The Evolution of HR Metrics at Limited Brands

Dennis Armstrong Vice President Enterprise Integration CEO HR Metrics and Analytics Teleconference November 22nd, 2004

Overview
Describe the evolution of the company to provide the context for our focus on metrics in general Provide some history on the development of HR metrics
What worked What did not

Discuss next steps in the evolution of HR metrics

11/16/2004

USC CEO presentation - HR Metrics

Limited Brands Inc. A Family of the Worlds Best Fashion Brands

Specialty retailer of apparel, intimate apparel and personal care and beauty products Portfolio of brands includes:
Victorias Secret Stores Victorias Secret Beauty Victorias Secret Direct Bath and Body Works Henri Bendel Express Limited Stores

Approximately $8.9 billion in sales in 2003 Over 4,000 stores in the U.S.

11/16/2004

USC CEO presentation - HR Metrics

Developmental Phases of Limited Brands

Entreprenurial Phase: 1963 - 1981
The Limited opens first store in 1963 at Kingsdale Mall in Columbus, Ohio Rapid expansion of Limited Stores Initiated first test of new concept: Express Strong focus on growth and results

Venture Capital Phase: 1981 - 1995

Growth and acquisition phase Acquired: Lane Bryant, Brylanes, Victorias Secret Stores, Victorias Secret Catalogue, Henri Bendel, Lerner Stores, Abercrombie and Fitch Created and grew: Limited Too, Bath and Body Works, Victorias Secret Beauty, Structure, IPO for Intimate Brands Inc. (VSS, VSC, VSB and BBW) Created independent, autonomous and (internally) competitive brands

Brand Growth Phase: 1995 - ????

Stock hit a wall in the late 1980s and early 1990s; increasing external competition Developed new business model: Brands, Talent, Capabilities Initiated portfolio and restructured the business: beauty and personal care, intimate apparel and apparel (apparel accounts for only 30% vs. 70%) One enterprise focused on: growing compelling brands, leveraging open market innovation, building capabilities and speed in all we do
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Evolution of the Company Created a Cultural DNA Predisposed Toward Analytics

Merchant mindset:
Patterning: the plan for the systematic collection and synthesis of information on evolving fashion trends and offerings by competitors Competitive Intelligence: positioning the organization in a way to maintain a competitive advantage; requires definition of competitors, plan for collection of information from benchmark competitor stores Customer Intimacy: Anticipating how the target customer will react to the merchandise; requires the definition of, and systematic learning about, the target customer (e.g. observations, interviews, store visits, etc.) Fashion Radar: Identifying the next fashion needs/trends for the target customer; requires collection of fashion signals from a variety of sources and integration of the separate elements into a whole (e.g. story boards, samples, etc.)

Hypothesis generation: integrating observations and generating testable hypotheses Testing: specific tests of hypotheses in store environments Disciplined cadence of meetings to understand results Hindsighting: Structured, formal periodic post-action reviews Get it done attitude: inherent focus on results and growth
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Background on HR Metrics at Limited Brands

Venture Capital phase generated autonomous and independent brands
Each brand run independently Competed for capital investment from corporate office Lacked centralized functions (e.g. IS, HR, Finance, etc.)

Ten brands with different HR metrics

Varied from elementary to sophisticated Most were cost based metrics (e.g. cost per hire) Lacked common definition for terms and calculation of metrics (e.g. turnover and hiring cycle time varied based on idiosyncratic brand definition) Lacked a common set of core metrics across brands and Functions

Migration toward one enterprise forced initial attempt to develop core set of HR Metrics

11/16/2004

USC CEO presentation - HR Metrics

Created HR Metrics Team In 2001 To Develop Core Set Of Metrics

Objective: Develop a set of critical and collectable measures designed to assess the effectiveness of HR services, programs and activities Guiding Principles:
Start small with critical few measures Identify measures that can be collected Initiate consistent, disciplined data collection Focus on HR cost management initially Identify trends and relate to business objectives Build the measures over time

11/16/2004

USC CEO presentation - HR Metrics

Introduce Metrics Over Three Time Horizons

Horizon I Next 6 - 12 mos
Focus on HR expense and headcount information Basic HR efficiency measures (e.g. cycle time, cost of hire, turnover, etc.) Focus: Expense management and understanding of basic trends

Horizon II

12 - 24 mos

More sophisticated efficiency measures (e.g. offer to acceptance ratio; inclusion/diversity; training hours per associate; etc.) Focus: Improve HR services in support of business strategy

