The processes to evaluate, monitor and enhance Human Capital are considered to be something of a new science, a little difficult to interpret and unpredictable; Graham Borley, Practice Head for Change and Strategic HR at Blue Edge Consulting shares his tips on how to produce a working model, the human capital scorecard.
Most people think of banks and money when they hear the term capital. In the business world this could also include stocks, equipment, property and numerous other items that can easily be valued and/or sold. However, in many cases the true value of an organisation is only partly represented by these tangible assets.
Following the increased nervousness created by the dot com bubble bursting there is a growing imperative to gain a fuller understanding about the intangible assets and the value that these promote.
This has been fuelled in no small way by anxiety created in attempting to value companies with very little tangible asset capital. As such there has been a great deal of effort put into accounting processes that will assign value to intangibles. One group of intangibles that is proving difficult to properly evaluate is the area of human assets; often known as “Human Capital”.
Thus, as the requirement to evaluate Human Capital climbs the management reform agenda, the pressure for human resource professionals to be able to prove the returns generated from their investments in people processes is increasing.
And many business people would argue that this is not before time. In almost no other area of the business would it be possible to plough precious resources into a project or activity without a strong argument about the return to the business that is likely to accrue.
The view frequently taken by the HR profession has been that its activities are on a softer level and are not measurable and in many cases this stance has been appropriate (frequently it is accepted without question that good HR processes are good for the business).
The down side of this approach is that because HR professionals have not developed the practices that prove its worth to the business, it has also undermined the ability for HR professionals to develop strategic business partnerships and has occasionally led to the HR profession becoming marginalised.
This said, it is easy to understand how the HR function can become marginalised if it does not represent itself in real business terms at the top table. Like an iceberg, only a small proportion of the vital actions delivered by the HR team are easily visible.
The vast majority of the activity takes place below the surface and is not obvious to the business. To be fair about this we should also say that, in the majority of cases, the business is happy that this is the case as long as there are no problems. The difficulties occur in times of change and when required to justify resource investment in times of increased pressure for cost management.
In order to gain the confidence of the business leaders as a strategic activity that will positively impact the business, HR professionals must develop systems and processes that will show the business, in real financial terms that it is making a difference.
There is a wide agreement that people are assets whose value can be enhanced through investment, the goal being to maximise value while managing risk. As the value of people increases, so does the performance capacity of the organisation, and therefore its value to clients and other stakeholders.
Many organisations have realised that it is only through their people that their business can gain real competitive advantage. However, the processes to evaluate, monitor and enhance Human Capital are considered to be something of a new science, a little difficult to interpret and unpredictable.
This can be especially prevalent in a business environment that is changing rapidly, where mergers, acquisitions, restructuring and downsizing are altering the industry landscape almost daily.
More than ever it is the people working for a company who drive its capacity to perform and succeed that represent its largest operating expense. To ensure best advantage of this Human Capital, HR professionals need to align their management goals and the goals of individual employees with corporate strategy – to deliver strategic plans with quantifiable results and to be able to deal with change proactively.
It is by successfully managing the knowledge, skills and attitudes of all staff that winning companies are created. But without the right information, you can’t measure or predict how employees will be affected by the actions you are taking or get an understanding if they are making the right impact.
Increasingly, HR professionals will need to demonstrate the benefit of the Human Capital activities to the bottom line. Furthermore, over the past year or so there have been a number of groups (most notably the Accounting for Human Capital group led by Denise Kingsmill) that have attempted to create a generic standard for human capital reporting. These initiatives have created recommendations for the types of measures used to determine the important aspects to be recorded but have stopped short of defining specific requirements.
Over the coming months the organisations should begin working on their Human Capital Edge scorecard with the primary objective of being able to create a substantive report for inclusion in the company’s OFR (Operating and Financial Report) at the end of the financial year 2006/7.
Secondary objectives should include bench marking capability (if you can become involved in one of the collaborative groups working on this issue) plus the opportunities for predictive and diagnostic decision making.
When you begin to work on your human capital scorecard we would recommendation that companies produce a working model that will:
- Facilitate end of project and end of year reporting – this will include return on investment statements.
- Approach Human Capital management holistically – incorporate all the data your organisation needs to make decisions about Human Capital.
- Be future proofed – the ability to forecast outcomes from specific HC interventions.
- Have diagnostic ability – the ability to be able to diagnose problems across an organisation (that is either business unit to business unit or whole business to whole business.)
- Allow benchmarking – the ability to get a meaningful interpretation of the data through both internal and external comparison.
This approach places the emphasis upon HR departments to produce the measures to which their success will then be evaluated against a Human Capital scorecard that is relevant for your business. For organisations that are serious about their ambition to have integrated strategic HR partnerships, this is a real opportunity to properly position the HR function and agree a methodology for evaluating effectiveness.
Graham Borley can be contacted at [email protected]