Maximizing your ROI in Human Capital
by Mario A. Biscocho

It is an oft-repeated pronouncement by company executives that “employees are their most important asset.” But in a down cycle, they treat positions and even training budgets as variable expenses—the first thing cut. Even accepted accounting methods treat investments in people as current expenses instead of assets that have a future value. Too many executives still regard and manage employees as costs instead of investments.

Investment is defined by Webster as the act of putting money or capital to gain interest or income. The concept, therefore, of Return on Investment (ROI) revolves around the wealth or value generated by an investment. The ROI in new equipment can easily be quantified by the bigger volume of production churned out. And the ROI in an upgraded IT system can be measured by the man-hours saved due to the improved efficiency. These are all tangible assets, but how do you measure the ROI on something intangible as the human resource? And better yet, how do you maximize your ROI in human capital?

These questions challenged Laurie Bassi and Daniel McMurrer of McBassi & Company because they saw that there weren’t robust methods for measuring the bottom-line contributions of investments in human capital management (HCM)—things like leadership development, job design, and knowledge sharing. Thus, they, together with colleagues, embarked on a decade-long worldwide research to develop a system for assessing HCM, predicting organizational performance, and guiding organizations’ investments in people.

Their research has revealed a core set of HCM drivers that predict performance across a broad array of organizations and operations. These drivers fall into five major categories: leadership practices, employee engagement, knowledge accessibility, workforce optimization, and organizational learning capacity. Each of the major categories is further subdivided into four to five factors, arriving at a total of 23 factors or practices called human capital drivers.

Bassi’s and McMurrer’s research further called for the rating of the company’s maturity score for each of the HCM practices, where a score of 1 was the lowest and 5 the highest, by managers and employees who participated in the surveys. In fact, multiple surveys were done over time, and they found out that the evolving maturity scores revealed progress or regression in each of the HCM practices. The findings of course could help companies decide where to focus improvement efforts that will have direct impact on performance.

The HCM measurement tools that Bassi and McMurrer have developed can help HR gauge how well people are managed and developed throughout the organization. The two likened their HCM methodology to the Six Sigma techniques, which reduce defects by managing manufacturing process variations as the methodology can be used to identify and manage process variations in human capital management that negatively affect organizational performance. They hastened to add that their HCM methodology is iterative because it has to be conducted at different periods to check the organizational health of the company amidst changing conditions of the market and competition.

One company that has employed the HCM methodology espoused by the two was American Standard, where the analysis of the two has enabled the company to pinpoint the HCM practices that most consistently predict sales productivity and factory safety, the company’s foremost strategic concerns.

Loren Gary, in his article Tying Your People Strategy to the Bottom Line observed that more and more companies are turning to the so-called dynamic modeling frameworks in their attempt to measure the effect of human capital investment on business success.

Dynamic modeling frameworks, says Jeffrey Schmidt, managing director of innovations consulting firm Towers Perrin, seek to establish links between human capital drivers (compensation, training), human capital capabilities (leadership, employee engagement), intermediate key performance indicators (productivity, customer satisfaction), and ultimately, financial performance measures such as stock performance or revenue growth.

Establishing such linkages requires proof of causation, e.g. to demonstrate that employee satisfaction leads to a better company performance, one must show that not only that the two factors are related, but also that employee satisfaction precedes the improved company performance. As well, one must determine that the improved performance is not a result of other factors such as economic conditions. Of course, one has to do more than simply measure his hunches, he needs sharp focus on where to spend initially. Unfortunately, because human capital drivers’ influence on earnings varies significantly by industry, there is no one formula firms can employ to determine the right mix of expenditures. Moreover, the effects of a specific workforce investment will change over time. So how do you choose which drivers to concentrate on now? Let corporate strategy be the guide.

“Alignment with strategy is what creates value for an intangible asset,” says David P. Norton, president of the Balanced Scorecard Collaborative. The higher an intangible asset’s strategic readiness, the more aligned it is with the company’s strategy and the faster it can be converted into a tangible asset, which can then be turned into something liquid—earnings.

Loren illustrates the above with the Disney experience. Disney’s emphasis on customer responsiveness led it to provide extra training for the people who swept the amusement parks so that they could also function as listening posts, gathering firsthand intelligence about guests’ experience. Of course, this has been one key in Disney’s success, a case of identifying a potent HCM investment that yielded fantastic returns.

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Mario Biscocho is the Vice President and Executive Director of the Executive Search & Selection Division of John Clements Consultants, Inc.

References:
Maximizing Your Return on People (Laurie Bassi and Daniel McMurrer)

Tying Your People Strategy to the Bottom Line (Loren Gary)