Measuring and Managing Human Capital

Today, the term “human capital” is generating a lot of buzz in corporate boardrooms and human resources departments both large and small.

“Human capital is the collective sum of employees’ attributes, life experience, knowledge, inventiveness, and energy,” explains Robert Lyons, Vice President of Kelly Financial Resources, a business unit of Kelly Services.

“Everyone in the company has to understand that talent is the only thing that will make the company successful. They also need to understand that the singular way this focus shift will happen is to manage talent effectively.

"You must motivate your employees, develop them, select them properly, and release them when appropriate.”

Why Measuring Human Capital Matters

Since payroll and benefits account for approximately 35 to 40 percent of a company’s operating expenses, it is surprising that organisations have not focused more of their efforts on measuring and developing human capital.

According to CFO magazine, 79 percent of the Chief Financial Officers in the United States directly or indirectly manage their company’s human resources functions. Whether or not a CFO oversees HR directly, payroll, selling, and general administrative expenses make up the number-one expense on the corporate balance sheet, and therefore costs related to human capital cannot be overlooked.

Calculating the Value of Human Capital

Jac Fits-ens, author of the groundbreaking book, The ROI of Human Capital, suggests that organisations implement a human capital scorecard, based on the balanced scorecard monitoring and reporting method. Then use it to organise and monitor their human capital information. The metrics used should thoroughly look at the investment and utilisation levels of human capital by including cost, time, quantity, and quality measures.

In developing a human capital scorecard, organisations must remember that selecting metrics is an ongoing process, not a singular event. Additionally, the chosen metrics should not be slanted to show only “good” results while avoiding the “bad” ones. To benefit from the process, a company must be open to showing improvement trends rather than strong initial results.

Impacting Shareholder Value

Organisations that take the time to consistently measure their human capital and implement steps to increase its value find that their efforts usually generate significant benefits. The results from Watson Wyatt’s 2001 Human Capital Index® (HCI) survey link superior human capital practices to higher shareholder return. The study identified 49 specific human resources practices that have the greatest impact on shareholder value. The research quantifies the amount of increase in a company’s market value that can be expected from an improvement in each of those practices.

A Whole New Approach to Managing Talent

The ability to understand and measure human capital opens up a whole new approach for organisations to take in managing their talent. By targeting and exploiting critical human performance capabilities such as organisational adaptiveness and stakeholder engagement, companies can achieve and sustain a high-performance culture.

Measuring and Managing Human Capital

Consulting firm McKinsey & Company has identified five imperatives that companies need to act on if they are going to win the war for managerial talent and make talent a competitive advantage:

• Embrace a talent mindset. Companies such as GE and Amgen believe that to achieve business success, you must first have great talent.
• Craft a winning employee-value proposition. Everyone wants to be given challenging development opportunities with a forward-thinking, market-winning company.
• Rebuild your recruiting strategy. Hunt for talent all the time, not just when a position is vacant.
• Weave development into the organisation. Improve the frequency and encourage the candor of feedback, and institutionalise mentoring.
• Differentiate and affirm your people. Cater to your top performers, help middle performers improve their game, and remove weak players.

“If companies believe that their people are their greatest asset, then companies must also recognise that their ability to compete is affected by the people they employ,” says Lyons. “Recruitment firms can play a large role in helping businesses maintain a competitive advantage by providing highly qualified management professionals and even temporary contractors, without disrupting the bottom line.”

“In fact, some of the best run companies allocate for a significant percentage of their hires to come from outside resources, versus promoting from within. This helps to recalibrate what a new manager’s expectations are versus the established company norms,” continues Lyons. “By measuring and developing its human capital, an organisation can ensure that its most valuable asset is utilised to the highest degree.”

From Kelly Services