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MANAGEMENT INSTITUTE

Presents:

HUMAN CAPITAL

Predicting Financial Performance with Human Capital Metrics


July 29, 2013

Human Capital Management Institute

About Human Capital Management Institute


The Human Capital Management Institute (HCMI) was founded on the belief that organizations can and must, find better ways of measuring their investments in human capital. Our vision of the future is one in which human capital measurement and information is as integral to business decision making as financial information is today.

We Bring Financial Discipline, Standards and Rigor to the HR Function

HCMI Background:
Specialized in HR analysis & measurement
Deep expertise in Workforce Analytics & Planning Board made up of CFOs and HR heads

What We Do:
Measure the immeasurable in human capital Transform workforce data into business intelligence Provide technology, consulting and training so HR can partner with Finance

SOLVE Workforce Intelligence Software w Strategic Consulting w Training Best Practices w Workforce Analytics and Planning w Benchmarking
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HCMI Products and Services


SOLVE Workforce Intelligence Software Integrated Dashboard, Advanced Tools, Metrics, Data Blueprint and Predictive Modeling Automated Completion of HCFS Human Capital Financial Statements Human Capital Impact Statement Human Capital Asset Statement Human Capital Flow Statement Workforce Quantifier ROI Calculator ROI of Workforce Decisions Cost of Turnover, Workforce Cost , Cost per Hire Business Case for HR Interventions Job Framework Mapping Integrated Taxonomy 15,000+ jobs Map Critical Job Roles Workforce Planning Link Workforce and Financial Metrics Advanced Retirement Calculator Forecast Skills, Costs, Talent and Productivity Career Path Quantifier ROI of Career Path Build, Buy or Lease Talent Analysis
Advanced Analytic Studies COE Launches Training Courses

Data Driven Decision Making!


Bus. Units Reject Analysis

Integrated HR Databases HR Data Warehouse


Drill-down, standard reports Scenario Analysis

1 st Analytics Study
historical data scrubbed

HR Analysis Validated

Bus. Units Demand more

HR Data Cleansed

Turnover, Headcount, Hiring

First Good Metrics

External Benchmarking
Context for decisions

Initial Reports & Analysis

Data Errors Lost HR Credibility

HR Standards Established
HR data/systems Assessed

Data Errors
Historical data still bad
Analytics journey steps Setbacks along the way Journey path and goal

HRIS system data

Data Gathering

HR Analytics Mandate

COE Formation

HR Roadmap Design Step by Step Actionable Deliverables and Insights Map for, Systems, Data, Tools, Skills, Metrics + more Data Integration Blueprint Modular Talent Management Components Detailed Data Dictionary + Metric Formulas Key Analysis Segments and Dimensions Workforce Capability Assessment Data and Systems Capability + Risk Analysis Human Capital Measurement Standards Human Capital Metrics Handbook Over 600 Metrics and Detailed Definitions More than 100 KPI and Best in Class Metrics Unique Metrics that Monetize Human Capital Training and Advisory Support Expert Guided Standard and Customized Ongoing Advisory Support Services Beginning and Advanced Training Statistical Sales Predictor Predict Revenue by Economic/Workforce Factor Link to economic drivers to workforce metrics Analytic Engagement Projects High Performer Profiles Engagement ROI and Sales Impact Turnover and Retention Driver Analysis

Span of Control Optimizer Tool Benchmark and Optimize Spans Optimize Management Layers

Low Turnover Impact


Driver #3 Driver #2 Driver #1

Some Turnover Impact

High Turnover Impact

Commute Distance Dissatisfaction With Compensation Hired Through Employee Referral Job Title or Position Work Location High vs. Low Turnover Manager Number of Jobs in Last 3 Years

.02 .11 .19 .27 .33 .50 .70

Correlation Coefficient ( 0-1)

Factors Leading to Increased Turnover

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Measuring Human Capital

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Value Creation in Todays Marketplace


Are we focused on managing the right things or just managing what we know how to manage?
Tangible asset management tools are established and form the basis of modern Finance as a Decision Support Science. (DCF, FCF, IRR, WACC, etc)

Tangible Asset/Value

Standard and Poors S&P 500 Company Index

Well Measured

Easy to Measure

In the Post Industrial Marketplace


Market value Is driven primarily by factors that do not show up on a balance sheet. The largest being Intellectual or Human Capital*.
Hard to Measure

Intangible Capital Value

<30% of value of Standard & Poors 500 index can be explained by tangible/intangible book assets.

