In my prior posts in this series, I discussed how descriptive analytics and diagnostic analytics can be used to inform Human Capital decision-making. Descriptive analytics is the most basic of techniques and can still provide vital information for decision-makers. Diagnostic analytics begins to create relationships between variables and attempts answers the question “Why did this happen?” This installment will discuss predictive analytics and provide an example of how this level of analytics can be used to understand the impact of your decisions.
To review:
- Descriptive Analytics: What happened
- Diagnostic Analytics: Why did it happen?
- Predictive Analytics: What will happen?
- Prescriptive Analytics: How can we make it happen?
Predictive analytics takes a quantum leap from descriptive and diagnostic analytics as it uses statistical analyses to understand the strength and direction of the relationships between observable events in your organization. What we’re creating at the predictive analytics level is a comprehensive statistical model of all the HR variables in the organization, examining how they interact and then predicting or explaining an outcome variable – in most instances a financial variable like EBITDA or revenues or market share.
In a sense, it is like putting the organization through an MRI machine to understand what variables are related to one another, if these relationships are by chance (random) or if they have statistical significance (and are not occurring together by chance) and how accurately can we explain or predict an observed outcome variable.
The benefit of this approach is not just understanding if observable event are happening together, but to understand the weight and statistical significance of that relationship. For example, if we know that training and development investment is positively correlated to EBITDA performance (with statistical significance) then we might say “Yes, let’s keep investing in training and development”. However, if that relationship is very weak (it has a small correlation coefficient), then we might think twice about spending money on something that doesn’t move EBITDA that much. However, if we find that attrition is negatively correlated to EBITDA performance and has a strong relationship, then we might want to invest that money into retention programs since reducing attrition will have a bigger impact on EBITDA than providing more training.
The process not only allows us to understand what drives performance, but gives us a roadmap into what we should be doing to explain or predict the outcome we’re observing. Because each organization is unique, there is no “standard approach” but the value is quite profound in not just understanding HCROI but selecting the right areas for enhanced HR programs to ENHANCE HCROI and ultimately corporate financial performance.
Through the rigor of predictive analytics we can express the totality of the organization’s human capital impact to an algorithm.
This example shows that data analytics provided a quantum leap in understanding the HC drivers of corporate financial performance and removes the “guess work” of where and how we should be investing resources to enhance the impact of employees on performance.
Solange Charas is a senior-level human resources expert with 30+ years of experience as a consultant, practice leader, top corporate executive, and board director across all industry sectors. She was the Chief Human Resources officer at Havas Worldwide, Benfield and Praetorian Financial Services Group and held senior-level positions at Ernst & Young and Arthur Andersen. She serves of the boards of 2 public companies, a non-profit organization and a higher-education institution. She is the Founder and CEO of HCMoneyball – a SaaS company founded to provide support for enhanced decision making about spend on people in any organization.
Solange earned a PhD in Management from Case Western Reserve University’s Weatherhead School of Management, an MBA in Accounting and Finance from Cornell University’s Johnson Graduate School of Management, and a BA in International Economics from the University of California, Berkeley. She has authored numerous articles, including “The Art and Science of Valuing People” in HR Director, “6 Ways to Coach Your Company’s Teams to Be Champions” in Entrepreneur Magazine and “Why Men Have More Help Getting to the C-Suite” in Harvard Business Review.
