For this assignment, you will write an essay in which you compare and contrast the following strategic measurement tools used by business and human resource professionals as presented in the Required Unit Resources for this unit. Compare and contrast the
MEASUREMENT TOOLS FOR STRATEGIC HRM
Identify the common measurement tools for strategic HRM.
Housed within many HRMS are statistical packages for HRM. Just as we have to quantify and measure other parts of the organization, we also have measurement tools specific to HRM. Some of the most common tools are economic value added (EVA) balanced scorecards, including organizational scorecards and HR scorecards, and return on investment (ROI). Let’s take a brief look at each of these tools.
Economic Value Added
Economic Value Added (EVA)
Economic value added (EVA) is designed as a method for calculating the creation of value for the organization’s shareholders. Economic value added (EVA) is a measure of profits that remain after the cost of capital has been deducted from operating profits. It provides shareholders and managers with a better understanding of how the business is performing overall. As an equation, EVA would look like this:104
EVA = Net operating profit after tax – (Capital used × Cost of capital)
Return on Investment (ROI)
So EVA is a measure of how much money we made through our operations minus the amount of money that we had to spend or borrow (at a particular interest rate) in order to perform those operations. For a company to grow, it must generate average returns higher than its capital costs.
Return on Investment (ROI)
The concept of ROI is, at its core, very simple. Return on investment (ROI) is a measure of the financial return we receive because of something that we do to invest in our organization or its people. ROI is most commonly used in financial analyses, but many areas ofHR lend themselves to ROI calculations. These areas include training, outsourcing, benefits, diversity, and many others. In each of these areas, we can calculate the cost of the process—whether that process is training, diversity management, or anything else—and compare that to the returns we get from the process.
To calculate ROI, you need two figures: the cost of the investment and the gain that you receive from making the investment. From there, the calculation is pretty simple:
Let’s use a quick example to illustrate. Assume that we create a training course to improve the skills of our assembly workers, and also assume that we send those workers through that program. To send all of the workers through the training costs us $1,000,000. We know that historically, during a normal year of production, the assembly workers have been able to assemble $5,000,000 worth of our product. However, after the training is complete, we measure our assembly process over the ensuing year and find that our amount of product created that year has increased to $8,000,000. This gives us a $3,000,000 gain from the investment. We can plug these numbers into our calculation and find out the following:
So in this case, our return on investment over the course of 1 year is 2 times the cost of the investment.
It is always important to calculate at least a rough ROI for any investment in organizational resources. There’s a definite need to understand how much we get in return for an investment in our people. Don’t just assume that the return on investment is always positive—because it’s not.
Balanced Scorecard (BSC)
Balanced Scorecard/Organizational Scorecard
Is your organization achieving its mission? If you don’t have a quick and accurate answer, then besides financial measures, you need a BSC.105 The BSC is one of the most highly touted management tools today.106 The BSC concept, credited to Robert Kaplan and David Norton,107 basically states that measurement of an organization’s success using purely financial measures is not sufficient. The organization also has to take into account nonfinancial measures, like the learning and growth rate of its human resources pool, designed to help the organization compete strategically within its industry.108
The balanced scorecard (BSC) measures financial, customer service, internal process, and learning and growth (or sustainability) measures. All four dimensions of the scorecard are equally important, because the results in each area affect the other areas of performance.
In addition to the organization’s balanced scorecard, an HR scorecard has been designed and is being used by many businesses in operation today. The HR scorecard identifies HR deliverables and HR system alignment, compares HR alignment with strategy, and measures organizational gains created by HR practices.109 Let’s explain each of these four dimensions of the HR scorecard.
Which measurement tools are used where you work or have worked? If you don’t know, ask a financial manager whether EVA, ROI, BSC, and/or an HR scorecard are used.
1. Identifying HR deliverables. What functions does HR perform, and what services does HR deliver that provide value to the organization? These functions include many things we will introduce you to in this book—recruiting, selection, training, employee development, compensation and incentives, and many more.
2. Identifying HR system alignment through the use of a high-performance work system (HPWS). HPWS is a set of HR practices—including comprehensive employee recruitment and selection procedures, compensation and performance management systems, information sharing, and extensive employee involvement and training—that can improve the acquisition, development, and retention of a talented and motivated workforce.110
3. Aligning the system with company strategy. This is the process of comparing the HPWS with the organization’s strategic plan and making sure that the HR procedures being followed match well with a strategic direction of the company. In other words, if we are a differentiated producer, we need to make sure all of the recruiting, selection, training, and other processes are aligned with that differentiation strategy.
4. Identifying HR efficiency measures. This is the process of measuring the returns that the organization gets from its HR management policies through the use of items such as the EVA and ROI calculations above.