Tuesday, October 13, 2015

Measuring Human Resource Capital

One of the most under measured parts of a business is the human resource capital and it represents one of the biggest challenges facing business; namely finding the best and brightest people. It is these human resources or people who ultimately create value for the organization. People generate value through their application of skills, talents, and abilities. The key is to invest in people so that human resources are productive, knowledgeable, effective, and efficient. This is what separates the average company from the exceptional. Getting a return on this investment or ROI is extremely important.

People who create lots of value often have certain characteristics:

    They openly share their knowledge and expertise with others
    They transform data into intelligence for better decision-making.
    They pay attention to details, collecting and gathering information to reach informed conclusions.
    They communicate clearly and concisely.

We can extend this concept to all aspects of intellectual capital; i.e. people interact with processes, knowledge, systems, customers and other intangibles within the business. Once you understand this interaction, you can measure these relationships to ascertain returns on human resource capital. A critical question to ask is: What impact does a person have on these intangibles? For example, one employee may interact with complaining customers in order to gain knowledge and improve the business. Another employee may view complaining customers as a nuisance to be avoided.

Each process can have its own unique set of metrics. These metrics can be applied within a formal measurement system designed specifically for human resource capital. In his book The ROI of Human Capital, Dr. Jac Fitz-enz describes how all performance measurement systems can be placed into a matrix. The following matrix was developed for measuring Human Resource Capital (HRC):

In the above matrix, we would have costs associated with acquiring personnel; such as advertising, agency fees, and relocation costs. These costs would fall under Acquire Human Resource Capital. The next level down is time; i.e. how long did it take us to recruit a new employee. Quantity would be the number of applications processed; often viewed as the "driver" within the process. Error refers to any event that does not meet our expectations; such as incorrect processing of new applications. Finally, the Reaction level looks at how people respond to various events within the process. This can be somewhat subjective. In any event, we can transform our matrix into a Balanced Scorecard. Here are some examples of metrics that correspond to each dimension:

Measurement Examples
Acquire HRC
Cost per Hire, Time Required to Fill Position
Maintain HRC
Average Pay per Employee, Labor Cost to Operating Cost Ratio
Develop HRC
Training Hours per Employee, % of People who can be Promoted
Retain HRC
Turnover Cost, Retention Rate, % of Voluntary Separations to Involuntary

“The challenge of human resources analytics is to identify what data should be captured and how to use the data to model and predict capabilities so the organization gets an optimal return on investment on its human capital. The goal of human capital analytics is to provide an organization with insights for effectively managing employees so that business goals can be reached quickly and efficiently.” -
Human Capital Analytics: How to Harness the Potential of Your Organization's Greatest Asset by Gene Pease,  Boyce Byerly, and Jac Fitz-enz

Financial professionals are often too focused on applying metrics to a process as opposed to the underlying foundation behind the process; namely people. The emphasis should be on people since people are the glue that pulls together the elements of intellectual capital – processes, systems, knowledge, etc. Measuring and managing this “glue” is critical to squeezing value from all elements of intellectual capital.

 The Five Most Important Metrics for HR per Jac Fitz-enz:

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