Human Capital Strategy

Measuring HRM-4

2007-10-22T12:55:00.000+03:00

Measurement is the first step that leads to control and eventually to improvement. If you can't measure something, you can't understand it. If you can't understand it, you can't control it. If you can't control it, you can't improve it.
H.James Harrington

In Measuring HRM-3, i have tried to give as many important recruitment metrics as possible so that HR professionals may choose one or two of them for their own purposes. As i said previously; those metrics are neither new nor invented for this website. Instead, they can easily be found by just clicking my favorite HR links on the left side. However, the important thing is to be aware of measurement vitality, to know how to align those metrics with overall business and HR strategies and how to interpret those along with a methodical approach. That's why in most of the key research results we see that that the need for a measurement method and for an alignment are the missing pieces in HR professionals' knowledge.

II. Compensation and Benefits Metrics

In this competitive and challenging business environment, it became a very key issue for HR to attract, retain, develop and reward employees better than your competitors do. Thus ascribes an importance for measurement activities related to recruitment, remuneration and development processes of the Organization. There is a clear need to measure the effectiveness of such programs. In this section i will try to cover 12 compensation and benefits metrics that can be utilized in monitoring compensation efficiency and effectiveness.

Offer Acceptance Rate: You can see in many of the reference literature that this metric is considered as one of the recruitment process metrics. However, most of the candidates are rejecting the offers made due to uncompetitive compensation totals. It looks at the percentage of offers made to hires that were accepted. As a result, it will be much more convenient to treat this metric as one of the key indicators showing how successful the Organization is in attracting new employees and the attractiveness of compensation and benefits programs. The formula suggested is; Offers Accepted / Offer Made

High Performer Voluntary Turnover Rate: Tracking turnover and especially voluntary turnover is an important issue for every Organization. While compensation is only one dimension of separations, for our purposes on this article, i recommend to follow up the high performer voluntary leaves due to inadequate compensation and benefits within the Organization. High performer employees may be described as the top 20% performers in the company. Organizations should monitor this metric as a leading indicator of potential dissatisfaction with compensation programs among high performing employees. The formula can be described as; High Performer Voluntary Leaves due to compensation / Headcount (except temporary)

High Performer Resignation Rate: As a complementary to above metric, this will show the percentage of high performers who resigned from the Organization due to inadequate remuneration. The formula is; High Performer Voluntary Leaves due to compensation / High Performer Total (except temporary)

Voluntary Turnover Rate: This metric looks at the percentage of total number of employee that voluntarily left the organization because of the inadequate or uncompetitive compensation and benefits programs. It can be easily calculated as; Total Voluntary Leaves due to compensation / Headcount (except temporary)

Compensation Revenue Factor: This metric describes how much was invested to employees' compensation in order to generate revenue (net sales). Over time, this measure shows if the Organization is obtaining more or less return on every dollar it invests in its people. The formula; Compensation Total / Revenue. For example, if you had a result of 26% out of this formula, this will mean that you are investing an average of 26 cents in compensation to generate one dollar in net sales.

Compensation Expense Percent: The compensation expense factor metric describes how much was paid to employees as a percentage of overall operating expenses. This measure shows the compensation cost structure of an organization. It can be calculated as follows; Compensation Total / Operating Expenses

Compensation and Benefits Revenue Factor: This metric describes how much was invested to employees' compensation and benefits total in order to generate revenue (net sales). Over time, this measure shows if the Organization is obtaining more or less return on every dollar it invests in its people as remuneration. The formula; Compensation + Benefits Total / Revenue

Compensation and Benefits Expense Percent: The compensation and benefits expense factor metric describes how much was paid to employees including all benefits (long-term incentive, management bonuses, sales bonuses...) as a percentage of overall operating expenses. This measure shows the compensation cost structure of an organization. It can be calculated as follows; Compensation + Benefits Total / Operating Expenses

Average Compensation per Employee: Organizations struggle to maintain a balance between cost and providing competitive compensation packages to employees during a period of high competition for talented employees. Average Compensation per Employee provides an assessment of an organization’s compensation levels relative to competitors. This metric can also be monitored by job families, job grades or by management levels of the Organization, when benchmarking to external data. The formula; Compensation Total / Headcount (except temporary)

Performance Bonus Pay Percent: It is a common practice to provide annual cash bonuses to employees relative to the performance levels. And, these figures are in considerable amounts within the total compensation and benefits packages. This metric can be either found by dividing the performance bonus pay to compensation total, or to compensation and benefits total. The first will give the percent of annual bonuses relative to annual base salary and the latter will provide the percentage within the total remuneration package of the employee. Performance Bonus Pay / Total Compensation or, Performance Bonus Pay / Compensation and Benefits Total

Salary Range Exception Factor: Almost every compensation systems are managed based on salary ranges. This metric will show HR professionals, how many exceptions exist within the structure. It is worthwhile to know what percentage of the employees have salaries that exceed the maximum for their grades or less than their grades’ minimum levels. It can be both calculated for a specific range or for the whole population in the Organization. The formula; Number of exceptions / Headcount (except temporary)

Compensation and Benefits Satisfaction Factor: Satisfaction surveys tell a lot if conducted and analyzed properly. In order to have an idea on the satisfaction levels with the rewards and compensation expectations, this metric should be tracked as the percentage of employees who are satisfied with their compensation.

In order to get meaningful results out of these metrics, benchmark data should be found and analyzed according to company needs, business and HR strategies. HR professionals should set their targets accordingly and perform gap analysis on the deficiencies.

Next part of Measuring HRM article series will cover metrics on Training&Development and on Succession Planning&Talent Management.

References:

Jac Fitz-Enz, ROI of Human Capital
Jac Fitz-Enz, How to measure HRM
http://www.pwc.com/saratoga

Measuring HRM-3

2007-10-17T15:11:00.000+03:00

It is obvious that in today's challenging business environment, the most successful Organizations will be those that are able to; measure the impact of their investment in people, manage their human capital as strategic assets, align the workforce with overall business requisitions, and use measurement to drive decisions, monitor performance and improve the outcomes.

In my previous articles on HR measurement, i have tried to come up both with empirical evidence on HRM performance linkage with overall business results and with survey results showing HR professionals' lack of an established measurement system. The picture is so clear; despite the effect of HR practices or programs is significant to the financials of Organizations most of HR professionals still are not able to show the impact of their work or the impact of the workforce with the help of some quantified, objective data. As a result, measuring the impact of HR programs and systems on key business results is far from being a common practice.

This and my upcoming articles on HRM measurement will cover the most important and widely used HR metrics in order to quantify the effectiveness of HR programs or processes. Those measures are not new at all. My intent is not to discover or invent new things. On the contrary, those are available online and free for everyone’s access. So why not to use them? The answer is, not sparing the time for such measurement activities and not being able to interpret those metrics and understand their meanings.

