First step towards human capital management

Last week, Paul Kearns looked at the business drivers for human capital management. This week, he shows us how they can be achieved.

In part one we looked at the business, market and governmental drivers behind the advent of human capital management (HCM). The intention was to illustrate that HCM really is a new and significant departure for those HR teams who want to rise to the challenge. Of course, many organisations have already started calling their HR efforts ‘HCM’, but there is little evidence that any of them can answer the question of how much their HR strategy is actually worth in terms of market value.

So, rather than give the impression of doing HCM, it is probably much easier to just face up to the fact that HCM is a new discipline for all of us. After all, it’s also a new discipline for financial and investment analysts, as well as accountants. That saves you having to make any excuses for lack of progress. Don’t forget, the reason there is so much interest in HCM is that the accounting profession failed to measure the things that really do drive exceptional organisational performance over the past 20 years or so. Moreover, at a time when conventional accounting and auditing practices are in turmoil as a direct consequence of the debacle over the black holes found in the accounts of organisations such as Enron, WorldCom and Parmalat, the HR profession – for once – need make no apologies.

So, if you accept that you are going to start out on a new journey towards HCM, where might those first, tentative steps take you?

Step 1 – Check whether your board even knows about the subject

HCM needs board commitment. You will not secure the requisite commitment unless they really understand the potential value that HCM could bring. Take along the figures shown in part one comparing Toyota with the rest of the automotive manufacturing industry, and ask your finance director to explain how this can be so when they all have access to the same capital markets and technology?

If this gets them interested but no clear explanations are forthcoming, suggest that part of that value gap can be created from managing people as human capital – with the emphasis on the ‘human’ more than the ‘capital’. HCM is meant to be a very mature way to run an organisation, so the last thing you want is a debate about whether we call people ‘resources’ or ‘capital’. What we are looking for is the best monetary value from human potential.

Now, ask what your organisation is planning to do to leave your competitors as far behind as possible. For a harder edge, you could suggest that if you do not embrace the principles of HCM, then maybe the board’s reputation will suffer accordingly.

Of course, HCM is only for the ambitious. If the board is quite relaxed about the current market position and isn’t looking for significant value gains maybe you need to go elsewhere to get your HCM experience. As a parting shot, you could also mention the possibility that in future they might have a legal obligation to produce an operating and financial review with this type of data in it.

Step 2 – Signal that HCM is a radical departure from conventional HRM

Step one is to check understanding and, if necessary, to whet the board’s appetite. Only then can you suggest that, if it wants all the benefits to be had from HCM, it has to adopt a completely fresh approach to the way the organisation manages people. The board will, of course, ask for examples of what this might mean, so here are a few to start the discussion:

  • There should be no fixed training budget. If people are being seen as value-adders then the board should be prepared to sanction any spend that aims to add value through training and development. In return, you will have to start demonstrating the return on investment (ROI) on that spend by using the same financial calculations used by the finance and operational departments.
  • All the talk about performance management has to be finally made a reality. HCM might be about getting the best value out of people, but that does not mean you should shy away from dealing with areas of under-performance. How can you talk about maximising human capital while you tolerate passengers? This again means you have to have a robust employee performance measurement and management system in place.
  • On the reward front, there are basically two options: you agree to pay market rates and then really concentrate on employee engagement, motivation and retention (the Toyota option); or you take the lid off your rewards policy on the basis that you have to be prepared to put your money where your mouth is for those who generate the most value. However, there’s no room for fat cats in HCM.
  • It’s also about time you wrapped up many existing HR policies and practices under the one umbrella of talent management and put someone in place who has clout and really knows what they are doing. The head of diversity will have to go, because this will now be under the auspices of the head of talent management – which is where it should have always been, anyway.

This should be enough for the board to start noticing the difference between HCM and HRM. The old HR practices will start looking decidedly jaded by comparison.

Step 3 – Get a board sponsor

This step is quite obvious. Really, the only sponsor to give HCM the weight it needs is the chief executive, so you should perhaps have advised them of this before embarking on step one. But then any HR director with political nous will have already realised this. You will also coach the CEO never to use the phrase ‘our people are our greatest asset’ again. From now on, the mantra is: ‘we aim to maximise the value of our people – their individual value and our value are one and the same’ – or something along similar lines.

You should also point out to the sponsor that there will be plenty of resistance along the road to HCM: from managers who have never managed performance before; from those who like training courses with no clear business objective; and anyone who thinks ‘hitting target’ is the only thing they have to worry about.

Developing the full potential of people is now the name of the game, and what better way to set an example than starting at home, with the HR team.

Step 4 – Develop your HCM people

The biggest problem for HR will be finding HCM professionals. They do not currently exist, so there is no point going out into the market to look for them. The only option is the home-grown variety, and these are unlikely to be readily found among existing HR ranks.

HCM is a new discipline requiring new skills. For example, who in your present team can analyse a balance sheet or a profit and loss account and come to some conclusions about what is required from an HCM perspective? Who can look the financial director in the eye, after looking at the existing cost base or revenue stream, and suggest ways of making a significant, measurable impact through HCM practices?

The HCM professionals will need to have an unusual blend of high numeracy with great people skills. They are likely to come from an operational background, but will already have a reputation for getting the best out of the people they have inherited. They will be high performers themselves, who will see that bringing the same level of performance throughout the organisation will require structural changes and fresh perspectives.

Step 5 – Start producing some HCM figures now

Probably the most immediate, practical step of all, is to start producing the sort of data required for a future operating and financial review. Talk value, not cost. Look for outputs, not inputs. Don’t measure staff turnover in terms of recruitment and training costs – instead, measure lost revenue opportunities through losing experienced people. Look at customer service level changes that are directly connected to customers meeting too many new faces.

While you’re doing this, stop measuring HR inputs such as training costs, training days and time to recruit unless you have a corresponding measure of output – that is, the performance levels of those you have trained or recruited.

Draft your first HCM report – what would it look like, and what information should be included to represent the value of people in your organisation? If you are surveying employee attitudes or satisfaction, make sure you have a corresponding chart tracking what they bring to the organisation. If this is difficult, then maybe you need to re-visit the design of such surveys.

Get ahead of the game. HCM is coming, whether you like it or not. It is much better to shape it to what your organisation needs, than have it dictated to you.

Feedback Are you measuring your people policies? If so, tell us how.  E-mail your thoughts to [email protected]

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