Feature

When it comes to making decisions about people issues and programs, intuition isn't enough. To make optimal business decisions, management needs data-based insights.

Business metrics and analytics to support business decisions fall into three categories—benchmarking, behavioral analysis, and predictive analytics. While benchmarking reveals how a company compares to its competitors and behavioral analysis explores who does what and why, the deepest level of insight comes from predictive analytics—the new frontier of HR business metrics.

Predictive analytics involves mining data to identify patterns that can predict future outcomes. Credit card companies routinely use data mining to analyze millions of transactions and predict whether a given transaction is fraudulent. Predictive analytics is used in many other marketing, customer relationship, and risk management applications. Now, Hewitt is applying the methodology to help companies make better decisions about human capital management.

Linking HR Investments to Shareholder Value
For the first time, Hewitt's Human Capital Foresight™ (HCF) applies predictive analytics to a massive database of HR data and transactions to predict the impact of people-related decisions on business operations and shareholder value. "Our clients now have a quantitative, data-based model to help them make optimal human capital decisions," says Judy Whinfrey, Hewitt's Client Leader for Human Capital Foresight. Using HCF, companies will be able to model the operational and financial impact of such fundamental strategies as differentiation, pay at risk, total rewards mix, and organizational structure. They can identify "flight risks" among pivotal employees (those who are crucial to business results), set priorities for human capital investments, and generate metrics for internal and external reporting and performance measurement.

"The day will come when key HCF metrics are as commonly reported to the investment community as earnings per share," says Mark Ubelhart, Hewitt's Value-Based Management Leader. "The metrics represent the bottom-line equivalent of earnings per share for human capital."

Human Capital Foresight provides the predictive analytics companies need to quantify business impact before they make people-related decisions. "This is where I think HR can deliver clear strategies directly linked to the business and clearly identify the return on their spend, rather than simply saying, 'We need to do this because it's the right thing from an HR perspective,' " says Bob Toohey, Vice President of Total Rewards for Verizon Communications Inc., one of eight clients that participated in the HCF pilot. "Should I spend more on training or reallocate the funds elsewhere, if the data tells me I won't get a solid return on my investment? That kind of quantitative analysis is important in today's environment. This is in the right direction—we need to continue to refine it and deliver the answers to our internal clients."

Leveraging the Industry's Leading Database
Human Capital Foresight leverages the massive amounts of data Hewitt collects and routinely refreshes for clients. Hewitt's HR database—the most extensive in the industry—is a by-product of their HR outsourcing and consulting engagements with clients. More than 1,000 companies and more than 20 million employees are represented in the database. All personal and company identifiers are removed to protect confidentiality before the data is aggregated and analyzed using HCF.

Hewitt's vast database eliminates the need for clients to do their own data collection and cleansing, which is costly and difficult. "That's a real benefit," says Toohey. "If I run a metric and want to compare it to other companies, I can get that data without having to do surveys and a lot of extra work with data that has already been compared against benchmarks from the companies in Hewitt's database. This is beneficial in the long run, because HR managers often run various metrics such as cost per employee and staffing statistics. But is the result good or bad? You need a basis for comparison and a target to achieve improved results."

Attracting and Retaining Pivotal Employees
With data on more than 20 million employees, Hewitt's HR database is a microcosm of the U.S. labor market. In mining the data, Hewitt was able to analyze the aggregate flow of employees into and out of companies, and observe the movement of pivotal employees. The researchers demonstrated that the flow of pivotal employees into and out of an organization is a strong predictor of shareholder value creation.

Human Capital Foresight captures this flow in a metric called Talent Quotient™ (TQ). A company's TQ score reflects the level of its ability to attract and retain pivotal employees.

Hewitt identified HR factors that correlate with TQ, from differentiation of pay increases to executive tenure, and converted them into metrics. Using HCF, a company can see how its score on each metric influences the company's overall TQ score—and how changing the underlying variable can improve that score.

The results can be a powerful guide for people-related business decisions. For example, HCF revealed that for companies already providing above-average benefits, modest reductions in benefit levels have a minimal effect on the ability to retain pivotal employees. In addition, companies that overweight benefits offered today compared with benefits accumulated over time score better than average in attracting pivotal employees but below average in retaining them. And in certain cases, companies with dramatically differentiated pay programs for high-potential employees can actually exacerbate their loss of top talent.

In general, the research revealed that for many drivers of TQ, more differentiation is not necessarily better. "For pay raises and many other metrics, if you have too much differentiation, you may actually be at a disadvantage," says Whinfrey. "Through HCF, we can define the optimal level."

Optimization Charts Reveal Sweet Spots
The key findings of HCF analyses are captured in "optimization charts" showing where a company stands on each metric, compared to the optimal position, or "sweet spot." The sweet spot is the metric value that results in the maximum contribution to the company's overall TQ score.

A sample optimization chart for the metric "differentiation of pay increases" (how widely or narrowly pay increases are distributed across the population) is shown here for a hypothetical company.

The red circle shows the company's current position for the metric. The vertical bars within each segment show how much the company's TQ score could change if it moved toward that metric value by changing policy. That TQ improvement translates to a financial impact on the company's future cash flows.

This company's degree of pay increase differentiation is beyond the sweet spot. That suggests the company should focus on all elements that impact pay increases, such as performance management, career progression, and identification of high-potential employees.

The objective of each optimization chart is to provide insights into which areas may warrant further investigation. Such action-oriented insights are provided for every metric and tailored for each client. A quick scan of all of the metrics, and the height of the sweet spots, gives management a fact-based prioritization of its human capital investment opportunities.

It's particularly revealing to evaluate each metric for narrower segments within the company. The standard Scouting Report—an annual report of HCF findings tailored for each participating client—offers segment analysis for three compensation categories—broad professional, management, and executive. "There's incredible interest among some clients in taking deeper dives," says Ubelhart. "Companies want to compare sales organizations across divisions, or different demographic segments to one another. Our ability to do cross-segment, cross-company, and cross-industry analysis has tremendous value in making fact-based policy decisions."

Sample Optimization Chart

METRIC: DIFFERENTIATION OF PAY INCREASES

The objective of each optimization chart is to provide insights into which areas may warrant further investigation. Such action-oriented insights are provided for every metric and tailored for each client. A quick scan of all of the metrics, and the height of the sweet spots, gives management a fact-based prioritization of its human capital investment opportunities.

Rollout to Hewitt Outsourcing Clients
After intensive work with eight pilot companies, with Hewitt as the ninth, the HCF team is gearing up to deliver customized Scouting Reports to a select group of outsourcing clients that have sufficient depth of data to ensure effective analysis. The inaugural report is being provided at no cost as an extension of current services.

"I think that linking HR investments to business results, through Human Capital Foresight, will help move HR managers one step closer toward where they need to be," says Toohey. "It will bring them into the future, get them moving in the same direction that the entire business world is moving. If you, as an HR manager, can't prove your case from a business point of view, you won't be able to make a significant impact on your company."

 Back to Top