Reading leading indicators: The best way to accurately predict upcoming changes is to look at leading indicators. All around us, leading indictors are in use. Water management organizations routinely monitor snowpack to predict the availability of runoff water and water table movement, while firefighters predict future fires by looking at the amount of undergrowth and the humidity it contains. In business, lots of organizations manage according to leading indicators, including the Federal Reserve Bank, which offers its Beige Book eight times a year with information on leading economic indicators that predict the direction of the economy. Despite their prevalence in many other organizations that deliver essential services, leading indicators are seldom used by HR to drive management action.

    The use of leading indicators supports a model known as proactive HR. We all know that preventing fires is a superior approach in mitigating damage compared with fighting them once they erupt, but more often than not, HR departments get so caught up in fighting the daily fires of people management that they have no time left for forecasting.

    For organizations trapped in an endless cycle of damage containment, the notion of proactive HR might seem a stretch, but a few firms have already proved the transition is possible. The best example is Valero Energy, the winner of an Optimas Award from Workforce Management in 2006. At Valero, industry visionary Dan Hilbert has championed an effort to both identify the leading people indicators of critical incidents at the refining operations level and quantify the potential dollar impact on the company if corrective action is not taken. Imagine being able to predict a critical failure in your business based on human capital analytics such as vacancy rates, workforce demographics and overtime utilization. Adopting proactive HR is more critical than ever before as the rate of change in business makes even the slightest increase in organizational downtime more destructive.

    Finding your leading indicators: To get started, identify the key people management situations in which you could mitigate damage or prevent it altogether—if you just had an early warning signal. Typical problem areas (or opportunities, if you like) include mission-critical role vacancies, increased turnover, increased absenteeism, increased job-site injuries, decreased worker productivity, increased time to hire and increased contingent workforce utilization.

    In the second step, you use three to 10 years’ worth of data to identify when there was a significant spike or downturn in each of the identified people management measures prior to a critical incident. If a data trend consistently occurs before each similar incident, you have identified a leading indicator for the incident. An example of a precursor for rampant turnover might be a spike in internal transfer requests, or growing absenteeism. Some critical incidents can be correlated to internal measures, while others may be driven largely by external forces. Starbucks, for example, found that there was a direct relationship between the unemployment rate and the turnover in certain jobs, but not in all jobs. The final step is to work with the CFO to quantify the dollar impact of these problems so that senior managers understand the dollar consequences of not acting in time.

    At first, the idea of investing all the time and labor required to conduct this type of analysis may seem too intensive, but I assure you that accurately predicting just one critical incident in your organization will do more than generate a positive ROI. The impact of a manufacturing plant being taken offline for just a few days because of the defection or retirement of key workers can easily be millions of dollars—billions in some industries.

Workforce Management, Apri 23, 2007, p. 42 -- Subscribe Now!