Horizon III

24 - 48 mos

Entire suite of HR metrics defined for inclusion in HRMS Reports automatically generated enable management and improvement Focus: Adding value through cross-organizational alignment of resources
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Proposed HR Expense Information - 2001 Traditional Functional Orientation

Recruiting
Payroll for recruiting staff Travel for recruiting staff Temporary help for recruiting staff Search fees Advertising Interviews Relocation On-boarding / orientation Consulting Materials / supplies / forms

Comp & Benefits

Payroll for C & B staff Travel for C & B staff Temporary help for C & B staff Compensation and benefits expenses Store bonuses (non-IC) RM / DM car expense Consulting Materials / supplies / forms

HR General
Payroll for HR generalists Travel for HR generalists Temporary help for HR generalists EAP expense Outplacement / COBRA / misc separation Legal Consulting Materials / supplies / forms

HR Other
Office supplies Equipment depreciation (e.g.PCs) Equipment lease / rental United Way contributions Charitable contributions

Training & Development

Payroll for T & D staff Travel for T & D staff Temporary help for T & D staff Training Store management meetings Consulting Materials / supplies / forms

Associate Programs
Associate communications Associate opinion surveys Associate events / activities Store SPIFFs / contests / spots

11/16/2004

USC CEO presentation - HR Metrics

HR Metrics 2001: Largely Activity Based Efficiency Measures

Proposed Metric: Voluntary and involuntary turnover Headcount review and management Hiring productivity ratio Required information or Data and Implementation Status: Number voluntary departures/total incumbents over one year Number involuntary departures/ total incumbents over one year Status: Ready for implementation Number hired/HR recruiting headcount Report based on headcount summary Status: Ready for implementation Open = Date requisition approved Close = Date new hire starts work Develop spreadsheet with all required information Number hired within range/total number hired by job Retention at end of first and second year Performance at end of first and second year New hire recruiting source Number of MW retained/total number must win talent Status: Under development in OLR database Items and comparisons from performance management survey Status: Completed, survey will be conducted in Feb/Mar 02 Distribution of plan vs. actual performance ratings Status: Ready for implementation in 1Q 02 Responses to survey distributed at critical periods post-hire (e.g. 6 mos; 12 mos) Status: Under development Responses to survey distributed at quarterly briefings Status: Prototype developed for LTS Responses to exit survey distributed pre/post departure Status: Under review for implementation
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Hiring cycle time Cost of hire Percent hired within range

New hire retention New hire effectiveness * Recruiting source effectiveness* Retention of must win talent at enterprise and brand/function level* Effectiveness of performance management process* Understanding of leadership behaviors Variance to performance distribution guidelines New hire work experience (recruiting, selection, on-boarding, training, relocation, etc.) Associate work experience (work satisfaction, referral, etc.)* Former associate work experience and reasons for departure *Note: Potential effectiveness metrics
11/16/2004

USC CEO presentation - HR Metrics

Challenges to Initial Efforts

Lack of accountability for submission of data Lacked resources to consolidate and interpret data, and report information Some methods for data collection and consolidation were cumbersome and costs may have exceeded benefits (e. g. headcount) Other competing priorities with higher urgency Lack of consistent and significant senior level interest Impending implementation of a HRIS (PeopleSoft) Lack of a clear overarching enterprise strategy from which to develop common metrics
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Approach for Development of Metrics Varies

Start with the data and work up to strategy:
Determine available data Collect data in Excel spreadsheets Develop link to Brand or Function Strategy (Optional) Share Information with Senior Leadership Create Action Plan To Address Issues (Optional)

Start with the strategy and work backwards to data:

Enterprise Strategy Determine HR Strategy to Support Enterprise Strategy Generate Testable Hypotheses Derive HR Metrics From Testable Hypotheses Determine data required, report frequency and learning agenda

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USC CEO presentation - HR Metrics

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Guidelines for Development of HR Metrics A Work In Progress

HRIS creates temptation to generate data and reports Development of metrics requires focus on outcomes of metrics
Relevant provides meaningful information about the how we leverage people, resources and capital to improve enterprise performance Integrated related to other metrics in a way that tells a story and enables drilling down to determine cause and effect relationships Process oriented provides information related to a key process supporting the strategy Distortion focused on key talent, brands and capabilities Actionable provides information that we can act on Easy to use leverage exception based reporting to focus attention

Potential categories of metrics

Talent management Inclusion Enterprise workforce effectiveness (brands, functions, home office, stores, etc.) HR function operating and effectiveness measures HR project performance
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Approach for Developing HR Metrics

