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10 Measures of Human Capital Management

February 4, 2001
Related Topics: HR Services and Administration, Workforce Planning, Featured Article
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The Saratoga Institute, now a part of Spherion's Human Capital Consulting Group, has been measuring the value of human capital for 20 years. Among the 250 different metrics used by the institute are revenue factors, profitability, and investment in a company's workforce. Using a number of formulae, researchers at the institute are able to quantify the value of human capital as well as its overall effectiveness, claims Robert Morgan, president of the Human Capital Consulting Group.

    "One of the things we encourage companies to do is to take the top 10 metrics - not necessarily all 250 - and measure themselves. Not every metric is important to a company. Itdepends how labor-intensive they are, if turnover is a problem, if they are in a knowledge industry, things like that."

    Those 10 metrics were developed by Jack Fitz-enz, founder and chairman of the institute. Since there is no set standard of measurement that fits every company, Fitz-enz says, it's important to decide which of these apply to your company's situation. What is important to one firm, he says, might have little value to another.

  1. Your Most Important Issues. These are the targets of all lower-level measures. Whether it be one or a few measures, make certain that you are focused on them and that your metrics lead in a direct line to them.

  2. Human Capital Value Added. How do the people in your organization optimize themselves for the good of the company and for themselves? This is the prime measure of a person's contribution to profitability and shows that you can answer the question: "What are people worth?"

  3. Human Capital ROI. This is the ratio of dollars spent on pay and benefits to an adjusted profit figure.

  4. Separation Cost. It's important to know how many people are leaving and from which areas, but it's more important to know what that costs the organization. The average cost of separation for an employee is at least six months' equivalent of revenue per employee.

  5. Voluntary Separation Rate. Loss of personnel represents potential lost opportunity, lost revenue, and more highly stressed employees who have to fill in the gaps. If you can cut the separation rate, you don't incur the cost of hiring for these positions or lose quality in your customer service.

  6. Total Labor Cost Revenue Percent. This is total benefit and compensation cost as a percent of organizational revenue: the complete cost of human capital. In other words, this shows how much of what you are taking in through revenue goes to support the company's total labor cost (including temporary, seasonal, and contract or contingent workers. Thus, it accounts for all your W-2 and 1099 employees.

    This metric is designed to help you track changes in your workforce. You can do this best by comparing this metric to your revenue factor, your compensation costs, your benefit costs, and your contingent off-payroll Costs. If your Total Labor Cost Revenue Percent is increasing, you need to see if this is because your compensation costs or your benefit costs are increasing or if your revenue is decreasing. This will help you determine what actions to take based on your business objectives. Cutting costs may only help in the short-term if revenue is decreasing.

    Also, by looking at this number in comparison to your contingent off-payroll costs, you can analyze whether or not your contingent workforce is contributing to an increase or decrease in your total labor costs.

  7. Total Compensation Revenue Percent. This is the percent of the organization's revenues that are allocated to the direct costs of the employees. This differs slightly from Total Labor Cost Percent; it does not include the costs for any off-payroll employees who receive a 1099. It only accounts for any on-payroll employees. Again, it is best to compare this measure to your Revenue Factor, your compensation costs, and your benefit costs to analyze what is happening with workers before creating strategies to address any concerns.

  8. Training Investment Factor. Forces are in conflict within the workplace. There is a continuing invasion and distribution of technology aimed at improving individual productivity and a growing demand for better service. Yet many workers cannot read, write, do simple calculations or talk intelligently with customers. The organization must invest in bringing up basic skills.

  9. Time to Start. With the ongoing shortage of talent, recruitment will be a major challenge. Monitoring the time from approval of a requisition until someone is on the job is a strategic indicator of revenue production.

  10. Revenue Factor. This is the basic measure understood by managers.

Workforce, February 2001, Vol80, No 2, p. 35  Subscribe Now!

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