At most organizations, human capital is woefully underutilized. In the aggregate, that mismanagement leaves billions of dollars on the table in expenses that could have been saved and lost profits that could have been reinvested. In short, our return on people (ROP) is second rate.
There are three options for reversing this defect. One is to restructure the standard human-resources management model. The second is to introduce a systemic analytic process for managing human capital. The third is to do both.
Thirty years ago, the quality movement remade America’s manufacturing system. It had a profoundly positive effect on our global competitiveness. At about the same time, I introduced quantitative measurement to the human-resources function. Since human-resources people tend to be numbers-averse, it is only within the past 10 years that measurement and analysis have begun to take hold around human-capital operations. Now I am seeing some companies applying analytics to staffing, training, performance management, and retention, thereby realizing competitive advantages along with significant financial gain.
Leveraging human capital is a business function that is essentially similar to leveraging other investments. From an analytic viewpoint, human capital must be treated exactly like every other asset. Although people employed are different than things owned, the principles of assessment, planning, execution, and evaluation are the same. The main difference is the mobility and independence of human capital. That difference seems to deter management commitment; however, when you have a repeatable, systematic approach, the effort required is reasonable and the return exceptional.
The Analytics Foundation
There are four basic elements of human-capital analytics systems: assessment, planning, execution, and measurement. When carried out thoroughly and with insight, they generate a database for descriptive and predictive analysis.
Assessment is, by far, the most important phase of the human-capital analytics model. It has two aspects: the external market and the internal environment. A thorough knowledge of external forces and internal factors is necessary for all subsequent planning. That may sound like an enormously time-consuming task, but it is not.
It begins with a premeeting survey of all executives who will be involved in the assessment phase. They are queried as to their views on market forces as well as the company’s operations and how these are affecting or will affect management of human capital in the near future. This is a necessary preplanning drill that surfaces all elements that can be examined for future effects. It is the grist of the assessment mill whereby attendees at the meeting collectively produce an inventory of forces and factors. The example below shows the typical matters that are discussed.
External Forces: State of the economy, labor availability, customer trends, competitor actions/plans, government regulations, technology trends, new markets.
Internal Factors: CEO’s vision, brand, culture, processes, leadership status, employee capabilities, financial state, technical ability, QIPS (quality-innovation-productivity-service) levels.
In practice, there are seldom more than 10 variables in either external or internal areas that are deemed to be important. As in all strategic-planning processes, the greatest value is putting the key variables on the table for thorough discussion and agreement. This consensus building is concluded usually within two days. From it, a workforce planning committee is formed, usually headed by the chief human resources officer. But the CEO maintains oversight, since he or she has ultimate responsibility for sustaining a capable workforce. That is especially true for the leadership cadre.
Workforce planning is undergoing a makeover. Traditional planning was a structured, gap-filling, industrial-era exercise that produced a rigid plan always running behind constantly shifting needs. In lieu of building competencies around invariably outdated and ignored job descriptions, the new planning program focuses on building workforce capabilities that can flex to serve the evolving needs.
Basic questions for planning include:
- Which are our mission-critical capabilities?
- How strong is our current bench in each of these?
- What are the incumbents’ growth potentials?
- How vulnerable are they to being hired away?
- What would be the impact if these capabilities are not refilled quickly?
Note that we talk about human capabilities rather than changeable jobs. To answer workforce questions, we focus on the skills, knowledge, and behaviors that are essential requirements for performing any given job. Some are inherent and some can be developed. They include skill, commitment, motivation, flexibility, knowledge, engagement, creativity, and growth potential.
The critical planning point is twofold. First, how will these evolve as business and therefore workforce requirements change? Second, how will the source of change affect workforce requirements? Experience shows that if change comes from technological advances, workforce needs will be different than if change comes from government regulations, competitor actions, customer swings, or new market opportunities.
Execution is the efficient and effective development of human capital. It is guided by the assessment and strategic workforce plan and is carried out through improving processes for staffing, deploying, developing, compensating, engaging, and retaining human capital. This starts at the human-resources function. Services are designed by the human-resources department and executed in partnership with line and staff managers. Employee-capability development is the responsibility of each manager. Human resources provides the technical guidance and services to support that.
Measurement (and its sibling, valuation) is the last phase in leveraging human capital. It has often been said that what gets measured gets done. Metrics have three levels: strategic, which is the concern of C-level executives; operational, which is the province of midmanagement; and leading indicators, which help monitor predictive and prescriptive actions. The following are a few of the many metrics and leading indicators companies are using.
Strategic-level human-capital ROP metrics:
- Revenue per full-time employee
- Profit per full-time employee
- Total cost of workforce (TCOW)
- TCOW as a percentage of operating expense
Operating-level human-capital metrics:
- Cost to hire, cost per trainee, cost of turnover
- Time to fill jobs, time to deliver services
- New hire fit
- Voluntary turnover rate
- Training effectiveness
- Manager and employee satisfaction levels
- Leadership rating by employees
- Readiness level of backups for key positions
- Learning-and-development spend per employee
- Engagement level and performance effects
- Mission-critical turnover rate
- “Great place to work” rating
Leveraging human capital is not an arcane, mysterious act. It is a matter of systematically and thoroughly applying the analytic management practices described above: assess, plan, execute, and measure. Effective ROP reduces operating expense, generates revenue, and enhances competitive advantage.
Dr. Jac Fitz-enz is widely known as the father of human-capital strategic analysis and measurement. He is the founder of The Predictive Institute, a group of organizations and thought leaders formed to develop a new model for human-capital management.