If your small business has yet to kick off an HR analytics strategy, now is the time. Whether you have five, 50 or 500 employees, insights can be gleaned from taking a hard look at your people data — insights that can help you understand how to improve internal processes and better distribute talent to deliver on your business’s goals.
What is HR analytics?
HR analytics is the practice of collecting and analyzing talent data to drive business decisions. Talent data encompasses any information related to employees, from recruiting metrics to turnover rates and everything in between; it can be qualitative information (such as employee engagement survey results) or quantitative information (like cost per hire, time to start, etc.).
Software is required for HR analytics. Businesses may use a standalone HR analytics tool (such as Visier or Personio) or another form of HR software with built-in reporting functionalities. HR analytics may also be called workforce analytics, talent analytics or people analytics.
Benefits of HR analytics
HR.com’s State of People Analytics survey revealed that 57% of HR professionals agree or strongly agree that people analytics leads to better business outcomes. That’s the headline when it comes to the benefits of HR analytics, but let’s look into some of the specific ways this practice improves business outcomes.
- Improved hiring decisions: HR analytics enables data-driven hiring decisions, which will always produce better results than hiring based on a hunch. For example, you can analyze historical data on the channels you use to source candidates and determine which ones produce the most high-quality hires. Then, you can focus sourcing efforts and resources on those channels.
Screening assessments (which help judge a candidate’s fit for a role) provide another example of how HR analytics can improve hiring decisions. You can design screening assessments to measure applicants’ proficiency in specific skills, using the results to determine which candidates should move forward in the interview process.
- Better candidate experience: If you commit to collecting recruitment data over time, you can use it to improve the candidate experience at your organization. Certain metrics (such as application completion rate, time to fill and offer acceptance rate) help uncover bottlenecks or problems within your hiring process.
For instance, if the application completion rate for open roles is low, that could mean candidates are abandoning their applications because they’re too complicated or tedious to complete.
- Lower voluntary turnover: HR analytics can help you diagnose sources of voluntary turnover at your organization. Of course, to reap this benefit, you’ll need to collect information from employees through exit interviews and job satisfaction surveys. That way, you can identify trends and patterns in employees’ responses.
For instance, if departing employees regularly cite compensation as a reason for leaving the organization, that’s a sign that you need to revisit your compensation strategy and ensure it’s competitive enough to appeal to high-quality talent.
- Improved employee productivity: Productivity metrics vary from role to role; for example, a salesperson’s productivity might be measured by the number of calls made or emails sent to leads over a specific period, while a copywriter’s productivity could be gauged by the number of words they produce in a week. Either way, tracking such metrics over time is a form of HR analytics that allows you to understand how an employee’s performance compares to that of their teammates and whether there’s a need to address productivity blockers or introduce performance improvement plans (PIPs).
- More effective training and development: Conducting a skills gap analysis (which is an HR analytics strategy) is a must if you want to create effective training plans. Skills gap analyses help determine the difference (or gap) between the skills you need to deliver on business goals and the skills your current workforce has. The results of a skill gap analysis can be used to inform what future training plans should focus on.
Further, if your workforce uses a learning management system, you can capture metrics that help you understand employees’ learning approaches. Course completion rates and progress reports are an obvious example — these metrics will reveal which courses are and aren’t engaging learners. From there, you can revisit courses with low completion rates to determine whether they’re too difficult, redundant or simply not needed for your upskilling goals.
7 key HR metrics for small businesses
The metrics that matter for small businesses differ slightly from those of medium-sized or large organizations. Small businesses have fewer employees to collect data on, and they also typically invest in fewer strategic HR initiatives, so there’s a greater emphasis on big-picture metrics that help HR teams understand how efficiently they’re allocating their time and resources.
HR costs as a percentage of revenue
HR costs as a percentage of revenue is a metric that compares your business’s HR expenses to its total income. Businesses can use the HR cost-to-revenue ratio to track their budget efficiency; the goal is to either increase revenue or lower costs over time, as a lower HR cost-to-revenue ratio is considered a sign of efficient resource allocation. According to 2022 research from Gartner, the average HR functional spend as a percentage of revenue is 0.74%.
The HR cost-to-revenue ratio can also be used to track the impact of new HR investments. For example, if an investment in new HR tech boosts revenue, it could lower the HR cost-to-revenue ratio despite being an additional expense.
Organizations can calculate HR costs as a percentage of revenue with the following formula:
[ (total HR expenses/total revenue)*100% ]
HR-to-employee ratio
The HR-to-employee ratio (also called a staffing ratio) compares the number of HR team members to the total number of employees at an organization. This ratio is significant because evidence suggests that having too few or too many HR professionals on staff can lead to turnover.
