Human capital—the elusive asset; measuring and managing human capital: a strategic imperative for HR - 2003 Research Quarterly

HR Magazine, March, 2003 by Leslie A. Weatherly

Why it Makes Good Business Sense to be Human Capital Savvy

Studies reflect that HR practices can and do "drive" business outcomes.

"According to the 2001 Human Capital Index (HCI) study, adopting and implementing key HR practices in five broad categories can result in up to a 47 percent increase in market value." (10)

These five categories, established by Watson Wyatt for the original study in 1999, are: total rewards and accountability; collegial, flexible workplaces; recruiting and retention excellence; communication integrity; and focused HR service technology.

The American Society for Training and Development (ASTD) conducted a study in 2000 designed to examine the average annual training expenditures of more than 500 U.S.-based publicly traded firms. The results of the study were crystal clear. The study concluded that the firms in the top half of the group, i.e., those that invested the most in training and development, had a total stockholder return 86 percent higher than firms in the bottom half, and 46 percent higher than market average. (11) Interestingly, similar results are borne out in the research conducted by Becker, Huselid and Ulrich presented in The HR Scorecard: linking people, strategy and performance. Representative highlights from the 429 firms surveyed include a difference between the bottom 10 percent (42 firms) and the top 10 percent (43) firms of $158,101 and $617,576, respectively, in sales per employee. This study, which was based on a number of comparative HR management quality indices, represents a 391 percent return on investment (ROI) fo r the top 10 percent firms.

How was this accomplished? A multitude of HR practices were evaluated and compared. However, two indices in relation to employee training and development stood out. The first involved the number of hours devoted to the training of employees during their initial year of employment; 35.02 hours for the bottom 10 percent versus 116.87 hours for the top 10 percent. The second involved the number of hours devoted to employee training annually, i.e., after their first year of employment; 13.4 hours for the bottom 10 percent of firms and 72 hours for the top 10 percent of firms. (12) Clearly, the continuous investment in training and education by the top 10 percent is providing a substantial ROI.

Optimizing the Human Capital Return on Investment (ROI)

Following are what some of the top HR strategic business partners and their organizations are doing to build and maintain their human capital investment:

1. Management's stance in relation to continuing education and on-the-job training for employees is the single most influential factor in the success of workplace learning programs; the president/CEO holds the key in this regard, i.e., if the CEO is convinced that the return on investment (ROI) justifies the expense and stands firmly behind a program, the rest of the management team will follow.

RECOMMENDATIONS: Get your CEO firmly behind your workplace learning programs by focusing awareness on the development of people (management and employees alike) as a major source of obtaining and maintaining competitive advantage; fully substantiate the ROI for any program endorsed by HR; this means knowing upfront the key results areas (KRAs) for your business, i.e., what to measure and understanding what the ongoing measures of success will be. In other words, once the training programs have been put in place, how will the critical success factors related to these programs be monitored over the long term and/or reported to senior management? A comprehensive reporting and evaluation program will be required.