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Please welcome Kris Dunn back to The HRExaminer Editorial Advisory Board. Who is Kris Dunn? That’s an easy question. Kris is the Chief Human Resources Officer for Kinetix, a RPO firm dedicated to growth companies. Prior to becoming a part of Kinetix, Kris has served as a VP of HR for DAXKO, a VP of HR for SourceMedical, a Regional VP of HR for Charter Communications, a HR Manager for BellSouth Mobility (subsequently known as Cingular and AT&T based on which round of consolidation you are referring to), and a Project Manager in the market research division of Aragon Consulting (gobbled up by IBM Global Services). With that track record in mind, he can say what he thought he never would – he has almost 15 years in the HR biz. Full Bio…
Revenue Per Employee: The Only Performance Goal You’ll Ever Need for HR Leaders
by Kris Dunn
Getting older is a bitch. The body breaks down, the hair starts going gray. Pharmaceutical commercials begin to be more interesting.
You also realize the way you do it isn’t the only way it can or should be done. Some call that perspective, others are blindsided by the shocking revelation they’re a face in the crowd.
Case in point: How do you measure the effectiveness of an HR Leader? I’ll define HR Leader fairly broadly to keep everyone engaged – let’s say that’s not only those who lead the HR function for an entire company, but also those with generalist responsibility over a client group of employees. If you support a line of business or a function and have a flock of employees to hire, train and fire, you’re an HR leader.
Talking about the effectiveness and performance of HR is a black hole. You’ve got the transactional side, performance, talent acquisition, etc. All sub-areas of HR have metrics, and HR leaders have been told that measurement is the key to the HR function being viewed as strategic.
But the top 20 metrics you can cite are really just white noise when it comes to measuring the effectiveness of an HR leader.
There’s only one metric that really matters when measuring HR. It’s called Revenue Per Employee (RPE). Take the revenue produced by your company or business unit and divide it by your total number of employee (FTEs for the budget geeks in the house).
Compare Revenue Per Employee year over year for your HR leader. Did it go up or down? That’s all you need to know. The rest is BS.
Here are some thoughts why Revenue Per Employee is the only metric that makes sense when viewing the performance of an HR Leader:
1. If it’s about the business, there’s no better measurement than revenue. Everything else is a squishy mess that the line leaders don’t understand or care to comprehend.
2. Your HR leader influences the biggest cost center in most companies – the people. If revenue takes a hit, he/she should always have their eye on the denominator of the RPE formula. That’s the expense side of the equation, and while it’s easy to make the number look better for a couple of quarters by cutting heads, the RPE metric makes the short-term focus be balanced with a view towards what’s going to deliver revenue over the next year – or five.
3. Everyone’s situation is different and needs change from company to company. The best HR leaders aren’t attached to any single platform of what talent levers are most important. Drop the right HR leader into the top job, and they should be able to evaluate the strategy that’s going to deliver an upward trend on Revenue Per Employee for any company – whether that’s Tyson Foods or Groupon.
4. All the stuff HR people love to argue about is embedded in the Revenue Per Employee formula. You have a secret sauce related to Performance? Innovation? Sales? Culture? If it’s something that can drive revenue, it impacts how you’re going to be measured via Revenue Per Employee. Pick any pet area of HR you love. It’s included in the formula if you really believe it can drive business results. The big question is whether you can get more ROI towards Revenue Per Employee by focusing your time somewhere else. That’s the game and the question you have to ask.
5. Revenue Per Employee is a great litmus test for an organization’s HR MBOs. You’ve got a project you want to spend a quarter on? Wow, that organizational design stuff sounds great, but hold up – how’s it going to generate a positive return to Revenue Per Employee? If you can’t articulate the impact to RPE and at least BS me a bit for how we’re going to measure the return, you’re probably not ready to talk about the money you want to spend on the project.
Start thinking about who you are as a HR pro related to Revenue Per Employee, and you quickly see some areas that you’re weaker in than you’d like to be. Me? I’m a decent analytical guy and love to recruit. My gap? I’m not sure I’ve spent enough time thinking about training and development and how it impacts the productivity of the workforces I’ve supported. If my past CEOs would have thrown the Revenue Per Employee slide up on a quarterly basis, that gap would have been exposed early and often.
Revenue Per Employee. The smart CEOs don’t need the details of what you’re doing with the workforce, they just want to see that metric over time, then have a little conversation about the top 5 things your team is focusing on that’s going to drive that number up.
Demand to be evaluated via Revenue Per Employee only – if you dare.
I’ve been talking to HR Execs over the last several months. I’m noticing something. There’s a change. We’ve crossed a line. Something’s up.
Here are some of the things I’ve heard:
- I am tired of hearing that ‘getting it’ is better than ‘doing it’. When getting it means not doing it, it’s an expensive thing to get. Doing it makes it possible to get it in the first place.
- I am extremely tired of investing my time and energy into free services that are supposed to make my life easier. They never do. And, I’m left drowning in the certainty that I no longer know what I am doing.
- I am tired of crap that changes just as I am getting used to using it. Developers (all of whom are either smarter than me or think so) make up new ideas about how to use stuff faster than I can absorb the old ones. As soon as I start to get the new and improved way, there’s another newer and improveder way.
- I am tired of free turning out to mean ‘ill-conceived’ or useless. The only part of free that is actually free is the part that doesn’t come directly out of my wallet. The weeks and months of learning stuff that doesn’t work or gets changed as soon as it does also comes out of my wallet in lost time and opportunity. That free stuff is really, really expensive.
- I am tired of feeling like understanding the latest toy is preferable to getting my job done. Sometimes the tsunami of the new drowns out my memory of what I was doing in the first place. While I may not be suffering from ADD or Autism, I want to hide from the next new thing you want to tell me about.
