Global human capital report: US productivity surging ahead of Europe while higher value-added low-cost skills from China & India impact US and Europe

Published at 10:16 AM on 11 April 2006

The world’s largest human capital report on over 15,000 organisations across Europe and the US reveals that the US continues to pull ahead of Europe in terms of people productivity and human capital return on investment. Additionally, the increasing use of higher-skilled, educated talent in India and China, combined with attractive low costs is also having an impact on Europe and the US, against a backdrop that shows training levels in Europe are dropping. Human capital return on investment (ROI), which demonstrates the ratio of profit to remuneration, saw further improvements in ratios in 2004, but at markedly different rates, once again showing the speed with which the US economy is able to recover and grow. There is now a difference of some 33% between the US and Europe, to the advantage of the US. The human capital ROI ratio rose in the US from $1.42 in 2003, to $1.52 in 2004. Figures for Europe show only a very modest growth overall; from €1.13 to €1.14. Richard Phelps, partner, PricewaterhouseCoopers LLP said: “The US has continued to produce impressive results, demonstrating its ability to move faster and more flexibly than Europe, and putting itself into a stronger position to respond to the new surging economies of the Far East and elsewhere. The trend identified in our report last year, has continued throughout 2004. “Interestingly, the superior US performance also reveals a correlation between successful commercial performance and higher levels of remuneration on both a national and a sector basis. It is widely accepted that there is a virtuous circle interconnecting comparatively high levels of remuneration with higher consumer demand levels, thereby boosting company revenues and added value per employed person.” The rapid emergence of India, China and others as suppliers of low-cost goods and services is increasingly having an impact on both Europe and the US. It is becoming clear that it is far more than low-skilled services and manufacturing that are being ‘exported’. India’s growth in particular has been fuelled by an astonishingly rapid development of skills and know-how, notably in information technology and other professional services. Richard Phelps, partner, PricewaterhouseCoopers LLP said: “The report clearly reveals a number of key challenges for those involved in human capital, if they are to help their organisations adapt and develop to meet the dilemmas posed by the highly competitive global marketplace. The report makes it clear that human capital issues have a powerful impact on the competitive abilities of all businesses.” Other key findings include: Offshoring and outsourcing While the scale of outsourcing is growing, with a light increase in the total spend on outsourcing and offshoring in Western Europe, it is of note that businesses are now using third parties to deliver higher value-added activities with offshore suppliers who are increasingly well-equipped to perform them. People – human capital – are at the heart of the offshoring issue. It is the relative cost of labour and skills availability that are the overwhelmingly dominant factors in driving a company to move a functional area offshore. The onus is on human capital executives to understand the key benefits and risks underpinning the successful use of third parties and off-shored employees to enable them to guide their organisations in the strategic decision-making process. Corporate transparency Driven by regulatory initiatives, there is a growing demand for extra-financial reporting to be included alongside the financial information provided by companies. This trend has a bearing on the prominence of and the way in which human capital information is presented. Companies are aware of the need for transparency but they don’t all think this requirement will give them any commercial advantage. The debate now is more about which human capital measurement could be most usefully produced, as opposed to whether there is any point in producing it at all. Leadership As was the case in last year’s Saratoga key trends report, there is again no indication that the considerable investment in leadership development is resulting in enhanced performance. This lack of evidence that leadership is measurably improving suggests that some of this investment cannot be returning sound returns for shareholders and stakeholders. The level of preoccupation with leadership development shows no sign of diminishing, with 53% of US respondents saying that their senior management had attended one or more leadership courses in 2004. Neither is there evidence that European investment in leadership development, estimated at €1.5 billion in 2003, fell in 2004. Gender diversity The data for gender diversity in last year’s report demonstrated a relatively stable level of female employment across Europe, at about 39.2% in commercial activity. This year’s report shows that the proportion marginally decreased to 36.3%. However, this has been compensated in part by a small rise in the number of professional and managerial posts occupied by women. The presence of women in professional positions (qualified but not supervisory) has risen from 29.3% to 32.03% and in managerial positions (supervisory and higher) from 24.6% to 25.0%. Women account for more than half the total employees in the banking, insurance, retail & leisure industries and 40% of managerial positions in banking and retail & leisure sectors. Women fill only 28% of positions in the utilities sector and 20% of positions in the engineering and manufacturing industries. Training and talent development The relative levels of spending on training are higher in the US than in Europe – where they have in fact declined year-on-year. In Europe, the average number of training hours fell from 23.9 in 2003 to 19.7 in 2004 and the overall investment in training also fell in absolute terms from €704 per employee in 2003 to €552 in 2004. The picture in the US is markedly different with a robust increase of 5.5% in training investment. Measuring and managing employee engagement The report focuses on what people do rather than say and shows signs that organisations are attempting to link performance to pay. The amount of total remuneration that is performance-related has risen from around 5% last year to 6.5% in this year’s report. HR executives need, increasingly, to assess levels of commitment and engagement by whether employees actually ‘go the extra mile’ towards increasing productivity and competitive advantage, as opposed to simply expressing their contentment. Work/life balance The report highlights a current ambiguity; does commercial success partially result from offering family-friendly policies, or are those policies a by-product of success? Though no conclusive evidence points either way, top performers in the western economies, not surprisingly, tend to operate with positive employment policies. This dilemma is at the heart of global competitiveness; critically, decisions need to be based on measured performance results as opposed to ‘feel good’ factors. Impact on the HR function There is little evidence that to suggest that the HR role is developing to a higher level of strategic influence within business organisations. The number of HR Directors on the main boards of FTSE 100 companies has fallen to only six. In the US, 63% of HR Directors have a direct reporting relationship to the CEO, compared with 81% in 2003. ENDS

Notes to Editors:

1. This ratio indicates how many units of currency are produced for every unit paid to an employee. The currency is therefore irrelevant and allows for cross comparison between different economies. 2.A copy of the report: ‘Key trends in human capital – A global perspective - 2006’ can be downloaded from www.pwc.com/uk/keytrends 


For more information contact:

Rebecca Laird.
CIPS Manager, PricewaterhouseCoopers LLP 
Tel:020 7213 5829 
Mobile:07793 680 467 
 

Richard Phelps
Partner, PricewaterhouseCoopers LLP 
Tel:020 7804 7044 

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