There seems to be a general notion that one cannot really measure what the HR function does. That notion is, of course, not of true value. HR function like marketing, legal, or finance-must be evaluated based on it adds to the organization. Even though defining and measuring HR effectiveness is not as straightforward as with some areas, it’s contribution to the overall objectives of organisation cannot be denied.
HR managers perform two major functions. These are traditionally being called as line and staff functions. While the line function refers basically to managing the HR department, more significant is the staff function (also called advisory role). HR managers and their performance are subject to audit for these functions. Other departments, managers, and employees are the main “customers” for HR services. If these services are lacking, too expensive, or of poor quality, the organization may suffer in achieving its objectives. HR can position itself as a partner in an organization, but only by demonstrating real links between what HR activities contribute to organizational results. To demonstrate to the rest of the organization that the HR unit is a partner with a positive influence on the bottom line of the business, HR professionals must be prepared to measure the results of HR activities. Then the HR unit must communicate that information to the rest of the organization.
Studies in India and abroad have found relationship between the best HR practices and reduced turnover and increased employee productivity. Further, those practices enhanced profitability and market value of the organisations studied. Data to evaluate performance and its relationship with HR practices comes from several sources, but five systems are most often used to measure HR effectiveness. These are:
a) HR audit,
c) HR accounting ,
d) HR information systems, and
e) HR research.
HUMAN RESOURCE (HR) AUDIT
Though auditing of other function of an organization is universally emphasized, the same cannot be said about the personal function . Various studies indicate that a comprehensive appraisal of the HR function is under taken by only a small percentage of companies, though many of them do conduct appraisal of certain aspects of their personnel activities. However now that the role of HR management has reached a degree of maturity a systematic and comprehensive audit of its function is called for.
A human resource audit evaluate the HR activities in an organization with the intent of improving those activities. The audit may include one division or entire company. It provides feedback about the HR function to operating managers and HR specialist. It also provides feedback on how well managers are meeting their HR duties. In short audit is an overall quality control check on HR activities in a division or a company supports the organization strategy. The concept of HR audit is similar to the financial audit –a process to evaluate and a take action where necessary. Auditing is an evaluation of the system in order to enable management to take decision regarding the efficient running of an enterprise.
In any organization activities of various departments are constantly reviewed to ascertain if they are moving in the desired direction and to decide what changes should be made in view of altered environment condition. The CEO will want to know how the various units are functioning and how far they have been able to meet policies and guidelines agreed upon. The assistance will depend on the range of services deemed suitable in a situational context. These generally involve maintenance aspects, long range plan and also assumption about the future. Firstly this service needs to be reviewed. Additionally a check is needed to ensure that management objectives are understood in same manner by all involved. Finally an evaluation will serve the purpose of identifying the gap between the objectives and results. In addition to the top management’s need for audit, the HR manager himself will be concerned about reviewing the activity of his department. The frequency and indicator may differ, yet the concern are manifestly the same.
Hence auditing which is the part of control function, may be defined as the examination and evaluation of policies, procedures and practices in all phase of business to achieve the most effective administration of the organization. Extending the definition to the field of HR management auditing consist of the analysis and evaluation of policies, procedure and practices to determine the effectiveness of HR management in an organization.
BENEFITS OF HR AUDIT
Several benefits associated with HR audit are listed below. An audit reminds member of HR department and others its contribution, creating a more professional image of the department among manager and specialist. The audit helps clarify the department’s role and leads to greater uniformity, especially in the geographically scattered and decentralized HR function of large organisations. Perhaps most important, it finds problems and ensures compliance with a variety of laws and strategic plans in an organization.
a) Identifies the contribution of HR department to the organization
b) Improves the professional image of the HR department.
c) Encourages greater responsibility and professionalism among member of the HR department.
d) Clarifies the HR department’s duties and responsibilities.
e) Stimulates uniformity of HR policies and practices.
f) Finds critical HR problems.
g) Ensures timely compliance with legal requirements.
h) Reduces human resource cost through more effective HR procedure.
i) Creates increased acceptance of needed change in the HR department.
j) Requires thorough review of HR department’s information system.
Besides ensuring compliance, the audit can improve the department’s image and contribution to the company. Operating managers may have more respect for the department when an audit team seeks their view. If the comments of manager are acted on, the department will be seen as being more responsive to their needs. And since it is service department, these actions may improve its contribution to organizational objectives.
SCOPE OF HR AUDIT
In order to conduct HR audit, HR manager requires considerable amount of data. To conduct meaningful HR audit information on following human resource functions is necessary:
1) Procurement Function
a) In inventory present and future needs for manpower
b) Reliable performance standard
c) Possible change affecting manpower
d) Location and matching of required and available skills
e) Valid measure for testing and selection
f) Cost of requirement and replacement
2) Development Function
a) Valid measure of employee performance
b) Cost benefit calculation on training and development
c) Linkage between individual aspirations and organizational needs.
d) Career and succession planning.
3) Compensation Function
a) Linkage between wages and productivity
b) Impact of money on work motivation of employee
c) Employee cost in term of turnover
d) Effect of inflation and technology on wages label and productivity
e) Value of collective bargaining and fringe benefit programmes to the organisation.
