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Published March 2007

The Relationship Between Competencies and Financial Performance

 

  Josh Bersin

Performance management has become one of the biggest new investments in HR organizations today. Bersin & Associates' research found more than 45 percent of HR managers rate "improvement of performance management processes" as one of their top two areas of focus. Companies of all shapes and sizes, including learning management system (LMS) and human resource management system (HRMS) providers, as well as best-of-breed vendors, now offer modules for performance management.

But these investments will not yield value unless companies first take stock of the fundamentals underlying their performance management processes. Automating problematic or outdated processes brings no benefit.

Over the last two years, Bersin & Associates has researched many aspects of talent management, including the correlation between various components of talent management and business results.

In a recent research project, we studied one of the pivotal elements of talent management: the use of competencies. We set out to understand what competencies drive high-growth and high-profit organizations, as well as the reverse.

The results were pretty amazing. Data showed the use of specific competencies in performance reviews is directly correlated to business outcomes such as market-share growth and above-average profitability. For example, fast-growing high-technology organizations manage and value "innovation" and "creativity" much more than low-growth companies in the same sector. Successful retail organizations heavily value "teamwork" as a critical competency.

Of course, many other factors drive revenue growth and profitability. But this research convinced us there is indeed a relationship between the use of certain competencies and financial performance.

Detailed in the recently published report, "The Role of Competencies in Driving Financial Performance," this research is important to HR executives and professionals for two major reasons.

First, it justifies the difficult, time-intensive and often painful work that goes into competency development and management. Secondly, the results can help guide organizations to select the competencies they measure, depending on financial goals, organizational maturity and industry sector.

Research Methodology Differentiates Findings

This research project was conducted with actual usage data, made available by SuccessFactors, a provider of talent management solutions. These data set this research apart because most research is conducted by surveys, which means results are influenced by respondents' knowledge, opinions and other such factors.

Analysts examined the use of competencies among 28 large organizations in four industry segments: financial services, technology, manufacturing and retail. Research was based on 1.3 million competencies used in more than 300,000 performance appraisals. Analysts then looked at the relative financial performance of each of these companies and categorized them as either "high-performing" or "low-performing."