The LAMP Framework
We believe that a paradigm extension toward a talent decision science is key to getting to the other side of the wall. Incremental improvements in the traditional measurement approaches will not address the challenges. HR measurement can move beyond the wall using what we call the LAMP model, shown in Figure 1-3. The letters in LAMP stand for logic, analytics, measures, and process, four critical components of a measurement system that drives strategic change and organizational effectiveness. Measures represent only one component of this system. Although they are essential, without the other three components, the measures and data are destined to remain isolated from the true purpose of HR measurement systems.
Figure 1-3 Lighting the LAMP.
The LAMP metaphor refers to a story that reflects today's HR measurement dilemma:
- One evening while strolling, a man encountered an inebriated person diligently searching the sidewalk below a street lamp.
- "Did you lose something?" he asked.
- "My car keys. I've been looking for them for an hour," the person replied.
- The man quickly scanned the area, spotting nothing. "Are you sure you lost them here?"
- "No, I lost them in that dark alley over there."
- "If you lost your keys in the dark alley, why don't you search over there?"
- "Because this is where the light is."
In many ways, talent and organization measurement systems are like the person looking for the keys where the light is, not where they are most likely to be found. Advancements in information technology often provide technical capabilities that far surpass the ability of the decision science and processes to use them properly. So it is not uncommon to find organizations that have invested significant resources constructing elegant search and presentation technology around measures of efficiency, or measures that largely emanate from the accounting system.
The paradox is that genuine insights about human resources often exist in the areas where there are no standard accounting measures. The significant growth in HR outsourcing, where efficiency is often the primary value proposition and IT technology is the primary tool, has exacerbated these issues.7 Even imperfect measures aimed at the right areas may be more illuminating than very elegant measures aimed in the wrong places.
Returning to our story about the person looking for keys under the street lamp, it's been said, "Even a weak penlight in the alley where the keys are is better than a very bright streetlight where the keys are not."
Figure 1-3 shows that HR measurement systems are only as valuable as the decisions they improve and the organizational effectiveness to which they contribute. HR measurement systems create value as a catalyst for strategic change. Let's examine how the four components of the LAMP framework define a more complete measurement system. We present the elements in the following order: logic, measures, analytics, and, finally, process.
Logic: What Are the Vital Connections?
Without proper logic, it is impossible to know where to look for insights. The logic element of any measurement system provides the "story" behind the connections between the numbers and the effects and outcomes. In this book, we provide logical models that help to organize the measurements and show how they inform better decisions.
Most chapters provide "logic models" for this purpose. Examples include the connections between health/wellness and employee turnover, performance, and absenteeism in Chapter 5, "Employee Health, Wellness, and Welfare." In Chapter 4, "The High Cost of Employee Separations," on employee turnover, we propose a logic model that shows how employee turnover is similar to inventory turnover. This simple analogy shows how to think beyond turnover costs, to consider performance and quality, and to optimize employee shortages and surpluses, not just eliminate them. In Chapter 8, "Staffing Utility: The Concept and Its Measurement," we propose a logic model that shows how selecting employees is similar to optimizing a supply chain for talent, to help leaders understand how to optimize all elements of employee acquisition, not simply maximize the validity of tests or the quality of recruitment sources. In Chapter 9, "The Economic Value of Job Performance," we propose a logic model that focuses on where differences in employee performance are most pivotal, borrowing from the common engineering idea that improving performance of every product component is not equally valuable.
Another prominent logic model is the "service-value-profit" framework for the customer-facing process. This framework depicts the connections between HR and management practices, which affect employee attitudes, engagement, and turnover, which then affect the experiences of customers, which affect customer-buying behavior, which affects sales, which affect profits. Perhaps the most well-known application of this framework was Sears, which showed quantitative relationships among these factors and used them to change the behavior of store managers.8
Missing or faulty logic is often the reason well-meaning HR professionals generate measurement systems that are technically sound but make little sense to those who must use them. With well-grounded logic, it is much easier to help leaders outside the HR profession understand and use the measurement systems to enhance their decisions. Moreover, that logic must be constructed so that it is understandable and credible not only to HR professionals, but to the leaders they seek to educate and influence. Connecting HR measures to traditional business models in this way was described as Retooling HR, by John Boudreau, in his book of that name.9
Measures: Getting the Numbers Right
The measures part of the LAMP model has received the greatest attention in HR. As discussed in subsequent chapters, virtually every area of HR has many different measures. Much time and attention is paid to enhancing the quality of HR measures, based on criteria such as timeliness, completeness, reliability, and consistency. These are certainly important standards, but lacking a context, they can be pursued well beyond their optimum levels, or they can be applied to areas where they have little consequence.
