Human capital

Human capital
Find a way to measure how employees impact the bottom line

By Daniel Schroeder, for SBT

Question: I’m the human resources manager for a health care organization. We’re in the middle of a 12-month-long management-development program. We’re exploring topics like systems thinking, problem solving and decision-making, teamwork, etc. We’ve spent a lot of time talking about how we measure up – across departments, across offices and within the industry. We’re trying to improve our processes and looking for the data to tell us how we’re doing. Here’s my issue: In our training sessions, we’re being told that our people, not money, equipment, etc. are our most important resource. We’re told that our people ultimately influence how successful we are. Yet, when we explore the various process improvement and measurement methods, we seem to focus on financial or customer data. This doesn’t make sense to me. Aren’t the employees the ones who drive performance in these other areas? Why aren’t we talking about how to better measure the impact of our people? How can I, as the HR manager, begin to make this happen?

Answer: In my experience, your situation is a common one. Traditionally, when organizations have tried to measure success, they have done so in terms of tangible resources like money, buildings, machinery/equipment, etc.
Employees tend to be viewed as a "soft" resource, difficult if not impossible to measure in terms of the overall profit picture. Yet, given that employees can account for 40% or so of an organization’s operating expense, from my vantage point it is absolutely imperative that vigorous measurement be pursued in this area.
Too often, however, I have found that this is not the case. Too often I have that a measurement hole exists when it comes to evaluating the impact of human capital – the amalgamation of capabilities and potentialities that employees bring to the table.
And this is in spite of the fact that The Balanced Scorecard (Kaplan and Norton) has become the latest bandwagon that business seems to be jumping on.
At the core of this approach is the idea that high performance organizations have a broader view of success than merely the bottom line – that they measure performance in the areas of finance, customers, operations/processes, and learning and growth.
My experience tells me that many organizations do a credible job of measuring financial, customer and operations performance. Few organizations, it seems, do a very good job of measuring learning and growth. Part of the problem, of course, is that at the heart of evaluating employee learning and growth is the comprehensive evaluation of training programs.
As I have discussed in previous articles, this is a difficult proposition that involves answering questions other than the standard, "Did the employees like the training?" Answers to other relevant questions must be vigorously pursued – "Did they learn it?" "Did they apply it?" "Did applying it make any difference?" And so on.
Beyond that observation, my take on The Balanced Scorecard is that the learning and growth factor is too narrow (i.e., there is more to the people processes of the organization than how much money is spent on training). It does not adequately capture what is encompassed by the organization’s human capital.
From my perspective, the learning and growth factor should be broadened to encompass the total impact of human capital. To do so, it should include measuring the impact that accrues from the activities of acquiring, maintaining, and retaining employees, in addition to developing them (i.e., learning and growth).
How many managers do you know who do a really good job in each of these areas?
How are you doing in these areas?
Researchers who have studied what it takes to measure human capital suggest one way to get started is to think in terms of the value added by each of the key activities (i.e., acquiring, maintaining, developing, and retaining employees). To do so, using indicators that allow change to be easily tracked and documented is most effective-cost, time, quantity, error/accuracy/performance, and reaction/satisfaction.
As an example, to develop a comprehensive scorecard for the activity of acquiring employees, you might gather the following data:
Cost – Cost per employee hired
Time – Time to fill open jobs
Quantity – No. of employees hired
Error/Performance – Job performance rating of employees hired
Reaction/Satisfaction – Level of manager satisfaction regarding employees hired

Or how about this example for measuring the impact of retaining employees:
Cost – Cost of employee turnover
Time – Turnover by length of service by employees
Quantity – Voluntary turnover rate
Error/Performance – Readiness level
Reaction/Satisfaction – Turnover reasons

Similar examples could be offered for the other two activities of maintaining and developing employees, but you get the idea. It is actually a very straightforward concept – measure the important aspects of your work so that you know if you are doing well or not-so-well.
Let me take this one step further. Let me suggest that if you really want to support the business, really want to be part of the critical discussions, etc., you need to attach the data you gather to the organization’s "leading indicators."
For most organizations, the leading indicators have to do with profit/loss, percentage of market share, production/operational efficiency, customer satisfaction and retention, etc.
Let me make a bold statement: If the data that you gather do not relate to the organization’s leading indicators, then you might as well not bother gathering the data in the first place.
So, let me cut to the chase – Stop measuring transactions! Start measuring "what matters!" Start measuring how the activities in which you engage relate to the goals the organization wishes to achieve.
So, if the organization is looking to provide service that "excites" its customers, then you need to think about measuring how what you are doing bears upon this important outcome. For example:

Acquiring- Define customer service competencies and institute a selection method that accurately differentiates service-minded from non-service-minded candidates

Maintaining – Develop and deploy a competency-based performance management program that reinforces the critical customer service dimensions

Developing – Offer performance-based instruction that transfers beyond the training room to where it matters the most-in exchanges with customers

Retaining – Recognize and incent employees who "wow" the customers, making use of a mix of monetary and non-monetary methods

You can see that by engaging in these practices and measuring how you are doing (using the standards of cost, time, quantity, error/performance, and reaction/satisfaction), you are linking and aligning with an important organizational outcome. In short, you are no longer a bystander, but rather a "player."
Voltaire observed that, "Doubt is not a pleasant condition but certainty is."
As the HR manager, do you doubt the contribution that your work area offers to the organization’s overall performance?
To proceed with greater certainty, start measuring your organization’s human capital. Start measuring your key HR activities. Start linking and aligning your key HR activities with the organization’s leading indicators.

Daniel Schroeder, Ph.D., of Organization Development Consultants Inc. (ODC) in Brookfield, provides "HR Connection." Small Business Times readers who would like to see an issue addressed in an article may reach him at 262-827-1901, via fax at 262-827-8383, via e-mail at or via the Internet at

Aug. 22, 2003 Small Business Times, Milwaukee

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