Measuring Returns on Human Resource Capital

One of the most under measured parts of a business is the human resource capital and it represents one of the biggest challenges facing business; namely finding the best and brightest people. It is these human resources or people who ultimately create value for the organization. People generate value through their application of skills, talents, and abilities. The key is to invest in people so that human resources are productive, knowledgeable, effective, and efficient. This is what separates the average company from the exceptional. Getting a return on this investment or ROI is extremely important.

People who create lots of value often have certain characteristics:

• They openly share their knowledge and expertise with others
• They transform data into intelligence for better decision-making.
• They pay attention to details, collecting and gathering information to reach informed conclusions.
• They communicate clearly and concisely.

We can extend this concept to all aspects of intellectual capital; i.e. people interact with processes, knowledge, systems, customers and other intangibles within the business. Once you understand this interaction, you can measure these relationships to ascertain returns on human resource capital. A critical question to ask is: What impact does a person have on these intangibles? For example, one employee may interact with complaining customers in order to gain knowledge and improve the business. Another employee may view complaining customers as a nuisance to be avoided.

Each process can have its own unique set of metrics. These metrics can be applied within a formal measurement system designed specifically for human resource capital. In his book The ROI of Human Capital, Dr. Jac Fitz-enz describes how all performance measurement systems can be placed into a matrix. The following matrix was developed for measuring Human Resource Capital (HRC):

. . . . . . . . Acquire HRC. . . . Maintain HRC . . . .Develop HRC . . . . .Retain HRC

Cost => . . . . . .? . . . . . . . . . . .. ? . . . . . . . . . . . . . . . . .? . . . . . . . . . . . . . . ?

Time => . . . . . .? . . . . . . . . . . .. ? . . . . . . . . . . . . . . . . .? . . . . . . . . . . . . . . ?

Quantity => . . . .? . . . . . . . . . . .. ? . . . . . . . . . . . . . . . . .? . . . . . . . . . . . . . . ?

Error => . . . . . .? . . . . . . . . . . .. ? . . . . . . . . . . . . . . . . .? . . . . . . . . . . . . . . ?

Reaction => . . . .? . . . . . . . . . . .. ? . . . . . . . . . . . . . . . . .? . . . . . . . . . . . . . . ?

In the above matrix, we would have costs associated with acquiring personnel; such as advertising, agency fees, and relocation costs. These costs would fall under Acquire HRC. The next level down is time; i.e. how long did it take us to recruit a new employee. Quantity would be the number of applications processed; often viewed as the "driver" within the process. Error refers to any event that does not meet our expectations; such as incorrect processing of new applications. Finally, the Reaction level looks at how people respond to various events within the process. This can be somewhat subjective. In any event, we can transform our matrix into a Balanced Scorecard:

Perspective => Metrics

Acquisition => Cost per Hire, Time Required to Fill Position

Maintain => Average Pay per Employee, Labor Cost % to Operating Cost

Retention => Cost of Turnover, Retention Rate, % of Voluntary Separations

Development =>Training Hours per Employee, % Promoteable People

Financial professionals are often too focused on applying metrics to a process as opposed to the underlying foundation behind the process; namely people. The emphasis should be on people since people are the glue that pulls together the elements of intellectual capital – processes, systems, knowledge, etc. Measuring and managing this “glue” is critical to squeezing value from all elements of intellectual capital.