Analytics tools are poised to transform human resources. Measuring factors related to compensation, recruiting and employee retention helps ensure that HR spending calls are sound.

In the ongoing quest for greater efficiency and productivity, businesses have left few stones unturned. Over the past decade, companies have revamped practically every business process in the search for competitive advantage. The one area that most organizations haven't targeted is the squishy world of human capital.

That's starting to change. Analytics tools similar to those that have transformed finance, operations and customer relationship management are poised to revolutionize human resources. Workforce analytics software is helping companies examine compensation, recruiting, retention and performance so that they can make more informed decisions about how to structure HR programs, policies and pay. "Companies are recognizing that the softer side of the business can be measured and that it's a key factor in achieving success," observes David Ulrich, a business professor at the University of Michigan in Ann Arbor.

Combining business intelligence tools with advanced query and reporting capabilities, workforce analytics software provides new ways to view, manage and leverage HR data. These applications can identify compensation models that maximize productivity in a certain employee population, and they can determine behavioral characteristics of employees most likely to leave the organization.

Workforce analytics software empowers employees, from line managers up, to make effective decisions. These systems can tell a vice president of sales how to tweak compensation, rewards and responsibilities to keep top performers engaged. They can enable an operations executive to slice and dice data about labor trends to create an optimal pay structure at a new factory. They can show an HR director which benefits employees use -- and which they don't -- in order to most effectively allot corporate resources. And they can help finance executives track costs and ROI associated with HR projects.

Those capabilities "turn the intangible into tangible," observes Ron Hanscome, senior program director in the Plymouth, Minn., offices of IT research and consulting firm Meta Group Inc. "Although workforce analytics is rooted in human resources, the ability to deliver detailed information about workforce issues and trends benefits the entire organization."

"The power of workforce analytics is that it allows organizations to analyze a multitude of interrelated factors. It can drill into places that previously couldn't be reached," notes Betty Silver, human capital strategist at SAS Institute Inc. in Cary, N.C. "In today's highly competitive environment, gaining control of the cost and benefits of human capital is essential."

According to the Meta Group, about 60 percent of Global 2000 companies will use workforce analytics software by the end of 2003. Not surprisingly, several major enterprise resource planning (ERP) vendors -- including SAP, PeopleSoft, Oracle and Lawson -- have tossed their hats into the ring. Best-of-breed vendors like SAS Institute, Siebel Systems and Workscape have also entered the fray. All of these companies offer Web-based applications that can transform HR data into actionable knowledge. "The notion of HR metrics has finally taken shape," says Marcia Barkley, president and principal consultant of MBarkley Consulting in Sacramento, Calif.

New Light on HR Challenges

One organization that has embraced workforce analytics software is International Finance Corp., an arm of the World Bank Group headquartered in Washington, D.C., that has more than 2,000 employees in 63 countries. IFC provides loans and equity financing for private-sector projects in 175 countries.

In the past, IFC had no real grasp on the effectiveness of its compensation, recruiting and promotion strategies. "We tried to use spreadsheets but wound up with different people arriving at different answers," says Joseph Fucello, human resources program officer. "Too often, we used our gut instinct to make decisions." In addition, IFC wanted to understand why many of its investment officers -- mostly MBAs -- left the organization after about five years' service. "That's the time they become the most productive and valuable," Fucello notes.

That was a couple of years ago. Now IFC is blazing a trail to enterprise enlightenment by using SAS Institute's Human Capital Management software to leverage data stored in its Oracle Financials suite and its PeopleSoft human resources management system.

After implementing the system, IFC performed an analysis of its compensation structure and found that its investment officers were not receiving the sizable pay increases they expected after five years with the company. That finding led the organization to develop a career progression model and a performance-based compensation structure.

Because the system is Web-based, IFC has been able to deploy it globally. "We have employees in Africa and Asia who are using the system to make key business decisions," Fucello reports.