In order to be successful in HRM measurement, one important component is the necessity for the alignment of the metrics you use with the Organization’s overall business and HR strategy in order to add value. That is to understand what is important to the business, what key business measures exist and what can be done as for the HRM part. Second major component is benchmarking the results that you obtain as measures do not tell you what your competitors are doing. Measurement answers the question “how are you performing?”. Benchmarking answers the question “how are you performing relative to your competitors?”. Measurement can not be treated as an independent activity and should be considered together with benchmarking in order to allow Organizations to assess for improvement.

As a common practice, HR professionals may use between 8 to 10 metrics that demonstrate HR's impact on the business. A larger amount of measures besides that, will be both unnecessary and difficult to maintain. It is vitally important to focus HR department energy on the ones that really matter and add value.

I have determined six HRM field that in my opinion add more value than any other practices and about which i will discuss the critical metrics. Those can be listed as:

Recruitment
Compensation and Benefits
Employee Relations (Engagement, Motivation, Industrial Relations)
Training and Development
Succession Planning and Talent Management
Employee Movement

I. Recruitment Metrics

In this volatile business environment where a continous war for talent going on, hiring the workforce has become a critical task within HR. Recruiting and hiring the right candidate at the right time is critical to grow and sustain successful business results. HR professionals face challenge of both filling jobs quickly while also hiring effective and engaged workforce and this process must be continously monitored. Below you may find 9 most commonly used Recruitment metrics along with their explanations.

Response Time: In most of the Organizations you can hear complaints from other departments such as “HR is very slow as for the response time, we are lacking of qualified candidate as we were late for screening”. Most of such complaints are based on subjective judgment not on verified data. For responding such claims HR professionals should have data to talk towards it. The formula for this metric is suggested as:
Date of first candidate referred for interview – Date of job requisition

Time to fill: One of the metrics most commonly used to evaluate recruitment process efficiency. Although it looks at the average time it takes an organization to fill a vacancy, researches show a negative correlation between time to fill and voluntary turnover in the first year. In other words, as time to fill decreases, turnover in the first year increases. The formula for this metric is:
Total Days to Fill / Total Hires
Total days to fill can be found by deducting date the offer is accepted by the candidate from date the job requisition is received from the internal customer.

Cost per Hire: HR professionals must know and have a clear understanding about the cost effectiveness of the recruitment process. This metric may be interpreted as the hardest one to collect data. The formula;
Advertising cost + Consultancy fees + Total Interview cost / Total Hires
All expenses except interview cost is relatively easier to collect data. Consultancy fees should also include the tests (i.e personality tests or assessment center application cost...) which are used during the process. As for the interview cost, hourly interviewer’s income (including benefits) should be tracked and calculated.

New Hire Performance Rate: Every executive should track the performances of new hires and ensure that they are performing at desired levels. As this will help to evaluate the return on investment in new hires. This metric measures the average performance rating of new hires in their first year of service and compares it to the average performance ratings of the general employee population. A result of one would suggest that new hires are performing at the same level of the general employee population. A result below one suggests that new hires are performing at a lower level than the general employee population. The formula is displayed below:
Average Performance Score of Headcount with 0– 1 Year of Service / Average Performance Rating of Total Headcount (except temporary)

New Hire Promotion Rate: Another important metric for tracking the effectiveness of the recruitment can be stated as new hire promotion rate. The formula;
Total promotion of Headcount with 0-1 year of service / Total new hires in one year

New Hire Voluntary Turnover Rate: Quality of hire is a critical measure of HR and recruitment success. The most common way for measuring quality of hire is new hire voluntary turnover. As a common practice, any hire leaving within the first year of service voluntarily can be interpreted as poor hiring decisions. The formula suggested for this metric is:
Total Voluntary Separations (except temporary) with 0 to 1 year of service / Total Headcount (except temporary)

Poor Quality Hire Rate: As a complementary to new hire voluntary turnover rate, in order to provide an insight into hiring effectiveness, this measure can also be tracked and monitored. This metric measures the percent of total hires that voluntarily or involuntarily left the organization within their first year of service. The method for calculating Poor Quality Hire Rate is:
Total Separations (except temporary) with less than 1 year of service / Total new hires (except temporary) within 1 year
Given the high cost of hiring employees and the time invested by HR professional to interview candidates, organizations must minimize the number of poor quality hires.

Cost to Orientation: In order to have an highly involved and productive workforce, Organizations should give an extra importance to their on-boarding processes. Cutting costs on new hire orientation programs, IT and training support will only end up with costing the Organization more in the long-term. This metric tries to track the average cost of orienting newcomers to the Organization. This includes new hire orientation program costs, costs of materials and resources needed to perform the job, cost of HR professional's time and other related items that are included in the Company's orientation procedures. It also provides insight into the cost efficiency of orienting new employees to the organization.
Cost to Orientation / Total new hires

Orientation Rate: As it is mentioned above, orientation is one of the most critical parts of the recruitment process. Plus, it should cover every new hire without any exceptions. In order to follow up the percentage of new hires receiving an orientation program, the following formula may easily be obtained, New hires oriented / Total new hires

These were the most critically important Recruitment metrics that i find useful to monitor and to have a trend analysis.

It is up totally up to Organization’s specific needs, industry type and to the overall business strategy to choose among these top notch Recruitment metrics. Some may seem to be time consuming and some may seem almost impossible to compute. However, what will distinguish the high performer from the lower, will be the ability to compute and to talk in hard data.

Dear readers, I will continue on HRM metrics on the following articles.

References;

Jac Fitz-Enz, How to measure HRM, 1995
www.pwc.com/saratoga
Leslie A.Weatherly, The Value of People,2003
www.hrmetrics.org

Personal Note: Dear readers; i strongly recommend you to follow the www.shri.org.sg link for participating into the Future of HR survey which is a collaborative study of Boston Consolting Group and Singapore HR Institute. For additional information you may contact jayantee@shri.org.sg

Measuring HRM-2

2007-10-05T01:22:00.000+03:00

A positive vision of the HR function is foreign to many practitioners as well as to many of their customers. If the HR department is to survive into the 21st century, however, it will need to adopt a new self-perception. The image must be one of human resources as a value-adding function. There simply isn’t room for any other view.

Jac Fitz-Enz

In the first part, i have tried to give some academical proofs showing the impact of Human Resources Management (HRM) activities to the overall business performance and the necessity of measuring HRM. The matter arised from the question that i have revealed: do HR practices make difference in business results? Well, the answer was yes, and i hope dear readers, we do agree on this view.

Then the next question sticks out: are we, as HR professionals, ready for such measurement activities in order to show the impact of our efforts? To be honest, this is a really tough question to answer and the facts are "almost spooky". Also, they show that we have some more way to go and some more to do.

Before going on further discussion;

Almost every senior executive states that "people are the greatest assets" of their Organization. So how come many organizational decisions suggest a relative low-priority on both the human capital and the HR function. Think about your Organization; when it comes to cost cutting, first place to look is the investments in people such as training, headcount or salary increases. In this case, the "motto" becomes meaningless.

