Please forgive a newbie to blogging, but here I go…

A really interesting article from Veritude recently brought to my attention to the idea of measuring Employee ROI.  The article puts forward the following issue –

“Executives rank productivity as the most important labor-related metric for their companies to track.  Curiously, though, productivity isn’t the most widely used metric today or the one that executives would most like to use in the future.”

The article goes on to link productivity to a metric called Employee ROI.  It points out that the most commonly used metrics in HR today are turnover and labor cost as percentage of revenue.

Linking Employee ROI to productivity and drawing contrast to cost focused metrics such as labor cost as % of revenue and turnover % is extremely interesting because it implies the recognition of productivity increase as including revenue increase as well as cost savings.  Maximizing productivity is fundamentally maximizing revenue and minimizing cost.  This concept is easy enough to understand, but business cases for new initiatives and projects to boost productivity are almost always based on cost reduction rather than on revenue increase.

The idea of cutting workforce cost while maintaining output as a way to improve productivity is certainly not new. Companies have turned to outsourcing for years now to reduce the cost of their HR departments and of their workforces in general. If the cost of the outsourced service is less than the current cost, cost can be cut and productivity can be increased with very little risk. The issue with improve productivity by cutting cost is that the approach rests on the fundamental assumption that output isn’t going to be impacted by the cost cutting measures.

Companies that embrace Employee ROI as a metric may try to improve productivity by actually taking steps to increase the output of their workforce rather than simply cutting cost. The idea of increasing output isn’t new either, but it is often perceived as more risky than cutting cost. Companies that adopt these tactics must accept the assumption that the value that each employee contributes to is variable and not constant. Investment in improving the ROI of each individual employee may be perceived as risky, but already there are indications that the strategy will be a winner in the long run.

We have seen some intriguing examples recently of forward thinking companies such as Google making unusually aggressive investments in human capital and achieving extraordinary business results. Were these investments justified with business cases rooted in cost savings? Probably not. As time goes on companies will have to accept the fact that increases in productivity can’t come from cost cutting alone. Companies will have to invest aggressively in their workforces to remain competitive. Perhaps the most interesting part of the debate is that the true thought leaders are the ones on the ground, making innovations in Human Capital Management on a daily basis.