Decoding Dollars with Data: A People Analytics Guide to Finance

Bridging the Gap, when financial metrics meet People Analytics

Photo by Headway on Unsplash

In the business world, it often comes down to the numbers, especially that golden term: ROI.

But what if there’s a hidden pathway, one that takes the countless aspects of human behavior and weaves them into the very fabric of financial outcomes? That’s where People Analytics (PA) can shine its light.

Imagine PA as a compelling story, showing the ups and downs, feelings, and events of people’s lives at work. Yet, with every twist and turn, there’s a direct thread tying it to tangible financial insights. It’s a blend where human understanding fits perfectly with the crucial metrics driving businesses.

To make sense of this intricate dance, we rely on Key Performance Indicators (KPIs). These KPIs act as interpreters, adeptly translating human behaviors into the concrete language of finance.

Especially for People Analytics experts, this isn’t just another tool in the their learning path. To elevate and establish your role as strategic partners in business, grasping these financial intersections is pivotal.

It’s about mastering the boardroom language, ensuring PA insights aren’t just heard but actively valued. If the goal is to influence business leaders and highlight PA’s transformative potential, it’s essential to communicate in terms that resonate, all while championing the invaluable human insights you bring to the table. While in business,

Showcasing value often translates to showcasing returns.

With this blend of human understanding and financial acumen, we’re not just merging two worlds; we’re redefining the future of People Analytics within the broader business landscape.

What follows is a comprehensive look at these KPIs, underscoring the undeniable importance of intertwining human capital insights with financial outcomes.

Drawing parallels between People Analytics (PA) and Finance using similar KPIs can provide a more tangible understanding for finance professionals. It helps them see the immediate value and benefits that PA can bring to their domain. Here’s a look at some comparable KPIs and how PA can benefit Finance.

Return on Investment (ROI) vs. Return on People (ROP)

• Finance KPI: ROI measures the profitability of investments.
• People Analytics KPI: ROP shows the value that an organization receives from its employees in relation to the amount it invests in them.

The concept of Return on People (ROP) is very similar to ROI, and while there isn’t a universally accepted formula, it’s typically approached in a manner similar to other return on investment (ROI) metrics in finance. At its core, ROP seeks to measure the financial return a company gets from its employees or from the people-related initiatives .

Here’s a simplified formula to conceptualize ROP:

ROP= Financial Benefit from Employees−Cost of Employees/ Cost of Employees

To break it down:

1. Financial Benefit from Employees: This could be the total revenue generated by the company, or more specifically, the portion of the revenue directly attributable to employee efforts.
2. Cost of Employees: This encompasses all costs related to employees. It includes salaries, benefits, training costs, recruitment costs, and any other expenses directly associated with maintaining your staff.

The result, multiplied by 100, will give us the ROP as a percentage.

For example, if a company earns a financial benefit of $10 million from its employees and spends $5 million on employee-related costs, the ROP would be:

=$10 million — $5 million/$5 million = 1

This means the company is getting a 100% return on its investment in its people.

However, it’s crucial to approach ROP with careful attention. The direct financial impact of employees (especially in non-sales roles) can be challenging to quantify. Furthermore, this simple formula might not capture the long-term value or potential future contributions of employees. Thus, while ROP can be a valuable metric, it should be used alongside other metrics and qualitative assessments for a full picture of employee value.

Cost of Goods Sold (COGS) vs. Cost Per Hire (CPH)

• Finance KPI: COGS quantifies the direct costs associated with producing goods that a company sells.
• People Analytics KPI: CPH evaluates the total expense a company incurs to bring on a new employee.

The philosophy behind Cost Per Hire (CPH) mirrors that of COGS in many respects. Both metrics strive to capture the direct costs linked to essential operational activities: for COGS, it’s production and for CPH, it’s recruitment.

