Successful companies measure everything, from the effectiveness of a
marketing campaign to sales quotas to the productivity rate of a new manufacturing operation. But most companies
rarely measure the people side of the
equation: human capital investments.
“A business’s wealth and competitive
advantages are not only based upon the
hard assets it owns, such as buildings,
land and inventory, but also by the knowledge employees bring to a company,” says
Michael Manser, vice president of human
capital solutions for Talent Tree of
Houston. “Companies that understand
how to measure human capital are the
ones that have become the most successful companies today and will hold that
success in the future.”
Smart Business spoke with Manser
about the importance of measuring
human capital and some simple formulas
to get you started on measuring the “people power” of your own business.
First, what exactly is considered ‘human
capital,’ and why has it become so important?
Human capital is the collective set of
skills, dexterity, intelligence and psychological makeup and judgment of your staff.
What we have seen in the past 10 years is
an increasing importance in human capital
in relation to the revenue of a company.
For example, when a company changes its
CEO, you will see the stock either go up or
down. If the CEO makes a difference in
future performance, why not the vice president of sales, a CFO or a key scientist?
These employees all have value and an
impact on the bottom line.
It has become so important
that stock analysts are now
looking very closely at the
movement of employees.
How can business owners
measure human capital?
Employees are often not
part of the financial table
of the company. But there is a simple way
business owners can get some basic information about the value of their human
capital.
Employees can be measured in terms of
productivity and efficiency. Productivity
equals revenue per employee. For example, if you have 100 employees and your
annual revenue is $100 million, the average productivity per employee is $1 million. Efficiency is the net income of a
company divided by the employee base.
For example, if your $100 million revenue
business makes $10 million in net income,
your 100 employees drive $1,000 net
income per employee.
What can a business owner do with this information?
The interesting part is when you compare these numbers from your own business to that of your competitors. The
numbers show if your employees’ performance (human capital) is positioning
your company to be a leader in market
share or return on investment.
Below is a real example of three publicly
traded firms. Company A uses this competitive information to confirm it is
achieving its desired market strategy of
being the profit leader in the space. It is
going to also use these benchmarks for
value pricing strategies and productivity
goals as it expands its presence in the
coming years.
| Company A |
Company B |
Company C
|
|
| Rev. ($mill.) | 14,448 | 13,270 | 13,535 |
| Net inc. ($mill.) | 708 | 173 | 336 |
| Employees | 65,078 | 41,000 | 47,000 |
| Margin | 27.4% | 19.3% | 31.4% |
| Net income | 3.7% | 1.3% | 2.5% |
| Productivity (rev/employee) |
$222,017 | $323,663 | $288,611 |
| Efficiency (net/employee) |
$10,885 | $4,220 | $7,138 |
| Prior Year Rev. Growth |
9.6% | 60.9% | 9.6% |
| Observations | Lowest productivity, but highest efficiency | High productivity; low efficiency situation | Highest margin, meaning value proposition, middle of the pack on productivity and efficiency |
*Company A confirmed the statistics fit with their desired market strategy of being the profit leader in the space. But they are going to expand their presence in the coming years and will leverage their existing employee base to be even more productive.
Is this the human resources department’s
role — rather than financial department —
to analyze these statistics?
Yes, HR departments should step up,
present this information and take a more
strategic role in driving a company’s
growth. The CFO wil not traditionally
show human capital performance metrics
as a formula in the financial statement.
HR can drive strategy by sharing benchmark data with executive teams and utilizing these financial measures to drive
performance standards, and determine
staff size relative to market goals.
In today’s sophisticated and competitive
landscape, we need to ensure we are
strategically maximizing every capital
investment. These basic human capital
measures serve as a bridge between HR
and finance, giving CEOs a comprehensive perspective on performance and how
it impacts their strategies.
MICHAEL MANSER is the vice president of human capital solutions for Talent Tree, based in Houston. Reach him at (713) 361-7303
or by e-mail at [email protected].