2008 – New evidence supports the need for effective
human capital management
A new report delivers what it says is “the most compelling
evidence to date of the link between effective people management
and business success.”
The report, People and the Bottom Line * has been produced
by the Work Foundation
and the Institute for Employment Studies (IES) for a number
of sponsors. I should confess at the outset that I had some
small input in to the work through a body called the Human
Capital Standards Group that I set up a while back with
Ruth Spellman and Tim Melville Ross when they were respectively
chief executive and chairman of Investors in People.
If you read anything about this group at the time and were
wondering what has happened to it, I can tell you that the
answer is nothing. It may reconvene at some stage when and
if it has something to say. But just recently there has
been very little.
The reason for this is that the group was focused on one
aspect of human capital measurement – the need for
some widely used, generic measures that could give potential
investors in idea of how well a company is performing as
Such measures would have been desirable if the UK Government
had gone ahead with plans to introduce Operating and Financial
Reviews in public companies. But these reviews were scrapped
in 2005 by Gordon Brown when chancellor.
Abandoning the reviews removed the urgency for companies
to agree common measures. There has been no shortage of
employee measuring in the interim but companies continue
to operate metrics in a piecemeal fashion, often for their
The standards group was able to call on some significant
expertise in the HR sector so it was useful for the IES
team to find out where the consensus might lie on measuring.
I’m not sure we achieved full consensus but I recall
that it was felt by some that there needed to be qualitative
as well as quantitative measures when dealing with people.
One way to measure management, for example, would be to
ask people how well they thought they were being managed,
marked against a five-point scale. It could be that simple.
The IES, in the meantime, had assembled a long list of
potential metrics – 40 from its original list and
another 36 supplied through the Human Capital Standards
Group. These were included in a survey of nearly 3,000 employers.
One of the problems with this approach is that employers
could only comment on measures they were already using.
This means that it is difficult to prove the worth of a
potentially very good measure if employers are not using
In fact the IES found very little evidence to link any
single human resources practice to overall business success.
When a number of practices were taken together to create
an index, however, researchers found that they were capable
of making a measurable impact on performance.
Increasing the index score by 10 per cent, according to
the research, would lead to an increase in gross profits
per employee of between roughly £1,000 and £1,500
While this supports the theory that applying bundles of
HR practices is more effective than focusing on specific
practices, it still does not show cause and effect within
“Whilst this research was not intended to demonstrate
causality, it has laid the ground for future work that could
do so by providing a tested set of measures that were both
acceptable to employers and shown to relate to performance,”
says the report.
The report has scaled down its measures to a final list
of 12, ten of which are hard measures, such as the proportion
of employees covered by a succession plan, and two which
look at employee attitudes to the way they are managed.
The list of measures is limited in this respect: it does
not include measures where employers had no supporting data
or where there was hardly any variation in responses, giving
little scope for differentiating employers.
There was little that the researchers could do about this.
It’s important, however, to stress that the exercise
was being carried out where some aspects of workforce development
are exposed to very little in the way of effective performance
measuring. Most companies would agree, for example, that
leadership is vital for their success but very few companies
have any useful measures of leadership. That is not to say
it does not matter.
It would be wrong therefore to present the measures in
the report as some kind of gold standard. They are not.
But there are, nevertheless, some useful measures such as
the proportion of employees who have a personal development
“We’re not saying that this is the holy grail,
but we are saying that we’re very happy with this
research which we think is something that we can endorse,”
says Simon Jones, acting chief executive of Investors in
People, one of the sponsors of the research.
Kirsty Yates, IIP head of research, says that the findings
may be used as a basis to develop some kind of “scorecard”
measure. “We wanted measures that were straightforward
to collect and which could be used to make comparisons over
time,” she says.
In that sense, these measures could well help to form some
kind of generic model but it must be seen as “work
in progress.” It would be unwise for companies to
view a list like this as something definitive or to ignore
many other areas of HR management that were not included,
either because almost every company is doing them or because
too few companies were carrying out such work.
Another danger with any metrics, once they are widely adopted,
is that they begin to attract most management attention.
On the other hand, as Mervyn Davies, chairman of Standard
Chartered Bank pointed out last week, HR managers that are
not feeding data in to the boardroom are going to struggle
to make any kind of an impact in their companies.
The best advice may be to take a look at the report and
draw your own conclusions.
*People and the Bottom Line can be found on the Investors
in People website: www.investorsinpeople.co.uk
See also: Human
Capital Standards Group paper