Accounting for People: Bridging the gap

With
organisations being asked for their thoughts on measuring their people
policies, Personnel Today asked Brett Walsh, UK head of Human Capital at Deloitte
& Touche, to outline HR’s role in measuring and managing human capital. We
also look at two companies already measuring the impact of their people
policies

The
past 25 years has seen a dramatic change 
in the way in which a company is valued.  In 1978, the book value of an organisation represented
approximately 95 per cent of its stock market value. Today, a high proportion
of business market value is driven by intangible assets, such as human capital,
that do not appear on the balance sheet.

The
financial reporting framework has not yet adjusted fully to accommodate this
change and currently there is no recognised procedure for organisations to
illustrate the return on investment in people. As a result, investors and
available staff cannot effectively judge how one organisation differs from
another in terms of how their human capital is managed. This is set to change.

Last
autumn, Deloitte & Touche launched a survey of human resources
professionals in conjunction with Personnel Today, which found that
three-quarters of organisations already measure human capital, using a variety
of methods, but very few believe the methods they use are effective.  The overall conclusion was that if human
capital is to become a tool by which different stakeholders can assess an
organisation, a standard approach must be developed, with clearer metrics that
are simple to understand and based on easily collectable data.

The
Accounting for People Task Force, led by Competition Commission deputy chairman
Denise Kingsmill, was established earlier this year to look at how
organisations can measure the quality and effectiveness of their human capital
management and how this can be reflected in the annual report and accounts.

The
taskforce is expected to issue some initial thoughts for consultation in the
early summer, before presenting ideas to the Government later this year.  The outcome could dramatically change the
status of HR from a supporting service to a direct contributor to company
profitability.  

One
objective of the taskforce is that human capital reporting does not become a
burden for the HR director. Rather than making it a requirement for all listed
companies, it is expected to be strongly encouraged. As long as the process is
not overly bureaucratic or expensive, I expect the uptake will be high.  

‘Maximising
the return on investment in people’ was ranked the second highest priority for
CEO’s in a recent Deloitte & Touche survey of CEO’s and HR directors (Jan
2003).

This
suggests business leaders are already aware of the high costs of employment as
a percentage of total costs and will be broadly supportive of the taskforce
recommendations. Organisations will be keen to further enhance their
communication to shareholders and investors as an ’employer of choice’ as a
matter of best practice.  

If
human capital metrics are to appear in the annual report then it will become
the responsibility of the board to understand and manage this process.  This information will need to be recognised
and valued on an equal footing with other business measures routinely examined
by business leaders, presenting a real opportunity to the HR director.  The onus is on the HR director to bridge the
gap for the board between the soft issue of people management and hard,
meaningful human capital metrics.  

CASE
STUDY:
Standard Chartered Bank
Tim Miller, group head of HR

In
the past few years, Standard Chartered Bank (SCB) has put a lot of work into
measuring its human capital. And according to Tim Miller, group head of HR at
the bank, the benefits have been manifold, writes Roisin Woolnough.

"I
really believe in getting good data on your people – such as the quality of
leadership and the engagement of your people," he says. "It’s people
who make the difference to profitability, levels of revenue and customer
satisfaction, so the more information you have about the metrics of employees,
the better."

As
yet, the bank includes little human capital information in its annual company
reports, but Miller expects that to change within a few years.  

One
area where he has seen real benefit from measuring staff data has been in the
graduate recruitment process.

"We
used to not measure our graduate recruitment process, but began doing so two
years ago," says Miller. "We used to recruit graduates through doing
the milkround, but when we looked at the data, we realised that what we had
thought was just a few thousand CVs coming in was actually more like 55,000.

"From
that we worked out how much it was costing us in management time, admin time,
response time, interview time etc. We would have never have known that
otherwise," adds Miller.

As
a result of that data, the whole process is now carried out entirely online,
including selection. Miller says this has reduced the cost of recruitment by 70
per cent.

How
these graduates perform once they join the company is now also tracked. "I
can see how graduates have progressed – what percentage of graduate intake is
in senior management within five years, or leave within three years. When you
start to measure these things you can think about how to manage your human
capital, and can improve graduate development programmes."

Miller
has been developing a series of metrics for measuring human capital, often
using third-party expertise.

One
example is The Gallup Organisation’s measurement tool, Q12. This is used to
measure employee engagement, commitment and productivity, and SCB has been
using it for three years. It has found a definite link between how engaged
employees are, and how productive they are.

"If
you look at our most engaged branches, the upper quartile of that group are
about 30 per cent more productive in terms of profit and revenue," says
Miller. "They are twice as likely to meet customer needs and customer
satisfaction scores are much higher."

Staff
turnover, absence and sickness rates are also substantially lower in these
branches.

Q12
is also used to measure how well managers manage. There are 12 questions that
fit into four categories, and managers get a scorecard of their results.

"We
are giving a lot more prominence to how we manage people and measure their
performance – such as our report on directors on innovation," says Miller.
"It’s important to demonstrate to shareholders that we are providing high
quality management."