Definitely there is a fault in such kind of cases, and in part, it is related to HR professionals. Why? Let's go in deep...

Empirical evidence is ok, what about the real business life?

It is satisfactory that the HRM performance and business result linkage is proved academically for many times and that the researches are still mounting up. But, solely such practices are not enough in the real business life. Today's business environment is totally fierce, challenging, demanding and as a consequence, every function tries to improve their processes, to show their impact and value added to the overall business and to strengthen their image towards the senior management.

HR function is no exception to this challenge. What is exceptional about the HR function, however is that it is less prepared and equipped than most of other functions to quantify its impact on business performance. That brings some explanation to the fault i have described above. Such acts within an Organization are faced simply because few HR professionals can explain in economical value-added terms how people can provide sustained competitive advantage and the role that the HR function plays in this process.

Let me clarify this issue with the help of 3 survey findings which were conducted by one of the most important HR thinkers and institutions in 1995, 2006 and in 2007 respectively.

In 1995, a study conducted by Dave Ulrich in U.S asked senior managers what they viewed to be the key skills for HR in the 1990s. The responses showed that management wants HR to be more involved, provided they acquire certain business management and change management capabilities. On the business side management wants to see HR gain competence in technical, strategic and financial areas. It was recommended that HR learn how to diagnose situations and analyze data.

In 2006, Society for Human Resources Management conducted a Strategic HR Management survey in U.S with a participant total of 427 HR professionals. 48% of the respondents reported that their Organization do not have in place an established method to measure the effectiveness of HR strategy through metrics and analytics. Out of total population, only 48 were frequently using metrics for showing the impact of people, namely human capital measurements. To a large or to some extent, 78% of HR professionals interpreted the lack of an established method for measuring the effectiveness of HR strategy through metrics and analytics, as the major barrier for limits HR from contributing to the Organization's bottom line. The second major barrier was the fact that HR department is not able to directly measure HR's impact on the bottom line.

In 2007 Deloitte Touche Tohmatsu and Economist Intelligence Unit together conducted the Aligning at the Top survey in which 531 HR and non-HR executives were participated. 85% of those respondents said that human capital contribution is vital to every aspect of their Organization's performance, particularly important for improving customer satisfaction, increasing customer loyalty and improving products and services. Although senior business executives viewed people issues as strategically important, they are not confident that HR is ready for the challenge. In fact only 25% felt that their HR plays a crucial role in strategy formulation and operational success. Almost 70%-80% of HRM measurements were related to mostly on administrative measurements rather than strategic measures.

From 1990's to today; three different survey but similar thoughts on HRM. All results show that, although there are many articles, conferences, books and academical researches on HRM-business result linkage and on Strategic Human Resources Management, the perception of executives didn't show a dramatic change at all. The surveys indicate that as above quotation from Jac Fitz-Enz stated, that HR function should have a new value-added vision without any question.

Why to have a HRM measurement?

Major barrier for HR function to show its impact to the overall financial results, is the lack of methodology or ability to deliver such measurement activities. This was the reality in the past and still remains valid today. Before designing any measurement system, HR professionals must convince themselves first of all about the true benefits of having such quantitative systems. Let me state briefly some of them;

To determine whether an HR system or process is accomplishing its objectives,
To identify the strengths and weaknesses of HR processes,
To calculate the return on investment in an HR process/system,
To establish a database for assisting management in decision making,
To provide benchmark data, and to compare results with competitors,
To identify performance gaps that should be analyzed and eliminated in the Organization.

Overall, measurement is usually undertaken to improve or to re-design the HR function or measure its contribution to organizational effectiveness. Organizations are managed by hard data and by figures. HR must face this challenge and transform itself accordingly. Senior management wants to know how functions are performing. In order to impress the senior management, HR professionals must get use to talk in terms that they understand and appreciate. This means numbers and figures describing HRM activities.

If measurement is so vital in today's business world, why do most of HR professionals stay far away from this necessity. Well it is simply because of some myths like;

Measurement is difficult; it is often perceived as a complex activity as it involves data collection and analysis,
Of the subjectivity myth, we can not measure what we are doing,
There is no time for measurement,
Measurement is time-consuming;
Measurement appears to be expensive: as it is perceived to be complex and time consuming,
There are no clear-cut standards for measurement,
Unless a ROI is calculated measurement will be useless: However ROI is just one of the measures that HR professionals can use. If ROI is not feasible, there are many other,
There are too many variables affecting HR program performance to measure and evaluate the function: In a work environment several variables can affect an individual’s performance; while these are significant factors not directly under control of the HR, they should not be used as a basis for discarding measurement (this view is introduced especially for detailed turnover analysis).

Excuses, excuses, excuses... I can count many other of them. But the time is not to list the excuses, this is the time for having a new vision.

In Closing Part-2

The question was are we, as HR professionals, ready for such measurement activities in order to show the impact of our efforts? Unfortunately, real life experiences show that we are still not there, but we are improving.

As HR professionals, we must not forget that Organizations compete for business through the human capital they employ and are getting differentiated on the basis of the knowledge each possesses. For its part, HR function finally has the opportunity to move from the background to the forefront of the business equation. HR professionals who are truly serious about making a difference need to measure the business impact of HR processes and systems have on their Organizations.

Let's keep in mind that as HR function we position ourselves as strategic business partners of the Organization, one of the most effective ways to do so is to support the business strategy through quantified and objective data.

The third part of Measuring HRM will try to come up with some useful HRM metrics examples for quantifying HRM processes.

References:

Jac Fitz-Enz, Human Value Management, 1990
2006 Strategic HRM Survey, SHRM
DTT-EIU, Aligned at the Top Survey,2007
Jack J.Phillips, Accountability in HRM, 1996

Measuring HRM-1

2007-09-30T22:34:00.000+03:00

Maybe someone could equal the cost...possibly they could. And maybe someone could equal the quality of service that goes along with that and constitutes great value...possibly they could. But the one thing they would find it impossible to equal very easily is the spirit of our people and the attitude they manifest toward our customers.
Herb Kelleher, CEO of Southwest Airlines

There is a widely-held belief in business environment that major means of achieving sustained organizational competitiveness or competitive advantage is through the management of people as assets but not as overhead costs to be minimized in a blink. Today, conventional sources of business success can still provide competitive leverage but diminished as impact. Instead, organizational culture, knowledge, capabilities and human capital gained importance and regarded as more vital to be managed and to be measured. Data from the Brookings Institute will help to put the importance of the measurement and management of human capital assets into perspective: In 1982, hard assets represented 62% of a company’s market value on average. By 1992, this figure had dropped to 38% and in 2002 to 15%.

