Insight 2005 archives

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Appraising people power

By Petra Cook, head of public affairs, Chartered Management Institute.

The Operating and Financial Review (OFR) is heralded as being "forward-looking". It is intended to be a balanced and comprehensive analysis of the development and performance of the business, including all the main assets underlying the financial position during the year, and those which are likely to affect its performance in future years. But the changing nature of business has resulted in assets that are increasingly intangible. Some of the key contributors to future business success are those that are most difficult to quantify. For example, workforce, customers, knowledge base, brand and reputation.

It has been estimated that as much as 80 per cent of a company's worth is tied to the value of the workforce (Grossman, 2005). Yet recent research by the Chartered Management Institute (CMI), Oracle and the Centre for Applied HR Research found that, although 90 per cent of managers record various people metrics, only 20 per cent believe that their measures are effective or even useful. So how forward-looking is the OFR when it comes to helping companies make these measures work?

Human Capital Management
The debate on how to measure and account for the value of the workforce (human capital) has been long and convoluted. Despite the widespread interest in how we account for people generated by the government's review of reporting requirements, the final outcome of the "Accounting for People" taskforce was deemed by some to have been so limited in its conclusions as to have left Human Capital Management (HCM) meaningless. The HCM advocates' dream of non-financial measurements that could be benchmarked and compared between organisations seemed dead in the water.

Even describing an organisation's people assets as "human capital" is felt by many managers, particularly those outside the financial community, to sound manipulative and cold-blooded. And it would be if one failed to recognise the qualities of humans that other physical and intangible assets do not have. For a start, human capabilities can and do change. The human capital asset is altered as it is employed, as people grow through on-the-job learning and experience. They can make choices, so organisations need to engage and influence individual motivations. It is the varied nature of human capital that makes its measurement and management so difficult. But this is by no means insuperable.

These qualities set human capital apart but do not negate the fact that employees are a manageable asset that can and must be integrated with the strategy of the organisation. The CMI's recent research has demonstrated such strong statistical correlations between human capital and business performance that business leaders need to bring a disciplined, investment return-oriented approach to the management of this asset. The management case for HCM remains compelling. Michael Porter, renowned competitiveness guru, has been one of the foremost exponents of the view that people are the only source of competitive advantage left to us today. And a key part of the business case for HCM is that it focuses on an area that remains uniquely within an organisation's control: the ways in which it uses and builds the skills and capacity of its people.

Missing links
There was a good deal of expectation that the introduction of the OFR would give the HCM agenda a boost. Although the OFR does not provide a prescriptive approach setting out indicators on employees, it does recognise the importance of employees throughout key elements of the disclosure framework. For example, it describes how organisations could measure factors affecting employees, such as staff morale and health and safety. However, it has disappointed many by failing to make the link between employee metrics, customer satisfaction and the bottom line ' critical connections that are key to a company's future success. If measurement of human capital is to be meaningful to investors, it is critical that companies talk the language that investors understand.

The OFR's example measures of employee morale and health and safety are quantified in terms of the respective risk factors of high employee turnover and lost time through injury. So far, little guidance has been offered in terms of metrics that focus on future value creation by seeking competitive advantage through the deployment and development of employees.

If the OFR is to meet its objective of being forward-looking, investment in employee development, talent management, succession planning and building workforce capacity need to be taken into account. Simple statistics such as hours spent on training and number of courses offer little value unless their impact is evaluated in the business context. We know that good HCM reporting combines narrative and hard data about the aspects of the workforce that most affect business performance. The focus needs to be on lead indicators that will help investors assess the future impact of various people management strategies on long-term performance.

Basic guidelines published last month by the CMI attempt to set up a practical framework for establishing appropriate measures that can be readily understood by stakeholders. The guidelines were developed in response to research which indicated that almost half of managers reported that their organisations do "little or nothing" to measure the contribution of employees to organisational performance.

A positive outlook
Despite the delays in the regulations and doubts as to whether the new OFR requirements will drive HCM reporting activities, in practice the market leaders in HCM are already reaping business benefits by improving how they measure the links between people management and business strategy. All organisations need the right mix of knowledge, talent, skills and experience to implement business strategies that will create competitive advantage.

One of our most positive findings has been that the management community does appear to want better quality information about its workforces. The building blocks for a more sophisticated approach to HCM reporting are in place in some organisations but too many still need to get the basics right ' for example, measuring staff turnover. It is gaps like these that provide a major opportunity for organisations to improve their performance.

As those involved have been arguing for so long, HCM is not the soft, intangible stuff that boards discount as irrelevant to their strategic focus on the business. HCM is about the successful management of an organisation and its people, and providing managers with the relevant and appropriate information that they need to manage effectively. There remains a lot to be done, but from the perspective of management accountants, the signs are encouraging.

Getting the basics right: a guide to measuring the value of your workforce (April 2005) is available from http://www.managers.org.uk/researchreports or call 020 7421 2721.

May 2005