One of the most common questions we’re asked when working with a company for the first time is “what human capital metrics are most important?” Or in another guise: “what should be our human capital KPIs?” It would be very tempting to provide a simple direct answer to that question. Tempting, but wrong, although many consultants and vendors attempt to pitch their clients that they have the single all-important human capital metric.
Try a thought experiment with me. What’s the most important financial metric? If you are like most people, the first thing that comes to mind is profit. And obviously, that’s critical to the success of any private-sector organization. But ask any financial analyst and they’ll quickly tell you that profit alone is not enough to assess the value of the company, and can in fact be very misleading. Financial analysts incorporate dozens of variables, at a minimum, in their valuation models. Revenue growth, market share, cost of goods sold, cash flow, EBITDA, ROA, ROE, ROIC, EVA and a veritable alphabet soup of other acronyms all play a role in helping to evaluate the true financial health of an organization. And if the world of finance, where everything can be reduced to a number, still has that kind of complexity, why should human capital be any different?
The truth is there is no universally most important human capital metric. The cumulative talent that an organization possesses can drive operational and financial outcomes in a myriad of ways. It is only through a careful understanding of each organization’s unique business environment, including their strategy, cost structure, business model, competitive dynamics, and labor markets, that the most critical human capital metrics for that organization can be assessed.
At Infohrm we have more than 25 years of experience helping organizations along this journey. We’ve learned, through our work and more importantly through the guidance and expertise of the clients we are privileged to serve, that every organization is unique. Retail organizations tend to focus disproportionately on the service value chain; financial services on identifying, attracting, and retaining the highest of high performers; utilities on knowledge management and retaining the core skills of hard-to-replace technical talent; software and media companies on instilling a culture of innovation.
And even within these industries there are often meaningful differences. A utility operating in a highly deregulated market will face very different market dynamics than one coping with more stringent regulation. A financial services company focused on bringing wealth management to middle class customers will need a different set of employees – and a different set of human capital KPIs – than a top investment bank serving ultra high net worth individuals.
There is no single human capital metric that can serve as the silver bullet for all of these different entities. Instead, at Infohrm we begin working with a new organization by working through the Infohrm 100, a comprehensive set of 100 critical human capital questions. By engaging in a dialogue with leaders and line managers, from across all functions, our consultants use the 100 questions to drive a productive conversation around cost and profit drivers, critical job roles, the relative value of high performance in different functions, and how the skills and competencies needed to run the business are changing over time.
It is only with a careful understanding of these issues that a true set of core human capital metrics relevant to each specific organization can be identified and managed.
Tags: HCM, human capital measurement, KPI, Metrics
David, I entirely agree. Nor would anyone expect to gauge employee satisfaction with a single item, not even with twelve. Anything remotely like one-size-fits-all simply doesn’t work in human capital. You’re right too that there is a veritable alphabet soup of HC metrics available. My question comes rather from that end of the scale – among the many how few metrics do you really need? I note that McBassi’s scorecard which used to contain 80-odd items now has around 50, the missing items having been dropped because they weren’t sufficiently predictive. McBassi is in a different part of the forest to yourselves so I’m not holding them up as a model. But why do you need 100 items (lines of enquiry) to get started? Or maybe you don’t – maybe you introduce them in sequence as needed. As you can see, this is not my field. As a psychologist I focus on behaviour and changing behaviour: a different track into the same human capital forest.
Michael, thank you for the thoughtful reply. The Infohrm 100 are grouped into macro-level buckets of inquiry, and tree out from there. Usually it is obvious from initial discussion which of these macro levels are most important to the business, and so the conversation narrows rather quickly.
You are of course right that no organization can manage or optimize against 100 metrics, or anything close to it. A full discussion of how to select, report, and use an appropriate set of metrics would take us far afield of the purpose of a blog, but at the highest level, our work focuses on helping an organization select a small number of metrics that are business relevant, actionable, and (a highly underrated attribute) consumable by the end user. It is critical that data be provided in the most user-friendly way for the intended recipient, or else it gets lost in the noise of thousands of other items vying for their attention. HR has historically struggled with all three aspects of metrics reporting, and the consumability point is completely missed by most providers of ERP/BI solutions.
David, I just tripped over this link – couldn’t be a better instance of the dangers of the single metric: http://www.newscientist.com/article/mg20427311.200-beyond-gdp-we-need-a-dashboard-for-the-whole-economy.html?full=true
Let’s keep in touch in the new Year