Human capital management (HCM) has been a much discussed topic over the last few years with numerous articles and books published on the subject. Bettina Pickering, of PA Consulting Group, asks whether it is worth the HR directors’ attention.

Various definitions of HCM have emerged over the last few years and almost overnight hardly any HR software vendors are left who have not re-branded their solutions as an HCM solution.

So is it a fad? Or is there something in it for HR?

Whatever its label, HR must embrace, if they haven’t already done so, the need for meaningful management information which lies at the centre of an HCM approach. HR needs to be able to show the value add of HR activities to the business in number terms.

Most other business functions have developed a clear view of their contribution to the bottom line and business goals through balanced scorecards, cause and effect analyses and other methods.

For example, finance points to efficiency ratios, value add analytics of spend and so on; IT points to total cost of ownership analysis and outsourcing; and procurement points to supplier management and cost reduction.

The spotlight is on HR

HR has often been left behind due to the view that HR actions are intangible and therefore cannot be measured. However, increasingly, the spotlight is being turned on HR with questions about value add being asked.

Due to the ever increasing trend towards cost cutting and cost/investment justification, most expenditure and budgets need to be justified through their contribution to the bottom line in some way or another. Without these justifications, HR directors will struggle to get approval for the budgets they require to continue to manage ‘human capital’ effectively and in line with the business’s strategic goals.

HCM tries to apply capital (cash, land, machines) management principles to the management of employees. In addition to putting structures and processes in place to ensure employees’ skills and talents are optimally managed and maintained, a key focus of HCM is on being able to quantify the impact of HR activities and processes on the bottom line and even goes as far as measuring each employee’s value to the bottom line.

Of course, employees are not machines; their emotions come into play and their impact is an individual combination of talents and ambitions. Results and outcomes from HR initiatives cannot always be predicted with certainty and to the exact ‘penny’.

However, that should not be an excuse to put one’s head in the sand and shy away from putting measures in place that are able to show success and value add of HR activities by highlighting trends and patterns.

In many cases, HR directors will need to think creatively about what measures or combination of measures to use in order to show the value add. For example, absence rates are relatively easy to measure and show, and so therefore is the impact of any initiatives aimed at reducing absence.

Intangible actions

However, the impact of leadership development, line management development and employer branding on key business goals and thus the bottom line is often not as straightforward to measure. Secondary measures need to be employed to show what difference ‘intangible’ HR actions like leadership development, communications or targeted coaching are making to the business.

Breaking down line management competencies, for example, measuring these competencies through 360 feedback and running these against leavers and employee turnover figures not only shows the impact of line management up-skilling activities but also highlights the competencies where HR would need to focus their improvement initiatives in future.

Depending on the organisation’s key strategic goals, some of these measures could change year on year. Therefore it is vital that an HR director not only develops the right measures for their business, but also makes sure that some basic structures are in place to gather the right data in the right format and quality. Furthermore they need to have analytics software in place to be able to support trend analysis and combinations of various business and HR measures.

So whatever one might think of the hype and discussion around HCM, some HCM concepts are here to stay. Therefore HR directors should embrace and welcome HCM as a good vehicle to get a value justification and value quantification mentality embedded within the HR function.

Talking in numbers and providing analytics, has not traditionally been a core HR skill, however, given where businesses are going with management information, it is one of the critical competencies that HR directors need to develop within their function as a matter of urgency (if it does not already exist).

In addition, HR directors themselves need to be able to hold their own in terms of talking numbers at board level and develop (if not already there) a detailed understanding on cause and effects of HR actions on key business goals and focus areas.

Bettina Pickering is a managing consultant for PA Consulting Group. For more information, please visit: www.paconsulting.com