In 2023, the ADP Research Institute analyzed payroll data from more than 25 million employees and found that the sweet spot is between 1.5 and 4.5 HR staff per 100 employees.
To calculate your staffing ratio, use the following formula:
[ # of HR employees/# of employees ]
Revenue per FTE (full-time employee)
Revenue per FTE measures the average revenue your business makes per full-time employee. Tracking revenue per FTE over time can give you insight into the productivity of your workforce.
A high revenue per FTE indicates that your employees are effective at their jobs, while a low revenue per FTE means that your business is either understaffed or overstaffed (or that your current employees are underperforming).
To calculate revenue per FTE, use the following formula:
[ total revenue/# of full-time employees ]
If the size of your workforce changes throughout a business quarter or year, use the average number of FTEs you employed during that time.
Salaries as a percentage of operating expenses
Lowering expenses is one way businesses beef up their bottom line. Labor costs are often the highest expense a business incurs — especially small businesses. For this reason, calculating salaries as a percentage of operating expenses is beneficial; it reveals how much of your business’s operating expenses are spent on human capital.
Related: What is human capital management (HCM)? | CNN Underscored Money
What percentage you should aim for varies widely depending on your industry. Some sources suggest that 15% to 30% is a normal range for salaries as a percentage of operating expenses; however, certain businesses may have lower payroll costs, while others may be higher. For example, manufacturing operations that take advantage of assembly lines and automation may have lower payroll costs than landscaping firms that pay overtime or double time during busy seasons.
To calculate salaries as a percentage of operating expenses, apply the following formula using financial data from a given fiscal year:
[ total employee salaries/operating expenses ]
Attrition rate
Attrition rate (sometimes called churn rate) is a metric used to quantify the speed at which employees are leaving your business. Attrition rate considers both voluntary and involuntary turnover — meaning it counts whether an employee quits, is terminated or retires. That said, attrition rate only factors in roles that are left vacant; so if an employee is terminated and promptly replaced, you wouldn’t factor their departure into your business’s attrition rate.
Keeping an eye on your attrition rate is important because vacant roles cause problems for businesses. For starters, the employees who remain at the business have to take on more work, which can lead to burnout and lost productivity. On top of this, it puts strain on whoever is tasked with filling open roles. Finally, high attrition can mean a loss of institutional knowledge (everything from core processes to client preferences); this is especially a concern when a senior leader or manager retires or leaves for another opportunity.
To calculate the attrition rate for your business, use the following formula:
[ (# of employee departures/average # of employees)*100 ]
For accurate results, use data from a specific period, such as a quarter.
Voluntary turnover rate
As the name suggests, voluntary turnover rate only considers voluntary employee departures (i.e., resignations and retirements). Employees leave a business for several reasons — some may be seeking more competitive compensation, while others may want to escape a toxic work environment. Either way, tracking your voluntary turnover rate is useful, if only to understand what percentage of employee departures are voluntary.
To calculate voluntary turnover rate, use the following formula:
[ (# of voluntary employee departures/average # of employees)*100 ]
For accurate results, use data from a specific period, such as a quarter.
Time to fill
Time to fill is a recruitment metric that represents the number of days it takes to fill an open role. Time to fill considers the total number of days (including weekends and holidays) that pass from the original job requisition until a candidate accepts an offer. At its core, time to fill is a measure of recruiting efficiency.
We suggest calculating time to fill for every hire made. If you do this, you’ll be able to calculate your team’s average time to fill, a metric that’s highly useful when planning for the future of your workforce and determining whether your hiring process has any bottlenecks. Also, calculating time to fill will help your team pick up on patterns, like whether certain kinds of roles are more difficult to fill than others.
To calculate a role’s time to fill, use the following formula:
[ offer acceptance date – job opening date ]
Cost per hire
Cost per hire is a metric that represents the average amount a company spends to acquire a new employee. Expenses factored into cost per hire include internal costs (such as recruiters’ salaries, referral bonuses and software tools like applicant tracking systems) and external costs (such as job board fees, background checks and funds paid to external recruiting agencies).
Cost per hire is most useful when it’s contextualized alongside the quality of hire. For instance, having a high cost per hire isn’t necessarily a bad thing if it means that you’re acquiring (and retaining) the best talent. If your cost per hire is low but you’re not attracting the right people to your business, that can be a sign that you need to dedicate more resources to your recruiting efforts.
