A recent McKinsey survey published in Mckinsey Quarterly ((Reineke, Spiller, Ungerman, 2007. “The Talent Factor in Purchasing.” McKinsey Quarterly 2007 Number 1. Page 6)) highlighted a study on the purchasing organization and the correlation of core competencies to an organization’s bottom line. While the purchasing organization has a clear and direct line to total costs and therefore profitability, this analysis can also be extrapolated to other centers of the operation.
I thought this was a very interesting study (if you have access to McKinsey Quarterly) where they looked at the performance ratings of purchasing employees and then tied those ratings with annual savings from purchasing as well as the annual reduction in cost of goods sold. McKinsey then went on to look at the correlation between three leading factors in talent competencies for purchasing employees and the percentage performance improvement gained by the business by each point of improvement in the competency score. The effects were obvious and quite large.
In today’s world where we in HR struggle to communicate relevant information to executives (relevant defined by them) this is the type of analysis that we need to be doing. Unfortunately, unless you have fully built out competency models that are fully integrated with your performance management plans, you’re out of luck. Not only do those programs need to be developed and integrated, but you need to have implemented them with the knowledge that you’d want a certain type of metric at the end of the day. Strike two. Not only that, but it would be awfully helpful if you had a data warehouse and some cubes sitting around to drill through the analytics. Strike three. The reality of this type of metric is that while it’s what we should be going for, HR doesn’t usually have the tools to plan for these programs or provide the total analysis needed. Not everyone can hire a McKinsey or even a guy like me.
What HR needs to do is prove the effect our programs have on the bottom line. Our talent programs are in their infancy, and we haven’t built them with the understanding of everything we’ll want out of them in ten year’s time. Many of us think we’ve turned the corner and talent is the next thing. Well, talent is the next thing, but if you think we’ve reached our final destination, you’re in for a wake-up call. The type of analysis that McKinsey did in this study is the type of data we should all have at our fingertips in the near future. Get ready for it…
11 responses to “Quantifying Competency’s Effect on Productivity”
Quantifying Competency’s Effect on Productivity In today’s world where we in HR struggle to communicate relevant information to executives (relevant defined by them) this is the type of analysis that we need to be doing. Unfortunately, unless you have fully built out competency … [
10. Gender gap in compensation begins at the onset of female careers… http://news.yahoo.com/s/nm/20070423/ts_nm/work_dc_2 and… http://news.yahoo.com/s/ap/20070423/ap_on_bi_ge/pay_gap_3 11. Competency and productivity… https://systematichr.com/?p=692 12. Book review: “True North”… counsel on leadership…. http://www.usatoday.com/money/books/2007-04-22-true-north-usat_N.htm 13. Employment web site association publishes its code of ethics…
In today’s world where we in HR struggle to communicate relevant information to executives (relevant defined by them) this is the type of analysis that we need to be doing. Unfortunately, unless you have fully built out competency … Read more
So, performance differences may in fact be causing best practices and not the other way around! This is why you need to read the Halo Effect. It’s not just me either; smart people think you should read it too. Addendum: Others have written about thesamearticle.
In spite of McKinsey’s rigor and results (and high consulting fees), HR can achieve similar results in compensation and benefits without detailed competencies since the quantitative aspects of their respective jobs most closely parallel the procurement function. For example, the healthcare benefits function has numerous ways its function can be objectively evaluated since many plan-related metrics exist.
Unfortunately, few benefits directors (under 5%) receive bonuses based upon their ability to manage trend (healthcare inflation) or get refunds due to overpayments for that matter. Given the amount of money benefits managers are spending, one would think that the McKinsey’s of the world would have figured this out, but McKinsey too for the most part actually avoids consulting to the HR function. Regardless, I totally agree with the McKinsey procurement model and agree that HR should follow that model. Benefits professionals should be proactive, raise their hand and volunteer to be the HR pilot. Not only will these individuals be rewarded, but HR would look like a hero once the results were in.
Howard’s example of managing trends in health care inflations is a great one to pull apart in terms of a companies responsibility to health of their employees that is not within the perview of health insurance.
Until HR and its clients and expanded network can begin to articulate the intangible measures that do not feed into the bottom line directly we will not be able to measure HR influence on ROI and bottom line.
The “new bottom line” as my colleague Gil Friend describes as a thought leader in the WE Sustainabilitly Thought Leader examines both tangible and intangible factors. Often it takes articulating programs, e.g. reducing non ionizing radiation exposure in the workplace to reduce employee risk of cancer and chronic illness, to measure a bottom line, e.g. reducing the hospital and emergency room visits that increase a company premiums.
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To establish a health prevention program that may be as extreme as eliminating or shielding employees from EMF Exposure (produced by wifi and cell phone use) requires partners with credentials outside of the realm of expertise that most HR firms currently hire or cooperate with to build measurable programs of impact on employees and other.
Investing in talent management may also be about investing in an HR program that is specific to your company and culture to help a recent graduate or credentialed expert adapt and learn how to learn in your company culture to build successful outcomes and measures with other.
[…] 24th, 2007 · No Comments Dubs at Systematic HR cites a recent Mckinsey’s Quarterly article by Reineke, Spiller and Ungerman. It shows that […]
Dubs
Great post – and always good to see a route through to proven bottom line impact for HR.
However, I’m not sure that I agree with the implication that talent management, competencies and metrics need a ‘big bang’ implementation to work (or at least plenty of resources).
My experience is that it is possible to get value from a competency-based approach tactically. Indeed, it’s almost usual – getting the full value of competencies usually demands some experience of using them. After that the implementation can be refined and extended (and almost always is, in my experience).
I’ve put up a post on my blog with more on this.
You’re spot on, mind you, when you say that talent is the next big thing, but it’s early days.
Cheers
Don
[…] The Talent Factor in Purchasing Interesting article from McKinsey about competencies already discussed by Donald H. Taylor and SystematicHR. […]
Dubs:
Chiming in a little late here – but the key finding of the report –
“Top purchasers hire better people for sourcing roles, set clearer performance aspirations for these people, and create strong purchasing cultures that align the purchasing function with corporate strategy.”
leaves me a little un-impressed. You could substitute HR Execs or CIO’s for purchasers – and the statement would still be true – right?
Tom O’B
The Talent Factor in Purchasing « TO’B HR Blog
[…] systematicHR – Human Resources Strategy and Technology » Quantifying Competency’s Effect on Produ… What HR needs to do is prove the effect our programs have on the bottom line. Our talent programs are in their infancy, and we haven’t built them with the understanding of everything we’ll want out of them in ten year’s time. Many of us think we’v (tags: talent-management resources hr roi value metrics) […]