4) Maintenance Function
a) Absenteeism, turnover, accidents, grievance disciplines, man-days lost and other indicator of organizational health
b) Environmental standards for physical and mental health of the employees.
c) Causes and cost of employee separation
d) Incentives for voluntary separation, if necessary.
5) Integration Function
e) Communication and leadership climate in the company
f) Adoption to environmental change
g) Causes of changes in productivity level
h) Impact of change in technology and market.
The persons in charge of auditing should examine the effectiveness of the HR function by raising the following issues:
a) Identify who is responsible for each activity.
b) Determine the objectives sought by each activity
c) Review the policies and procedures used to achieve those objectives.
d) Sample the records in the HR information system to learn if the policies and procedures are being followed correctly.
e) Prepare a report commending proper objectives, policies, and procedures.
f) Develop an action plan to correct errors in objectives, policies and procedures
g) Follow up on the action plan to see if it solved the problems found through the audit.
Obviously, audits are time-consuming. As a result, small firms use ad hoc arrangements that often limit the evaluation to selected areas. Very large organisations have audit teams similar to those used to conduct financial audits. These teams are especially useful when the department is decentralized into regional or field offices. Through the use of audits, the organisation maintains consistency in its practices even though there are several offices in different locations. And the mere existence of corporate audit team encourages compliance and self audits by the regional offices between visits.
The audit report is a comprehensive description of HR activities that includes both commendations for effective practices and recommendations for improving practices that are less effective. A recognition of both good and bad practices is more balanced and encourages wider acceptance of the report. An audit report contains several sections. One part is for line managers, another is for managers of specific HR functions, and the final part is for the HR managers. For line managers, the report summarises their HR objectives, responsibilities and duties. Examples of duties include interviewing applicants, training employees, evaluating performance, motivating workers, and satisfying employee needs. The report also identifies people’s problems. Violations of policies and employee relations laws are highlighted. Poor management practices are revealed in the report along with the recommendations.
The specialists who handle employment, training, compensation, and other activities also need feedback. The audit report they receive isolates areas of good and poor performance within their functions. For example, one audit team observed that many jobs did not have qualified replacements. This information was given to the manager of training and development along with the recommendation for more programs to develop promising supervisors and managers. The report may also provide other feedback such as attitudes of operating managers about the HR specialists’ efforts.
The HR manager’s report contains all the information given to both operating mangers and staff specialists. In addition, the manager gets feedback about:
a) Attitudes of operating managers and employees about the department’s benefits and services.
b) A review of the departments’ objectives and plans to achieve them.
c) HR problems and their implications.
d) Recommendations for needed changes and the priority for their implementation.
With the information contained in the audit report, the HR manager can take a broad view of the function. Instead of solving problems in a random manner, the manager can focus on those which have the greatest potential for improving the department’s contribution to the organisation. Perhaps the most important, the audit serves as the map for future efforts and a reference point for future audits. With knowledge of the department’s current performance, the manager can make long term plans to upgrade crucial activities. These plans identify new goals for the department, which serve as standards for future audit teams.
Evaluation by audit results is usually superficial because the interpretation of such indicators is generally limited. High absence rates, for example, may result from a variety of causes. Turnover may be low because unemployment is high. The audit probe should be much deeper –apprising programmes, policies, philosophy and theory. Policy on the depth of the audit must determine which of the following level is desired.
a) Results including both accomplishment and problem regarded as effect of current management.
b) Programmes including the detailed practices and procedure of which they are composed.
c) Policies both explicit and implicit.
d) Philosophy of management, its priorities in value, goals and objectives.
e) Theory or the assured relationship and plausible explanation they clarify and relate philosophies, policies and continuing problems.
The audit process thus consist of identifying indexes, indicators, statistical ratio and gross number in some cases ,and examining the variation in time frame in comparison with a similar previous corresponding period. A summary statement is then prepared and sent to top management for information and action. Subsequent research and practice have revealed that conventional audit have a limited focus, are isolated from the totality of the organization and its human resource, and look upon procedure only, or emphasize apparent results. Substantive issue such as organization pattern, style of management, appropriate structure and manpower implication or the centralized Vs decentralized system are not dealt with in depth. To what extent do the above factors help develop the human resource potential, or assess the impact of environment change, political and social, on the industrial relation system and consequently, how effective is the current industrial relation strategy and practice. Finally, what modifications are envisaged to cope with emerging pattern? These are the some of the wider issues which must be dealt with as they will have an impact on effective management of human resources.
One possible approach to start the thinking process in relation to the HR function is to ask the following question :-
a) What is the philosophy underlying the function?
b) What principles of management are being followed in carrying it out?
c) What policies have been established for this function?
d) What procedures have been established? Are they in line with the company philosophy, policies and principle?
e) Are the procedure, policies management principle and philosophy of each function consistent with those of other related functions?
Such an investigative process calls for imagination in piecing to gather data from company record and discussion with employees, using questionnaires to conduct surveys, obtaining comparative data from other organisations and finally, correlating on variable with another to understand the interrelatedness and thus arriving at a broader and deeper understanding. If the personnel manager is doing the audit he should adopt a fact finding, probing and problem-solving approach–the role normally played by an external consultant to diagnose the state of an organization’s health.