Another
measure is the introduction of talent-based selection tools in SCB’s sales
force. "The productivity of our sales force is dramatically better as a
result," says Miller. "The best people that come through this now are
$18,000 per quarter more effective. On average, that is $72,000 more a year."

According
to Miller, the important thing is to keep rechecking your data, looking for
trends and providing the hard data to back them up. "Facts beat
feelings," he says. "You might feel how something is going, but unless
you have the data, you won’t really know."

About
Standard Chartered Bank

Standard
Chartered Bank employs 129,000 people in 54 countries.  Specialising in the emerging markets fields
in consumer and wholesale banking, its offices are primarily based in Asia, the
sub-continent, the Middle East, Africa and Latin America

Business
benefits


You can improve the bottom line, revenue and profitability


Reduce cost to the business: 58 per cent of our total costs are related to
people. Measuring the efficiency and effectiveness of that cost is very
important


Improved levels of service excellence and customer loyalty


Substantially lower levels of turnover and absenteeism. Sickness rates are
dramatically lower in high-performing teams


You have a great data source for measuring how your business is performing,
management trends, and so on


You can more accurately diagnose and rectify problem areas. For example, if
your data shows that attrition rates are higher in one specific business, you
can address it

CASE
STUDY:

Nationwide Building Society
Keith Astill – head of corporate personnel

Keith
Astill, head of corporate personnel at Nationwide Building Society, says that
since Nationwide started measuring employee data seven years ago, the results
have helped determine the HR strategy, writes Roisin Woolnough.

"It
gives us our HR agenda," he says. "We had a lot of data previously,
but now make much better use of what it is telling us."

The
starting point was the selection process. Astill believes it is vital that
recruits share the same values and aspirations as Nationwide and has built up a
whole raft of data on the appropriate talent employees need to have.
"There are themes like ‘Wanting to go the extra mile for the customer’ and
‘the way we deal with people is important to me’. Now, for the first time, we
had a way of measuring and comparing people’s attitudes when they came to us
for interview. Because service is vital to us – it’s the way we promote our
brand  – we needed to ensure the people
working for us shared the same aspirations."

He
says data shows that the improved selection process has significantly improved
sales and customer satisfaction figures. "There has been a double digit
growth in product areas right across the board."

Astill
also wants to make sure Nationwide is matching up to employee expectations. The
company runs annual employee opinion surveys and according to Astill, eight
themes have constantly been mentioned.

"We
ask them what they think is important to enable them to do their job well. It’s
about understanding what our people want [so they can] give of their best and
[ask them] how good they believe we are we are at delivering. For example, they
wanted us to improve the performance management system and the way we reward
them. They said we needed to do some work on how senior management communicated
with the business."

Astill
thinks that if you can address such concerns, employee productivity, efficiency
and loyalty increases. While employees may represent the biggest cost to the business,
they are also the source of the greatest return. "And if you get the
culture right – it is more often how things are done as much as what you do –
they will deliver a superior service to customers," he says.

In
the past few years, Nationwide’s employee turnover has dropped from more than
12 per cent a few years ago to just under 9 per cent today, which Astill says
is 5 per cent better than the industry average.

"And
every 1 per cent difference equates to approximately £1.2m to bottom line
costs, at a conservative estimate," he says. "You have less
recruitment to do, less advertising, training and induction costs. But more
specifically, and this is why it’s a conservative estimate, is that less
turnover means employees develop better long-term relationships with customers.
This is actually the key thing as it reflects our business strategy."

Employee
absence has also fallen in successive years, standing at 3.25 per cent and is
on a decreasing trend. Employee satisfaction on the other hand has been on the
rise – 2002’s employee opinion survey revealing a 73 per cent satisfaction
rating, up from 50 per cent eight years ago. Within that timeframe, the
commitment index has also grown, now standing at 83 per cent –  a 12 per cent improvement over the past
couple of years," he says.

Nationwide
reports on some of these findings in its annual company reports. But in the
next few years, Astill expects more comprehensive reporting to be included.

"I
expect more detail to go in about our employees – some of the metrics they feel
are important to them and our performance against this. These are forward
planning measurements."

Astill
says this data is so critical to what HR does that he would be loath to talk to
the board without it. "In every commercial organisation, if you’re just
reliant on what someone thinks or feels without evidence to break it up, it is
almost impossible to present a convincing argument," he says. "I
wouldn’t want to go into a senior management meeting without that evidence."

About
Nationwide building society

Nationwide
has 15,000 employees worldwide in 750 locations. It has 11 million customers
and assets of £75bn.

Business
benefits


It enables organisations to apply their limited resource where it matters.


It gives employees a proper position with other stakeholders.


It provides a useful way to consider these issues in the board room.


It enables meaningful comparisons to improve performance, grow the business and
create value.


It should enable businesses to differentiate themselves and develop some
competitive advantage because they are playing to what matters to their
business.

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