Consider the measurement of employee turnover. Much debate centers on the appropriate formulas to use in estimating turnover and its costs, or the precision and frequency with which employee turnover should be calculated. Today's turnover-reporting systems can calculate turnover rates for virtually any employee group and business unit. Armed with such systems, managers "slice and dice" the data in a wide variety of ways (ethnicity, skills, performance, and so on), with each manager pursuing his or her own pet theory about turnover and why it matters. Some might be concerned about losing long-tenure employees, others might focus on high-performing employees, and still others might focus on employee turnover where outside demand is greatest. These are all logical ideas, but they are not universally correct. Whether they are useful depends on the context and strategic objectives. Lacking such a context, better turnover measures won't help improve decisions. That's why the logic element of the LAMP model must support good measurement.
Precision is not a panacea. There are many ways to make HR measures more reliable and precise. Focusing only on measurement quality can produce a brighter light shining where the keys are not! Measures require investment, which should be directed where it has the greatest return, not just where improvement is most feasible. Taking another page from the idea of "retooling HR" to reflect traditional business models, organizations routinely pay greater attention to the elements of their materials inventory that have the greatest effect on costs or productivity. Indeed, a well-known principle is the "80-20 rule," which suggests that 80 percent of the important variation in inventory costs or quality is often driven by 20 percent of the inventory items. Thus, although organizations indeed track 100 percent of their inventory items, they measure the vital 20 percent with greater precision, more frequency, and greater accountability for key decision makers.
Why not approach HR measurement in the same way? Factors such as employee turnover, performance, engagement, learning, and absence are not equally important everywhere. That means measurements like these should focus precisely on what matters. If turnover is a risk due to the loss of key capabilities, turnover rates should be stratified to distinguish employees with such skills from others. If absence has the most effect in call centers with tight schedules, this should be very clear in how we measure absenteeism.
Lacking a common logic about how turnover affects business or strategic success, well-meaning managers draw conclusions that might be misguided or dangerous, such as the assumption that turnover or engagement have similar effects across all jobs. This is why every chapter of this book describes HR measures and how to make them more precise and valid. However, each chapter also embeds them in a logic model that explains how the measures work together.
Analytics: Finding Answers in the Data
Even a very rigorous logic with good measures can flounder if the analysis is incorrect. For example, some theories suggest that employees with positive attitudes convey those attitudes to customers, who, in turn, have more positive experiences and purchase more. Suppose an organization has data showing that customer attitudes and purchases are higher in locations with better employee attitudes. This is called a positive correlation between attitudes and purchases. Organizations have invested significant resources in improving frontline-employee attitudes based precisely on this sort of correlation. However, will a decision to improve employee attitudes lead to improved customer purchases?
The problem is that such investments may be misguided. A correlation between employee attitudes and customer purchases does not prove that the first one causes the second. Such a correlation also happens when customer attitudes and purchases actually cause employee attitudes. This can happen because stores with more loyal and committed customers are more pleasant places to work. The correlation can also result from a third, unmeasured factor. Perhaps stores in certain locations (such as near a major private university) attract college-student customers who buy more merchandise or services and are more enthusiastic and also happen to have access to college-age students that bring a positive attitude to their work. Store location turns out to cause both store performance and employee satisfaction. The point is that a high correlation between employee attitudes and customer purchases could be due to any or all of these effects. Sound analytics can reveal which way the causal arrow actually is pointing.
Analytics is about drawing the right conclusions from data. It includes statistics and research design, and it then goes beyond them to include skill in identifying and articulating key issues, gathering and using appropriate data within and outside the HR function, setting the appropriate balance between statistical rigor and practical relevance, and building analytical competencies throughout the organization. Analytics transforms HR logic and measures into rigorous, relevant insights.
