Had Gordon Brown gone ahead with the introduction of operating and financial reviews (OFRs) 18 months ago – and with them an obligation on companies to report to shareholders on the value of their employees – it would have been interesting to see how organisations would now go about reporting the human capital element of their business.
Before OFRs were scrapped, the UK Accounting Standards Board issued guidelines covering the reporting of human capital, but these were generally regarded as insufficient. However, several bodies have emerged that purport to be delivering standards, suggesting that the debate on human capital management (HCM) is still valid.
These days, discussions about HCM (how organisations structure themselves to optimise the talents and skills of their staff) now revolve around human capital measurement (how organisations actually measure HCM, and what aspects they evaluate).
One company with a vested interest is consultancy firm Valuentis, which sells a suite of software products that track 93 people management activities. It has also developed a people-flow model that helps organisations to follow the movement of people through the business over time. “We have mapped the entirety of human capital management,” claims chief executive Nicholas Higgins.
But for some, all-encompassing approaches of this kind complicate the issue, overawing HR practitioners to the point where they ignore HCM altogether.
“There’s a danger of tying the HR function in knots,” says Chris Bones, the principal at Henley Management College. Bones is a panel member for the Investors in People Human Capital Standards Group, a body formed in July 2006 that also counts representatives from organisations such as the Chartered Institute of Personnel and Development, the Work Foundation and the CBI among its number.
According to Richard Donkin, a Financial Times business journalist and the driving force behind the group, its aim is to establish a basic set of human capital measurement standards that are common to all businesses, and that would mean something to investors looking at an annual report.
Donkin says the final standards are likely to include some qualitative evidence alongside metrics such as profit and turnover per employee and the percentage of vacancies unfilled within a month. He argues that if every employer asked employees the same standard question, such as: “Would you recommend this company to a friend?” or: “Are you well managed?”, the findings would give a useful measure of employees’ well-being and attitudes to the organisation.
“People get hung up on performance measures and return on investment. If you combine factual findings with qualitative information, you can build a rounded picture of an organisation’s human capital,” says Donkin.
Getting the basics right
These deliberations underline how immature human capital measurement is. This should come as no surprise, however, since financial accounting standards have taken centuries to evolve and gain acceptance.
But while the debate rages, some organisations are getting on with collecting data about their employees and using it to make strategic decisions about how they allocate resources. At the Royal Bank of Scotland (RBS), for example, head of human capital strategy Greig Aitken has been working in HCM since 2000 when, following the acquisition of NatWest, the organisation started to measure the impact employees were having on the business.
Aitken says organisations should start by getting the employee data all in one place. That said, few employers are likely to need a global data warehouse of the kind used by RBS, which pulls in data from 30 systems worldwide. “Don’t start off by recording employee engagement scores,” is Aitken’s advice. “Just get the basics right, such as absence rates, training costs per employee and turnover rates. Find a benchmark.”
Seven years down the line, Aitken says he is able to view measurements that really mean something to business leaders. For example, RBS has drawn up a leadership index, which uses a number of metrics to rate the leadership skills of individuals. By cross-referencing this data against sales and customer service feedback, Aitken says he can give a breakdown of what aspects of leadership exist across any group, division or department, and relate how much these skills are worth in terms of sales and customer satisfaction. “Headline figures like this are far more impactful than a spreadsheet the size of Germany,” he says.
At Standard Chartered Bank, group head of people product management, Debbie Whitaker, is also innovating in HCM. The bank’s headcount has doubled over the past three years, so the onus has been on recruiting and retaining talented staff, she says.
Whitaker has been instrumental in setting up processes that track high-potential employees right from the recruitment stage and measure their impact on the business. This, she says, has given the company an insight into whether its selection processes are improving, and helps gauge the value of high-potential staff to the business. “The value comes from looking at performance over time. This is not something that will give you real value after a few weeks,” she says.
But analytical rigour of this kind is not traditionally associated with the HR function. For example, Henley Management College has just launched a postgraduate course in Advanced Human Resource Management – and it is no coincidence that it is a Master of Science degree.
Ali Gill, managing director of talent management consultancy Getfeedback, fears that the scientific aspect of HCM means there are significant skills gaps. “There are few HR people who can combine numerical skills with emotional intelligence,” she says.
Measurement key to management
This does not mean, however, that HR should not strive to develop skills in this area. According to Higgins, HR’s success in embracing human capital measurement may be a deciding factor in whether the function plays an active role at the boardroom table. “Human capital measurement does require discipline and learning, but HR must get round it or face being squeezed out by accountants who are taking a greater interest in this area,” he says.
He goes so far as to suggest companies should introduce the role of chief human capital officer (CHCO) in recognition of the evolution of HR’s role. He says he is already working with a FTSE 100 company that is considering making such a change. “Having an effective CHCO would benefit the HR function by making it more dynamic and would help move it away from the traditional silo approach,” he says.
But Bones feels the new title is too abstract and would mean little to most people. He sees nothing novel in human capital measurement and says a revamping of the HR function is unnecessary. Areas such as employee engagement have become popular in recent years, but Bones points out that HR practitioners have used measures such as profit and turnover per employee for years. He adds: “Human capital measurement is not new to HR. Good HR has always been interested in making sure it gets the outcomes it wants.”
Case study: 02
Talent management consultancy Getfeedback has been working with mobile phone network provider O2 to measure the impact that sales training can have on the company’s bottom line.
Three years ago, it created a framework of skills and behaviours it wanted the sales force to cultivate, including better listening and presentation, and a service aimed at generating higher levels of customer satisfaction.
It devised training and mechanisms to track improvements. 02 asked managers to deliver a monthly report detailing the level of competency shown by the sales team. It also recorded other metrics, such as how satisfied and committed each staff member was and how much revenue they generated.
It became clear that the employees who were developing the fastest were generating the most revenue – up 18% on the average. Those who were developing quickest were also the most engaged with the company: real evidence that one factor drives another, and a strong case for building human capital measurement into your HR strategy.