29 May. 2014 | Comments (0) Share Follow @Conferenceboard
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Federal Reserve Board Chair, Janet Yellen, uses what she calls her “dashboard” of jobs data to justify the Fed’s easy monetary policies and to argue there’s still considerable slack in the labor market. The Bloomberg website recently published Janet Yellin’s dashboard, which you can reference by clicking here. As you can see, her dashboard consists of the following nine measures:
• Layoffs/discharge rates
• Nonfarm payrolls
• Job openings rate
• Unemployment rate
• U-6 underemployment rate
• Quits rate
• Hires rate
• Long-term unemployed share
• Labor force participation rate
Most of these indicators are what economists call lagging indicators of success. These lagging indicators of success inform the Fed on the success of previous actions taken to drive the economy, and provide input on additional policy changes necessary to achieve desired outcomes. For instance, more than two-thirds of the metrics on Janet Yellen’s labor-market dashboard are still showing worse readings than before the recession, reinforcing her belief that the economy will need “extraordinary support” from the Federal Reserve for “some time to come.”
Lagging indicators in the business world
This notion of using lagging indicators of success or outcome measures to inform Fed policy decisions to influence future outcomes is a staple in the business world. CEOs have their own dashboards, including the balanced scorecard that measures financial, customer, internal business processes, and learning and growth indicators. The majority of the measures, in each of the four categories, are lagging indicators.
So, in a sense, CEOs are managing by looking in the rear-view mirror. However, that rear-view mirror helps executive teams clearly see and understand the precise outcomes of previous strategy actions. Questions would include: “Did we achieve our intended goals when we approved action “x” or “y”? If not, what should we be doing differently? What did we learn from this outcome about the actions that were taken?” Another example of this would be, “Did the pace of sales improve, as expected, based on the training program targeted to drive growth in sales?”
Intersection with predictive analytics
As noted in the blog, Predictive Analytics: A Potential Fools Errand, predictive analytics attempts to relate what we know in the present to what we want to know about in the future. In economic terms, predictive analytic measures are referred to as leading indicators of success. How then do human capital lagging indicators of success such as human capital ROI and productivity intersect with the concept of predictive analytics or leading indicators of success? Quite nicely, actually.
In his book, The New HR Analytics, Jac Fitz-Enz identifies four leading indicators of success: retention, readiness, leadership, and engagement. When an organization measures these four factors over time and across business units, correlates the results to the lagging indicators over time, and inventories previous human capital strategy actions, a story begins to emerge on the nature of actions necessary to drive the leading indicators, and ultimately, the lagging indicators of success.
In conclusion, just as Janet Yellen and CEOs use lagging indicators to assess the level of success of prior policy decisions while guiding them in making strategic and tactical decisions to influence future performance, so too can HR effectively use lagging indicators of success to inform human capital strategy decisions for their organizations.