Not well Measured

Source: Ocean Tomo Research, Inc., 2011

Human Capital = employee knowledge, training, productivity, experience, culture, leadership, development, performance, creativity, etc.

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The Challenge of Measuring Human Capital


Complexity of Workforce Data
Employee/Full-Time-Equivalent (FTE) Jobs/Roles/Skills Time - Tenure Compensation ($ vs. Equity) Advanced Analytic Insights Workforce Planning Success

Lack of Standards
Span

Compensation
Transfers New Hire Turnover Training Recruiting

Frequency of Change
Promotions, Transfers, Hires, Terminations

Benefits of Control Turnover Succession Data

Jobs/Roles/Skills
Employee Data Human Capital Management Institute

Time - Tenure

Lack of Analytic Skills


Measuring the Intangible

Workforce Planning vs. Workforce Analytics


Workforce Planning
Workforce Planning and Analytics Linkage
Strong Workforce Analytics insights enable future Workforce Planning success. Workforce Optimization Future Scenarios Key Performance Indicators

Future

Present
Workforce Knowledge

Predictive Analytics Trend Analysis Workforce Planning Planning and Analytics Workforce Analytics

Past

Workforce Analytics
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Human Capital Financial Statements (HCF$)


Deliver HR Value with Human Capital Financial Statements:

Greater Transparency into an organizations greatest asset: the


workforce

A Method to Value Knowledge Capital: measure knowledge capital,


the 80% of market capitalization not captured by traditional financial statements

Improved Investment Decisions: better information = more


informed investment decisions

Standards in Human Capital Measurement and Reporting: enable advanced benchmarking capabilities for industry, geographic,
specific job roles and more

Definitive Methodology for Quantifying Workforce Productivity: quantifies productivity and talent management impact
across the talent management lifecycle

True Linkage of Human Capital to Financial Results

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Analysis Overview

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Background
Analysis Period: 1996 - 2011
Industries:
1. Accommodation & Food Services 2. Admin Support & Waste Management Services 3. Arts & Entertainment 4. Finance & Insurance 5. Health Care 6. Manufacturing 7. Mining 8. Professional, Scientific & Technical Services 9. Real Estate, Rental & Leasing 10. Transportation & Warehousing 11. Utilities 12. Wholesale Trade

Sectors: 12 Primary Industries

Sample Size: 22,100 Companies

Focus: Year-over-year changes in human capital metrics and business performance. Primary Hypothesis: Financially successful businesses (those that have rising share prices which are higher than competitors) have flexible and adaptable human capital programs.
Primary Human Capital Metrics Analyzed: - Human Capital ROI Ratio - Profit per FTE - Return on Human Capital Investment - Total Cost of Workforce - Total Cost of Workforce Percent of Revenue - Revenue per FTE
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- Total Cost of Workforce Percent of Expenses

Do Human Capital Metrics Predict Stock Price?


YES! Select human capital metrics predict stock price change for companies across 12 industry sectors !
A 10% gain in human capital metrics drives stock price gains of 3% to 19% Total Cost of Workforce (TCOW) is superior to headcount metrics (i.e., FTE) New metrics reveal surprise productivity winners and losers

HC Metrics Correlation Future Stock Price Changes (R-Squared) R-Squared predicts to future stock price changes (possible values between 0 - 1)
70.0% 60.0% 63.9% 59.4% 59.1% 57.0% 53.0% 52.6% 52.0%

R-Squared Value by Industry Sector


49.6%

R-Squared

50.0%
40.0% 30.0% 20.0%

47.2%

45.2% 35.6% 35.2%

10.0%
0.0%

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Analysis Highlights

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Traditional Financial Performance

Highlights:
Finance & Insurance, Wholesale Trade, Transportation and Utilities improved Accommodation & Food Services, Arts & Entertainment and Healthcare lag Surprise - Transportation
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Is the Productivity Real?


