February 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 an employer.

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 own purposes.

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 it.

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 a year.

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 the metrics.

“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 plan.

“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