Measuring Human Capital

By Nerissa R. Mendoza, on 22 May 2009

There is a popular saying that goes: "Our most valuable resources or assets are our people."
I would like to modify "people" to read: "the right people."The paradox, however, is that only a few of them get to match job specifications.

In our country, close to half a million college graduates get to enrich our available work force each year.

This is the lament especially of business process outsourcing (BPO) entities which get a bulk of applications from new graduates each year.

For large people-based organizations like BPO firms, the path to profitability is the same as for smaller outfits — it is achieved by ensuring that the company meets clients’ expectations and requirements.

Hence, contracts frequently include performance expectations, with clients’ needs in mind.

A large work force is, undoubtedly, the largest expense item of a company which, if well-selected and maximized, can drive the bottom line.

In this way, a large work force somehow epitomizes the concept of human capital, since it is the company’s most dynamic asset.

Hence, the continuous search for better metrics to guage the productivity of one’s work force, especially amid increasing cost controls due to more trying business conditions.

Quality and process improvements of the likes of Six Sigma and Balanced Scorecards that have been effective in different parts of the organization have found their way to human resources (HR) departments.

With the trend in value or triple bottom line reporting spurred by accounting scandals, businessmen and analysts are searching for reporting tools that better account for intangibles that contribute to the company’s value, including "human capital."

A universe of human capital metrics is now being explored in benchmarking and analytics studies. They cover the entire HR value chain, ranging from hiring to "de-hiring."

With the ongoing war for talent, organizations have become highly conscious of cost per hire and, as talents make their exit, turnover or separation has also become a valuable metric.

A key measure that will surely attract the interest of CEOs, CFOs and HR heads is human capital return on investment (HR RoI). This measures the pretax profit an organization makes and divides this by each regular full-time equivalent (FTE). This is derived by dividing the net of gross revenue minus non-wage or non-people cost by wage or people cost.

What is important is to identify what matters, meaning one links measurements to organizational goals and action planning. The following simple four-step process may serve as a handy guide:

1) set the organizational goal;

2) identify relevant metrics;

3) set action plans; and

4) examine the outcome to see if the goal was met.

If the goal set is retain the best talent, it is considered of prime importance to the organization. Then, the organization may want to establish a baseline of the effectiveness of human capital, see how much it is losing from those who leave voluntarily and how much it costs the company to replace those who leave. Baselines are HR RoI, voluntary separation rate and cost per hire.

The action plans to meet set goals could vary from optimizing resource recruitment to implementing succession planning.

During the review period after initiating the action plans, the outcomes should be correlated to the baselines established in step number (2) by posing the question like, did actions yield the desired results, i.e., HR RoI increased, cost per hire decreased and voluntary separation incidence rate decreased.

The correlations become more interesting if trends are established and group or business unit comparisons are made. They could help identify the high earning business units with the best-managed resourcing costs and high employee engagement and commitment levels, all pointing to profitability and sustainability.

To make human capital measurement a strategic input to decision-making and strategy formulation, investing in a database system is a must. It will expedite the capture of human capital statistics and quick correlation with costs and revenues.

With talents sourcing and management increasingly becoming challenging, HR practitioners will have to adopt a metrics-driven mindset. From a traditional "soft" approach when dealing with a huge number of warm bodies, these professionals now have to strike a balance between the traditional qualitative approach and some number-crunching.

There is a popular saying that goes: "Our most valuable resources or assets are our people."
I would like to modify "people" to read: "the right people."There is a popular saying that goes: "Our most valuable resources or assets are our people." I would like to modify "people" to read: "the right people."