Human capital management and measurement evaluates how HR policies and practices create value by ensuring long-term sustainable performance in an increasingly competitive world. There is no doubt therefore that reporting human capital is highly relevant to investors. Delia Goldring FSN contributing writer, visiting Professor in HRM at Middlesex University and Director Performance Options, looks at the practical challenges of human capital measurement.
Watson Wyatt Worldwide Inc, a major consulting firm, conducted a study of HR practices for 405 publicly traded companies in the US. They concluded that there is a correlation between how human resources are managed and the amount of shareholder value. According to Bruce Phau, head of Watson Wyatt's measurement division, ’if you can improve your human resource management in certain key areas, you can experience a 30% increase in shareholder value’. The message is clear – at least from this study - measuring and managing human capital is a major part of creating value.
If that is so, then why are there no standard set of metrics or key performance indicators that measure human capital value regardless of organisation size, complexity or industry?
Choosing the best technique to measure human capital value is not an easy task. A variety of methodologies exist and all have their advantages and disadvantages. In 2002 Deloitte & Touches’ report Measuring Human Capital Value examined the benefits, limitations and effectiveness of the five main approaches: HR benchmarking and metrics; balanced scorecard; HR practice effectiveness; accountancy-based models and the highly technical and financially orientated economic value added (EVA) method.
The most popular, despite not being seen as the best technique, was HR benchmarking and metrics, which compares HR policies and practices and HR metrics across organisations and sectors. The reason for it not being regarded as the best technique is that it is difficult to identify which benchmarking comparators to use. Also organisations, particularly in companies that carry out a range of diverse activities, must benchmark against comparators in their industry sector in addition to choosing the right comparators at the internal corporate level, with each business group adopting the benchmarks that best suit their own operations.
Kaplan and Norton's Balanced Scorecard introduced in 1993, based on the premise of trying to stop organisations from designing conflicting measures, put forward a range of measures designed to work in harmony, approaching performance measurement from four perspectives: financial; customer satisfaction; internal efficiency and effectiveness, and learning and innovation. However, there was little emphasis on human resource management and in 2001 Becker, Huselid and Ulrich came up with the HR Scorecard.
As they said ‘organisations often measure employee outcomes in terms of aspects such as total compensation, employee turnover, cost per hire, percentage of employees who had a performance appraisal in the last twelve months and employee attitudes such as job satisfaction. But they really need to assess how well these human resource measures capture the strategic human resource drivers and attributes that are crucial to the implementation of an organisation’s competitive strategy’.
They focused on the importance of setting targets, measuring HR activities and linking them in with company strategy using Sears Roebuck the US store group as an example of how looking after employees leads to more contented clients and shareholders.
The HR Scorecard looking at strategic, customer, operational and financial perspectives poses the following questions:
Strategic Perspective
• Do we have the talent we need to be successful in the future?
• Are we investing in growing our HR capabilities?
Customer Perspective
• Are we viewed as a great place to work?
• Are we creating an environment that engages our people?
Operational Perspective
• Are our HR management processes and transactions efficient and effective?
• Are we using technology to improve HR efficiency?
Financial Perspective
• Is our return on investment in people competitive?
• Are we managing our cost of turnover?
Brett Walsh, Head of Human Capital Advisory Services at Deloitte & Touche Consultancy points out that ‘unlike finance, HR doesn't have a small group of core metrics, standardised internationally, to demonstrate the precise value of human capital. If you ask 10 people the most important metrics, they'll come up with 25. It's painting a picture, but it's still not in proper focus’
This lack of standardisation of HR metrics is one limitation to successful business analysis. Historically larger organisations, such as BT in the UK, have allowed individual business units considerable autonomy in developing their own HR indicators thus further adding to the lack of standardisation of HR metrics.
Despite BT having now created a set of 14 consistent in-house corporate metrics ranging from wealth, profit, and revenue created per full-time employee, to average remuneration, absence rates, voluntary resignation rates and executive stability the set of metrics is unique to BT and is probably not adaptable for use outside the organisation.
John Sullivan of San Francisco State University observed in 2004 that organisations often make two errors when it comes to developing and implementing HR metrics. These are, firstly developing and implementing HR metrics in a vacuum i.e. without consultation with professionals from other disciplines in the business and secondly developing more metrics than it is feasible to maintain and utilise. He suggests developing between 8 and 12 really important metrics that demonstrate HR’s impact on the business since ‘collecting data and calculating metrics is time-consuming and expensive, it’s important to focus your energies on the ones that really matter’.
Avoiding these two errors does not in itself guarantee success, but goes a long way towards ensuring that an organisation is set up to handle any problems encountered along the process of using HR metrics.
HR Metrics, like all other measurements undertaken by an organisation should have strong connections to corporate strategy in order to ensure that the evaluation of HR really matters to and has an impact on the organisation. The metrics need to take into account the broader issues that are affecting the organisation at the time they are compiled. For example, in the current economic climate an organisation going through a downsizing exercise and with little or no current research and development activity will need to concentrate on HR metrics that focus on costs. Whereas, organisations in growth situations may need to focus on metrics directed at creativity and innovation.
Every organisation has different perspectives and pressures on it and since people are an intangible resource just as we cannot definitely predict their behaviour it seems that it is also not possible to design a standard set of metrics that will fit every organisation.
Compiling HR metrics alone is not enough. The long term survival of organisations relies on not only measuring how capable and committed the workforce is but also on the need to develop essential employee competencies and on having a training and development system that helps employees learn faster than the employees of the organisation’s direct competitors.
