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