Evidence-based human resources (EBHR) represents a dramatically new approach to human capital analytics.
It provides practitioners with a conceptual framework as well as practical applications so they can establish causal connections between talent management and business performance.
In a 2001 survey by the Conference Board in the United States, 86 per cent of respondents reported the main motivation for measuring human capital was to “improve unit or company-wide bottom line.”
Another Conference Board study, conducted in 2004, found respondents had been quite successful in linking their human capital measures to internal HR goals, but less active in connecting their measures to business goals.
However, a few companies, such as Hewlett-Packard (HP), have been making inroads by establishing links between their HR practices and performance. Some have begun testing hypotheses regarding their own HR practices and a few have incorporated external research findings into the design of programs.
Hewlett-Packard goes for customer-centric culture
In 2002, Hewlett-Packard launched an initiative to build and maintain a “customer-centric culture.” The leadership team realized that to gain a greater understanding of the complex relationships between employees, customers and the financial performance of the business, this new strategy would need to include ideas and talent from across many functional boundaries of the organization.
So they constructed cross-functional teams at the corporate and business level. Involving leaders from different parts of the organization, such as marketing, HR and finance, helped each of them learn about their respective parts.
The teams approached the problem from an evidence-based perspective — incorporating HP’s existing marketing and HR data, existing research and the team members’ own strategic intuition — to develop a conceptual model that would help them understand their primary business drivers. This model was designed to identify and help actively manage the causal links between customer behaviour, the dynamics of the overall customer experience and the variables that impact the employee experience.
At the core of this model lay principles from the “service profit chain,” which provided HP executives with a linear, research-based explanation for the causal relationships between employee behaviours, customer experience, customer-buying behaviours and, ultimately, financial results. By incorporating their own employee and customer data, they were able to integrate the concepts from the service profit chain into a model that reflected HP’s pattern of relationships between employees, customers and financial performance — the “business performance chain.” There were three major steps taken to build this chain: managing financial performance; understanding the customer experience; and linking the employee experience.
Managing financial performance
Since the ultimate goal was to improve financial performance, the teams decided to start with business outcomes and then work backwards, collecting evidence to empirically demonstrate the various links in the business performance chain. Using this approach and incorporating existing research in the field of employee engagement, along with HP’s own internal employee and marketing data, the teams confirmed that financial performance begins with employees. They must deliver the experiences that drive customer loyalty and growth.
HP’s internal research found a strong correlation between their customer loyalty index (an aggregate of customer loyalty survey results) and three aggregate financial outcome measures: market share, gross margin and revenue growth. This result was strategically important because it justified the business case for focusing squarely on customer experience, while building confidence that increased efforts to improve customer experience would result in improved financial performance.
Understanding the customer experience
The discovery of a strong relationship between customer loyalty and financial performance encouraged HP executives to take a closer look at customer loyalty scores. Internal research revealed customer perceptions of product quality and support satisfaction were among the key drivers.
But improving product quality and support satisfaction and, more importantly, measuring those improvements were not straightforward propositions. In 2004, HP began to measure the behaviours of customer support operations teams. By analysing this employee performance data along with the corresponding customer satisfaction scores, the company discovered important correlations between several lower-level operational measures (such as knowledge and courtesy of customer service staff) and key customer experience measures (such as support satisfaction). This meant HP was able to diagnose a decline in operational-level measures before they affected the bottom line.
Linking the employee experience
In 2005, HP started analysing employee surveys to help identify links between the employee experience and operational performance. They began by grouping employees based on their function, recognizing that certain employee functions have more direct impact on specific operational outcomes.
The analysis revealed that certain key drivers of the employee experience, particularly “effective collaboration” and “empowerment to make decisions,” are jointly correlated to responses to specific sets of questions as well as those operational performance outcomes linked to customer attitudes. HP managers could now confidently focus their efforts on those areas of the employee experience that have the most direct impact on the business performance chain.
Acting on the evidence
Since 2005, Hewlett-Packard’s business performance chain has successfully been enacted in several businesses across the company. One business unit was falling well behind the competition, facing negative customer loyalty scores and increasing its percentage of at-risk customers. Starting with the employee experience, HP launched a comprehensive set of initiatives focusing on two aspects of the employee experience — empowering them to make improvements and improving cross-team collaboration — which, through their research, had been empirically connected to customer loyalty and financial performance.
Several operational measures improved as a result of employee initiatives. Following improvements in operational measures, HP experienced increases in several key measures of customer satisfaction. As anticipated, optimization of operational measures led to improvements in the net customer loyalty index. Finally, and most importantly, this business unit experienced increases in gross profit as a percentage of revenue — and, thanks to the knowledge of how this turnaround had come about, managers are able to continue to improve business results.
John Gibbons is a senior research advisor in the management excellence program at the Conference Board in New York. Christopher Woock is a research associate in the same program. For more information, visit www.conference-board.org.