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Measuring Human Capital 'Human capital comes with a person attached. People do not fit into neat little boxes.' Professor Harry Scarbrough 1. Human capital measurement needs to be tailored specifically to the organization's own needs Ð but capable of being benchmarked against other exemplars of good practice through the right comparators. 2. The focus of measurement Ð the recruitment and retention of key professionals, the acquisition of key transferable skills, the way in which the performance of these skills are enhanced through the individual's commitment and engagement Ð must be linked to overall business goals. 3. The measurement framework used must be able to integrate intangible assets (like human, information and organization capital) with more quantitative data (like financial performance data and customer satisfaction indices). 4. Alignment to key corporate goals does not mean simply 'keeping up with the rest'. Human capital measurement should provide HR functions with the foundation and the status to pro-actively influence corporate strategy. The experiences of Novo Nordisk demonstrate that realizing the benefits of internal people measures is a long way from making those measures work for you in the way you want. Human capital reporting Ð pinpointing the contribution made by human skills and knowledge to the production of goods and services Ð is a science in the making. Economists may have used it to explain a large part of the growth in output and production during the past 50 years. However, the measures used by organizations to demonstrate human capital's contribution are often outdated and unable to highlight soft or intangible contributions such as the commitment, engagement or innovative capability of the workforce. This is assuming that even the most basic measures are in place. In a survey of 1000 recruiters by the UK Chartered Institute of Personnel and Development (CIPD), conducted as recently as 2004,1 only seven per cent of firms were able to cost their labour turnover. In the case of one respondent, the Genesis Housing Group, the former HR director and his department were only able to demonstrate the full costs of inadequate measures by launching a variety of recognition and reward initiatives. This reduced annual turnover from 24 to 17 per cent, saving the organization £250,000 a year. As a result, Genesis senior managers now receive a quarterly report capturing a range of HR indicators. The process of gathering and interpreting them, in Genesis and other firms, requires combined skills and knowledge from new disciplines such as work psychology, corporate strategy, financial and statistical modeling and traditional people management. Even if the right measures are in place, and they cover the workforce as a whole rather than simply a small elite, there is no guarantee that the data will benefit the firm's strategy. HR measures need to be linked to specific outcomes such as sales, revenues, customer satisfaction and quality if they are to be of any value to the business as a whole. To create this value, they have to be communicated to the right people in the right form. Jim Matthewman, worldwide partner for Mercer Human Resource Consulting, pinpoints the problem when he comments: "Identifying the key drivers of performance and forecasting the impact of human capital interventions require powerful measurement techniques. However, analyzing this data is of little use if insufficient time is spent on interpreting and communicating the results internally and externally to meet different stakeholders' needs. Best practice organizations have started to measure the impact of human capital management on the business. But for the most, starting the journey means collecting the right facts and developing a platform to provide fact-based diagnosis, prioritize interventions and maximize the return on human capital investment." Our own research suggests that this journey requires travellers to confront many potential forks in the road. The most important are summarized below. If you are a subscriber, click here to read the full briefing. Click here to find out how to subscribe. |
