The past years have seen a growing interest in measuring human capital. The days when company leaders could say, "our people are our most important asset" and gloss over the value in a financial statement are dwindling.
As Harvard Business Review reported, "… too many organizations aren't as demanding, as rigorous, or as creative about the human element in business as they are about finance, marketing, and R&D."
The change comes from transforming our economy into an innovation driven, talent driven, and knowledge-based economy. According to EY, intangible assets, including human capital and culture, now comprise an average of 52% of the company's market value.
Yet, as recently as 2018, only 16% of CFOs surveyed felt they "truly understood the return on our human capital investments."
Why is measuring human capital so tricky?
The Failure of Rating Scales.¶ Over the past century, businesses worldwide have created complex systems of competencies, traits, and behaviors to gauge human performance. Those structures have contributed little or nothing to learning the value of human performance. They may have created a perception of value differences within organizations, but when we apply those numbers to compensation, pay becomes the only thing that matters. There Is no correlation with value to the enterprise.
Misunderstanding of Intangibles. In How to Measure Anything, Finding the Value of "INTANGIBLES" in Business, Douglas W. Hubbard explains that we often misunderstand intangibles in two ways:
- We apply the word "intangible" to things not touchable or physical objects, but many of them are measurable in other ways. Examples are copyright, trademark valuation, and patent ownership.
- We misunderstand the word "intangible" to mean immeasurable in any way, either directly or indirectly.
We can measure many things we think of as intangible by evaluating how they impact measurable things or how they impact entities around them. Consider how astrophysicists discover new celestial bodies by observing objects around them and how nuclear physicists discover subatomic particles.
It comes down to a question: "What moved?"
Irrational Dependence on Hard Measurement. Hubbard observed cases where important strategic proposals were overlooked in favor of minor cost-savings programs because approvers couldn't immediately see how to calculate the value.
The truth is that the world runs on estimates. Consider these (Hubbard, p. 4):
- Revenue forecast for a new product
- The value of data
- Public image
- The value of R&D
- Every sales projection, ever
Businesses can't operate without these estimates, and the same principles of estimating can apply to the impact of people on the organization. It's a matter of estimating what will move before launching an initiative and what moved afterward. Much of the impact is in your current data, but it may not reside in HR.
Why Measure Human Capital?
HR has been traditionally focused on internal efficiency measures, with somewhat practical efforts at measuring the effectiveness—primarily in L&D.
External Pressures for Measurement
Recently, the demand for measuring the value and impact of human capital has grown exponentially. Investors and other stakeholders want to know how ready the company's workforce is to adapt to the new economy and unforeseen disruptions.
The US Security and Exchange Commission has published new guidelines for reporting human capital value in proxy statement disclosures.
The International Standards Organization has published ISO 30414:2018, which groups 23 metrics recommendations into nine core HCR areas, with two additional categories for internal reporting: organizational culture and succession planning.
- Compliance and ethics (grievances, disciplinary actions, training compliance)
- Costs (total workforce costs)
- Diversity (age, gender, disability, other indicators of diversity)
- Leadership (employee trust in leadership)
- Organizational culture* (engagement, satisfaction, commitment)
- Organizational health, safety, and well-being (lost time injury, occupational accidents, deaths)
- Productivity (revenue/profit per employee, human capital ROI)
- Recruitment, mobility, and turnover (time to fill, time to fill critical positions, internal hire rates, turnover)
- Skills and capabilities (total training & development cost, training participation, workforce competency rate)
- Succession planning* (retention of key talent, candidates filled from within, readiness)
- Workforce availability (number of employees, scalability)
We disagree that organizational culture and succession planning will evolve only as internal measures. They are vitally important to potential investors and critical measures of the organization's health and adaptability.
Internal Pressures for Measurement
Leading organizations have been concerned for a long time about HR and Learning alignment to the business. It has been an essential topic of discussion among practitioners and HR executives.
CEOs want to know what value they are getting for their investment in people. HR and Learning leaders want to demonstrate that value. They need measurement and data to compete for scarce resources and to prove the value of what they do.
We believe that Objectives and Key Results (OKR), Key Performance Indicators (KPIs), or any other similar method your organization will buy into will show how to measure that value. By aligning measures to business objectives, HR can align their efforts to the business and show human capital's impact on those objectives.
The benefits of alignment and measurement are that they:
- Drive accountability throughout the organization as each individual is charged with a measurable contribution to critical results.
- Track the behaviors that contribute to those results, which enables HR and Learning practitioners to identify the contribution of methods, practices, and programs that hire, develop, and motivate your people.
- Align effort to business goals on the individual, team, group, function, and unit level.
Measuring human capital's contribution is a business imperative, but many organizations don't have a grip on what to measure or how. Read on to see how you can approach it.
What to Measure in Human Capital
You can decide what to measure by looking at the alignment of business strategies and talent priorities. Business strategies determine your talent priorities as you shape the workforce to meet the strategies. The talent priorities enable you to identify key metrics
Align Talent to Business Strategies
When we align talent to strategy, each objective demands specific talent priorities. There can be many contributing priorities, each with its specific value metrics.
Don't try to measure everything. Choose a small number of indicative measures that will drive results. Let those measures drive action and quantify their contribution to organizational strategy.
How to Measure Human Capital: A framework for success
When we talk about measuring human capital, we don't get into numbers and calculations until we have worked out a framework for governance and collaboration. HR and Learning don't exist in isolation. They exist to support the business, and the business needs to be involved in the development and measurement.
Here is our six-step approach to developing measurements of human capital.1. Form a Cross-Functional Team
Many of the measures you need don't reside in HR because what talent does affects business operation. Measuring the value of capital requires input and participation from throughout the business.
- Operations owns the business objectives that talent priorities enable. Operational leaders need to understand that contribution and must take ownership of the factors that drive it.
- Finance provides the financial acumen, budgeting, and procurement capabilities to fund and enable required technologies.
- IT provides the infrastructure and resources to enable the technology. All the resources you need may already exist.
- Your Analytics Team has the data scientists and analytical methods that will enable you to measure the talent contribution.
- Learning and Talent experts provide the science and methods behind talent initiatives.
- Marketing and Communications can help you with your talent initiatives' promotion and messaging to help every stakeholder understand your initiatives' purpose, methods, and impact.
2. Start with a Specific Goal
- Begin by understanding the strategic objective and business goals.
- Develop lists of behaviors, processes, and results you want to influence in your talent.
- Ask yourselves how you will know when you have achieved success and express results in numerical terms.
3. Understand the Data
- Ask Yourself What You know already about the objective or issue.
- Ask what you need to know to accomplish your objective.
- Understand the data you have in your HR and learning systems.
- Determine how you will access the data in other systems or platforms.
4. Agree on Objectives
- Form a team to develop measures.
- Understand the purpose of the initiative.
- Brainstorm measures and metrics.
- Align the objectives with each other and the business strategy.
- Map and understand causation among measures and objectives.
5. Develop Reporting
- Create reports and dashboards for each role in the organization
- Create communication assets to tell your story of alignment and impact
- Measure and monitor results
6. Launch Communications
- Initiate all-out communications to all stakeholders.
- If appropriate, include your Board of Directors and external entities.
- Include your initiative in your executive reports.
Create an Increasing Value
In today's world, measuring and reporting on the value of human capital and the impact on your efforts to increase in value is vitally important to your organization.
However, your efforts have benefits far beyond the numbers. When your organization understands the impact of what they can do to improve their people's value and contribution, you will have created a competitive differentiator for your company.
Pixentia is a full-service technology company dedicated to helping clients solve business problems, improve the capability of their people, and achieve better results.