Human Capital White Paper

Human Capital White Paperon the function. HR needs to make causal connections
Version 1.1clear between their practices and business value. This
What is Human Capital?means moving from describing good HR practice to
Other examples of intangible assets include: brand,proving it.
software, design, working methods and customerFor decades HR has wanted greater legitimacy for
relationships. The human capital asset captures all thetheir role; often without a seat at the top table. With
people oriented capabilities we need for a business tohuman capital now being such a source of competitive
be successful.advantage, the door is open for Human Resources to
It's important to remember, however, that individualsbring to the table the value they have for many years
are only an asset insofar as they choose to investbeen espousing.
their human capital in an organisation.But how do they do this?
Some people find the term Human Capital somewhatThe HR paradigm shift
mechanistic, but human capital is not about describingIf we accept human capital is one of the key assets
people as economic units, rather it is a way of viewingdriving creation of value, then HR is not a cost centre
people as critical contributors to an organisation'sbut an asset provider. It is a function that enables
success. This then throws the spotlight on howbusinesses to manage people better than other
businesses invest in their human capital asset, in ordercompanies, but to prove this, HR needs to change its
for it to add value. For any commercial organisation,approach quite fundamentally. Most HR functions are
this is an important component to understand. If aon this route, in some form or other, already: - Moving
company understands how its human capitalfrom efficiency to effectiveness
contributes to their business success, it can then be- Moving from cost to value-add
measured and managed more effectively.- Moving from inputs to outputs
Human capital management is a reciprocal relationship- Moving from data collection to data analysis
between supply and demand: employees, contractors- Moving from traditional HR data to linking it to
and consultants invest their own human capital intooperational performance
business enterprises and the business enterprisesHaving this intelligence informs our answer to the
need to manage the supplier. Any organisationquestion of what HR should be doing in order to deliver
interested in its performance will naturally ask how wellbusiness impact.
they are managing this asset to ensure maximumLinking HR practice and individual or organisational
return on their investment. In the same way, allperformance is therefore at the heart of what HR
employees, contractors, consultants and providers ofneeds to do so it can identify how HR policies translate
human capital want to ensure they are getting theinto performance. As a minimum, HR should have
appropriate return for their own human capital investingreliable data in conventional areas, such as churn,
through salary, bonuses, benefits, and so on.absence, labour costs, time and costs of recruiting, etc
Understanding how and why people add value or notbut they must also have access to performance
to an organisation is an important, and difficult,measures, such as production figures, sales targets,
management skill for the 21st century.service level agreements and be able to make links
Why is Human Capital an increasingly important issue?between the two.
Human capital has never been more critical toIncreasing the capability of HR to deliver more
competitiveness, because the world has changed.commercially will be the key to demonstrating how HR
Over the last 15 years we have witnessed acan really addvalue to an organisation.
revolution in the workforce, as well as in theWhat does this mean for Finance Directors and the
workplace.CEO? The gap between a company's tangible assets
The Workplaceand its stock market value is growing. For many
Increasingly the developed world has evolved into abusinesses the tangible assets on the balance sheet
service and information economy. In an informationrepresent a small part of their stock market valuation
economy, people are the critical asset and in a serviceor the value to a potential acquirer. In most
economy many more outputs are intangible, as muchorganisations, reporting and evaluation of human capital
as 80 per cent of a company's worth is now tied to itsis non-existent. As the world has changed and human
people. Access to financial capital is no longer acapital has become more critical to competitiveness, it
source of competitive advantage; our competitivenesshas exposed the limitations of traditional accounting
increasingly derives from know-how, or people'spractices in being able to identify the real value-adding
abilities, skills and competence. People, the humancomponents of an organisation. The issue is, if we
capital asset, with the right profile and capability providedon't know how to measure intangible assets, how do
an advantage, which is not easily replicated bywe know whether to invest, or how much? How do
competitors.we link investment in the following areas to business
The Workforceperformance?
