Human Capital: One of the most important investments you can make.
Successful companies measure everything: from the effectiveness of a marketing campaign to sales quotas to the productivity rate of a new manufacturing operation. But most companies rarely measure the people side of the equation: human capital investments.
“A business’s wealth and competitive advantages are not only based upon the hard assets it owns, such as buildings, land and inventory, but also by the knowledge employees bring to a company,” says Michael Manser, Vice President of Human Capital Solutions for Talent Tree of Houston. “Companies that understand how to measure human capital are the ones that have become the most successful companies today and will hold that success in the future.”
Smart Business magazine spoke with Manser about the importance of measuring human capital, and some simple formulas to get you started on measuring the “people power” of your own business.
First, what exactly is considered “human capital” and why has it become so important?
Human capital is the collective set of skills, dexterity, intelligence and psychological makeup and judgment of your staff.
What we have seen in the past 10 years is an increasing importance in human capital in relation to the revenue of a company. For example, when a company changes its CEO, you will see the stock either go up or down. If the CEO makes a difference in future performance, why not the vice president of sales, a CFO, or a key scientist? These employees all have value and an impact on the bottom line. It has become so important that stock analysts are now looking very closely at the movement of employees.
How can business owners measure human capital?
Employees are often not part of the financial table of the company. But there is a simple way business owners can get some basic information about the value of their human capital.
Employees can be measured in terms of productivity and efficiency:
Productivity equals revenue per employee. For example, if you have 100 employees and your annual revenue is $100 million, the average productivity per employee is $1 million.
Efficiency is the net income of a company divided by the employee base.
For example, if your $100 million revenue business makes $10 million in net income, your 100 employees drive $1,000 net income per employee.
What can a business owner do with this information?
The interesting part is when you compare these numbers from your own business to that of your competitors. The numbers show if your employees’ performance (human capital) is positioning your company to be a leader in market share or return on investment.
Here’s a real example of three publicly traded firms (with names of companies removed):
| |
Annual
Revenue
(millions) |
Annual
Net Income
(millions) |
Employees |
Margin
% |
Net
Income
% |
Productivity
Rev/employee |
Efficiency
Net Income/
employee |
Prior Yr Rev
Growth |
Observations |
| Company A |
$ 14,448 |
$ 708 |
65,078 |
27.4% |
3.7% |
$ 222,017 |
$ 10,885 |
9.6% |
Lowest productivity,
but highest efficiency |
| Company B |
$ 13,270 |
$ 173 |
41,000 |
19.3% |
1.3% |
$ 323,663 |
$ 4,220 |
60.9% |
High Productivity
Low efficiency situation |
| Company C |
$ 13,565 |
$ 336 |
47,000 |
31.4% |
2.5% |
$ 288,611 |
$ 7,138 |
9.8% |
Highest margin, middle of the pack on performance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| * Company A confirmed the statistics fit with their desired market strategy of being the profit leader in the space. But they are going to expand their presence in the coming years and will leverage their existing employee base to be even more productive |
Company A uses this competitive information to confirm they are achieving their desired market strategy of being the profit leader in the space. They are going to also use these benchmarks for value pricing strategies and productivity goals as they expand their presence in the coming years.
Is this the HR department’s role – rather than financial department – to analyze these statistics
Yes, HR departments should step up, present this information, and take a more strategic role in driving a company’s growth. The CFO will not traditionally show human capital performance metrics as a formula in the financial statement. HR can drive strategy by sharing benchmark data with executive teams and utilizing these financial measures to drive performance standards, and determine staff size relative to market goals.
The beauty of knowing this information is not only knowing how your business stacks up next to your competition, but also learning how your business is doing over time. Are you becoming more productive? Are you becoming more efficient? Is this in line with your company’s long-term and short-term initiatives? In today’s sophisticated and competitive landscape, we need to ensure we are strategically maximizing every capital investment. These basic human capital measures serve as a bridge between HR and Finance, giving CEOs a comprehensive perspective on performance and how it impacts their strategies.
Michael Manser
Vice President of Human Capital Solutions
Talent Tree
Interviewed by Marcia Passos Duffy