Is HCM dead in the water?

On 3 November 2003, the Accounting for People (AFP) report on human capital management was passed into the doubtless trembling hands of the secretary of state for trade and industry, Patricia Hewitt. On the same day, accountancy firm PricewaterhouseCoopers (PwC) ann-ounced it had finally finished buying the world’s best known human capital benchmarking consultancy, the Saratoga Institute, based in San Jose, California, and its European arm, EP-First, based in Henley on Thames in the UK.

The Saratoga Institute gets a brief mention on page 38 of the AFP report as possessing one of the “better known approaches” to the vexed question of how to measure human capital. But the other connection between the two announcements was that PwC was heavily involved with the AFP taskforce. Ed Smith, senior partner, sat on the taskforce itself, while Rosie Blackham, partner, was seconded from PwC to act as chair of the taskforce’s 23-member advisory forum. And Richard Phelps, previously managing partner at EP-First, but latterly a PwC partner, sat on the advisory forum. No other firm had such a hefty presence during the UK Government’s first dalliance with human capital.

For understandable reasons, the AFP report has since hogged all the limelight. But Off Message is firmly of the opinion that PwC’s purchase merits a good rummage in the undergrowth too.

PwC’s rationale for buying Saratoga/EP-First was straightforward. Sensing that human capital evaluation and reporting were set to be huge issues in future years, it sought to boost its expertise, and more importantly, its databases, through an acquisition.

Today, in a suggestive sign of the times, if anyone wants to know comparative stuff about people at work, such as how long it takes companies to fill a post, or profit per full-time equivalent employee, then it is tax-avoidance behemoth PwC that now possesses more information than anyone else in the world. Saratoga’s clients include 400 of the Fortune 500, while EP-First has gathered HR performance data on more than 6,500 European companies.

Saying that Saratoga has one of the “better known approaches” to human capital management is a bit like saying Arthur Scargill is a trade unionist.

Saratoga was founded in 1977 by the godfather of HR metrics, Jac Fitz-Enz, or ‘Dr Jac’ to the cognoscenti. At a time when most readers of this magazine were worrying about the tripartite system of government, employers and unions working together to solve national problems, Fitz-Enz was dreaming up ways of capturing the contribution of people to performance numerically. It took 25 years for his work to gain a mainstream audience: in 2001, the Society for Human Resource Management, the US equivalent of the Chartered Institute of Personnel and Development, declared his tome The ROI of Human Capital as its book of the year. He was, to put it mildly, ahead of his time.

Yet Saratoga/EP-First were always devotees of a very particular approach to human capital, often referred to as the ‘hard metrics’ school. Broadly, this view argues that HR must talk the accountants’ language, and not invent a new one. Just as numbers give a description of an organisation’s financial health looking backwards, so too can numbers give a description of an organisation’s esprit de corps looking forwards. The vital point is that those numbers must be as consistent and universal as possible.

In a 2002 book, Maurice Phelps, co-founder of EP-First (and father of Richard Phelps – EP-First was something of a family firm) maintained that there were seven specific sets of metrics that were “critical for most organisations”. They were: organisational effectiveness (such as revenue per employee), productivity and pay, absenteeism, turnover, recruitment, training and development, and finally the people function itself (such as the ratio of HR staff to workers).

The great advantage of hard metrics is that they enable organisations to get a sense of how good they are at managing people compared to others in their sector. If they choose to publish the information, external observers and investors could also gain a factual insight into how they treat their ‘human assets’.

Famously, however, the cause of hard metrics was heavily damaged last year when the AFP report was published. Paragraph 91 of the report states: “There was a widespread view that while the taskforce might stipulate that metrics should be used in reporting where possible and appropriate, individual organisations should be free to choose their own methods of data collection and analysis and to decide which particular measures to use and report.”

Translated out of drone-speak, this means companies should measure whatever they fancy, and ignore everything else. In effect, it kissed goodbye to all hopes of rigorously comparing apples with apples as regards HR information in operating and financial reviews for many years to come.

Sure enough, in a letter to the Financial Times on 20 September 2004, Phelps senior voiced his deep frustration at the “missed opportunity” of AFP. “It just made me wonder what type of accounts we would receive if we adopted the same approach to financial reporting,” he wrote.

PwC itself, of course, so heavily embroiled in the AFP pantomime, cannot and does not share this view. Today, it appears to have pocketed the new stockpile of data, but neutered Saratoga/EP-First’s evangelism about the cause of rigorous, universal, consistent HR metrics. “Organisations need to collect the measures that are relevant to their business strategy,” argues Phelps junior.


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