Tag Archives: human capital analytics

Evidence-Based HR managers know better than to rely on correlations

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Finding the causes of complex problems. is the single, most skilful part of the evidence-based manager’s job.  Asking ‘Why?’ is also a prime motivator of human behaviour.  Many of man’s greatest endeavours are driven by this most primal need – why are we here, what has caused me to feel this way?  If we fail to identify the right causes, using evidence-based analysis, we fail to find the right solutions.   When organisational  demands for activity – ‘do anything but do something!’ – take precedence over intelligent thought and proper analysis then we are bound to see short cuts being taken, however erroneous.

Academia is not put under the same immediate, operational duress so we expect academics to go to the trouble of providing better evidence with more scientifically rigorous methods.  The LSE (London School of Economics and Political Science) even takes its Latin motto ‘Rerum cognoscere causas’ – ‘to understand the causes of things’ – from Virgil’s dictum “happy is he who can discover the causes of things”.

Indeed, great happiness will stem from knowing the causes of what ails us and one LSE academic in particular has followed this line of enquiry – Professor Richard Layard – who is well known for his work on happiness and wellbeing.  These are both matters of great interest to those who have devoted their entire careers to the search for the causes of employee happiness and fulfilment at work. So has Professor Layard followed the LSE’s creed in this endeavour?

Anyone dealing with people issues at work will be reminded, every day, that HR management is not a ‘science’ in any meaningful sense.  It cannot be tested in laboratory conditions and neither does it respond well to conventional, statistical analysis. I am referring of course to correlations and regression analysis.  This is an arcane, statistical technique used by social scientists to pretend that they have identified the causes of complex human problems when, in fact, they have just resorted to stacking one correlation on top of another – which is not the same thing at all.  If this is all a bit too academic for you let me make my point much simpler.

Every HR department I know wants to believe that employee engagement causes organisational performance.  This notion appears obvious and very valid until you consider that the buyer of your office furniture could equally make the same claim about their role.  There is probably as much of a correlation between office furniture costs and profit as there is between engagement and profit but no one in their right mind (apart from the procurement department) would suggest that this denotes a significant, causal relationship with performance.  Evidence-based managers do not rely on correlations that can so easily make them look stupid.

This logic does not stop highly respected academics passing off correlations as causation though.  Take Professor Layard’s own paper  – ‘Good Jobs and Bad Jobs’ where he tells us in “Annex A: Evidence on Happiness” that

“Happiness research has confirmed that happiness is a single dimension of all experience, measurable by psychometric or neurological measures (both highly correlated).”

They may well be highly correlated but that will never reveal what causes what.  Or has the LSE dropped its motto now and replaced it with a much lower standard of evidence – “to find correlations between things”.  Would they be just as happy to pass off a bottle of cheap Cava as Dom Perignon at receptions for their generous alumni?  Probably, if they thought  no one would notice.

Surreptitiously and knowingly substituting correlation for causation is a serious crime and extremely dangerous.  There is a correlation between skin colour and prison population in the US and no doubt this is irresponsibly seized upon, by those with their own agendas, to infer that the colour of someone’s skin can actually cause crime.

This is the prime reason why evidence-based HR is now so high on the organisational agenda – because the development of HR management thinking over the last 30 years has been predicated on spurious correlations (e.g. happy employees are productive employees, diversity targets improve diversity) rather than causation.

There can be no better example of this than the “Best companies to work for” (*but see Update below) schemes. In the UK the image shown above was printed in The Sunday Times supplement announcing the ‘winners’ of this award in 2005.  The graphs purport to show a causal connection between being a ‘best company’ and superior performance, when compared to the FTSE 100.  Except that the small print had to admit that -

“in the last year … the FTSE 100 moved ahead with a 14.3% return against an 8.3% return for Best Companies”.

So not only had they failed to support their causal claim with the evidence on show, the correlation they used had been broken and they continued to refer to those with the worst performance as the ‘Best companies’.  One could infer from the ‘Best Companies’ own data that perhaps it should be called the ‘Most Stupid Companies’ awards?

This is why lies and ‘damn lies’ often masquerade as meaningful statistics. Coming up with a solution first and then concocting the ‘evidence’ (sic) later to justify it will never be able to compete with the professionalism of the evidence-based.  There will only ever be one winner in this competition.

For personal development linked to this topic visit the Consummate Professional Series Module 2 and Module 4

*Update 17th April 2012

This similar chart was taken from the i4cp site. Even if these graphs are true it is highly unlikely that they have anything to do with being (or not being) an i4cp member. Trying to mislead innumerate HR people is a sure sign of a non-evidence-based approach – interestingly Professor John Boudreau is on their Board of Directors.

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Managers with ‘ODD’ attitudes do not get EBM

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One of the many aspects of human behaviour that I have never been able to fathom is the ‘polar shift’ – moving from one extreme position to another without any rational explanation.  Anyone who has children will have witnessed it.  You are just about to go out and you say to your child ‘put your other shoes on’ and it ends up with them moodily selecting the most inappropriate shoes or simply refusing to go out.  There is no halfway house, no moderation. The worst cases are now classed as ‘oppositional defiance disorder’ (ODD).