As an inevitable consequence of this reality, Organizations are turning to their HR teams for a solution to seek to leverage their human capital for sustainable growth and success. This has brought some implications for HR professionals; to demonstrate its value to the Organization, especially to top management, to demonstrate how people are impacting overall business goals and ultimately the bottom line and to move beyond traditional reporting towards measurement of information that drives human capital performance.

The new economic environment can also be interpreted as an opportunity to play a strategic role and to have a greater credibility in the organization for HR fucntion. As Jac Fitz-Enz stated that; business is a game of numbers, and in order to move to the center of the Organization and to the forefront of the business equation, HR must be able to talk in quantitative and objective data.

In parallel with this business reality; the question is; do HR practices make difference in business results? Are HR professionals ready for such measurement activities in order to show the impact of their efforts?

HRM-Business Result Relationship

Measurement of HRM and the empirical evidences on its impact to the overall business results have been a special kind of interest area for me and still maintain an important part of my HRM thinking. In this first part of my "Measuring HRM" article series, I would like to share with you those important academic researches and their fundamental findings.

There is mounting academic research attempting to demonstrate the impact of Human Resource Management (HRM) on firm performance. This academic interest is evidenced by the fact that many acclaimed business journals like Academy of Management Journal, International Journal of HRM, Journal of Accounting&Economics, Strategic Management Journal have devoted special issues to research establishing this linkage.

First attempts...1980's

The 1980's initial studies HR-business results was simply built on "better deployment of individual HR practices should correlate with higher business results". First attempts looked in individual HR practices such as training, selection, appraisals and compensation to firm financial performance. For example, in 1987, Susan Nkomo examined the correlation between how much firms invested in HR planning processes and business results. Unfortunately she found no correlation meaning that investment in HR planning did not correlate with business performance.

By the end of 1980's, at 1989 and 1990; two large scale surveys were conducted to find relationships between HR practices and firm performance: First survey conducted by Randall Schuler and Susan Jackson, examined the relationship between business strategy and HR by showing how under different strategic conditions, HR practices would vary. This survey presented empirical evidence of the business strategy HR alignment, but did not then link this alignment to business results. Second survey was conducted by Arthur Yeung, Wayne Brockbank and Dave Ulrich, finding that HR practices not only varied by strategy, but that the alignment of HR and strategy had an impact on business performance.

Although the researchers have found that this linkage is valid, there were no clear economical effects stated on their studies.

Advanced Studies...1990's

Extended assessment of HR practices and financial performance continued to be the hot topic of HRM field during 1990's. Today's theory is mostly based on the results achieved from this decade. The evidence show specific and significant impact of certain bundles of HR practices or High Performance Work Systems (HPWS-performance-contingent pay, team based work structures, selective recruitment and hiring, extensive training) on turnover, employee productivity and financial results.

The major findings were extracted from a comprehensive study by Mark Huselid in 1995. He and his colleagues collected data from 968 firms in U.S for examining the relationships between HPWS and financial performance. Most important findings were:

A one standard deviation increase in HPWS, reduces turnover by 7% on a per employee basis.
Each standard deviation increase in HPWS equaled a 16% increase in employee productivity meaning a $27.044 sales per employee.
Each standard deviation increase in HPWS yielded $18.641 in market value and a $3.814 increase in profits.

Similar to Huselid findings, Ostroff in 1995 conducted a survey and developed an overall HR Quality Index based on the aggregate ratings of all HR activities adopted by a firm. Firms that score higher in the HR Quality Index consistently outperform firms with a lower index in four financial measures: market/book value, sales/employees, market value and sales.

Another important academic research in this HRM linkage field, headed by Randall Schuler, Susan Jackson and Mark Huselid in 1997. They have evaluated the impact of HR managers’ capabilities on HRM effectiveness and the latter’s on corporate financial performance. For 293 US firms effectiveness was associated with capabilities and attributes of HR staff. Major findings from this study were:

Respondents described their firms’ technical HRM activities (recruitment,selection,performance measurement, training and payroll) as more effective than their firm’s strategic HRM activities (compensation system, team-based job design, employee empowerment, quality improvement practices, talent management).
Strategic HRM effectiveness was significantly associated with firm performance, but technical HRM effectiveness was not associated with firm performance.
Respondents described the professional HRM capabilities greater than their business related capabilities.
A one standard deviation increase in overall HRM effectiveness corresponds to an estimated increase in sales per employee of 5,2%, valued $44.380.
A one standard deviation increase in overall HRM effectiveness yielded an estimated increase in cash flow of 16,3%, valued at $9.673 per employee and an increase of 6% in market value valued at 8.882$ per employee.

In Closing Part-1

Those academical researches were the fundamental of this HRM-Firm performance relationship issue. There are many other articles, researches on that subject available through the internet. Some of those can be found by following the links that i have put on the left side of this website.

As i said on my previous articles that we are moving from an industrial society to a knowledge society where the primary source of wealth is information, knowledge work and workers. In order to be successful on measurement of our activities, we should first know the basics, the theoretical background of this issue in order to find a place on the front rows.

The question was do HR practices make difference in business results?

Empirical evidence shows that definitely it does. And it has do so as the changing business realities have provided the HR function with an unprecedented opportunity to create significant value through the effective management of the firm’s internally consistent and externally aligned HRM system.

In the second part, i'll try to find answer to the question: "Are HR professionals ready for such measurement activities in order to show the impact of their efforts?"

References:

Measuring HR, an overview of practice, Dave Ulrich, 1997
Pitfalls on the road to measurement, Jeffrey Pfeffer, 1997
On Becoming a strategic partner, Barney-Wrigth, 1997
Technical and Strategic HRM effectiveness, Schuler,Jackson,Huselid, 1997
Measuring Organizational Performance in SHRM, Rogers,Wright, 1998
HPWS and Firm Performance, Huselid,Becker, 1998

Enhancing Human Capital Creativity

2007-09-14T15:26:00.000+03:00

An established company which, in an age demanding innovation is not able to innovate, is doomed to decline and extinction.
Peter Drucker

Today, Organizations are witnessing an unsurpassed change in an increasingly global, dynamic and competitive marketplace. Their aim is similar to one another, which is achieving sustainable competitive advantage and long-term success over competitors. But the road to reach out there is severe than ever. In order to respond to the needs of that dynamic business environment in which they are operating, Organizations have to be agile, embrace creativity and innovation more than and longer than their competitors do.

These latter two, creativity and innovation, became a "motto" almost for every business enterprise. It is the new management imperative that, as Peter Drucker indicated, are critical to growth in a competitive environment without which companies stall and die.

This is the new reality of today's relentless business environment.

And this reality leads us to most elusive asset of any company, namely Human Capital. It is just simply because an Organization's creativity and innovation level totally depend on the potential of their people. Thus brings an implication for HR professionals to set their agenda and to design systems for attracting, developing, retaining talent and engaging them towards getting the most of their human capital potential. It seems that the only way is to to nurture organizational learning, teamwork and collective intelligence by stimulating free-flow of ideas along with a disciplined and methodical approach to continous improvement.

