Are you still investing in something that you don’t know the value of?

Introduction

CEOs are always interested in their competitive advantage. But the strongest advantage they have is what walks out of the door at the end of the day.

It has become a common saying that the only competitive advantage that companies have is their people. All HR conferences are full of these CEO platitudes – such as, “people are our most important asset”. Yes, of course they are, and they shape the intellectual capital of the firm. Even better, people are a thinking part of your intellectual capital.

But how can your people or human resources become your human capital (HC)? It is easier to say how it is not possible. People will never be your human capital unless their contribution to value can be measured with the same interest and consistency as other assets.

Financials, added value and productivity

So, how you can find some way to get what is needed and what you like? Many CEOs like measurements and numbers to know how their business is thriving. If they want to discuss the status of their production, sales, marketing or IT areas, they can get the data and even benchmark them against their competitors. Speaking precisely using numbers in these areas is in marked contrast to assessing the value of human capital.

“After PricewaterhouseCoopers acquired Saratoga, the world’s leading firm for measuring human capital, we started providing companies with solutions for managing human resources based on local and international metrics from over 10,000 organisations from all main sectors, including banking, manufacturing, telecommunications, retail, and IT”, says Branislav Hunčík, Manager of Human Resources Advisory at PricewaterhouseCoopers Slovakia.

These metrics enable organisations to compare cost ratios, which have recently influenced the vast majority of decisions to move services offshore, or to assess productivity or human capital return on investment (ROI).

Let’s have a look at some financials from PricewaterhouseCoopers Saratoga’s report, Key Trends in Human Capital and from local Slovak HR benchmarking data to see some differences around Europe:

*Full-Time Equivalent

Starting at the top, in a few companies we saw an annual increase in revenue and profit, which was finally interpreted as a decline when human capital metrics for revenue and profit per employee were used.

To gain an overview of human capital in any company, it is very important to interpret the added value and productivity metrics. “We use the relation of profit before tax and remuneration to calculate added value. This metric, called HC ROI, shows how much money you get from every single crown invested in your employees. While the pan-European number is lower (1.13), in Slovakia there is a higher return on investment in HC. For each crown spent on employees, companies get almost one and half crowns back (1.38)”, says Branislav Hunčík.

In terms of productivity, it’s useful to adopt a few metrics. But the most straight-forward method is to relate remuneration to revenues. This number is easily benchmarked and says much about the sustainability of your costs for your reward system. Out of each crown of revenue, 13% goes to remuneration in Slovakia. The European ratio is much higher. This finding matches well with the reasoning for moving businesses offshore, which has brought many new investments to Slovakia.

Of course, although we have been considering the general data above, the proper value of benchmarking is found in looking at differences by sector, region, and company size.

Similarly, it is useful for a company to use HC metrics to measure its ability to recruit and retain talented employees. In the 2003 edition of HR Benchmarking, we isolated the Top 20 companies from the local Slovak database due to their exceptional financial performance. We were interested in seeing how good they are in the area of HR. Even in such a “soft” area as recruitment, they outperformed other companies. With a higher acceptance ratio – 93% compared to 84% – Top 20 companies were also more successful in filling vacant positions. Their effectiveness is also measured by lower costs for filling vacant positions, since their CPH (cost per hire) coefficient is SKK 16,700 (compared to SKK 29,700 for other companies). Their TPH (time per hire) coefficient was also lower. On average, Top 20 companies fill a vacant position within 23 days, while the process can take up to 37 days for other companies.

Training

In the effort to nurture internal talent, there has been a need to benchmark training as well. There are particular metrics covering the broader area of training and development to address organisational needs. We already have the initial findings from the 2004 edition of HR Benchmarking, and can say that measuring ROI in training is very infrequent, and at almost the same level that it was in 2003. When we look at the companies that performed the best financially and which invest up to 150% more than other companies to train their employees, only 6 % of them use some measurements to determine training ROI.

Effective HR Function

If an organisation adopts some metrics for assessing human capital, it is necessary to have good HR management processes. An important part of this is benchmarking the effectiveness of the HR function. This includes indicators on how many HR people an organisation has for managing human resources, and what the costs of doing this are. In the past, there was some discrepancy between the effectiveness of the HR function in the EU generally and Slovakia, but the numbers from the last two editions of the HR Benchmarking survey are converging. The ratio of employees and HR professionals in Slovakia went up, and there is now one HR person for every 99 employees, which is the European standard.

All these numbers come from basic metrics that can be useful for simple benchmarking. The important parts of the process of measuring human capital are aligning the HR function with the company’s needs, as well as linking selected metrics and desired goals. In order not to wind up in chaos by using 150 metrics, it is necessary to choose those that are really linked to the company’s goals. This presupposes having sound financial estimates and working out the financial impact for each area. It also means providing various cost estimates, such as for the current absence rate or the resignation rate in an organisation, to see where there is room for savings and better management.

Conclusion

Any wise investor looks after his capital and regularly checks the level of it. Why? Because what gets measured gets managed, and what gets managed gets accomplished.

In the UK, there is a growing trend towards more effective corporate governance, where Operating and Financial Reviews (OFRs) are shaping the future for HR practice and other areas. Reporting on human capital is now seen as something that should be the norm in general reports to shareholders and other stakeholders.

Then investing in people means more than knowing the 12 th row in the company’s balance sheet called staff-cost.

If you are interested in obtaining the HR Benchmarking reports for 2003 and 2004, or to arrange a presentation, please contact Branislav Hunčík on [2] 59 350 111.