From Crunching Numbers to Human Capital

8/7/2019 From Crunching Numbers to Human Capital

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When sipping that next cappuccino,cunsicier that the recent m arket cap ofSt.irbuck's Coffee Co. was 7,313 per-cent greater than its fixed assets.Google has a market cap that is 8,842percent of its fixed assets. Even hos-pitality organizations such as Star-wood Hotels & Resorts World wideInc. which posses s lots of realestate and giant manu facturingorganizations such as General Elec-tric Co. bave market cap ratios thatare sizeable when compared to tbeirinvestments in property, plants andequipment. (At the time this articlewas written, Starwood had a marketcap-to-assets ratio of 177 percent, andGE's ratio was 409 percent.)

There has been an increasing real-ization that fewer and fewer of anorganization's assets are tangible andfall neatly onto a line of the tradition-al balance sbeet. items such as brand,intellectual capital, culture, work-force skills and inn ova tion hav eincreasingly become major forces inshaping an organizat ion 's currentand future success. Many services

firms note that more tban 90percent of their assets walkout the door each n ight .Even manu facturing firmsare competing to a greaterextent than ever before onse rv ices and innova t ion sproduced by their work-force.

As such, the value ofhuman capital is too high to be solelytbe responsib i l i ty of tbe humanresources function, and CFOs canplay an important role in educatingand collaborating with HR to devel-op better ways to measure and man-age tbe value of the organization'shum an assets. Armed w ith informa-tion and analysis from finance, HR isin a much better position to assessand compare the potential impact ofhuman capital Investments and focusresources on those that will deliverthe greatest return on investment(ROl) for the com pany

Consider these four key questions:Why is it important to betterunderstand human capital?

By Will iam A.Schiemann


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How can the value of human cap-ital be measured?How can that information beused to make important businessdecisions?

What role can CFOs play in thisequation?I t ' s wel l known tha t in manyindustries, geographies or functions,human capital is becoming scarce.Hawaii, for example, is facing severelabor chal lenges , with unemploy-ment rates across the islands barelyabove 2.0 percent . North Dakotacan't find workers to support its agri-culture and energy industries tal-ent aside, there are just not enoughpeople.Hawaii ' s s i tua t ion is a perfec t

example of a trend that promises tosweep the rest of the U.S. and manyother parts of the globe in the nextfew years : ta lentsho r tage s (e i ther in / numbers or sk i l l s )tha t wil l dr ive upcosts and likelyreduce customer satis-fac tion and thu sreduce f inancia lgrowth and profitabil-ity.Solut ions such ass u p p l a n t i n g p e o p l ewi th t echno logy ATMs for tellers andcomplicated voice messages in iieu oflive operators have not solved thecrisis. Most indu stries still depend onpeople for their competitive advan-tage, and most Western businessesare increasingly dependent on servic-es, innovation and human productiv-ity to edge out their com petition.In many places, besides people,skills are in short supply. In theHouston area, the oi! and gas indus-try faces a crisis of talent at a timewhen growth has been strong. Richpension plans , modest re t i rementneeds and values that favor leisureare creating a "triple-witching" eventthat experts say wilt strip the indus-try of 30 to 40 percent of neededgeologists, engineers and other high-ly skilled professionals. While energycompanies have a voracious appetite

for these key skills, there simply isnot enough talent locally, and inmany cases, globally.This dearth of talent is due inlarge par t to the "baby boomereffect," as well as a lagging indicatorof a decades-long lack of engineeringand scientific training in the U.S. andother Western countries. In the talentsearch, "the game has changed," saida CEO of a major oil company. Whenit came to raiding talent, he said,there used to be an informal "hands-off" rule. Not so anymore, as "thoserules have gone out the window. Ithas gotten downright ugly."Globalization has only exacer-bated this situation. As China dealswith growing needs for technical

and middle -management sk i l l s ,Chinese executives are now raidingIndia, Eastern Europe and even the

Manage what you measureholds true as organizations compete

for talen t am id a shrinking wo rkforce.Those that develop measures forassessing their human capital canbetter manage and value

wh at they have.

ipating the future through good leading indicators of impending productivity, retention, customer satisfactioand f inancia l performance . Thiauthor and others have documentemany instances of such relationshipFor example, in a recent study with major restaurant chain, measures oemployee alignment, capabilities anengagement were powerful predictors of customer satisfaction anfinancial performance across thousands of restaurants.Also, just like economic indicators, there are good human capitaind ica tor s , such a s employeengagement, employer (not product) brand or alignment. These indicators may provide key informatio

about emerging t rends , such adeclining talent availability, higheturno ve r of s t rong pe r form ersunionization vulnerability and emerging ethicrisks.

U.S. for ta lent . And, while theimpending recess ion wil l l ike lyslow some talent problems for ashort time, the issue is certain toreturn over the next five years, withmore firms unable to compete dueto lack of talent.Why Measure?Perhaps the best reason to measurehuman capital is to consider the risksof not measuring it. These includeunpredicted labor shortages, skillsmismatches that choke off growth,talent fleeing to competitors and pro-ductivity levels that are only 70 per-cent of what they could be. Thosewho measure and manage these fac-tors will hav e a distinct adva ntage.

