November 8, 2005
Manufacturers that track and address the effectiveness of their workplace practices make recruiting and retaining talent a key part of their strategy—a huge competitive advantage.
Editor's Note: This column was prepared by Todd Luchik, manager of content development and research for Winning Workplaces, a not-for-profit organization that helps small and midsized businesses create better work environments.
How effective are your workplace practices?
Most stampers don't know, because few have measured them. In fact, many organizations fail to track basic human capital numbers. For example, a recent survey by JHA and Employee Benefits News found that only 12 percent of companies examine the cost of unscheduled absences. More than a third said they don't even track unscheduled absences.
Manufacturers that track and address the effectiveness of their workplace practices—the ones that make recruiting and retaining talent a key part of their strategy—have a huge competitive advantage.
In business as in life, people's words don't always match their actions. For instance, you would be hard-pressed to find an executive who doesn't profess to believe that hiring and retaining top talent is a key to the organization's success. And yet those charged with overseeing staffing and retention often are relegated to a supporting or administrative role.
Most HR professionals are excluded when it comes to determining strategy. One main reason for this disconnect is that HR fails to present these matters in terms that interest top executives—profit and loss, cost, and customer satisfaction. Metrics is where discussion of profit and loss, cost, and customer satisfaction begins.
Tracking key metrics such as turnover, absenteeism, and cost per hire can provide insight into how your people practices contribute to operational effectiveness and the bottom line. For example, estimates place the cost of replacing an employee at 1.5 times that person's annual salary. This figure includes recruitment costs, overtime to cover for absent workers, and lost productivity.
Benchmark your turnover against industry averages to ensure your organization meets or beats those numbers. Some costs associated with absenteeism are the administrative costs of rescheduling or hiring staff, the added payroll of temporary workers, and reduced productivity. Tracking absenteeism can reveal a number of savings opportunities. You cannot begin reducing incumbent turnover and absenteeism costs until you first measure them.
Certain key metrics, such as sales per employee and customer retention, are indirectly affected by how well you manage your staff. For example, Costco has long been known for progressive people practices, while its chief competitor, Sam's Club, has a less than stellar reputation as an employer.
As a result, Costco consistently outperforms Sam's Club in terms of sales per employee and sales per square foot of store space. The company's CEO, Jim Sinegal, attributes their success to a generous compensation and benefits package and a progressive management style.
A recent joint study by Purdue business professor James Oakley and Northwestern University's Forum for People Performance Management and Measurement backs up Sinegal's assertions. The survey reveals that organizations with high levels of employee satisfaction are more likely to have high levels of customer satisfaction. Organizations with high employee and customer satisfaction levels also enjoy better financial results than their competitors.
This should come as no surprise. Poor customer service means spending more on reacquiring dissatisfied customers and marketing to new ones, both of which cost more than servicing returning clientele. Word-of-mouth referrals from loyal customers are a cheap and effective source of new business, whereas a negative reputation can drive people away in droves.
In light of Oakley's study, one could argue that the most important measure of people practices is employee morale. High levels of turnover and absenteeism or low sales-per-employee numbers and customer retention rates often are symptoms of serious morale problems.
Consistently tracking employee satisfaction levels through surveys or focus groups reveals how you're performing. High-performing companies use workplace assessments, collect data yearly, and address problem areas on a continuous basis.
Unfortunately, an underlying misconception remains that people issues are soft. Business owners should be reminded that between 1997 and 2003 the stock of FORTUNE magazine's "100 Best Companies to Work for in America" outperformed Standard & Poor's 500 Index by more than 430 percent.
This is no accident. These companies recognize the strategic importance of hiring and keeping the best people and have made workplace best practices a priority. They measure the effectiveness of their practices by benchmarking their turnover against industry standards or gauging the mood of their work force through employee surveys.
They make addressing workplace issues a priority, treating their people as more than just a cost to be minimized. While the executives of these companies are caring people who truly want to treat their employees well, they don't do this merely out of the goodness of their hearts. They do it out of enlightened self-interest. By any measure, a company that examines key workplace metrics and makes people issues a strategic priority is better for people and better for business.