An important tool for achieving above mentioned purpose, Quality Circles (QC) may be used for creating an organizational climate where creativity and innovation are welcomed, valued and measured within a systematic approach. Let’s look in more detail.

Definition and Corporate Benefits of QC

Quality Circle is one of the techniques in Total Quality Management, firstly started in Japan and widely spread in the world’s largest corporations. It is formed by small groups of volunteer employees (from 3 to 6) from same or similar work units who meet to identify, analyze problems, find out root causes of problems, recommend and implement solutions regarding their work related problems. The logic is to push decision making to an organization level at which recommendations can be made by the employees who do the job, who know it better than anyone else and who can see ways of upgrading and improving the working environment.

Quality circles are originally associated with Japanese management and manufacturing techniques inspired by Professor Ishikowa's lectures, date back to 1960's and widely spread into US, and to other European countries between 1970 and 1980. In 1977, the total number of QC's in US was 30, then mounted up to 6.300 in 1983 and continously increased in number in the following years.

QC provide means by which employees are encouraged to participate in company matters and by which management could benefit from employees’ intimate knowledge of the business processes and creativity.

Successful implementation of Quality Circle applications bring together with numerous benefits to the Organization. The most noteworthy ones are cited below:

Improved teamwork: Employees work as teams. They meet regularly, discuss on project topic, decide together on project plan, and on actions to be undertaken.
Better communication: Employees may form project teams from the same or similar work units. QC requires intense communication within department and/or between departments in order to have successful results from the chosen project topic.
Enhanced creativity and innovation: Employees focus on their work area and try to find out possible ways for improving their processes. They try to bring new ideas on the table which automatically enhances innovation whether radical or incremental.
Better job quality and improved work environment: By the help of the methodology provided by the QC, employees use quality control tools and techniques for improving their business processes in order to be more effective and efficient in their work environment.
Increased employee motivation: Employee motivation is positively related with the outcomes of the QC. Seeing the implementation of their proposals, recognition of the efforts by the senior management of the company, have positive impact on employee morale and motivation.
Enhanced problem solving skills: Implementing QC requires the usage of quality control and decision making tools in order to represent the project in a systematic way. Thus, by the help of training investments, employee skills are improved.
Employee involvement: As i have tried to explain that QC is a method in which employees are involved and engaged on decision making process. People feel more responsible from their work, see the implementation of their suggestions and recognized by the company management. Such work environment positively affect the employee involvement and increase commitment to the Organization.
Personal development: QC activities are important opportunities for self development of all employees. Trainings are given to employees regarding quality control tools, advanced problem solving skills and techniques and also throughout the whole studies.

For a successful QC

Two pillars of QC ,which are also basics and the philosophy for any continous improvement study, are vital to discuss: Continous improvement and respect for people. Let me briefly explain what these two mean and why are so important for a successful implementation of Quality Circles.

Organizations must continously improve, innovate or re-design their business processes in order to stay ahead in the competition. Researches highlight that a culture of learning and development foster employee creativity, engagement and result with successful business results. QC approach is based on continous improvement. It supports the creation of a participative organizational climate where all employees, no matter where they stand in the organization chart, are able to participate in problem-solving process and lead to organizational effectiveness and improvement.

Respect plays a pivotal role in achieving successful results from QC. Organizations must learn to treat its employees with dignity and respect and create a workplace culture that fosters loyalty and engagement. Senior management must give importance to people and their feelings, should make every effort to understand, evaluate and support their ideas. Such effort will result with a respective corporate climate where all new ideas are granted.

Without these, none of the improvement activities will be flourished within the Company. Organizations must be transformed and accept people participation and respect on their improvement ideas as indispensable parts of their corporate culture. The availability of such environment will no doubt induce people creativity and result with high levels of employee involvement.

Efes Way on QC

Efes Beer Group (EBG) which is the 6th largest brewer in the European market, conducting every year QC activities in its international operations (namely in Russia, Kazakhstan, Moldova and in Serbia). The Group has started the implementation in 2005 and getting successful results from it.

At first, HR designed a QC system containing measurement models for the innovation ideas aligned with company needs. Secondly, they got full support from the senior management from every function of the Organization in order to create a work environment in which such improvement activities will be supported. Finally, with systematic follow-up, EBG achieved considerable savings from the QC.

Over 440 employees from every levels, worked for QC activities in EBG reaping an $4.5m annual benefit and saving from the QC implementations. This total was around $1.8m in 2006. After deducting the project costs from the benefit, net benefit is realized as $4.1m in 2007 yielding an increase of 134% when compared to 2006 figures.

In Closing

We are living in an era where a shift from industrial society to knowledge society has been going on. This transition brings together some important implications to management that the primary source of wealth is human capital. And the challenge for senior management is how to ensure its human capital to convert data into meaningful information and turn that meaningful information into common business intelligence along with a methodical approach?

Innovative organizations whether radically or incrementally, will be one step further than their competitors. For achieving such high levels of innovativeness, Companies must first convert their culture into more participative and more respective one. Thus ascribes a strategic role for all HR professionals as they will be the driver for that change in their Organizations.

With QC or other system else; HR have to come up with right solutions, right tools and with right systems in order to utilize the human capital to its best, to its highest use, to show the impact of employee decisions on overall business results by figures and to make this transition to knowledge society real for their Organizations.

People are strategic...What about HRM?

2007-09-07T22:16:00.000+03:00

In today's rapidly changing globalized business environment, people are considered to be strategic assets that ensure competitive advantage for an Organization. Senior management rely on intangibles as the key profit lever and primary source for long-term advantage over the firm's competitors. In most of the Organizations, people are not considered as an overhead cost to be cut but rather profitable investment as long as motivated, developed and rewarded via value added, responsive and aligned HR practices. That modern theory of business management puts management of people in the first place as importance and addresses as an imperative, challenging issue in this competitive environment.

The above mentioned and generally accepted view requires a new perspective on what is meant by HR function in the Organization, and a new understanding of how HR creates value in the Organization. This also requires an evolutionary change. Can HR respond on that change? Didn't HR arrive there yet? What should be done ?

These questions and many others are asked frequently and answers are trying to be uncovered within scholars of Human Resources Management (HRM). In this essay, my intent is not to give so detailed theoretical explanations neither on HRM history nor on Strategic Human Resources Management (SHRM). But rather providing some facts based on survey reports, on reputable authors' implications and on my personal synthesis about how to achieve this new vision for HRM.

Defining SHRM

We are all aware that in recent years, the field of human resources experienced an evolutionary change with a revolutionary speed. In the past, HR was heavily responsible for personnel and administrative activities. But today, although it still faces considerable barriers, HRM has started to get rid of its crust and involved on more strategic issues extensively over the last twenty years.

But, attaching the prefix "strategic" does not make you strategic in just one blink. It is a long-term process. Why?