Another major advantage of hav-ing the "righ t" measures lies in antic-

Can Human Capital BeMeasured?There are two major wayto measure human capital. One involves a "HolyGrail" quest for the perfect num ber one thacould be entered on thbalance sheet. Howeverthat one number, even ifound, would not p rovide muchmore than a static indicator of humancapital value and is not somethingthat would help much with key business decisions.

Various indices of labor investment and return, with varying tradeoffs, have been proposed. Yet, thereare high risks to standardized measures of human capi ta l . Measuresuch as revenue per employee (olabor dollar) can provide some broadguidance, especially when comparedto f i rms in a com para ble mark eniche. But even then, those firms mayhave different strategies; one mayleverage labor more while anotheleverages technology more.Nordstrom Inc., for example, creates a distinct brand through its customer - in t imacy mode l , which


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Figure 1

T u r n o v e r

ShareholderEquity

CustomerEquity

People EquityAl ignmentCapabilitiesEngagementPeopleDrivers

THR

DriversTPeople

Initiatives, InvestmentsSource: Metrus Group

requires higher labor inves tmentsthan, say, Wal-Mart Stores Tnc.'s low-cost, supplier-driven model, whichleverages human capital differently.An alternative approach to manag-ing human cipital is through the con-cept "People Equity." People Equityhas shown to be highly predicfi\'e of

key outcomes: employee retention,operational effectiveness, customersatisfaction, quality, internal serviceand financial performance.People Equi ty is comprised ofthree components, each of which iscrucial to the current and potentialvalue of the workforce:

Alignment of the workforce withthe business strategy;Capabilit ies to meet customerrequirements; andEngagement of the workforce tlie levels of raw energy, commit-ment and advocacy.In essence. People Equity drivescus tomer equi ty, which, in turn,drives shareholder equity (see Figure1 above) . While there are var iousways to measure People Equity, onethat's been proven most cost-effectiveis the use of strategic employee sur-veys. There is a parallel with customersurveys, which, over the past five orso years, have been reengineered topredict customer buying patterns md

loyalty, sales growth, market shareand financial performance.Employee surveys, when construct-ed to capture the alignment, capabili-ties and engagement (ACE) dimen-sions, are similar in that they predictpeople, customer, operational andfinancial performance. ACE dimen-

sions are good indices of how well theorganization is executing its strategy.Typically, when alignment is low,the organization is spending morelabor dollars to accomplish its goalsand its employees arc engaged in toomany low- or no-value ac t ivi t ies .Organizations in which capabilitiesare low are deficient in the talent,information or resoLirces required tomeet customer expectations forwhich they may pay a hefty penalty

in the marke tp lace . And, whenengagement is low, top performersleave more frequently, productivitylevels are suboptimal and dysfunc-tional outcomes, such as grievancesand labor strife, are more plentiful.F i v e Steps CFOs Can TakeThe tollowing are steps CFOs anciother financial leaders can take toensure they are making the optimalinvestments at their firms:1. Make sure there is a good humancapital strategy in place one that

pivots off the organization's humancapital differentiators.2. Insist on having good metrics inplace to capture those human capitalfactors. Such metrics should includeboth leading and lagging human cap-ital success factors.3. Make sure the organization's infor-ma t ion sys tems capture the ACEcharacteristics the three big driv-ers of humiui capital value.4. Ensure that measures exist for ofthe drivers of ACE these could bet ra in ing , core va lues , l e ade r sh ipski l ls , supe rv i sory prac t i ce s andmore.5. Be sure there is a strong trackingsystem for reviewing these measuresquarterly along with customer andfinancial performance.

Ins t i tut ing these measures wil lput the organization on the road topowerful human capi ta l measure-ment that provides both insight andforesight to distin guis h the firm in aworld of increasir\g competition andscarce resources.WILLIAM A. SCHIEMANN ([email protected]) is CEO and founder ofMetrus Group, a Somervillc, N./., consult-ing firm specializing in strategic perform-ance measurement. He's published dozensof articles and is co-author o /Bu l l seye!Hitting Your Strategic Targets ThroughHigh Impact Measurement .

T A K E A W A Y S-- W ith the realization that few er ofan orga nizatio nal assets are tangible,items such as brand, intellectual capi-tal, culture, wo rkforc e skil ls and inno-vation have increasingly become majorforces in shaping an org anization's cur-rent and future success. CFOs can play an important role ineducat ion and col laborat ion w ithhuman resources to develop betterways to measure and manage the val-ue of an organization's human assets. An effective approach to humancapital management is through theconcept of "People Fquity" PeopleEquity has show n to predict employeeretention, operational effectiveness,customer satisfaction, quality, internalservice and financial performance.


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From Crunching Numbers to Human Capital

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