Move Over, Profitability Per Employee — There’s a Better KPI

HRTech is bound to evolve in the coming times. Information Tech can be used to automate processes that are repetitive, prone to error and hypercritical. There are 50 per cent to 60 per cent of HR processes that can be replaced with process automation such as hiring and on-boarding, Recruitment, HR Administration, Analytics and Payroll processing.

For next decade, not just performance measurement or training or right recruitment process would be more than enough. Smart-Tech HR will need to be incorporated into designing of the organizational hierarchy functions and systems.

• Continuous Performance Feedback Would Become a Key HR function
• Personalized Learning Experiences Would Become Pivotal For Future Workforce
• HR Data Analytics Will Be Key For Organizations To Drive Efficiency 

Using profitability per Employee to predict efficiency of organization is like using miles in India for measuring Distance. Under rare circumstances these two might be correlated, but often the relationship is trivial at best. Profitability Per Employee is seldom predictive of future growth or effeciency. Not all revenue is created equally, and not all employees are paid equally.

However, there is an alternative KPI which can more accurately help predict growth of the enterprise, what we call is Strategic Key Ratio. Here’s how it works:

In the numerator, use material margin (or equivalent) rather than revenue. This is what a business has left over to convert materials into a product, and ultimately realize a profit. In other words, material margin represents the potential for value creation, whereas revenue as a numerator falsely assumes all our top line can flow through to the bottom line.

In the denominator, substitute the number of employees for total employee costs. Ultimately, the number of employees is unimportant. What it costs to enable those employees to do their jobs, however, is extremely important. Since we pay people more than just wages, total employee costs should include all people-related expenses: salary, commissions and bonuses, benefits, phone reimbursements, payroll processing, recruiting costs, professional development,.

This equation results in a telling snapshot of the state of a business. This ratio not only provides a snapshot of the financial health of a business, it also provides direction on where efforts should be directed to accelerate and sustain EBITDA growth:

• Under 3.0: Focus on margin improvement, because what’s the point in driving top-line growth if you’re not keeping any of your hard-earned revenue? Remember, most businesses have no problem making money; they have a problem keeping the money they make.
• 3 to 7: Pivot toward growth, but be selective about customer acquisition. Focus on targeted selling and catch a high-value whale rather than fishing for low-value minnows. Try and increase the efficiency of the employees by complete training, learning and development schedules.
• 7 and Above: Congrats! Keep doing what you’re doing and consider strategic add-ons to further accelerate value creation.

Conclusion:

We all understand that there is a pivot to organization required in terms of Technology, Finance, HR, Business Model. But firstly & only, we all need to understand the current status of our organization resources & costs with right vision and data. We need to evaluate HR cost from eagle’s eye point of view and micro view both. Once we understand our data points correctly it will give the right directions for management action.