While revenue and profit per FTE are commonly used metrics, they are by no means the best predictors of financial success. This is because they only show changes in revenue and profit relative to headcount rather than showing cost changes in the workforce overall.

Historically the assumption has been made that measuring headcount is a good proxy for measuring cost of workforce, however as our analysis and the below example illustrates, this is a fallacy.

The Case for TCOW:


For example, an organization with 100,000 employees at the end of 2010 and 100,000 employees at the end of 2011 would appear to have effectively controlled workforce cost by managing total workforce headcount. However, due to increases in benefits, wages, and changes in the workforce such as bonuses, promotions and mix of jobs hired, organizations with flat headcount growth can easily (and often do) experience 10% or greater increases in Total Cost of Workforce (TCOW).

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A New Relationship: Better Productivity Metrics


Highlights
SURPRISE Finance & Insurance, is going the wrong way! By these measures, Mining is a Big Winner Most sectors are clustered

Contrary to the previous revenue and profit per FTE metrics, not all sectors improved during the analysis period. Finance and Insurance and Arts & Entertainment both declined from 1996 to 2011.
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Mining 2012 Update


Dollars (Thousands) 350,000 300,000 250,000 200,000 150,000 100,000 50,000 0 Ratio 6.00 Year Median Revenue per FTE Median of Profit per FTE 5.00 4.00 3.00 2.00

Mining - Traditional Financial Metrics

Revenue per FTE increased 22% from 2011 to 2012, almost no change in Profit per FTE

Mining - Workforce Productivity Metrics

However, Human Capital ROI Ratio and Return on Human Capital Investment decreased 45% and 20% respectively from 2011 to 2012

1.00 -

Year Median Human Capital ROI Median Return on Human Capital Invest.

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Stock Price and HC ROI Ratio CAGR

Highlights
Rate of Change: CAGR vs. Actuals Macro Economic Variables Must be Considered Insight: Relative Company Performance
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Financial Services Case Study

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Financial Services & Insurance Breakdown


Revenue and Profit per FTE
2011 Performance

Highlights
Commercial & Savings Banks are middle of the pack Sales Financing (i.e. GE Capital), + Investment Banking look like stars Who is falling behind?

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Financial Services & Insurance Breakdown


Human Capital ROI Ratio, Return on Human Capital Investment
Highlights
Sales Financing is a top performer (i.e. GE Capital)
Investment Banking is a Surprise from 1996 - 2011
21.8% Revenue per FTE Gain
(-29.2%) Human Capital ROI Ratio Loss (-19.0%) Return on Human Capital Investment Loss

2011 Performance

Case Study: Productivity Metrics Comparison


Bank of America, Wells Fargo and HSBC
2012 Financial KPIs
No Clear Winner 2010 - 2012 KPI Change Rate

Wells and HSBC Outperform BofA

2010 2012 Productivity

Wells Looks Like the Star

Note: in USD $$

Data for 2010, 2011 and 2012 Years

KPI = Key Performance Indicator

TCOW= Total Cost of Workforce

FTE = Full Time Equivalent

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Summary

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Superior Metrics to Manage Human Capital


Market Share Example: Average Stock Price = $60/Share Shares Outstanding = 35 Million 5% increase in HC ROI Ratio and Return on HC Investment 5% Decrease in TCOW Percent of Revenue Projected Value Creation (Market Cap) = $116.6 Million
Includes Accommodation & Food Services, Transportation & Warehousing and Transportation, Support & Waste Mgmt Services

Overall, high-performing sectors seem to enjoy one or more of the following factors: 1) Lower human capital intensity 2) Greater potential and to increase revenue and profits without equivalent increases in human capital costs. 3) Increased demand and/or pricing for commodities (see Mining and Utilities) due to global demand, industry deregulation, or other factors. 4) Substantial automation of one or more core human capital labor elements.
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Key Human Capital Metric Formulas

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Human Capital ROI Ratio

HC ROI Ratio =

(Revenue (Total Expenses - Total Cost of Workforce)) / Total Cost of Workforce

Description: Net operating profit impact of each dollar invested in human capital.
Note: It is recommended that the metric "Total Cost of Workforce", which includes the total costs of employees plus all contingent headcount (contract and temporary workers), is used in calculating Human Capital ROI Ratio. If Total Cost of Workforce detailed information is not available, this metric may also be calculated using the total costs of employees as an alternative.

