Bottom Up
HR has always been a backward-looking function, serving up measurements of long-established processes and practices, or interviewing people as they leave rather than as they advance. If anybody expected much more of the function, they certainly didn't say so at budgeting time.

"Within HR, the sense was that we always had potential that was going unrealized," says Cynthia Maltbie, founder of HR firm People Logic and former executive vice president of human resources at Fidelity Investments. "HR has not been an incredibly well-funded area, and we needed to have funding to pay people to do the deeper analytical work. So rather than take a leadership role, we tended to be more oriented toward fulfilling the agenda an executive would set. We tended not to step out boldly."

And, really, what would they have said anyway? In recent years it has become fashionable for top management to mimic GE's iconic CEO, Jack Welch, who preached a staunch up-or-out approach. Welch praised HR as a critical function, arguing that its job was to rank employee productivity and fire the bottom 10%. Otherwise, the presence of those laggards would drive top performers away, planting the seeds of the company's implosion. Welch's fundamental rank-and-yank philosophy caught on (though the target percentage varied), in part because of its simplicity.

But the concept has its flaws. For one, rank-and-yank depends on skilled supervisors rendering rational judgments, yet Michelle Malay Carter, vice president at consulting firm PeopleFit, estimates that only about 40% of organizations have the proper structure in place to ensure that the most appropriate person evaluates employees. And since the company would always have a bottom 10%, this strategy inevitably breeds fear.

Then there is the question as to just how dead your deadwood really is: Without broader benchmarking, how can you possibly know that there are better replacements out there? Fortunately, this particular pearl of managerial wisdom "seems to have run its course," says Carter. But it may provide a useful example of how HR policies do, in fact, matter, and affect the entire organization.

Power to the People
That's worth bearing in mind as companies grapple with the concept of more-meaningful HR metrics. Over the past decade, as more of HR's transactional functions have been outsourced and automated, there has been keen interest in developing some sort of ultimate HR tool. A sophisticated system that pulled data from all over the company could enable company analysts — perhaps embedded in the HR department — to assess human capital in much the same way it ranks customers: by how much value they add to the company.

The technology could determine "what head count you'd need to support a new initiative," says Jason Averbook, CEO of Knowledge Infusion, a consulting firm specializing in HR analytics. The main contribution of HR would no longer be in filling an open IT position as effectively as possible today, but in determining "what kinds of coding skills you'll need in three years," Averbook says.

Metrics, however, can go only so far, as Jeff Mattiuz is learning. The vice president of finance at Oberg Industries, a tool-and-die maker that has seen its orders drop 45% in the last year, has turned to metrics in hopes of making some wise head-count decisions. He measures direct-labor utilization, overtime hours paid, company wages against industry benchmarks, and similar measures. The analysis "makes it easy for a numbers person to just cut people, reduce benefits, and restructure," he says.

Theoretically, that is. Walking the floor of his nonunion shop, Mattiuz can see that some of his recommendations have not been heeded. In this case, don't blame HR: they are firmly behind him, and acknowledge that some employees don't have enough work to justify their hours. But the operations managers disagree. "They tell me the statistics are just wrong," he says, "and I do recognize that numbers don't tell the whole story."

That's part of the story, anyway. "It's tough when you get down to personalities," he says. "There are certain employees that managers want to protect, so they shelter them and keep their hours up. I enjoy a healthy debate, but we can't sustain the business if we don't make the tough decisions."

It's one thing to measure; it's another thing to act. One possible solution, Averbook says, is to staff senior HR positions with people who have come from finance or other areas where ROI analysis and multivariable correlations have long been studied. Other companies may choose to restructure so that the head of HR reports to the CFO or to a chief performance officer.

"We are moving into a world where we have to be much more concerned with competing on the basis of our brainware," says Rutgers's Beatty. "The way we manage talent will make a profound difference in a company's success." A more sophisticated use of metrics would seem to be essential in establishing a link between popular HR initiatives, such as training, and their impact on corporate performance.

"The language of organizations is numbers," says Beatty. "HR needs to have the numbers to win arguments with management about where investments need to be made." And management needs to make sure there is a large enough number in the budget to allow HR to do that.

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