Intern’s Dilemma at Systematic Consulting Ltd.

Shantanu Mangal, a Master of Business Administrator, was really happy tha the finally got the
job of HR Analyst in a leading multinational consulting firm, Systematic Consulting Ltd.
Though he had HR analytics as an elective in his MBA, he was not very confident in calculating
accurate HR efficiency and effectiveness ratios. He was hoping to receive rigorous training on
the ratio analyses from the company during his six month probation period. Unfortunately, the
company had training programmes that only deal either with advanced HR Analytics or with
customized HR analytics. One fine day, Mangal’s boss, Sujeet Khanna, invited Mangal to his
cabin and gave him a task to calculate human economic value added (HEVA), human capital
added (HCA) and human capital ROI (HCROI) for their client, AAB International Pvt. Ltd.
Khanna gave the following figures to support the required calculations to Mangal:
He said,
Last year AAB International Pvt Ltd received a total of Rs. 90,000,000 from sales. Cost of
goods sold was Rs 45,000,000, cost of ordinary shares was Rs. 3,750,000, spending on the day-
to-day operations was Rs. 25,000,000 on which 10% tax was applicable, total payroll amounted
to Rs. 14,000,000, and total number of full-time employees in that period was 1,120,000.
Khanna asked Mangal to come back with the required values within 15 minutes. This deadline
of mere 15 minutes was a real pain for Mangal as he had to search for the meaning and formulae
to calculate the ratios. Anyways, he somehow managed to calculate the ratios and reported the
following to the boss:
HEVA= Rs. 1,018
HCVA= Rs 3 billion
HCROI= Rs. 3.2 billion
Do you think Mangals’ figures are correct? If you had been in Khanna’s seat, what would have
been your reaction?
Hint:
Human Economic Value Added (HEVA)- It is originated from the concept of economic value
added (EVA). This shows how much the workforce generate the leverage for the earning power
of company or the extent to which the human resource is able to add economic value to the
organization for each employee.
EVA is a measure of financial performance which considers true economic profit. It shows
how much true profit is available after paying off all expenses, taxes and also the cost of capital.
HEVA is the extended concept of EVA with human capital perspective. HEVA is EVA divided
by average headcount.

HEVA= (NOTPAT-Cost of Equity) ÷ Average Headcount

Where
NOTPAT= Net operating profit after taxes

HEVA = (Net Operating profit after taxes – Cost of capital) / FTEs

Human Capital Value Added (HCVA)- This tells about whether the organization is able to
generate profits after the salaries and benefits are adjusted to the revenue for each employees.
Price Water Coopers, Saratoga Institute (PWC) has suggested a measure for computation of
HCVA to show the contribution of employees to profitability.

HCVA= [Sales-(Total Costs-Employee Costs)] / Average Headcount

Total Costs = Revenue - Profit Before Taxes
Employment Costs = Pay + Benefits
Total cost can be calculated by deducting Profit before Tax (PBT) from sales.
Then,

HCVA= [Sales-{(Sales-PBT)-Employee Cost}] / Average Headcount

HCVA = Revenue — (Total Costs — Employment Cost) / FTE
FTE= Full time employee

Human capital ROI (HCROI) is a strategic HR metric that reflects the financial value added
by the workforce as a result of the money spent on employees (in terms of recruiting, employee
compensation, talent management, training, etc.). It shows the value that employees contribute
individually or collectively.
Suppose you roll out a health and wellness initiative in the workplace, costing approximately
$250,000. Those are your human capital expenses. The savings (reduction in stress,
absenteeism, burnout, etc.) you made from this initiative amounts to $700,000. Therefore:
HCROI = $700,000 – $250,000/$250,000

= 2 (represented as a ratio 2:1)

This means that for every $1 you spent on the wellness program, there was a benefit of $2.

HCROI ={[Revenue-(Operating cost- labour cost)]/labour cost}- 1

HCROI = (Revenue - (Expenses – Pay and Benefits)) / Pay and Benefits

Human Capital RIO is the Revenue minus non-human capital expenses divided by Human
Capital Expenses.
Where:

Non-Human Capital Expenses = Operating Expenses – Human Capital Expenses

Human Capital Expenses = Fixed compensation(salaries) + Variable compensation +

Benefits + Indirect cost

Revenue = The adjusted revenue after deducting the cost of capital, depreciation, etc