It is just simply because strategic means value added activities that differentiate you from your competitiors and have significant impact to the overall business results of an Organization. The term derived from the most acclaimed concept "strategy". And the strategy may be defined as performing similar activities different than or performing different activities than your competitors do.

You see... As long as you relate to strategy related terms, you will face common concepts: differentiation, value adding, innovation and so on. That's why SHRM can be described as a long and a severe road but also a road if not used will let you out of the competition. From this moment now, it is up to HR professionals' vision whether to sail away from their safe harbor and respond to that challenge or not.

Before going further, let's look at some notable examples of SHRM definitions which i'm sure will let us understand the concept and the philosophy behind it:

The pattern of planned HR deployments and activities intended to enable the firm to achieve its goals,
The process of taking a long-term approach to HRM through the development of HR systems, processes, policies that address and solve business problems and directly contribute to major long-term business objectives,
The linking of people with strategic goals and objectives in order to improve business and develop organizational culture that foster innovation and flexibility,
Acceptance of HR function as a strategic partner in the formulation and in the implementation of company's strategies through HR activities,
The process of linking HR practices to business strategy,
The process by which Organizations seek to link human, social and intellectual capital of their members to the strategic needs of the firm.

Many other descriptions can be found in various sources of information. But, still some question marks may stick in your minds, like for example: at what level is the applicability of Strategic HR Management in the Organizations? Is it irrelevant with the realities of the business world? Is it just a myth or a reality?

Let's try to find out some solutions to those reasonable question marks...

Is it myth or reality?

Strategic HR is not a title that is given to any of HR departments. For example, have you ever encountered with Strategic HR Director/Manager/Supervisor? I don't know about your answer but i didn't that's for sure. As i have tried to explain above that, what makes you strategic is the value added HR activities aligned with corporate business plans. It is not because of the fashion you will be recognized as strategic. Well that intangible side of SHRM makes people think inaccessible and let them see this new way of thinking for HRM as a "myth".

You can see many lecture, certificate programs in most of the leading universities of the world covering Strategic HR Management issues. There are millions of pages on the web and thousands of books on that subject covering the linkage between HRM and business strategies and how to reach there in real business life. All of these scholars, management authorities and thinkers can not be wrong at the same time. Well, if you still think that SHRM has nothing to do with real life and can never be achieved, than i should say that you are not pushing hard enough to get there and feeling much comfortable on your safe chair by just doing what it is said to you.

Society for Human Resources Management conducts every year SHRM survey in US via online questionnaire. In 2006, they have collected data from 427 HR professionals in US regarding Strategic HRM practices in their Organizations. According to some dramatic results;

56% of respondents reported that their HR department had a strategic plan, out of this 96% were aligned with corporate strategic business plan.
The majority (59%) of the respondents felt that employees perceived their HR departments as mainly having an operational role.
89% of the respondents indicated that HR could contribute to a large extent through employee relations.
68% stated that HR works closely with senior management in implementing corporate strategies.
Less than half of the population (47%) responded that senior management has come to accept and realize their investments in HR make financial sense.
The major barriers that HR professionals encounter with; 86% of respondents felt that their departments are focusing on administrative duties, 78% not able to directly measure HR's impact on bottom line and lacks an established method, 63% has limited involvement with board of directors.

As you can see from the survey findings that HR professionals still faces considerable barriers like focus on administrative issues and lack of measurement. Another finding that should be highlighted that HR is focused more on implementation than on the creation of corporate strategic business plans. These were key observations that let us see that we all have some more way to reach fully strategic HRM in our Organizations. I am sure that in the rest of the world, the overall picture is similar or worse than it is in US.

Astonishing similarity that i saw between Jac Fitz-Enz' interviews and the above mentioned survey fndings about the barriers or the perception of employees. In 1990, Fitz-Enz asked more than 1.200 line managers from US, Brazil, Canada, Australia, Denmark, France and South Africa, three strongest images that they have of the HR function in their company. The responses were similar to that of Society for HRM's survey;

HR is too costly (401 respondents);
It doesn't add value (287 respondents);
It's bureaucratic (184 respondents);
We can do it ourselves (163 respondents);
They don't know the business (118 respondents).

Roadmap for SHRM

From 1990 to 2006, two different set of findings similar in nature can be seen above. Only these two instruments are enough to understand how slowly that change in HR function is happening and how that change is a must for managing people as strategic assets within the Organization.

Strategic Human Resource Management is neither a myth nor a mission impossible for HR professionals. It is a long-term process not a "me-too" exercise. It must be considered as a new vision, a new roadmap for every HR department. In order to be succesful on this long journey;

Be one of the members in creation process of Corporate Strategic Business Plans,
Establish an HR vision and communicate it not only to HR Department, but to all employees,
Develop your HR Strategic Plan aligned with Corporate Business Plans,
Continously improve, innovate or re-design your HR applications, systems according to the changing needs of your Organization,
Know your business and the environment in which it operates,
Be the pioneer of Human Capital Management by facilitating change, developing your people,
Show by figures the impact of your work by HR metrics and benchmark with your competitors.

These highlights may seem almost hard to accomplish in some of the Organizations, but never should be considered as unachievable ones. I strongly do believe that HR must re-position itself and choose a new way towards the quest for SHRM. Success will come sooner or later...

References:

- Making HR a Strategic Asset; Becker, Huselid, Ulrich; 2001
- Strategic Management and HRM; Allen, Wrigth; 2 006
- Partner or Guardian?; Wright, Snell; 2004
- 2006 Strategic HR Management Survey, SHRM
- Human Value Management; Fitz-Enz; 1990
- Strategic Human Resource Management; Bratton
- Toward a SHRM Model of High Reliability Organization Performance; Ericksen, Dyer; 2004

An Overlooked Cost: Employee Turnover

2007-08-31T00:18:00.000+03:00

In my previous essays on this blog, i have tried to explain the uniqueness of human capital as a source of sustainable competitive advantage. And in the forthcoming writings, i will continue on doing that. For just remembering the key point i would like to re-state my thoughts: Today, companies should recognize people as the only true source for long-term sustainable competitive advantage and as the primary force that,if properly motivated and directed; enhance quality, pioneer innovation, drive the proper utilization of resources and increase customer satisfaction. In brief, human capital plays an important and critical role in the outcomes of a firm's financial performance.

When employees leave the Organization, they take with them their knowledge, skills and abilities that helped contribute to goals, profit and performance of the organization. That's what i also prefer to call as human capital depletion that absolutely have negative impact on the overall business results.

If this is the fact, then how come that detailed analysis of employee turnover still underperformed by HR professionals in some of the Organizations ? Is it because the importance played down ? Is it because of workload that brings on HR departments ?

Well, actually i do not have a clear answer for these tough questions. However, i will try to give some insights for analyzing the turnover in detail along with some practical ways for calculating its costs to Organizations.

