Customer satisfaction and responsiveness rates
Customer attraction and loyalty rates
Product brand strength
Market share
Product quality
First entry and time-to-market
Productivity and capacity

Of course, every firm defines different measures of success, but if you can prove that your function directly increases the value of any of these factors, your relative importance will increase within the corporate hierarchy.

Step 2 – Show them the money

Another problem that needs to be addressed is the way HR professionals report metrics. For example, almost every organization reports their turnover rate as a percentage (i.e., the turnover rate was 22% this year).

Unfortunately, because the language of business is expressed in dollars, percentages are generally not powerful enough to drive action. Instead, convert all of your major metrics into dollar impacts. So in the turnover example, instead of merely reporting the 22% rate, you would also convert the percentage into the dollar impact of that turnover on revenue (i.e., turnover cost us $28 million in lost revenue).

As a result of the increased attention that they get, converting metrics to dollars is a key feature of Talentonomics.

Step 3– Understand the different ways to prove business impact

There are seven ways to provide some degree of “proof” that a particular talent management program works:

Percentage improvement year-to-year. A side-by-side comparison is made between the performance number last year and the performance number this year.
Direct comparisons between employees. A direct comparison is made between the performance of “the last” employee and the current one. For example, comparing the performance of a “departed employee” and their replacement in order to demonstrate the value of terminating bad employees.
Performance differential. You contrast the performance of an “average” employee to the performance of an employee that performs in the top percentile, in order to show the added value of having top performers.
Demonstrate a correlation. Show a direct correlation (statistical relationship) between the increased usage of a tool or program by employees and an increase in productivity, revenue or profit. In reverse, demonstrate that when the usage goes down, so does their output. For example, when the average dollar amount spent on sales training goes up by 5%, sales go up by10%.
Before-and-after contrast. Prior to implementing a program, measure employee performance and then after implementation, measure it again to show the contrast in performance. For example, the performance of an executive’s team can be assessed before they were assigned an executive coach. After six months of coaching, the team’s performance could be measured again to show the percentage improvement.
Vacancy costs. Track the “lost” dollars in revenue that cannot be generated as a result of a position being open.
Split sample contrast. Instead of applying a new talent management program to the entire team or division, instead apply it only to one half and not to the other half (Which is known as the control group). This allows you to demonstrate the relative impact of the program compared to the control group, were nothing has changed. For example, half of the sales team was trained and the other half was not. The “trained” salespeople increased sales by 34%, while the control group had no change in sales.

Step 4 — Focus on the talent management programs that are likely to directly impact revenue

The final step is to identify the talent management programs or elements that are most likely to produce large impacts. In other words, which talent management programs are the easiest to prove (based on past experience) that they actually have a direct and significant impact on revenue?

In this section, I’ll provide examples (by talent management functional area) of some of the possible relationships between improved talent management and increased revenue:

Hiring

Productivity differential from great hiring. Calculating the difference in the on-the-job performance between average performing hires and top performing hires to demonstrate the economic value of hiring and retaining top talent (Example: there is $100,000 monthly sales difference between an average new-hire salesperson and a top 10% new-hire sales performer).
Innovation differential from great hiring. Calculate the difference in the value of innovations generated by hires with average qualifications versus hires that exceed qualifications by 20%.
Revenue loss due to vacancy. Dollars of revenue lost for every day a position is vacant due to slow hiring processes (in revenue generating and revenue impact jobs).

Onboarding

Time to productivity. The dollar value of the increased employee output as a result of the decreased “time to productivity” because of effective onboarding.

Retention

Departmental output and retention rates. The improvement in the dollar value of the department’s output as voluntary turnover rates decrease.
Productivity loss due to turnover. The average difference in the value of the employee output between those that “left” and the replacement employee.
Innovation loss due to turnover. Average difference in the value and rate of innovation between those that “left” and the replacement employee.
Revenue loss due to turnover. Dollars of employee output lost for every day a position is vacant as a result of voluntary turnover.

Training and Leadership Development

Productivity improvement. Average percentage improvement in the “on-the-job performance” after training is completed.
Productivity improvement of leaders. Average percentage improvement in the individual and team “on-the-job performance” after leadership development is completed.
Departmental output and training rates. The improvement in the dollar value of the team’s output as the percentage of “trained” employees on the team increases.
Departmental output and training expenditures. The improvement in the dollar value of the team’s output as the dollars spent on training increase.

Employee Relations

Productivity improvement. The average dollar value of the employee’s increased output after an employee relations effort is completed.
Performance improvement as a result of releasing employees. Average difference in the value of the employee output between those employees that were “released” and the replacement employee.

Educational Reimbursement

Improvement rates. The average dollar value of the increased “on-the-job” performance, faster promotion rates or increased retention rates after the degree is completed.

Overall HR Impact

Average revenue per employee. Percentage improvement between this year and last year of the average revenue per employee calculation (i.e. number of employees divided by total revenue).
Employee productivity. Percentage improvement between this year and last year of the average number of dollars spent on employee cost per dollar of profit generated (i.e. total employee costs divided by total profit).

Final Thoughts

Talent management and HR professionals are constantly saying they want to be business partners, but they are unlikely to meet that goal unless they become more “businesslike.” That means they must learn to utilize the tools that sales, marketing, supply chain, quality control, customer service, and finance have successfully used to build their credibility.

Talent management must build a strong alliance with the CFO’s office in order to learn their view of the “acceptable ways” of measuring program performance and revenue impacts, as well as to build up the CFO’s staff’s confidence in what you are doing. In tough economic times, all business functions increase their emphasis on metrics, economics, and statistics.

The question is, are you ready to make the change over to Talentonomics?