Analytics often connect the logical framework to the "science" related to talent and organization, which is an important element of a mature decision science. Frequently, the most appropriate and advanced analytics are found in scientific studies that are published in professional journals. In this book, we draw upon that scientific knowledge to build the analytical frameworks in each chapter.
Analytical principles span virtually every area of HR measurement. In Chapter 2, we describe general analytical principles that form the foundation of good measurement. We also provide a set of economic concepts that form the analytical basis for asking the right questions to connect organizational phenomena such as employee turnover and employee quality to business outcomes. In addition to these general frameworks, each chapter contains analytics relevant specifically to the topic of that chapter.
Advanced analytics are often the domain of specialists in statistics, psychology, economics, and other disciplines. To augment their own analytical capability, HR organizations often draw upon experts in these fields, and upon internal analytical groups in areas such as marketing and consumer research. Although this can be very useful, it is our strong belief that familiarity with analytical principles is increasingly essential for all HR professionals and for those who aspire to use HR data well.
Process: Making Insights Motivating and Actionable
The final element of the LAMP framework is process. Measurement affects decisions and behaviors, and those occur within a complex web of social structures, knowledge frameworks, and organizational cultural norms. Therefore, effective measurement systems must fit within a change-management process that reflects principles of learning and knowledge transfer. HR measures and the logic that supports them are part of an influence process.
The initial step in effective measurement is to get managers to accept that HR analysis is possible and informative. The way to make that happen is not necessarily to present the most sophisticated analysis. The best approach may be to present relatively simple measures and analyses that match the mental models that managers already use. Calculating turnover costs can reveal millions of dollars that can be saved with turnover reductions, as discussed in Chapter 4. Several leaders outside of HR have told us that a turnover-cost analysis was the first time they realized that talent and organization decisions had tangible effects on the economic and accounting processes they were familiar with.
Of course, measuring only the cost of turnover is insufficient for good decision making. For example, overzealous attempts to cut turnover costs can compromise candidate quality in ways that far outweigh the cost savings. Managers can reduce the number of candidates who must be interviewed by lowering their selection standards. The lower the standards, the more candidates will "pass" the interview, so fewer interviews must be conducted to fill a certain number of vacancies. Lowering standards can create problems that far outweigh the cost savings from doing fewer interviews! Still, the process element of the LAMP framework reminds us that often best way to start a change process may be first to assess turnover costs, to create initial awareness that the same analytical logic used for financial, technological, and marketing investments can apply to human resources. Then the door is open to more sophisticated analyses beyond the costs. Once leaders buy into the idea that human capital decisions have tangible monetary effects, they may be more receptive to greater sophistication, such as considering employee turnover in the same framework as inventory turnover.
Education is also a core element of any change process. The return on investment (ROI) formula from finance is actually a potent tool for educating leaders in the key components of financial decisions. It helps leaders quickly incorporate risk, return, and cost in a simple logical model. In the same way, we believe that HR measurements increasingly will be used to educate constituents and will become embedded within the organization's learning and knowledge frameworks. For example, Valero Energy tracked the performance of both internal and external sources of applicants on factors such as cost, time, quality, efficiency, and dependability. It provided this information to hiring managers and used it to establish an agreement about what managers were willing to invest to receive a certain level of service from internal or external recruiters. Hiring managers learned about the tradeoffs between investments in recruiting and its performance.10 We will return to this idea in Chapters 08, 09, and 10.
In the chapters that follow, we suggest where the HR measures we describe can connect to existing organizational frameworks and systems that offer the opportunity to get attention and to enhance decisions. For example, organizational budgeting systems reflect escalating health-care costs. The cost measures discussed in Chapter 5, offer added insight and precision for such discussions. By embedding these basic ideas and measures into the existing health-care cost discussion, HR leaders can gain the needed credibility to extend the discussion to include the logical connections between employee health and other outcomes, such as learning, performance, and profits. What began as a budget exercise becomes a more nuanced discussion about the optimal investments in employee health and how those investments pay off.
As another example, leaders routinely assess performance and set goals for their subordinates. Measuring the value of enhanced performance can make those decisions more precise, focusing investments on the pivot points where performance makes the biggest difference. Chapter 9 describes methods and logic for measuring the monetary impact of improved performance.
You will see the LAMP framework emerge in many of the chapters in this book, to help you organize not only the measures, but also your approach to making those measures matter.