‘People are our greatest asset’, but what do we really know about measuring
the value of that asset to the bottom line of the business? In part two of our
special report, Ed Smith* identifies some of the challenges, and reviews some practical approaches in use
today
In spite of the growing evidence (such as the work of Becker, Huselid and
Ulrich) of the importance and value of people to an organisation, company
reports remain stubbornly bereft of any measurement, valuing or reporting of an
organisation’s human capital strategy and policies.
But this cannot be solely attributed to a lack of interest on the part of
the investment community and board members. Measuring human capital and, in
particular, causality in business performance, is far from simple. In trying to
create value through people policies, the HR community faces three critical
challenges:
– Ensuring that HR policies are linked to business strategies and plans via
a coherent HR strategy
– Ensuring that the resulting policies engage effectively at line management
level
– Demonstrating to an external (and probably cynical) audience that the
policies really are adding value to the business.
To overcome the first two challenges, the people agenda needs to be fully
represented in the strategic planning cycle, and the process of policy design,
implementation and support must then be closely matched to operational reality.
To overcome the third challenge, businesses need a sufficiently robust
measurement framework that makes the value creation process (demonstrated by
sustainable growth in profits and translated, of course, into a healthy share
price) credible to the external sceptics.
The good news is that despite the enormity of these hurdles, more
organisations are now actively engaging in the quest to measure the value of their
greatest asset. Two practical approaches are developing which, for the sake of
simplicity, we can call ‘bottom up’ and ‘top down’.
Bottom up (policy and process focused)
The bottom up approach requires organisations to examine their business
policies and processes at a micro-level, and map very precise HR actions to be
taken, evaluate the resulting change, and then, if appropriate, apply the
actions across the business.
For example, the bottom up approach might reveal that a high staff turnover
during the early weeks of employment stemmed from a mismatch between
centralised recruitment processes and the needs of the branches. An appropriate
HR action, which could be piloted either in one branch or with a representative
sample, could be to make the branch managers responsible for recruiting their
own staff. If, at the end of six months say, the turnover rate during the early
weeks in the pilot branches had noticeably dropped, the organisation might want
to apply the change in policy and process to all its branches. The point is
that at this micro-level, you can actually measure the financial effect on the
business.
If we take a sales call centre as another example, we might find that the
business really makes its money by the up-sale of a second product. In this
instance, staff turnover would need to be analysed not against the traditional
measure of the time required to fill any vacant posts, but against the time
needed to gain the more sophisticated awareness and knowledge to cross-sell.
Then, an HR intervention to reduce turnover could be measured against the value
of otherwise lost or missed sales.
This is a big process to do well, and so far, successful implementation is
the exception rather than the rule. That is not to say it can’t be done, though.
One organisation, for which turnover among its client-facing staff is a
critical factor, has used the approach to identify the underlying issue,
develop an appropriate HR intervention, pilot it in a representative sample of
sites for six months, evaluate the change and then apply it across the
business. The result? A drop in key staff turnover, and a rise in sales.
Top down (strategy and policy focused)
Under this approach, organisations either identify a set of meaningful
metrics for themselves such as revenue or profit per employee, rates of
turnover, absenteeism and compulsory termination, or they adapt those already
developed by others and attempt to manage them.
The fact that businesses are finally waking up to the need to equip
themselves with this basic data about their people is undoubtedly a step in the
right direction. Many organisations know how many laptops they have, but lack
the same degree of certainty about how many people they employ, while numbers
relating to absenteeism rates or training budgets are not even recorded.
For some, therefore, the traditional HR measures are a challenge in
themselves. A bigger issue is often finding ways in which business (as opposed
to HR) outcomes can be meaningfully measured.
Recent surveys, including our own Global Human Capital Survey Report 2002/3,
highlight a link between some of these metrics and bottom line profits. For
example, four of the most significant attributes of higher-performing
organisations that we identified were:
– Low rates of absenteeism
– Depth and breadth of performance management
– Cohesion and rapid implementation of HR strategy
– A committed approach to corporate social responsibility.
However, deciding which metrics to use is the relatively easy part; the hard
part involves collecting and validating high-quality data for each metric.
Get that wrong, and it will be the old woe of ‘garbage in; garbage out’.
That is why firms should spend time – with guidance from the board – thinking
about what is needed in terms of data to support the specific drivers of value
from people for their business, getting and interpreting the data, and using it
to drive improvement.
One of the problems with mapping these measures to the business at a
macro-level is that you can concentrate so hard on managing the individual
numbers that you end up missing the underlying causes.
A good example is a business that was experiencing very high levels of lost
stock through petty theft among the staff. A severe clampdown reduced the
reporting of stolen stock immediately, but it was accompanied by a commensurate
rise in the reporting of damaged and destroyed stock. The underlying cause of
lax managers remained; the change in policy only brought about a change in
reporting, not an improvement to the bottom line.
Whichever approach companies opt for, they must bear in mind that any
endeavour involving people is both complex and chaotic (in the sense of being
unpredictable). So focusing on single measures – whether at the micro- or
macro-level – or taking actions without a clear map as to how they tangibly
help the business, is unlikely to have the desired results, or to impress the
stock market analysts.
It is an intriguing issue, and as businesses are just starting to take their
first steps on this subject, now is the time to give them the guidance they
need.
The timing is also right for boards to step up and report to their
stakeholders on how they are managing their ‘greatest asset’. Stakeholders have
a right to see how their appointed managers are deriving value from all of the
company’s assets – both tangible and intangible.
Ed Smith is PricewaterhouseCooper’s board member for people, knowledge
& strategies and a member of the Accounting for People Task Force
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