Archive for May 10th, 2012

I have learned a few basic truths about CFOs. They like efficiency and accountability, dislike making snap decisions, and are always looking for a better forecasting model. They also appear to prefer cars with good gas mileage.

For some of these same reasons, they generally mistrust the metrics offered by Human Resources about the state of the organization’s human assets. This may soon change, based on the first draft of a comprehensive Human Capital Financial Statement that was recently printed in CFO magazine.

While the ink is still wet on the draft, the impact is starting to ripple through both the HR and Financial camps. You can read the draft here – http://tinyurl.com/6vs9jx9. If you click on the link, pay careful attention to the small link to the spreadsheet model on page 2. If you miss it, you can jump to it here – http://tinyurl.com/6sv9msa. Examining the data categories on the spreadsheet will give you a fast snapshot of the work that has been done.

This is big. Finance has long been frustrated by “soft” HR metrics, with little thought going in to the alignment of what is measured to the core mission of the organization. Worse yet, key decisions may be driven by bad data, with bad results. The wrong type of people keep getting hired, or wellness programs are launched that do not change behaviors in a meaningful way. By agreeing to a more “forward looking” set of metrics that are measuring reliable predictors, better feedback loops can support better decisions.

Simply put, having a functional Human Capital Financial Statement can become a significant competitive advantage. I understand that financial statements by nature are backward-looking, and this work is trying to offer data that anticipates (and plans for) risks. While this is not a finished work, I am pleased that the conversation is finally beginning about what “dials” should be on the “dashboard”.

Let me give a couple of examples that might help clarify the importance of getting the numbers right. Many traditional metrics for HR are well accepted, but may not be that useful. For example, it is often thought that measuring the rate of employee turnover is a high quality metric, as it is easy to calculate and common sense says that lower turnover is better. Not so fast.

Most organizations do not track the data needed to show the turnover of high performers vs. low performers. You WANT a high turnover rate on the low performers, right? This means you must align the performance management system with the turnover data. More advanced organizations are starting to link low turnover rates of high performers to higher bonuses of individual managers and supervisors. Behavior rewarded is behavior repeated.

Taking the example further, in the Human Capital Financial Statement, there is a “High Performing Employee Differential” that enumerates the impact high performers have on an organization. If the performance management system is measuring the number and quality of high performance employees, then the metric can reliably appear on the dashboard. Is the wellness program paying off by helping motivate high performance? Clearly, the accuracy of the metric comes down to the quality of the data. It’s all connected.

I have often been puzzled by the willingness of HR departments to stick with meaningless metrics for decades. Measuring the speed of hiring, rather than the quality of the new hires. Measuring the turnover rate, not the quality of what is leaving. Measuring the head count, not the productivity. Measuring participation, not behavior change. And so on.

The Human Capital Asset Statement allows organizations the ability to look at human capital as a value producing factor; not just a cost. Trending the value contribution of the workforce during 2009, a difficult year, would have given great insight into the jobs and facilities that were adding value. You may know about the importance of critical high visibility roles, but be blind to the impact of hidden factors that impact client retention and profitability. In a good Human Capital Financial Statement, these should be measured and brought to light.

This is exactly where we are starting to head in this brave, new world of better metrics. My final point is the significant impact this will eventually have on equity markets and investments. Organizations frequently state that employees are their most valuable asset, yet publicly traded organizations provide little information on this “most valuable asset” to investors or the public. The Securities and Exchange Commission requires extensive disclosure regarding all major assets including financial, physical, and technological/intellectual property. However, they do not require disclosure of what is, for most organizations, their largest annual operating expense. Human capital and talent management are differentiators of success and sources of competitive advantage.

In a future world, human capital will finally be reported as a part of public financial statements. This will be big.

I work in HR, and we HR Professionals have known that talent management and wellness is important for quite some time. We have worked hard to get our recruiting, learning, total compensation, performance management, engagement, and other practices in order over the past decade.

With Human Capital Financial Statements, I hope we finally see a payoff.


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