Inevitable Issue

In a recent survey conducted by SHRM in U.S, approximately three-fourths of employees responded (462 in total) are either actively or passively job searching. And nearly three-fourths of HR professionals (population was 348) reported they are concerned with the voluntary turnover rate increasing and resulted 12% on the average in 2006. Most probably the situation is nearly the same in other countries where economy and job market are improving and employee turnover is inevitable.

Such kind of facts show us the importance and necessity of retention strategies in an Organization especially in a competitive and in a shrinking qualified labor market.

However, zero turnover is neither desirable nor feasible for several reasons: First, long-tenured employees generally have higher salaries, so that companies trade off years of experience and skills for lower salaries. If all employees stay and the organization grows at a normal rate, most employees eventually will be at near the top of their pay ranges and total remuneration expenses will be high. Second, new employee bring new ideas and any organization must continually renew itself with fresh ideas from new members. And third, organizations are living structures so that any change on it may unavoidably cause turnover. Therefore, a reasonable amount of turnover is healthy.

But the healthiness of the rate will depend mostly on the industry benchmarks and on the business strategies of the Organization. HR professionals must set targets on turnover, follow-up the results periodically, analyze the reasons of leaves and report the actual costs of turnover to senior management in order to prevent possible future negative impacts.

Well, how ?

Calculating Turnover Rate and Analyzing it...

Calculating turnover rate is easy, but the multidimensional analysis of it is harder and takes time.

The most common overall turnover rate calculation takes into account both voluntary and involuntary leaves in an Organization. It is simply calculated by dividing the number of employees left for any reason by the average number of employees during that time of period. However excluding total number of temporary personnel from the overall headcount will be a more robust way to analyze the turnover due to the fact that in some industries temporary personnel actions are ever so often encountered. Also, it is advisable not to consider transfers and promotions part of turnover because they do not involve movement outside the Organization.

As you can see, turnover is generally divided into 2 categories: voluntary and involuntary. These can also be named as avoidable and unavoidable. Involuntary leaves can be sampled like; dismissals, layoffs, retirements, military service obligations, family reasons or some other personal reasons that can not be avoided. Whereas voluntary leaves are the ones that must be studied by HR professionals as these may be directly related to HR practices or systems in an Organization; examples can be listed as: relationship with management, career opportunities, training and development opportunities, work environment and compensation&benefit. It is mostly voluntary turnover rate which is desired to be reduced or to be maintained at an acceptable level when compared to the industry averages as under normal conditions, voluntary turnover is greater than involuntary turnover rates. It is calculated by dividing the voluntary leaves total by the average number of employees during the time period. Again, excluding temporary personnel is preferable in my opinion.

Yet, only these simplistic calculations may not let you understand the big picture. It should be analyzed in more detailed and in a more multidimensional way.

It is often informative to look at turnover from more than one perspective at a time. Multidimensional analysis is realized only if you could correlate turnover or voluntary turnover by performance levels, seniority and even by age groups. This will let you see whether you are loosing employees that actually you did not want to loose, the percentage of separations among top performers and whether you are loosing employees in a short period of time after recruiting or vice versa. As i said, it is really hard and request time collecting such data, but it is vital to understand the turnover behavior. The method you can follow may be to put on a list the performance levels, seniorities and age groups alongside of leavers and to analyze according to your needs. It sounds simplistic but believe in me it requires effort.

For all these calculations two major needs arise and are vital for a successful turnover analysis: First, to have a very detailed reasons of leaves list covering both voluntary and involuntary leaves, and second to conduct exit interviews in order to understand the true reason lying beneath the leave. According to CIPD Recruitment, Retention and Turnover 2007 survey, 90% of respondents were using exit interviews. Sometimes, employees may not want to explain or give the real reason behind their decisions. Well in that case it is up to HR professionalism to discover the truth and analyze it.

What about Cost ?

Most of us are aware that employee turnover or let's say human capital depletion is costly like any other assets' depreciation. But honestly speaking how many of us do follow the cost data periodically and in a methodical approach ? It is obvious that only HR professionals may know the true cost of turnover and the overall impact on Organization like how finance professionals know better (not always but in most of the cases) calculating financial ratios.

So why do we mostly omit this important issue? Let's find a simplistic but helpful solution on that issue.

The impact of turnover becomes significant when its costs are calculated. Although detailed amounts are difficult to calculate for some of the positions, estimating at least in major categories may be obtained with little difficulty. According to Jack Phillips, turnover costs are usually in the range of 1 to 2 times annual salary. In a recent CIPD survey, it is stated that the cost of labor turnover averaged 7.750 GBP per position in 2006 overall UK.

Theoretically turnover costs may be divided into four categories; separation process cost, recruitment cost, training and orientation cost and finally lost productivity caused by the leave of the employee. I think that there are no clear cut content for all of these categories. But there is a pool of metrics from which the cost elements can be picked up according to the company needs. What you include on your cost calculations is up to HR professionals' vision.

I'll try to identify some of them...

Separation process costs are related to costs of time and expense required in order to exit an employee from the Organization. It typically includes; exit interview cost, cost of administrative issues related to separation and cost of separation pay if applicable.

Recruitment cost are generally related to sourcing, interviewing and hiring expenses of the replacement. It may include; advertising expenses, agency fees, interview costs, cost of tests or exams and the difference between the new and separated employee's annual compensation.

Training and orientation costs are those related to on-boarding process of a new employee and the traning expenses provided in order to speed up the learning curve of the new recruit.

Finally lost productivity costs which may be interpreted as the most difficult part of the turnover cost calculations. But you can give a try. It typically includes; cost of additional overtime, cost of additional temporary employee, cost of lost customers or profits and cost of additional employee leaves related to the termination.

I notice that it requires quite a lot effort and time for following such data for every single leave from the Organization. But, for simplicity you can calculate turnover cost for one position and use the figure for other leaves from the same position. For example, if one supervisor or engineer left the company, you can calculate cost from that leave and use it for any other supervisor and engineer.

While concluding...

I have tried to explore turnover issue by showing the importance and some tools to evaluate it. You can find other ways in your researches. But the most important point is not to undervalue this issue but to track its impact on overall business competitiveness.

While concluding i'd like to stress on the process:

Define comprehensive reasons of leaves, differentiating between voluntary and involuntary reasons will help you calculate both turnover,
Conduct exit interviews in order to discover the real reasons,
Analyze reasons of leaves by function and/or by management levels if possible,
Multidimensional analysis of turnover rates; turnover rate by performance levels, by tenure, by age groups or even by department based,
Track information regarding turnover costs based on four categories described above,
Take necessary actions to reduce the negative impacts; job enrichment, re-designing HR Systems...

Please keep in mind that HR should talk with figures showing the impact on Organization's business results, otherwise thought it would be just dividing numbers by numbers and have some attractive percentages.