Here’s a basic breakdown for each:

COGS: It represents the accumulation of direct costs tied to the production of the goods sold by a company. These can include raw materials, direct labor, and manufacturing-related overhead:

COGS= RawMaterials+ DirectLabor+ ManufacturingOverhead

Example: If a company has raw material costs of 50€, direct labor costs of 20€, and manufacturing overhead of 10€ for a product, the COGS would be: COGS = 50 + 20 + 10 = 80€

CPH: This metric aggregates all the costs involved in the hiring process. This could be advertising expenses, recruiter fees, interview expenses, background checks, and onboarding costs:

CPH= AdvertisingExpenses+ RecruiterFees+ InterviewCosts+ OnboardingCosts+OtherRelatedExpenses/ Total Number of Hires in that Role

Example: If a company spends 600€ on advertising, 1,000€ on recruiter fees, 500€ on interviews, and 1000€ on onboarding for a specific role and they hires two candidates for that role, the CPH for that role would be:

CPH = (600 +1,000 +500 + 1000)/2 =15,500 €

Additional Note: It’s essential to differentiate between “Cost of Recruitment” and “Cost Per Hire.” While both metrics pertain to the expenses associated with hiring processes, they provide distinct insights:

• Cost of Recruitment: This metric reflects the total expenditure involved in the recruitment process, including costs for advertising, screening, interviewing, and other recruitment-related activities. It provides an aggregate view of the total resources invested in sourcing talent.
• Cost Per Hire: This is a more specific metric that divides the total Cost of Recruitment by the number of hires made within a specific period. In other words, Cost Per Hire = (Total Cost of Recruitment) / (Number of Hires). This metric offers a per-person perspective, giving insights into the average expense incurred for each individual brought on board.

At their core, both COGS and CPH serve as vital instruments to show efficiency. While COGS offers insights into production efficiency and product profitability, CPH sheds light on the cost-effectiveness and efficiency of the recruitment process.

Just as businesses strategize to optimize COGS for better margins, HR departments and People Analytics teams aim to streamline processes to reduce CPH. This holistic understanding can empower companies to better allocate resources and drive profitability from multiple angles.

Earnings Before Interest & Tax (EBIT) vs. Employee Lifetime Value (ELV)

• Finance KPI: EBIT measures an organization’s operational profitability by excluding the effects of interest and tax.
• People Analytics KPI: ELV calculates the total net value an employee brings to an organization over the entire span of their tenure.

The concept behind Employee Lifetime Value (ELV) resonates with the ethos of EBIT. While EBIT focuses on providing a snapshot of a company’s operational health without the distortions of interest and tax, ELV aims to capture the comprehensive value of an employee, considering both contributions and costs during their time with the company.

Here’s a basic breakdown for each:

EBIT: This is an indicator of a company’s operating performance and capability to generate profit from core operations, excluding the costs of interest and tax. Formula:

EBIT=Revenue−OperatingExpenses(excludinginterestandtax)

Example: If a company generates a revenue of 1€ million and has operating expenses (excluding interest and tax) of 750,000€ the EBIT would be:

EBIT = 1 million — 750,000 = 250,000€

ELV: It’s a measure of the net value (contributions minus costs) an employee provides throughout their tenure at a company.

ELV=(AnnualContribution×TenureinYears)−(AnnualCost×TenureinYears)

Example: If an employee’s annual contribution (in terms of generated revenue, savings, etc.) to a company is 100,000€, and the annual cost (salary, benefits, training…) of that employee is around 60,000€ and they stay for 5 years, the ELV would be:

ELV = (100,000 × 5) — (60,000 × 5) = 200,000€

Additional Note: If you aim for a holistic view of an employee’s value contribution and you don’t wish to track Cost of Hiring as a separate KPI, it’s essential to incorporate the hiring cost into the ELV. This perspective means that the ELV for new joiners might initially show as negative, mainly due to the recruitment and onboarding costs. However, as the employee starts contributing, this value will typically turn positive, often from the second year onward. This shift highlights the time it takes for an employee to start net positively contributing to the organization, factoring in all associated costs.

