Why should we care about measuring Human Capital ROI?
It’s been a long time since the people function was referred to as “Personnel.” Today Human Resources professionals everywhere are using more sophisticated programs and techniques, and large companies are slowly beginning to adopt “big data” approaches to understanding HR efficiencies and to enhance decision-making related to HR investments.
Appropriately, the head of HR is focused on developing the talent at all levels of the organization and that requires a focus on skills – both soft and hard. The C-Suite, most often led by the CFO, will be the ones to evaluate return on HR rewards and program costs to understand drivers of financial performance.
The next big step is to prove out the relationship between discrete HR programs, practices, and people efficiencies to positive corporate financial outcomes. Ultimately, this rigor will indisputably quantify the value of Human Capital for the organization and prove the economic value-creating impact of specific investments in Human Capital. Think about this as similar to evaluating the ROI of launching a new product, buying a building, or investing in a new company – except here, we focus specifically on people costs. By understanding which discrete areas of HR are strongly correlated with corporate financial performance, we can better focus our efforts and attention on those value-creating activities. Some of my clients have told me this is like putting the company through an MRI machine and seeing from the inside what works and what doesn’t.
Here are some compelling reasons to measure HC ROI:
- The typical company today invests between 50% and 60% of gross profit in people and people programs – it’s a big expense and we should know if we’re getting a “bang for our buck” from our people – in other words, is there a positive or negative return on our investment in people?
- In an environment where labor is scarce, we will probably have to spend more for this scarce resource than before – we should anticipate that this expense will increase and it is even more important now than before to understand how what we’re spending on people is advancing our desired financial outcomes.
- By quantifying the value of Human Capital, we can begin to monitor, over time, its performance and how it correlates to other financial outcomes – and demonstrate the economic value-creating impact of Human Capital.
- By monitoring selected Human Capital metrics, we can begin to listen for signals that the organization is sending. For example:
- Is attrition higher in one division or department or under one manager?
- Is this a signal of something that we need to pay attention to?
- Is diversity lower in one division or department, or under one manager than the average for the organization?
- Is mobility lower in one division than another and lower than the competitor benchmark?
All these indicators provide information for further investigation that could have a positive impact on the company – from a risk management / mitigation perspective and from an EBITDA optimization perspective by managing the costs/expenses associated with Human Capital programs.
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Dr. Solange Charas is a senior-level human resources expert with 30+ years of experience as a consultant, practice leader, top corporate executive, and board director across all industry sectors. She was the Chief Human Resources officer at Havas Worldwide, Benfield and Praetorian Financial Services Group and held senior-level positions at Ernst & Young and Arthur Andersen. She serves of the boards of 2 public companies, a non-profit organization and a higher-education institution. She is the Founder and CEO of HCMoneyball – a SaaS company founded to provide support for enhanced decision making about spend on people in any organization.
Solange earned a PhD in Management from Case Western Reserve University’s Weatherhead School of Management, an MBA in Accounting and Finance from Cornell University’s Johnson Graduate School of Management, and a BA in International Economics from the University of California, Berkeley. She has authored numerous articles, including “The Art and Science of Valuing People” in HR Director, “6 Ways to Coach Your Company’s Teams to Be Champions” in Entrepreneur Magazine and “Why Men Have More Help Getting to the C-Suite” in Harvard Business Review.