Personal Note: Please take a few second to fill in the poll on the left side. That poll is designed to better understand the applications used by you for showing the impact of turnover. Thank you in advance for your cooperation.

References:

Jac Fitz-Enz, How to measure HR Management, 1995
John Dooney, Cost of Turnover, 2005
SHRM white paper, Analyzing employee movement, 1993
Jack J.Phillips, Accountability in HR Management, 1995
CIPD, Recruitment, Retention and Turnover Survey, 2007
www.shrm.org

Human Capital...Where does it come from ?

2007-08-28T10:38:00.000+03:00

We all know that famous saying stated in almost every Organization's annual reports or in most of the top manager's speeches; "Human Capital is the most valuable and important asset held by an organization today". Another fact is that when you google on the net, Human Capital returns with more than 160 millions of hits. Well, what is that? What makes it that much popular? Do we really know what is meant by Human Capital or is it just used for having an airy, attractive statements? The following essay will try to clarify the concept of Human Capital and its origin in order to better undertand its essence and its importance for today's business environment.

Defining Human Capital

It is easy to find thousands of definition related to Human Capital; in literature, on the net or in any other resources. Here are some most notable examples of description:

SHRM (Society for Human Resource Management) defines it as the collective knowledge, skills and abilities of an organization's employees,

Investopedia describes Human Capital as a measure of the economic value of an employee's skill set. The education, experience and abilities of an employee have an economic value for employers and for the economy as a whole,

Wikipedia says that Human Capital refers to stock of productive skills and technical knowledge embodied in labor,

SHRM Content Expert Leslie Weatherly gives a more comprehensive definition as the collective sum of the attributes, life experience, knowledge, inventiveness,energy and enthusiasm that its people choose to invest in their work.

All of these definitions and many others you can find resemble to each other and come to a common point which is Human Capital is a cluster, a combination of people's attributes. We'll come back on that description issue, let's look more closely to the origin of the concept...

The Origin

Eighteenth and nineteenth century capital theory mostly claimed that wealth was leveraged from investments in tangible assets such as plant, equipment or land. For an example, Karl Marx's concept of labor power was underlying that workers had to sell their labor power in order to receive income under capitalism. This type of thinking was stating that workers were entitled compensation only for their labor since the incremental values of the business came from investment in capital equipment.

Adam Smith defined "human capital" as one of the four types of fixed capital; however he considered human capital and the productive power of labor both dependent on the division of labor saying that "the greatest improvement in the productive powers of labor, and the greater part of the skill and judgement with which it is any where directed or applied, seem to have been the effects of the division of labor."

We can conclude that these two views of Human Capital are far beyond of today's thinking.

The use of the term in the modern literature dates back to 1960's when the term was used first by Nobel Prize winner economist Theodore Schultz. The concept firstly used to reflect the value of human capacities. His claim was that improving the welfare of poor people did not depend on land, equipment or energy but rather on education and knowledge. He concluded that the speed of recovery was due to a healthy and highly educated population. He called this qualitative aspect of economics "human capital". His research was based on why post World War II Germany and Japan recovered at almost miraculous speeds from the wide-spread devastation. Schultz who won the Nobel Prize in 1979, offered this description: "Consider all human abilities to be either innate or acquired. Every person is born with a particular set of genes, which determines his innate ability. Attributes of acquired population quality, which are valuable and can be augmented by appropriate investment will be treated as human capital".

Another Nobel prize winner economist Gary Becker also used the term Human Capital in his works. His book entitled "Human Capital" published in 1964, became a standard reference for many years. In his view, Human Capital is similar to physical means of production (factories, machines); one can invest in human capital via education, training and one's outputs depend partly on the rate of return on the human capital one owns. Thus, human capital is a means of production, into which additional investment yields additional output.

So;

As you can see whether the term exactly used or not, its origin goes back to 18th century. Whether it is seen as a supportive asset or a key driver that can be invested on it and getting some return of it. One thing is sure that, with the studies they have conducted, Schultz and Becker were the ones who have pioneered the modern view on Human Capital and changed the way it is treated on the overall economy.

Let's come back to description issue for our HR purposes and i'd like to extend Jac Fitz-Enz', father of Human Capital measurement,definition and try to define human capital as a combination or cluster of factors as the following:

The traits one bring to the job: intelligence, energy, enthusiasm, reliability, commitment, life experience,
One's ability to learn: aptitude, imagination, creativity,
One's ability to act: converting date into meaningful, value added information and turning it into business intelligence,
One's motivation to share information and knowledge; team spirit and goal orientation.

I'd like to conclude with a quotation from Jac Fitz-Enz, showing the importance of people, the most valuable and the most important assets of an Organization in today's knowledge economy;

The knowledge, skills and attitudes of the workforce separate the winning companies from the also-rans.

References:

www.shrm.org
www.investopedia.com
www.wikipedia.com
Jac Fitz-Enz, ROI of Human Capital,2000
Leslie Weatherly,Human Capital,The Elusive Asset-SHRM

Why Human Capital ?

2007-08-26T12:19:00.000+03:00

In this highly demanding and globalized business environment, the fundamental nature of competition in many of the world’s industries is changing. The pace of this change is relentless and is increasing. Business competition comes in many different forms and from a great variety of competitors and the challenges are mounting up.

Today, Organizations are competing in a global business environment where the rules of the game are changing rapidly. Continuous improvements in technology are forcing companies to be much more flexible than ever. Web-based technology has made the information accessible and available throughout the world so that customer awareness is increased significantly. Organizations have to be customer focused, fully committed and agile in order to adapt to the dynamic environment and provide solutions to ever-changing customer needs. Globalization has changed the way of doing business, changed the marketplace and demolished boundaries.

In order to have an advantage in the long-run over the competitors; every organization aims to achieve sustainable competitive advantage and to earn above-average returns. It comes when Company has value-creating processes, resources that cannot be duplicated or imitated easily by competitors. It provides a long-term advantage that is not easily replicated.

These developments within the business context made the conventional sources of competitive advantage less effective in the new competitive landscape. In its place, companies are supporting and embracing creativity, innovation and relying on human capital more than ever in order to secure and improve their competitive positionings. Right now, it is widely accepted that in the long run, the only reliable source for sustainable competitive advantage for any company, will be ability to improve, to innovate better and longer than competitors do. As Jac Fitz-Enz stated in "ROI of Human Capital", in the closing years of the twentieth century, management has come to accept that people, not cash, building or equipments are the critical differentiators of a business enterprise.

Human Capital became a key profit lever in today's knowledge and information based business environment. Without talented intellectual capacity, Organizations and senior management of business enterprises will face difficulties in order to stay ahead in this harsh competition. Thus ascribes an important and a key responsibility to HR professionals for showing the impact of this elusive intangible asset to the overall business results of the Organizations. This blog is designed for covering all related issues to the concept of Human Capital along with its measuruement practices by providing generally accepted key HR metrics with their detailed explanations.