When such behaviour continues into adolescence we put it down to teenage petulance – ‘be back by midnight’ turns into either sulking in their room or arriving back at four in the morning.  Being told to do something makes us want to demonstrate that we are not a slave to authority and what better way to demonstrate our independence than to do exactly the opposite of what the authority wants?  But I think there’s more to it than that and, when it persists into adulthood, the behaviour becomes even more extreme and, frankly, bizarre.

Tell someone in HR or learning that they have no evidence to support their favourite activity and they immediately move from a position of zero evidence to demanding the highest, most sophisticated level of evidence possible. Trainers, who do no evaluation at all, suddenly want to use control groups, randomised control trials or double blind experiments when a simple chat with a trainee would suffice (‘have you used what we taught you – were there any problems?’)

HR departments who never want to measure anything suddenly start producing masses of ‘HR metrics’ and because this mountain of data fails to answer the most obvious question (what value do you add?) they go and change the name to ‘human capital analytics’ – the child’s equivalent of choosing their flip flops to walk in the snow.

Of course the other polar response to the simple question – ‘how do you know your methods work?’ – is the asinine challenge – ‘well you prove to me that they don’t’.  It is a pity but these ‘managers’ are a little too old now to be sent to their room.  No evidence-based manager is going to waste their organisation’s precious time and money looking to prove anything. They know only too well that you cannot prove a negative (e.g. you cannot prove a god does not exist).  All the EB professional hopes for is a positive and constructive response, not the recalcitrant attitude of the teenager who simply refuses to do what is in their own, best interests.

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EBM – Doing it for real – Lesson 3 – Connect your evidence to value

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Lessons 1 and 2 set the scene of a sales director concerned with raising sales activity levels until we pointed out that activity, in itself, does not guarantee that value will be created (i.e. profitable sales).  When Rolls Royce manufactures aero-engines they make most of their profit from on-going maintenance contracts, not the engines, and for many years electrical retailers made more money from over-priced and unnecessary warranties than they did from the products themselves.

Value is a very slippery concept though; just when you think you have it pinned down it slips through your fingers.  All the large pharmaceutical firms spend huge amounts of money developing drugs but very few ever reach the market and produce the value they are seeking.  So the evidence-based manager needs to understand exactly how activity gets translated into value.  Let us return once again to the mindset of this sales director.

Lesson 3

Connect your evidence to value

Practical application

This lesson is really about how we start to persuade and influence non-evidence-based senior managers.  The sales director in question was not immediately interested in anyone telling him to reduce activity so the EB Manager has to get over this hurdle by leading the sales director through their own thinking process, away from activity and towards evidence of added value.  The simplest way to do this is to be absolutely certain in your own mind what value really means: if you are not supremely confident in what you are doing why would the sales director have any confidence in you?

The only definition of added value has to be –

Added Value =

(O) an increase in output (products sold)

(C)  a reduction in costs (average product cost)

(R) an increase in revenue (higher prices per product)

(Q)  an improvement in quality (which should lead to all of the above)

Many would disagree with this definition so if you have any other suggestions, for other contributory factors that do not fall under one of these headings, feel free to comment. Otherwise we can concentrate on getting the right combination of these 4 variables to produce more value; nothing else matters to the EB manager.

More importantly, added value always has a $ sign attached and produces a better return on investment.  So more ‘O’ means more products produced per $ spent on production; lower ‘C’ means a $ saving on every product produced; more ‘R’ means higher $ revenue and if you get Q right all of the others will show even greater returns in $’s.  Any activity that is not focused on one or more of these variables is, by definition, a non-added-value activity and EB Managers do not like wasting their time, or anyone else’s.

This is meant to be a simple statement of the blindingly obvious but, as other pieces in this series have already demonstrated, organisations can become so easily blinded to the obvious, particularly in matters of human capital management.

Now this particular sales director had already said they are only responsible for sales volume (O) but only the most naive manager would assume that will automatically lead to value.  The reason I was having this conversation in the first place was because profits were falling sharply, despite sales volumes.  So we have to look at all 4 variables in the round, simultaneously, to get a better picture of what is required.  In this case many sales were being made at a loss because the cost of delivering and maintaining the equipment was too high in some accounts.  This did not matter to the sales director (a point we will return to) because he was not targeted on profit.  So now the evidence-base has to be a measure of profitable sales, not just sales volumes. If you have followed all three Lessons you will arrive at a point where you can now usefully pursue a focused line of enquiry.

Expect to have to change tack often though when pursuing value through EBM.  The real problems are often obscured by apparent problems and you will have to unearth all of the underlying issues because value is the result of the whole organisation working together, not just parts of it.

When you can show that  Evidence = Value ($’s) it will be a clear indicator that all is well, the whole organisation is performing. This is a key feature that distinguishes EBM from conventional, non-evidence-based, non-value-driven management.  It explains why outmoded MBO (management by objectives) and conventional performance measures, in their most simplistic form, were never going to provide an answer to the question  – ‘are we maximising performance?’  All managers have to be interested in helping the organisation, rather than just protecting their own narrow interests, which means that EBM always has to adopt a holistic, ‘whole organisation’, perspective.

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