There is a change going on. We’re doing our jobs differently. It’s as if we’ve all been growing up and then, when we weren’t looking, something turned us into adults.
All around, advertising performance is changing. Mailing lists aren’t working like they used to. The marketing world is talking about targeting and retargeting.
I think this all has something to do with the maturity of the Software as a Service (SaaS) approach to delivering value.
Right now, SaaS Salespeople feel perfectly comfortable selling their ability to update software across the user base as a benefit. The SaaS business model only works when all customers use the same iteration of the tool. From one perspective, this offers the ability to innovate with amazing agility. From another perspective, features are produced without any friction.
The result is the sort of chaos that comes from an ever changing goal line. While agility is important, organizations resist change for a reason. Too much change, too fast is disabling. The problem with poorly implemented SaaS installations is that they destroy an organization’s ability to build on what it has learned.
In an enterprise setting, some of the randomness of rapidly evolving functionality is staved off by contract cycles and installation agreements. In the consumer markets, however, eternally new software, which must make developers happy, ceasely erodes the ability of the marketplace to move ahead.
The crack in the mirror is becoming clearer. Now that we have tasted unregulated change, we’ll start to hear about governing it.
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Several years ago, I got divorced. Setting the whole sad soap opera aside, a number of things that were important attributes of my life changed overnight. The short form of the story is that I got a new appreciation for the importance of Employee Assistance Programs.
One of the biggest surprises was the difference between being a home owner and a home renter. I’d owned the place in which I lived for so long that I’d forgotten what it meant to have a landlord. On the positive side, I was immensely more mobile and could afford to consider all sorts of living arrangements. As a renter, my commitment was as long as the lease and I had no material investment. The downside included limits on my freedom to modify the place, the loss of investment leverage and a lower sense of control.
Generally, renting involves less out of pocket expense, smaller commitment thresholds (on both sides), more personal mobility, less financial stability, less security and more of a certain kind of freedom. Somehow, ownership delivers a huge pile of intangible benefit in terms of perceived security and control.
When you rent, you can be assured that larger renters will receive better treatment; landlords have to manage their portfolios by focusing resources where the return will be greatest. So, if the largest tenant requires a certain infrastructure improvement, the rest of the tenants will share in the benefit. If a small tenant needs an improvement, it might take a while.
As long as you are willing to ride the horse of endless unpredictable upgrades, renting makes it possible (though not likely) to always have the latest tools and techniques at a marginal cost. Like any portfolio of rental properties, the flow of updates and maintenance depends more on the landlord’s financial position than market demands.
If, on the other hand, you want to customize the living area of your particular house, you’d better own it. If you value choice in tools and improvements, ownership makes it possible to choose timing based on your financial and needs.
In a nutshell, this is the surprise awaiting customers who move from on-premise software to SaaS. SaaS is a rental unit in which you can configure a few options. At the other end of the spectrum is the equivalent of home ownership. Many SaaS customers are waking up to the fact that they paid more attention to the monthly expenditure than they did to flexibility, control and ownership.
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Perhaps you’re the victim of the latest bad idea from Wall Street. Have you noticed that software companies, particularly SaaS companies, have made it a practice to outsource the installation and implementation of their tools? The rise of consultancies focused on the implementation of software is the best evidence of the trend.
So, the software company designs and improves its products based on what?
The key to understanding customer needs and requirements isn’t a focus group or a survey. It’s the hands on experience that comes from knowing your customer well enough to anticipate real world needs. Without a deep understanding of the details of implementation, integration and operational reality with the software, the product management function is left blind and helpless.
The result of outsourced implementation is the functionality herd mentality that dominates the marketplace. Ask anyone who was on the expo floor at HRTech to tell you the difference between vendors and you’ll discover an astonishing blank stare. Without a clear understanding of the world in which software is actually used, vendors use voodoo methodology to determine market requirements. Then, they applaud themselves for their achievement.
In the world of SaaS offerings, it’s as if all of the Tuxedo rental shops agreed on the one universal Tux. In order to fit any size male renter, the Universal Tux would need a mind bending array of buttons, hooks, elastic pieces, zippers and velcro in order to accommodate all of the possible users. It would have to be made of Lycra and feature Sansabelt pants.
By outsourcing the actual fitting of the garment, the manufacturer of the Universal Tux would be stuck imagining the variety of renters and introducing colors and features without actually checking into the user experience. (Hmm, now that I think of it, that might explain a lot about the tuxes I’ve seen recently.)
Tuxes are one thing. They are useful at the start of the marriage and occasional during it. HR Software, on the other hand, defines the daily operating environment of the people who use it. If HR Software were a tux, it would be the uniform you wore to work every day.
By intentionally blinding themselves to user reality, software companies are increasingly out of touch with the consequences of actually using the products that they sell.
In recent weeks, I’ve been party to a number of deep conversations with product managers from a variety of HR software houses. They were almost uniformly unable to imagine the actual costs of implementing their solutions (My guess is that the Total Cost of Ownership is something like 15 times the acquisition cost of a SaaS tool.) They generally preferred to brainstorm new product features to gathering coherent market data. Their relationships were more likely to be with buyers than users.
Software companies deal with buyers. Implementation consultants deal with users. The two groups don’t communicate in coherent ways.
Why is this?
Generally speaking, Wall Street (and Venture Investors) peg software company valuations (what you’d pay to buy the company) to a multiple of pure software revenues. SaaS companies are very attractive because it seems like you can rent that same ‘universal tux’ over and over again. (This is known as multi-tennancy). The costs associated with making the product fit a given customer always come at the expense of repeatable high-margin revenues. Software company owners and executives strive to move those costs off the books in order to maximize shareholder return.
It makes for great shareholder returns and bad market realities.
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