Nothing is accomplished in an organisation without people.
And the hub of all things people-related is the HR department, which drives activities – such as hiring, onboarding, leadership development and career improvement – that all have a big effect on the success of an organisation.
Therefore, both directly and indirectly, HR influences almost every aspect of a company’s financial performance and can have an impact that is overwhelmingly positive and profitable. Yet it can often be hard to prove this point, as people power is a metric that’s all too rarely measured.
But this is starting to change and HR teams that are adept at conducting people analytics are boosting profits – and their own reputation – by measuring and demonstrating the impact of people on financial performance.
But, how exactly do you go about measuring what many see as an intangible asset – human capital?
The first step in this process is to ignore the maxim that human capital can’t be measured. The fact is that people are an asset with a value that is inherently measurable.
It’s true that not all aspects of human capital are measurable, but technology is providing increasingly sophisticated models that can identify sources of value generation in the workforce.
However, for measurement to be effective in terms of assessing the value of HR, it must be forward-thinking – rather than the more traditional rearguard measurement techniques such as employee engagement surveys. This is because financial forecasting in any business needs to take into account the likely future commercial impact of strategic decisions. In HR terms, being able to clearly demonstrate the business case for initiatives such as redundancy programmes, recruitment drives, or learning and development campaigns, can be extremely valuable.
But exactly what you measure must be specific to your organisation. So, before you start measuring, you must identify the people data with the greatest potential for tackling your biggest business challenges. You must also work out how best to extract this data from your systems.
Align your HR and finance teams
For HR measurement to be truly successful, there needs to be close cooperation between HR and finance – as only then can you fully assess the impact of human capital on profits. So, it’s a good idea to give the finance department access to HR systems, and vice versa. It’s also wise to appoint a finance analyst to work in HR, who will oversee human capital data collection and analysis and become the authority figure in this area for both departments.
When all the relevant data has been analysed, HR must then be proactive in getting these measurements into the hands of senior executives and ensuring they understand the implications of the data and how it underlines the case for key HR strategies and programmes.
The case for people measurement is much more than just theory. It has been shown to work in practice, and a good example of this can be found at Xerox – which has initiated strong cooperation between its HR and finance departments.
Through sharing people data and the skill sets required to derive actionable insights from it, Xerox has been able to build predictive models for identifying the employees at greatest risk of leaving. This has helped cut staff turnover by 20%.
Also, Xerox now has a dataset available covering average labour costs according to role and country – enabling the company to target future talent investments in the biggest revenue generating areas.
The case for measuring human capital is becoming clearer – but few organisations actually do it. Some, like Xerox, do a great job of it, some don’t do it at all, whilst most are somewhere in between.
But you can’t be half-hearted when it comes to measurement – for it to be effective you need the full picture on human capital and its link to financial success and profitability. So, it is essential to link your measurement programme to clear business goals, introduce proper analytical systems and processes, and develop a strong relationship with the finance department to ensure an aligned approach.
Do this and you will produce valuable outcomes that, when acted upon, can greatly improve the financial performance of your company and also boost the internal standing of your HR department.