2003 - Human capital management
It was always going to end in
tears. Human resources managers have been banging
on for years about the growing importance of their
job as the contribution of employees becomes ever
more significant to the success of businesses.
They have argued that HR directors
need to be in the boardroom. They have stealthily
changed the emphasis of their role from that of
administering mundane personnel activities such
as payroll management, counting sick leave days
and allocating training rooms to a more dynamic
involvement with concepts such as "talent
management", "succession planning"
and "performance management". All you
need do to give the job a truly boardroom presence
is to spice the language a little more with words
such as "strategic" and "leadership".
Much of this changing emphasis
has swept across to Europe from the US. Now there
is a fashionable concept that looks as if it will
be sending HR into yet another metamorphosis:
human capital . The phrase has been around for
a while now. The reason we should sit up and begin
to take more notice of it is that it has come
to the attention of the people who still call
the shots in most businesses: the finance teams.
According to a report published
in the US, finance executives are arguing that
they need to be involved in HR issues to a far
greater degree than hitherto. The report, published
by CFO Research Services and sponsored by Mercer
Human Resource Consulting,* reveals not only that
finance executives believe they need to know more
about HR but also that they expect to have acquired
significantly more influence over the HR function
within the next two years.
Up to now, HR has remained something
of a mystery to finance directors. Employees have
been viewed as a cost and HR as a cost centre
that must be allocated finance every now and then
in order to fund pay increases. The concept of
human capital , on the other hand, views the training
and development of employees as an investment
that can produce measurable returns. Suddenly
this is music to the ears of finance executives
who understand the language of measurement and
consider it part of their domain.
There is still a way to go. According
to the CFO/Mercer report, on average companies
spend 36 per cent of their revenues on employees
but only 16 per cent of the survey responses say
they have more than a moderate understanding of
their return on labour costs.
This is a problem, says the report.
"It means that most companies lack the ability
to apply ordinary financial discipline to their
largest investment ... human capital remains a
vast area of spending where the finance function
offers little insight beyond guidance on what
the company can afford to spend." But this
is set to change, according to the survey of some
180 senior financial executives.
The respondents said they understood
that employee input was vital to achieving shareholder
value through customer satisfaction, profitability,
innovation and new product development.
But a closer look at the focus
of their interest demonstrates that these particular
leopards do not change their spots overnight.
Increasing productivity is seen as an important
goal - as it always has been - alongside the need
to build leadership skills. Measuring the contribution
of employees to business performance was less
of a priority among most respondents, although
interest in this area appears to be growing in
larger companies where executives were more likely
to list measurability as a strong concern.
The relative lack of interest
in measurement that emerged in the survey sample
appears to be reflected in a widespread frustration
with the effectiveness of many existing measures
developed in HR technology. This is one area,
suggests the report, where finance executives
believe their teams may be able to achieve improvements.
Whatever the case, nearly two-thirds of the surveyed
executives said they believed they should be making
decisions over HR or contributing significantly
to HR policy.
In what may be seen as a note
of diplomacy, most of those interviewed in the
research thought that HR and finance executives
should work together collaboratively and that
they should both report to the chief executive.
The sentiments may be genuine but there are clear
signs that finance teams are squaring up for a
turf war with HR.
As HR and performance measurements
become increasingly sophisticated, particularly
where they can demonstrably relate to the financial
bottom line, their use becomes ever more attractive
to the power brokers in the business. It seems
unlikely that finance directors are going to stand
by and see their right-hand role as guardians
of the accounts usurped.
"There is something afoot
here," says Dave Kieffer, a Washington-based
partner at Mercer Human Resource Consulting.
"It has been a cliche in
employee handbooks for a couple of decades that
people are the most important aspect of the business,
yet they still get laid off when times get hard.
But now I think there is an emerging sensitivity
to the value of human capital in a sense of its
future potential to the business and its developing
value over time."
This could be good news for experienced
employees, who have sometimes been most vulnerable
to cutbacks. People with what Mr Kieffer calls
"firm-specific" skills are most likely,
he says, to increase their value to the business
Demonstrating the bottom line
value of employees is the difficult part. But
today, says Mr Kieffer, it is possible to sift
through employee data to reveal patterns of employee
behaviour that can be linked to a company's performance
when variables such as stock market performance
are taken into account. The other dimension to
these developments is the role of consultancies.
Human resources consultancies and the HR divisions
of accountancy firms were not seriously affected
by the criticisms of auditing that emerged after
the Enron scandal.
A new focus on human capital
is raising some optimism that they have something
new to measure and something new to sell. The
US-led human capital movement could lead to interesting
times in HR and finance - even to the emergence
of hybrid roles such as those of human resources
or human capital accountants.
* Human Capital Management
-The CFO's Perspective, is published by CFO Research
in collaboration with Mercer Human Resource Consulting
as a pdf file