At the same time, the labour force has also changed- Induction
dramatically. Organisations know they need people to- Skills and technical training
deliver value in new and different ways, and that those- Management training
people they depend on have changed. For example,- Organisational roles
we see an aging, more diverse population, with more- Process design
women entering the workforce, more dual-earner- Workforce planning
couples. However businesses can still struggle with a- Reward management
general shortage of the skills required in a service and- Retention management
information economy.- Employee feedback
The war for talent in the human capital market place- Performance management, etc
means businesses can't take for granted thatWe know the evaluation and measurement of human
individuals will want to invest their own human capital incapital is difficult and that it's an evolving science, but
an organisation. Elements, other than traditional pay andfor most Finance Directors, understanding the
job security, need to be put in place to attract andperformance of their human capital investments is
retain top talent.extremely weak compared to their understanding of
These changes have culminated to ensure that humanany other asset in their business.
capital is becoming a major driver for organisationalMany finance professionals see people as an
performance. Forty-six per cent of Chief Executivesoperating cost, not as a source of value creation. They
say that finding good people and keeping them is theiralso then treat all expenditure on human capital as a
single biggest worry and most fear their employeescost to be minimised, as opposed to a cost that can
are ill-equipped in terms of skills. The investmentbe optimised. Without the measures and links,
community is now probing human capital issues, yethowever, it is hard to know how to do the latter and
most Chief Finance Officers say they have only awho in the business is responsible for that: HR; Finance;
moderate understanding of the returns they get fromor both?
what is often their largest single investment - people.There is also a difference between internal and
Human capital then is a critical contributor toexternal reporting. Increasingly, externally a company
competitive advantage. What is the challenge forwill be assessed on the basis of the amount of
organisations?information it can provide about its internal labour
Human capital may well now be the most criticalmarket and how well that market serves its business
source of competitive advantage, but it is also theobjectives. External human capital reporting required of
most difficult to measure. If people are a company'sorganisations today is still limited and is largely narrative,
greatest asset, how do we quantify the value of thisbut this may well change.
asset?The real challenge is how to move along the
The phrase 'our people are our greatest asset' hascontinuum, using HR analytics, to deliver a picture of
become a tired cliché around which real cynicismhow human capital investments create business value.
has justifiably been created. The cynicism is based onTo move from generating HR information, to reporting
the gap between what a business says and what ithuman capital and then measuring that asset, so it can
does. If an organisation can't prove that its people arebe managed.
its greatest asset, then it isn't being measured and itWhat does this mean to Ceridian clients?
can't really be managed. The quantifiable evaluation ofOur Vision is that "Everything we do is focused on
human capital is a challenge and there is currently noincreasing the value of an organisation's human capital
accepted way of doing this. There is no singleand enabling HR to deliver real business impact."
measure, independent of context, which can describeThe scenarios outlined previously represent a real
the impact of employee competencies andopportunity and a real challenge for Ceridian. As an HR
commitment on business performance. There areservice provider we are dealing with HR and Finance
reliable methods for measuring the return onprofessionals who are struggling with the issue of
investment on physical capital, but not for humanhuman capital in their own organisations. We therefore
capital; it's a new and evolving science.have an opportunity to create a value-add proposition
Causality is the issue; it is very difficult to prove linksthat moves us out of the'efficiency' box of a classic
between 'cause' and 'effect' in a complex working andoutsourcer, i.e. just being cheaper, and into the
social environment. Assigning causality is a challengeeffectiveness box, i.e. that we add value to our clients'
because a business context is a very different socialbusiness.
environment, e.g. is customer satisfaction reallyTo do this we need to create tools for HR and
improved because employee retention has proved, orFinance in order to allow them to understand their
is it because that business invested in betterhuman capital strengths and weaknesses, and then
technology and improved their product? Is andevelop solutions to increase the value of their human
organisation getting discretionary effort from its peoplecapital. Ceridian has therefore engaged a human
because they have been allowed flexible working, orcapital partner to create the tool that will establish the
because they are being paid more than competitors'links between HR practice and business value. This will
offers, or even a mixture of both? Correlations are notbe linked to our overarching market proposition, but will
the same as causality either. The challenge for mostbe founded in sound research and development.
organisations is that if the value of human capital can'tCeridian will create a simple, pragmatic tool that is also
be quantified, where and how do they make the bestacademically robust to demonstrate our capability,
investment in their asset, and how do they know whatcredentials and leadership in this field. The model will be
the return on that investment will be?innovative and a differentiator that positions us as
What does this mean for HR?human capital specialists, helping HR become more
The pressure on HR functions to perform is greatercommercial.
than ever because of the critical role human capitalThis also means that Ceridian will be 'practising what
plays in an organisation's wealth, success andwe preach', opening our doors with pride to clients and
competitiveness today. If the role of HR is to optimiseprospects in terms of our own human capital reporting,
'people performance' then businesses need to askanalysis and management. It will also be imperative that
what 'good' HR looks like for their organisation.we work with foundation clients to build compelling
Increasingly it's understood that a good HR functioncase studies of the evidential links between human
can add significant value and make a real contributioncapital and business value. It also means that for every
to an organisation's performance, however looking atone of our solutions, human capital management and
HR through a human capital lens puts further demandsinterventions will be linked to ROI.