2005 - Trends in human capital management
Over-exuberant recruiting in
the late 1990s and poor workforce discipline created
one of the worst recessions in the international
employment industry, according to a report published
Key Trends in Human Capital:
A Global Perspective, published by Saratoga, the
human capital arm of PwC, is one of the most extensive
studies of its kind, based on data collected from
10,000 employers across Europe and the US between
2001 and the first quarter of 2004.
It offers revealing insights
into the effectiveness of international employment
strategies over the past three years, but also
gives valuable indications of the measures that
companies can take to evaluate the bottom line
contribution of their workforces.
The study's broad findings were
that during the economically buoyant years of
the late 1990s companies lost control of their
employment costs "recruiting wildly and losing
essential workforce disciplines".
Workforce reductions and tight
financial management, however, allowed companies
to avoid a deep recession in most of their markets.
The result, it says, is that
in 2002 and 2003, both the US and Europe experienced
a resurgence in sales and profitability across
Sales per employee have increased
18 per cent in the US and 11.3 per cent in Europe
since 2001, says the report. Profits per employee
have increased even more during the same period.
"It would seem that in times
of economic transition, the US is able to move
faster and more flexibly than Europe, both when
responding to adverse economic conditions and
subsequently implementing innovative propositions
for growth," says Saratoga.
Prior to 2002, however, companies
were experiencing much lower returns from their
employee investment according to a Saratoga measure
its calls human capital return on investment.
This looks at pre-tax profit
generated by each dollar or euro invested in pay
and benefits. In the US, the human capital ROI
fell from $1.65 in 2000 to $1.31 in 2001. During
the same period in Europe a return of Euros 1.15
in 2000 fell to Euros 1.12 in 2001.
The ability to compare cost ratios,
says Saratoga, is influencing the vast majority
of decisions to move services offshore.
The number of companies taking
work offshore trebled in 2002, according to the
study. It found that cost reduction was the main
objective in four out of five decisions.
The Saratoga data, collected
from a number of human resources areas, have produced
some surprising results.
In 2003, for example, it estimated
that in Europe some Euros 1.5bn were invested
in leadership training. However, its research
has produced little evidence so far to demonstrate
that these investments have produced any significant
Another surprise, given the strengthening
commitment that companies claim to be making in
diversity programmes, is that the proportion of
women in managerial posts across European companies
covered by the study, fell back between 2001 and
2003 by 1.9 percentage points to 24.6 per cent.
The proportion of women in professional
posts during the same period fell even more markedly
from 33.6 to 29.3 per cent.
In the same period the proportion
of women in the total headcount remained stable
at about 39 per cent.
Saratoga says that women managers
appear to be most strongly represented in functional
and back office specialisms that were among the
hardest hit during restructuring programmes.
Saratoga has developed metrics
allowing companies to measure their ability to
recruit and retain promising employees.
It suggests that companies seeking
to place themselves among the top quartile of
businesses operating talent management programmes,
should be seeking an acceptance rate of jobs offered
to graduates of more than 97 per cent with a resignation
rate of less than 3 per cent.
Workforces, it suggests should
be looking to have a graduate representation of
more than one per cent.
Most companies that pay serious
attention to fostering management talent, says
Saratoga, tend to invest equally heavily in training.
Companies in the top quartile of training investment
provided an average of 34.4 hours of formal training
per employee a year at a total cost of Euros 2,048.
Across all companies in Europe, however, training
levels have been reduced since 2001.
Another popular concern of HR
departments, the commitment of employees to the
work they do, more commonly described as "engagement"
these days is tracked in a cluster of measures
looking, for example, at the rate of resignations,
submission of grievances, absence rate, the rate
of staff suggestions, pay and performance pay.
A company that is highly rated
for engagement, will have comparatively low staff
turnover, absences and base pay, but higher proportions
of performance-related pay, training and staff
Many large companies nowadays
also look at their HR ratios the proportion of
HR staff to full time staff. In the US since 2002,
the mean ratio is 85 employees to every HR manager.
In Europe the ratio was 90 to one in 2003.
The combinations and permutations
of measures available to gauge the strength, cost
and output of workforces make a mockery of suggestions
I have heard, even among many senior HR people,
that human capital measurement is vague and confused.
It is true that there has yet
to be an adoption of standard measures. But the
150 measures used by Saratoga could easily be
adopted as standards.
"We would give these away,"
says Richard Phelps, partner Saratoga. "There
is no reason why you can't use these or other
measures to adopt a global standard.
"The most important point
is that we have a set of measures that can be
used consistently, so that shareholders can compare
performance figures between companies on a like-for-like
The UK government has introduced
measurement in education, so that parents can
compare schools on the basis of how children perform
in exams and on teacher-to-pupil ratios, for example.
In the same way, the health service
publishes statistics on waiting times for operations.
The system isn't perfect and
we all know that management attention tends to
be concentrated on the things that get measured.
After all, measurement is just
a tool, providing chunks of information, not the
whole picture. But we wouldn't buy a car without
knowing its fuel consumption, its acceleration,
or how big the boot is.
Yet there are companies out there
that know little more about the investment in
their staff than the annual wage bill. That simply
doesn't make sense.
The report, Key Trends in
Human Capital: A Global Perspective, can be obtained
from [email protected]
as a pdf file