While EBIT offers stakeholders an unclouded view of a company’s operational efficiency, ELV provides organizational leaders with insights into the tangible and intangible value an employee brings over their journey with the firm. In the grand narrative of business operations and human capital management, EBIT and ELV represent critical metrics that emphasize financial health and the comprehensive value of human resources, respectively.

Operating Margin vs. Talent Utilization Rate

• Finance KPI: Operating Margin is a profitability measure that indicates how much of each dollar of revenues is left over after both costs of goods sold (COGS) and operating expenses are considered.
• People Analytics KPI: Talent Utilization Rate assesses how effectively an organization’s human capital is being utilized towards productive tasks.

OperatingMargin= (OperatingIncome/Revenue)×100

Example: If a company has a revenue of $2 million and an operating income of $500,000, the Operating Margin would be 25%.

TalentUtilizationRate=(Billablehours/Totalworkinghours)×100

Example: For an employee with 160 total working hours in a month and 120 billable hours, the Talent Utilization Rate is 75%.

Understanding the relationship between operating Margin and Talent Utilization Rate can guide decisions around hiring, training, process improvements, and investments in technology. For instance, if Talent Utilization is low, yet Operating Margin is healthy, the company might have room to innovate, expand, or diversify. While first metric emphasizes the financial aspect and the other focuses on human resources, together they offer a 360-degree view of both the human and financial aspects of operational efficiency.

Liquidity Ratios vs. Employee Turnover Rate

• Finance KPI: Liquidity Ratios measure a company’s capability to pay off its short-term obligations using its most liquid assets. Key liquidity ratios include the Current Ratio and Quick Ratio.
• People Analytics KPI: The Employee Turnover Rate reveals the percentage of employees departing from an organization within a specific time frame (typically annually), indicating the rate of staff churn.

Liquidity Ratios (taking Current Ratio as an example): = Current Assets / Current Liabilities

Example:
With current assets of $1 million and current liabilities of $500,000, the Current Ratio is 2.

Employee Turnover Rate:

Employee Turnover Rate = (Number of employees who left during period / Average number of employees during period) × 100

Example:
If 20 employees leave a company with an average of 200 employees in a given period, the Turnover Rate is 10%.

Liquidity ratios unveil a firm’s financial flexibility, whereas turnover rate sheds light on its organizational backbone. A financially robust company can be susceptible if it faces high employee churn and vice versa.

On the other side, high employee turnover can impose recruitment and training costs, potentially straining liquidity. A firm grappling with liquidity might under-invest in employee welfare, potentially heightening turnover.

Final Note: In the field of People Analytics, it’s important to consider that there isn’t a one-size-fits-all approach when it comes to KPIs. Whether it’s Employee Lifetime Value, turnover rates, engagement scores, or any other metric, there isn’t a universally “correct” formula. How an organization calculates and interprets these KPIs often varies, depending on its unique goals, the data it has access to, and the level of complexity it wishes to delve into.

Factors such as the industry, the company’s size, its growth stage, and its strategic focus can significantly influence the components and weights given to specific metrics. So, when working with or presenting these KPIs, it’s always essential to customize them to your organization’s context, ensuring they are relevant, actionable, and aligned with the company’s broader objectives.

In overall, comparing financial markers with our People Analytics isn’t just for show. It’s about speaking the same language as our finance pals and showing that, we’re all on the same team, aiming for the same goals.

For those of us in People Analytics, these side-by-side looks are like secret handshakes — they help us fit in and contribute to the big decisions.

Remember, it’s not just about numbers or people alone, It’s about how both dance together that makes our company groove.

So, the next time you’re chatting with the business team, use these comparisons as your playlist. Let’s ensure we’re not just part of the conversation, but leading the beat in our company’s success story.

If you find yourself at a crossroads, grappling with how to define your People Analytics KPIs, let’s connect, I’d be happy to support and exchange.

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