16 Aug. 2013 | Comments (0)
If you always think as you’ve always thought,
You’ll always do what you’ve always done.
If you always do what you’ve always done,
You’ll always get what you’ve always got.
If you always get what you’ve always got,
You’ll always think as you’ve always thought.
Several prominent organizations promote the use of per full-time equivalent measures (Per FTE) to monitor how well the financial resources companies spend on human capital are performing. These financial measures include productivity and profitability. For instance:
- McKinsey & Company regards Profit per Employee as a pretty good proxy for the return on intangibles,
- The Corporate Leadership Council recommends the use of Operating Revenue per FTE as a measure of the workforce productivity, and
- The Saratoga Institute suggests using Profit per Regular FTE as a key performance metric.
Per-full-time equivalent (FTE) measures can be useful in determining the efficiency of an organization’s HR operations. However, when it comes to measuring efficiency and effectiveness of human capital, per-FTE measures lack credibility in the C-suite. It is simply too important to get the ROI and productivity measures on human capital correct to rely on such credibility challenged metrics. Here are the issues:
The definition of an FTE is inconsistent. There is no universally accepted definition of a full-time employee equivalent. This is no small issue. How do you define an FTE when today’s workforce consists of part-time or contingent employees, temporary employees, agency employees, and independent contractors, as well as outsourced jobs, projects, and services? How should employees on leave of absence (paid or unpaid) be treated? Attempts to do so are tortured at best.
For instance, a CHRO told me that she devotes the equivalent of one employee per week each month to calculate the number of FTEs. Even then, there’s no universal agreement throughout the company on the results of this person’s efforts. What a waste of an employee’s valuable time.
Within the same organization, it is common for HR, Finance, and Operations to define FTE differently, and the challenge of counting FTEs gets even tougher when there are business units in other parts of the world. As a result, per-FTE numbers are not reliable as a valid common denominator across departments, business units, peer organizations, or industries to measure and compare financial performance.
Apples-to-apples comparisons are elusive. Companies want to establish a baseline and measure performance and progress over time, across business units, and against peer organizations. This gives them some context to measure their performance. However, for the reasons cited above, per-FTE numbers do not provide standardized, credible data for apples-to-apples comparisons.
Profit per-FTE is not an ROI measure. Any ROI calculation needs to define and isolate an investment amount in dollars or other currency. Nowhere in the Profit per-FTE formula has the investment been identified. If a company outsources jobs or replaces employees with machinery, Profit per-FTE statistics may improve even when the underlying profitability of the company declines. In the health sciences field, they call this a false positive.
Also, what’s a good number? On face value, there is no way of determining if the result is good or bad.
Revenue per-FTE is a flawed productivity measure. While Revenue is the proper numerator in a productivity equation, use of a per-FTE number as the denominator is flawed for all of the reasons cited above.
Per-FTE measures are not credible with the CFO. To be useful in the C-suite or boardroom for business planning purposes, any financial metric must pass the CFO sniff test. CFOs, by and large, do not trust per-FTE financial measures for all the reasons mentioned above.
At the risk of being accused of piling-on, these shortcomings of per-FTE measures can also be found in the seminal book, The Balance Scorecard, by Robert Kaplan and David Norton. The authors observed the following about the Revenue per-employee ratio: “Another way of increasing the revenue per-employee ratio through denominator decreases is to outsource functions. This enables the organization to support the same level of output (productivity) but with fewer internal employees.”
In conclusion, it’s time to bury the per-FTE measure as a human capital financial metric. HR is better served using the human capital ROI and Productivity formulas described in my previous blogs. They were developed with and vetted by Fortune 100 CFOs, Wharton MBAs, private equity executives, and investment bankers (so they pass the CFO smell test). They can be used with confidence with the CEO and board. Put simply, they make the business case for human capital strategy investments.