Review Business Strategy
Identify explicit and implicit implications for HR: What can we do? What should we be doing? Conduct external environmental scan: Whats your competition doing (the business and HR)? What are current and emerging best practices in HR that have relevance? Conduct internal environmental scan: Review surveys, staffing, meeting take-aways, interviews with key executives, informal observations, etc. Hindsight previous initiatives and results: Did we deliver? What was the result? Did it matter? Summarize issues, opportunities and trends: How can HR support key business strategies? Do we have the capabilities currently? Should we build, buy or partner? Develop the Critical Few Initiatives: What is the HR strategy that supports the business strategy? What are the critical few initiatives that support the HR strategy? How will we measure the effectiveness of these initiatives? Review the strategy and metrics while they are in progress: Do you key constituents care about the strategy and the metrics? Revise, align and execute: Edit the list down, not up. Align HR against the strategy and rationale. Restructure HR or reallocate resources to deliver and assess. Develop metrics and interim measures of success that provide directional feedback while initiatives are in progress.
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Compile Formal and Informal Data

Consolidate Observations and Generate Strategy and Hypotheses

Review Strategy and Metrics with Key Constituents

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USC CEO presentation - HR Metrics

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Development of the Talent Management Dashboard

Sourcing Recruitment Selection On-boarding Development Engagement Retention Critical questions and testable hypotheses:
What are the best sources for key positions? What are the atypical sources for key positions? Selected specialty retailers will provide the best source for critical talent. What recruitment strategies work best for key positions? How do we assess the effectiveness of our recruiters? Recruiters with knowledge of the performance characteristics of top tier performers and strong interview and sales skills will perform best. What are our key jobs? How effective is our selection process for key jobs? What do we need to do to improve our selection effectiveness for key jobs? Selection systems tailored for key jobs will result in a higher proportion of top performers. What do new associates in key positions need to know in order to accelerate their assimilation and movement to top tier performance? What it the ROI for onboarding? On-boarding accelerates assimilation and movement to expected performance in key positions. What are the performance characteristics of top performers? How can we determine the effectiveness of our development strategies (what is the ROI)? Action oriented learning approaches for key jobs is more effective than other approaches. What is the ROI on approaches that support engagement? Engaged associates are more productive than nonengaged associates. What is the turnover or our top tier performers in key positions? What is the ROI on our retention approaches? Tailored retention approaches are more effective in improving retention of top tier performers.

Potential HR metrics:
Effectiveness of sources for key positions (% of top performers after 2 - 3 years by source) Effectiveness of recruiters (% retained and performing at expectation or better after 1 2 years) Recruiting costs Turnover in key positions Effectiveness of selection systems for key jobs Costs of selection systems for key jobs vs. other jobs at the same level Turnover in key jobs of top tier performers Associate perceptions of the on-boarding process Effectiveness of the on-boarding process for key jobs Effectiveness of execution of development approaches for top tier talent (content, timeframe) Performance of participants in action learning vs. other approaches Effectiveness of measures of engagement (i.e. survey measures) and correlations between job performance and tenure of engaged vs. non-engaged associates Effectiveness of execution of retention strategies for top tier performers in key jobs vs. comparable approaches for other jobs

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USC CEO presentation - HR Metrics

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Workforce Effectiveness Metrics

Right people, right place, right time
Currently we are historians reporting on recent and current events Transition to ability to forecast shortages of talent in key positions and presenting an integrated plan to address the need before it becomes a problem (recruit, select, on-board, develop and engage)

Demonstrations of ROI on HR strategies to gain alignment and support from senior leadership
Relationships between effectiveness of execution of HR strategies and approaches and results (i.e. relationship between well executed and integrated HR programs and retention of high performers) Impact of process facilitation and change management approaches in support of large scale enterprise initiatives
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Process for Developing the Capabilities for Leveraging HR Metrics

Continue to build and develop hypotheses and measures Engage leadership outside of HR in metrics development Determine reporting format, cadence and targets, as appropriate Align HR leadership on metrics, rationale and use
Enable leaders to earn a right to a strategic seat at the table Provide regular updates on key HR and workforce effectiveness metrics (exception based) Demonstrate ability to interpret trends and forecast emerging issues and consequences

Develop and implement simple set of high impact metrics Consciously seek an opportunity for an early win Develop linkage between metrics and business results
Associate engagement and store productivity Store manager turnover and store productivity to determine vacancy opportunity costs

Continue to build and develop additional metrics based on pilot test

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