IDS HR Study 783, October 2004

Human capital measurement

• Explains what is meant by human capital measurement
• Describes various human capital measurement models and how they seek to identify clear links between HR metrics and business performance
• Looks at the debate on how and where human capital information should be externally reported
• Features detailed case studies of how seven organisations approach human capital measurement

The HR function is coming under increasing pressure to demonstrate that it is adding value to the organisation. This reflects a move away from seeing people primarily as a cost towards showing in tangible terms how the right HR interventions and investment can add value to the business in the future and bestow competitive advantage.

The Accounting for People report, sponsored by the Government, has played a prominent part in raising the visibility of the human capital concept. HR reporting is also increasingly making an appearance in corporate social responsibility communications. Meanwhile, HR practitioners are recognising that they have to demonstrate in financial terms - and by reference to robust measures - the difference good HR policies and committed employees can make to business performance.

A number of human capital models have been devised to help establish the important HR interventions or 'human capital drivers' that can make a measurable difference to how staff perform. The starting point for most organisations is the production of a reliable series of HR metrics. But instead of looking at these in relative isolation, the aim of the human capital approach is to be able to link improvements in such measures directly to corresponding improvements in business performance. A number of the linkages may appear to be intuitive, but human capital measurement is about delivering objective data to inform the direction of HR strategy and to help make better HR investment decisions.

What's in this HR Study?

This special IDS HR Study covers the following areas:

Overview

Linking HR interventions to measurable business outcomes

Measurement in practice

• human capital models
• data collection
• types of HR measures
• examples of links between HR metrics and business performance data
• ‘human capital drivers’ or key variables that can make a difference
• planning HR interventions

HR and human capital reporting

• current forms of HR reporting
• the Accounting for People report and recommendations
• Operating and Financial Reviews - a possible forum for human capital information

Company case studies

Details of how seven organisations approach human capital measurement

B&Q, working with Gallup, has been able to prove the links between levels of employee engagement, customer satisfaction and business performance in terms of improved sales and profits, and reduced costs.

BP is developing a human capital performance management methodology and tool that is intended to improve the effectiveness of how it identifies which people interventions will have the most significant impact on performance delivery and, consequently, on bottom-line results.

BT has been revising its HR metrics to focus on formats that will allow it to measure the contribution of its people strategy to its business goals. Detailed analysis has allowed BT to segment its employees in terms of what motivates them and therefore enables it to tailor HR policies accordingly.

Nationwide Building Society's Genome model allows it to demonstrate the links between employee commitment, customer satisfaction and business performance. Employee retention has been identified as a key influence on these three elements.

RAC Roadside has developed what it terms its 'People Profit & Loss', recognising the importance of employees in delivering the company's goal of inspirational service. It combines a number of measures and targets in key areas, such as absence and staff turnover and allows managers to formulate HR policies to the ultimate benefit of customers and the company's bottom line.

The Royal Bank of Scotland Group has developed a human capital model that correlates a range of HR metrics with business performance indicators. RBS has identified 'employee engagement' as the key variable in this process.

Tesco recognises that the quality of the customer experience is the key to gaining market share and, by delivering against a number of 'people promises', it seeks to create an environment, characterised by loyal and motivated staff, which is most conducive to business success. Accordingly, its HR policies are focused on dealing with issues that affect the commitment of staff.