Human capital is now firmly acknowledged as a strategic source of value
Creation –indeed, a company’s most valued asset — in today’s knowledge-based economy. As natural custodians of human capital, human resource executives are expected to lead its development, but most HR organizations lack a strategic planning process for human capital, much less a consistent way to describe and measure it. The following is an outline of these leading methodologies.
Measuring, Tracking, and Benchmarking the ROI of Human Capital Dr. Jac Fitz-enz, founder and chairman, Saratoga Institute; author of The ROI of Human Capital; and acknowledged as the father of human capital benchmarking and performance assessment.
Reflecting a growing view among leading thinkers, Jac Fitz-enz believes the HR organization will never achieve full potential until it can describe the role human capital plays in creating organizational value and demonstrate its investment return. Armed with such data, HR practitioners can identify and analyze relationships between business actions and human capital results. This is hardly bean-counter thinking; employee costs can exceed 40% of corporate expense. Add to that the investment in talent, development of organizational knowledge, and the fact that training time hasn’t diminished nearly as rapidly as product and business cycles have accelerated, and you can see that turnover costs have mushroomed.
Traditionally, HR has reported on its ability to reduce the costs of HR processes, rather than focusing on the results. HR, like every business function, should have a set of operational metrics. Yet most functional areas lack metrics that describe their effectiveness in creating value. Just as an accounting system tells us what is happening by reporting profits and losses, there is a basic methodology for process management. Fitz-enz cited five generic ways to evaluate an HR process: How much does it cost? How long does it take? How much was accomplished? How many errors or defects occurred in the process? And, how did employees respond (e.g., to the job satisfaction survey)? Each of these criteria can be applied across the three core human capital practices: acquiring talent (cost per hire), developing it (cost per trainee), and retaining it (cost of turnover). Fitz-enz also advocates that organizations involve HR more actively in strategic planning. And if HR’s mission is toimprove business operations – to become a strategic partner – HR professionals must, as he says, “get their heads out of the paper and theirminds in the business.” The Balanced Scorecard can establish a common language and focus for demonstrating human capital’s impact on desired business outcomes. Managing human capital effectively will help organizations execute their strategic plans. Start with the enterprise, he says, cascade to the business units and functions, and then show the value created from human capital. Measurement is the fuel for the Balanced Scorecard, and human capital is the driver of strategy – and ultimately, success.
Measuring and Managing Human Capital: Getting to the Strategy Table David P. Norton, co-creator, Balanced Scorecard; president and co-founder, Balanced Scorecard Collaborative.
HR executives have long been concerned with the question, “How do I get to the strategy table?” A recent study by Kennedy Information, the leading research firm on the consulting industry, found that 40% of HR executives are asked to sit at the strategy table, while 60% still play a passive or reactive role. Norton’s conclusion: HR lacks the science and tools to describe and measure human capital (as many as 85% of organizations do not have an adequate way to describe human capital, according to a BSCol survey of HR executives). Without the ability to measure HR’s strategic contribution, organizations cannot manage human capital as a strategic asset. It’s little wonder that half the organizations BSCol surveyed stated that human capital is not linked to strategy.
The Balanced Scorecard, though, has emerged as an important tool to address this challenge. The missing link between HR and the enterprise, Norton observes, is a shared model of the strategy. Such a model would give HR professionals a point of reference for defining the impact of human capital on organizational strategy – and for tailoring development programs to the organization’s strategic priorities. The Balanced Scorecard is the “how” that transforms the HR function from sideline player to strategic partner.
The starting point is to build a strategy map to articulate organizational strategy and then define how human capital is linked to strategy. This strategy-based view of human capital provides a prescriptive framework to guide the development of measures of the contribution of human capital. Out of this framework arose the BSCol “Human Capital Readiness Report,” which provides a snapshot of an organization’s human capital relative to its strategic requirements. It documents the strategic requirements, then shows, through its measures and programs, how human capital is being developed. HR professionals can use the report as a communications tool that, among other things, can help justify the value of human capital investments, something they are under increasing pressure to do. The report provides the foundation for a periodic review of HR’s strategic challenges and contributions – in effect, a progress report.As such, it becomes the bridge between enterprise strategy and HR,giving HR entrée to the strategy table and empowering it as a true strategic partner. HR can now work toward improving human capital readiness, and more broadly, toward enhancing the organization’s ability to execute its strategy.
HR in the New Millennium: A Perspective from the Profession Helen G. Drinan, CEO, the Society of Human Resource Management.
The impact of technology, global competition, outsourcing, and ashrinking pool of qualified talent on the organization demand a new kind of HR leadership – strategic leadership. Is the HR profession up to the challenge? How aligned are HR professionals with the CEO’s top priorities?
One million people in the United States identify themselves as HR professionals. Opportunities abound for forward-thinking HR professionals. But for those who ignore the skills, experience, and technology it takes to implement workforce strategies with bottom-line impact, survival is at stake. Both types fail to understand the macro business environment and long-term issues – a requisite step to building successful business-aligned HR strategy. This integrated worldview has never been more critical, given today’s accelerated, globally competitive business environment, and increasingly service- and knowledge-based economy.
In a recent study, the Society of Human Resource Management (SHRM) addressed such key questions as: What is the most exciting work in HR today? What skills and experience levels are necessary for the successful HR professional? Within the next decade, what is the primary workplace challenges facing the HR profession? And will the HR profession as we know it survive?
Workforce issues are at the top of the CEO’s agenda. The SHRM study also revealed the increasing recognition that people represent the only real competitive advantage a company can sustain – and that HR’s “seat at the table” is already established. The question is: Will it be occupied by an HR professional – or someone else? Who will execute the human capital strategy?
Interest in HR issues has grown beyond the HR department; indeed, there’s a growing acknowledgment that human capital management has become a requisite skill for CEOs. Consider a recent Conference Board study, which cited customer loyalty and competition for talent as two of the biggest CEO challenges. SHRM’s study revealed that HR’s pressing issues are: becoming a strategic partner, applying new technology, managing talent, recognizing and developing the employee’s relationship to company brand, dealing with mergers and acquisitions and business reconfigurations, and reducing costs.
So what is the profile of outstanding HR leaders? Among other things, they derive their agendas from enterprise business objectives; they stay in touch with the workforce; think “customer focus,” not “customer service”; and concentrate on a few strategic priorities.
The Future of HR: Linked to the Enterprise Strategy A growing number of HR experts – Brian Becker, Mark Huselid, David Ulrich, Steve Kirn, John Boudreau, to cite a few – are searching for measures and systems, both quantitative and qualitative (behavioral), to better align HR strategy with business strategy. Jac Fitz-enz provides an “HR-out” view that looks at HR processes and describes the human capital value added. The Balanced Scorecard offers a framework to manage and measure human capital and provides an integrated strategic planning process for HR. David Norton provides a “strategy-in” view of measuring and managing human capital.
At the same time, more and more organizations are successfully integrating human capital management and HR strategy through the BSC. At Alterra Health Care, the percentage of employees who understand the company’s strategy grew from 20% to 80%. Hilton Hotels increased customer satisfaction as well as post-stay loyalty. It also shares company stock with employees. Crown Castle International transformed the HR function into a human capital partner, and Ingersoll Rand overhauled its strategicmanagement system and aligned the organization using the Balanced Scorecard, with HR as leader and champion of the process.
It is clear that human capital is a strategic priority; what’s not is how it will be managed. But if these positive developments are any indication, we should expect to see more of the strategy table seats occupied by HR in the not-too-distant future.
