Human capital ROI - the most wonderful measure of all?
14 July 2017
When you read about HR, people management or employee updates in company reports it isn't long until you come across the V-word ... value. "People create the value in our business"; a strategy to "add value to customers"; increasing the "value of our return". And you might reasonably wonder what any of those things actually mean. Yes, value has been devalued!
After decades of such value proclamations, they are too rarely backed up by good data. What if there was a single measure that consolidates everything to do with people management, tracks performance, compares you to your peers and supports business planning? Well there is ... Human capital Return on Investment (ROI).
If you accept the premise that the purpose of HR is to help the organisation have the right people, with the right skills, in the right places, at the right time to work in ways that deliver on business strategy, then Human Capital ROI is the fundamental baseline measure of employees’ contribution to creating value.
But we already have other good measures, don't we?
Many organisations track KPIs like 'revenue per employee' or 'profit per employee' in their balanced scorecard. While these are perfectly sound measures, their focus is too narrow to properly assess the impact of people on company performance. Two companies with the same size workforce can have identical revenue and profit performance, while having very different levels of workforce productivity and significantly different Human capital ROI. Which would you invest your money in?
So what is Human capital ROI?
Human Capital ROI describes the profit return to the organisation per unit of expenditure on employees. In its purest form, it’s the relationship between the workforce cost and company profitability. It combines all of the primary business drivers where opportunities for improvement can be explored and targeted. Positive impact on the ratio is achieved through:
• revenue improvement,
• efficiencies in non-people cost arenas,
• better controlling the number of Full Time Employees (FTEs) employed,
• managing people costs and/or improving the alignment of remuneration structures to desired business performance goals.
In reality, all of these factors move in combination, but it is exactly these interdependencies that are overlooked when using metrics such as revenue per employee. Revenue growth, cost reduction and actions around workforce size and cost alone cannot result in higher Human Capital ROI unless other factors are also moving positively or being controlled.
One KPI to rule them all?
We wouldn’t go so far to say that Human Capital ROI is the only measure to use. As with all things, it needs to be used alongside other data and metrics in a balanced way. It isn't the measure to end all measure, but it surely is important. It has wider application than other metrics and should be a people KPI for any commercial enterprise. It has a role to play in understanding and driving individual company performance and workforce productivity, understanding industry performance, and even at the macro-level it applies across markets in describing differences in productivity between countries and undeveloped, emerging and mature markets.
Jonathan Moses (UK - People Analytics)
Office: +44 207 212 2025
Email: [email protected]