Now IFC is using the software to tackle another challenge: ensuring diversity in global staffing. "We are looking beyond traditional counting by nationalities and gender," Fucello says. "We're analyzing regional promotion trends to ensure that future management is as diverse as the clients we serve." The SAS application generates custom reports that refresh automatically as changes occur in the workforce, he notes.

Transforming Compensation

Managing compensation is never a simple task. In the late '90s at Northrop Grumman Information Technology, the $17.2 billion defense contractor Northrop Grumman's IT arm in Reading, Mass., tracking compensation companywide meant shuffling hundreds of spreadsheets among managers. Inaccurate data caused confusion. Analyzing the information was problematic, and using it to make solid business decisions was almost impossible. Human resources administrators wanted to adapt the company's pay structure to fit the needs of line managers looking to increase employee retention. And they wanted the ability to view each employee's compensation history -- including base and incentive pay, bonuses, and stock options -- at the click of a button.

Over the past few years, Northrop Grumman IT has implemented a Web-based compensation software package from Workscape. The system connects to the Lawson and PeopleSoft applications that manage the company's HR, payroll and financial data. Now managers can run what-if scenarios to see how pay increases for various employee populations affect budgeting and retention.

A budget review and planning process that used to take eight to 10 hours "now takes a few hours," says Audrey Sullivan, director of business solutions with Intellego Solutions LLC, an IT consulting spin-off of Northrop Grumman that manages the project. More importantly, "it's possible to know that the company is compensating its most valued employees appropriately," she notes. Following the success of the project at its IT division, Northrop Grumman extended the system to its corporate offices and now uses it to track some 22,000 employees.

Transforming Corporate Vision

While success stories like IFC's and Northrop Grumman's are common, workforce analytics initiatives present more than a few challenges. One of the biggest is mapping data so that it can flow seamlessly across departments, divisions and business units. "Workforce analytics is only as good as the underlying data and how it's used," the Meta Group's Hanscome cautions.

Plus, according to professor Ulrich, workforce analytics provides the greatest benefits when organizations use it to combine HR data with information from other corporate functions. Companies often have 10, 20 or even 30 years of finance and operations data squirreled away, he notes. By overlaying that information with employee and compensation data, workforce analytics systems can help finance executives understand a pay plan's effects on staffing levels or determine an optimal level of turnover. "An organization can make some scientific adjustments based on past successes and failures," Ulrich notes.

Then there's the challenge of choosing an approach and a particular product. The workforce analytics applications that ERP vendors offer are relatively simple to implement and generally work well for companies that already own an ERP suite, but most are not able to bridge gaps between heterogeneous systems. That's particularly problematic for businesses that depend on legacy applications or a mélange of datamarts. Those organizations may get better results from a stand-alone workforce analytics product -- and they may need custom programming or middleware to implement it.

Finally, there are cultural issues. According to Barkley, organizations that push analytics and decision-making out to managers require an entirely different mind-set. "It's essential to educate managers on how to use all the information," she says. And users must adapt as the company redefines their roles and work processes. "Workforce analytics is valuable only to the extent that people learn to collaborate and share data," she observes.

But the rewards are worth the effort -- and the cost. The Meta Group estimates that the typical cost of a workforce analytics package starts in the low six figures and averages about $250,000 per 10,000 employees. However, many purchasers recover that outlay within a few months to a year. The savings come from more effective planning and reductions in staff time. Managers can generate complex reports on the fly, eliminating the need for support from IT staff and analysts. The software also uncovers waste, overspend and areas where funds are not being used to maximum advantage.

What's more, a well-designed system can integrate with an HR scorecard and incorporate industry metrics to provide a more complete picture of cause-and-effect relationships.

For a growing number of companies, that's a winning strategy, and one that's transforming their corporate vision. "Workforce analytics allows organizations to connect the dots and view the big picture," says Hanscome. "It's finally possible to relate and correlate HR information to the rest of the business."