January 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 today.

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 most sectors.

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 return.

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 suggestions.

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 basis."

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 kirsten.palmer-jeffery@uk.pwc.com

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