In the first of a two-part series on human capital management, Paul Kearns looks at the business case for measuring your ‘number one asset’
You have probably become inured to the cry of ‘wolf’ heard so often these days in HR circles. Demographic timebombs, HR re-engineering and business scorecards are just some of the many examples of much-vaunted topics, which are heralded with great fanfare but usually fail to disturb HR departments unduly, or leave any lasting impression.
So being alarmist about the latest big idea, human capital management (HCM), will probably serve no purpose. In fact, there is a distinct whiff of déja vu in the HR air from those who think this is just HR measurement in new clothing. Not so. A sober review of some rather startling facts might make you wake up to the latest opportunity, or enormous challenge, that HCM represents.
How about this for starters? Which organisation would win the ‘world cup’ for getting the best value out of its human capital? Microsoft? Motorola? Tesco? Actually there’s no contest – the answer is Toyota and has been for some years now. This does not necessarily mean that it has the best HR function though. It means it literally gets more dollars returned on its investment in people compared to its competitors. How do we know this? Well, the results speak for themselves. Toyota’s market value (share price x number of shares) of over $120bn is more than the combined value of Ford, General Motors and Daimler Chrysler (based on figures for January 2004). And Toyota is much more profitable as well. Toyota can produce a car for $3,500 less than its competitors in the US, for instance.
When it comes to HCM, shareholders and investment analysts are the key people drawing their own conclusions from such figures and it is their views that count. Share prices are based on the confidence they have that organisations like Toyota will continue to deliver best market value. Moreover, once this level of performance is seen to be achievable it becomes the benchmark for the industry. So HR needs to be thinking how it convinces them, not its internal customers. HCM asks whether your ‘best’ is good enough and what real market value it brings in terms of money.
Consequently, HCM is based on much tougher success criteria than we are, perhaps, used to in HR. Rates of sickness and absenteeism, staff turnover and even employee attitude surveys will cut no ice if there is no clear, causal connection to a corresponding improvement in market value. The currency of HCM is added value per employee (in terms of money) – not their number of training days per year or even how much of your salary bill is committed in the training budget. Not unless you can show the return on investment on this spend.
One problem with current thinking on HCM is that it is regarded as an ‘intangible’. However, some academic estimates suggest that intangibles account for up to 75 per cent of the difference in market valuations of companies. In the US, this has led to many HR practices designed to influence such intangibles (hence the focus on ’employee satisfaction’). But maybe they are missing the point? What Toyota does is all very tangible indeed and involves a great deal more than just trying to keep its employees satisfied. Toyota believes in developing its supply chains as partners. It shares knowledge and expertise in return for lower supplier prices, which in turn necessitates open-book accounting. This is, of course, in addition to all its other HR practices of developing staff in the philosophy and practice of kaizen (see below left). It is also very tangible in the results it delivers.
If we call this HCM then we know it can generate enormous value. So what could it do for the future of UK plc?
That’s exactly what Prime Minister Tony Blair and Secretary of State for trade and industry Patricia Hewitt are thinking. They would be very keen, especially with our apparently persistent productivity gap, to know how to help UK businesses (and the public sector) perform like Toyota.
Never mind the commercial sector. What if our NHS, local government and the police managed to get this much value out of their enormous investment in ‘human capital’? No wonder the Government wants to get regular reports from organisations indicating how they are performing on the HCM front. This explains why it commissioned the Company Law Review as far back as 1998 and set up the Accounting for People Taskforce in 2003 to improve the way organisations report on these matters.
But you cannot report on HCM if you are not actually doing it. So what exactly is it and where do you start? We will look at the first tentative steps you should take in Part 2 next week.
Toyota staff provide 75,000 reasons for using kaizen
Kaizen is a simple, Japanese philosophy defined as continuous (kai) improvement (zen) through gradual, systematic change. It avoids the pitfalls of throwing money at organisational problems by encouraging a thoughtful approach. Masaaki Imai in his book, Kaizen: Key to Japan’s Competitive Success, defined it as: “A means of continuing improvement in personal life, home life, social life, and working life. In the workplace, [it] means involving everyone – managers and workers alike.” Kaizen promotes making small improvements immediately to encourage active employee participation. Toyota has used kaizen processes since the late 1970s. At one of its US plants 7,000 employees made more than 75,000 suggestions in 1999 and amazingly, 99 per cent of them were implemented.
HCM v HRM
- HCM (human capital management) specialists need to know the difference between the book value and market capitalisation of their organisation
- The most important stakeholders in HCM are external not internal
- HCM is about value not cost. People are value adders not overheads, as in HRM (human resource management)
- HCM has to show the value generated by people management in the annual operating and financial review
- HCM means demonstrating a clear and causal link to organisational performance, not just following best HR practices
- HCM is about measuring organisational outputs (profit, revenue, service levels) while HRM tends to concentrate on input measures (eg, recruitment costs)