Best Use:
Organizations tracking Human Capital ROI Ratio can effectively measure the linkage of overall trends in market value over time (for publicly traded or other organizations for whom a relative market value is obtainable). Ideally, this metric should be used for long term strategic predictions rather than short term measurement as market value can fluctuate dramatically due to uncontrollable events as well as industry and market changes.
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Return on Human Capital Investment

Return on HCI

Total Operating Profit / Total Cost of Workforce

Description: Return on Investment (Profit) expressed as a percentage of the total dollar amount invested in human Capital. Best Use:
Organizations tracking Return on Human Capital Investment can effectively measure the linkage of overall trends in market value over time (for publicly traded or other organizations for whom a relative market value is obtainable). Ideally, this metric should be used for long term strategic predictions rather than short term measurement as market value can fluctuate dramatically due to uncontrollable events as well as industry and market changes.

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Total Cost of Workforce (TCOW)

Total Compensation Costs + Total Cost of Workforce = Benefits Costs + Other Workforce Costs

Should include:

Employee compensation (salaries/wages, incentives, overtime, + equity & other pay)


Contingent temporary/contract labor (costs) Employee benefits and perks (costs) HR function (costs, e.g., recruiting, training & support)

Retiree or inactive workforce costs (costs)


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Next Steps

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SOLVE: Analytics in 3 Easy Steps


1. Load data 2. Run Scenarios for ROI and Intelligence 3. Save and Present Results WORKFORCE INTELLIGENCE SOFTWARE

SOLVE

Workforce Planning

Analytics w ROI

HR Transactions

Dashboards Metrics

Standards

Data Integration Blueprint

Human Capital Financial Statements

Source Systems

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What you Get with SOLVE


CEO/COO
Workforce Productivity ROI of the Workforce

CFO
Human Capital Financial Statements Tools to Control Workforce Cost

CIO
Automatic HR Data Warehouse Data Integration Blueprint

CHRO
Integrated Talent Mgmt Scorecard HR Power Tools (i.e. ROI Calculator)

HR Function Leads
HR Talent Management Dashboards
Workforce and HR KPI Metrics
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SOLVE Overview
Step 1) Dashboards Step 3) Human Capital Financial Statements Step 7) Drill to Detail
Step 1) Analyze workforce trends and identify opportunities. Step 2) Manage scenarios, set projections leveraged across all tools. Step3) Model Detailed TCOW, RCOW, Productivity and Human Capital ROI.

Step 2) Scenario Manager and SOLVE Wizard

Step 8) Advanced Index Metrics

Step 4) Calculate cost savings and ROI. Validate scenario feasibility. Project Revenue, Profit, TCOW and Total Comp. Step 5) Forecast and plan multiple scenarios, drill into position groups and locations. Identify pain points. Model HC, skills, cost productivity and talent. Step 6) Calculate ROI of Career Paths. Step 7) Drill to detail for specific locations, job groups and business units. Step 8) Configure custom index metrics to answer tough talent management questions. Step 9) Model relocation analysis to optimize workforce costs at the Location, location and position level. Includes external supply analysis and benchmarks.

Step 6) Career Path Step 4) Workforce ROI

Step 5) Workforce Planning

Step 9) Location Optimization

(In Development)

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Question and Answer

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Contact Information:
Human Capital Management Institute
Joseph Morrissey, VP Sales joseph.morrissey@hcminst.com Grant Cooperstein, VP Analytics grant.cooperstein@hcminst.com
For more information about the following products and services, please visit the links below:

SOLVE

Workforce Productivity Reports

Human Capital Financial Statements Thought Leadership

Training

Human Capital Metrics Handbook

Workforce Intelligence Consortium Group

@HCMI
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Human Capital Management Institute