To calculate cost per hire, use the following formula:
[(internal recruiting costs + external recruiting costs)/total number of hires]
3 common challenges of HR analytics
In HR.com’s survey, less than a quarter (22%) of HR professionals indicated that their organization is very or extremely effective at designing and implementing processes to get the most out of people analytics. Understanding the challenges of HR analytics can help you overcome this.
1. Contextualizing information
HR metrics on their own aren’t very helpful — context is required to get the full story. For example, you can calculate time to fill, but it’s practically useless without a benchmark or historical data to compare it to.
2. Bringing together disparate sources of data
In 2023, Intelligent SME reported that the average small business with 500 or fewer employees uses 172 apps. Whether this is true for your organization or not, the fact is that using even three to five different tech tools can complicate the process of collecting useful data for HR analytics.
For example, you might use a human resources information system (HRIS) to organize employee data and a recruiting platform to oversee the hiring process. Tack on a payroll tool, benefits administration system and employee scheduling system, and you’ve already got enough sources of information to cause a headache when trying to bring them all together.
3. Data quality
As is true for any form of analytics, data quality is a concern; this is especially true if you’re doing manual calculations or data entry or if your HR tech stack is fragmented. Accurate data is essential to glean usable insights from HR analytics, so we recommend implementing data standards that ensure you’re collecting and analyzing clean data. Data standards are rules for structuring information fields (e.g., how many characters a name can be or how to format dates).
HR analytics tips and best practices
Before you start an HR analytics initiative, it’s important to lay out the program’s goals and how you intend to achieve them. You’ll also want to track your metrics over time and have benchmarks to compare your data against.
Set clear objectives
Identify areas of the business you’re looking to learn about (and ultimately improve on). If you’re hoping to solve a specific problem — for instance, speeding up a slow recruitment process — this should be easy.
Once you’ve identified an objective to focus on, determine the benefit(s) of achieving it. Continuing with the example of speeding up a slow recruitment process, you could argue that filling open roles faster would protect the business from lost productivity and prevent burnout among employees who have temporarily absorbed the responsibilities of that position.
Implement data security/governance policies
People data contains sensitive information, some of which is protected by data privacy laws. To avoid fines and litigation, implement data security/governance policies that detail how your organization intends to maintain clean, accurate data. If possible, involve IT, HR and legal professionals in establishing and enforcing these policies.
Use reliable data sources
Although we’ve shared formulas that you can use, manually calculating HR metrics isn’t the best idea. As the poet Alexander Pope once wrote, “To err is human.” For the most accurate analysis possible, avoid manual data manipulation and use software to collect and interpret information instead.
Several types of software can be used for HR analytics, including:
In some cases, you can collect metrics from disparate systems and migrate them into one analytics platform. Alternatively, you can use each system’s native reporting features, although this may create data silos, which have some downsides.
Track metrics over time
One of the best ways to contextualize data is to commit to collecting and comparing metrics over time. Without historical data, you can’t know whether the changes you make to business processes and strategies are improving things. For this reason, you should establish a regular cadence to capture metrics — monthly or quarterly is our recommendation for most small businesses.
Use benchmarks as comparison points
In addition to historical data, industry benchmarks can serve as useful comparison points in HR analytics. Benchmarking is the practice of comparing your organization’s key metrics to those from similar businesses.
The best benchmarks come from businesses of a similar size in your industry. Unfortunately, finding this information can be difficult, and when you do find it, there’s a good chance it will be protected by a paywall.
That said, here are a few places to start your search for benchmarking data:
You can also ask your HR software vendor if it has any benchmarking reports or findings from its client base to share. For example, Gusto has a pay insights section on its website that uses localized data from metro areas across the US to help businesses understand if their compensation strategy is competitive based on the standards in their city.
Frequently asked questions (FAQs)
Predictive HR analytics is the practice of analyzing historical data to forecast or predict the future. In addition to regular data analysis, predictive analytics relies on machine learning, artificial intelligence (AI) and statistical modeling. Examples of what predictive analytics can help organizations with include predicting voluntary turnover rates and calculating the potential impact of new hires on a business’s bottom line.
To put it plainly, failing to analyze and apply findings from HR data is a mistake. HR analytics helps you understand how efficiently your organization is hiring and distributing talent; without it, you’re blindly trusting that your HR processes are helping the business achieve its goals.
Analyzing data helps you identify patterns, problems and opportunities within your HR processes. Applying findings from HR analytics will help you overcome obstacles that are preventing you from achieving business goals. For instance, collecting information from new hires about the interview process can help you understand how to improve the experience for future candidates.
Credit: Source link