Let’s face it: HCM (human capital management) is an exciting topic. However, have any of us seen widely publicised examples where HCM has been successfully implemented? Probably not, as most so called HCM success stories are point solutions, which do not address the human capital management processes from end to end.
Every action taken in an organization has some influence on the financial health of the organisation. Activities such as manufacture and sale of products can be very easily and directly measured in terms of impact on the bottom line. However, when it comes to HR interventions or services, the link between the HR intervention and its impact on the bottom line becomes less obvious. In order for HCM to be a profit driver for the organization these links and dynamics must be understood first. HR must be very clear as to which levers and which combination of levers will achieve what financially measurable result.
In order to make HCM a profit driver for the business there are a number of key basic things that HR need to put in place and get right before HCM can be used to drive profit.
Joined up thinking is required!
The human capital of the organisation represents a significant, if not the most significant, part of the intangibles base. However, unlike the management of other intangibles, HC, however it is defined, is seldom managed to a single clear agenda. Employee related activities are often done in isolation from each other, and not with the concern of maximising HC or the value it drives for the organisation. Take for example the network solutions provider or global insurance company both of whom discovered, after the event, that they had reduced numbers in one area of the organisation only to find out a matter of weeks later that they were in need of similar resource elsewhere in the business. Had the principle of maximising the overall HC of the organization been considered this would not likely have occurred.
Budgets and employee related activities can no longer be territorial but need to be managed based on business goals
It sounds rather obvious: ensure that any HCM actions are aligned and fully support business strategy; however, this direct link is sadly absent or very tenuous in many companies. For example, if an organisation is looking to grow, the obvious link to HR actions is to increase recruitment, however often other factors such as retention and staff motivation to retain customers or increase the customer base may have not been addressed in the human capital management plan.
A key point to note in this context is that HR should facilitate the management of HC but ownership of HC must lie with the business. As a service function, measured largely on customer satisfaction, HR often face a conflict of interest in delivering holistic HC management strategy. HR’s customers, employees and line managers, make demands of HR which do not support the HC objectives and the business strategy. For example, in a major utility line managers kept requesting training in HTML & JAVA development, when this was an outsourced capability. HR spent in excess of £0.5 million satisfying these requests despite these being misaligned with the HC and business objectives. HR should have never authorised and organised training for outsourced skills.
Holistic management of HC means that human capital related budgets must also be guided by a strategy of maximizing the human capital of the organisation. Current budget silos that often exist in Human Resources, such as the split between L&D, general HR budget and/or departmental budgets for pay rises and employee incentives, are often in competition. These processes are not adapted to make choices between building or buying capital. These budget silos need to be broken down and handled in a more fluid manner.
Although most HR managers support and welcome holistic and more fluid management of HR budgets, they often lack the right tools to support capture and analysis of factual data to support their decision making. More often than not HR has not been able to get the right IT systems including analytics packages for their needs as business and other needs were satisfied first. However, in order to implement and successfully operate HCM, suitable HR systems including state of the art analytics and reporting are vital.
HCM activities need to be applied to the end to end processes and not hot spots or pinch points
Often HCM type actions are taken based on specific points in HR processes for a variety of reasons for example ease of implementation, proper Management Information is available, that process is broken and needs fixing. However, as discussed above, the lack of joined up thinking, can deliver suboptimal, and in some cases negative, results as costs outweigh financial and other benefits.
Therefore it is critical to apply HCM concepts to the whole HR value chain and tie HR activities and levers to operational value drivers to create the direct link to financial value drivers of the organization. HR activities need to be quantified in terms of cost to undertake these and impact on the relevant business processes and thus financial drivers.
Using this value chain approach will enable HR and the board to make informed decision on the value on key HR activities to the bottom line.
Introduce HCM measures to the organisation’s scorecard
Appropriate measures and KPIs need to be put in place to monitor success of HC management activities and interventions and their contribution to the profitability of the organisation on a period basis.
In essence the measurement of the effectiveness of a human capital management strategy is the organisations ability to maximise the HC of the organisation across the various stages of the employee lifecycle: Acquisition, Reaction, Retention and Development.
In order to ensure any possible profit achieved through HCM activities is not eroded through HR staff constantly having to track every single HR action manually, the data for these measures and KPIs should be collected through appropriate joined-up technology; HR systems covering the end-to-end human capital process combined with analytics packages which allow HR managers to track and analyse the right KPIs for their business. Not every organization’s systems are geared up to support HCM as HR systems still tend to be a collection of best of breeds and ERP components which do not necessarily interface with the operational systems or with each other.
These HCM measures are of very little value if no action is taken based on their messages. For example if unplanned employee turn-over increases and the organization has significant growth targets, then resource (staff and money) should be reallocated from areas which do not support growth to staff retention activities. If this feedback loop does not work and is not applied seriously, then HCM will always remain an interesting idea but it will not be a real profit driver for the business.
Conclusion
There are basic things an organisation needs to put in place to create a sound basis for HCM:
- Joined up thinking and understanding of impacts of HR actions
- HR alignment to business strategy
- HC activities applied to end-to-end processes
- Business led ownership of Human Capital and its measurement.
In order to achieve this, a significant up front investment in strategic thinking, understanding of organisation dynamics, organization design and technology is required to make this work. It is a useful concept and will in future, when it works, enable organisations to manage their employees as an 'asset'more profitably than in the past. However, any organization should bear in mind that we are still dealing with people and not machines, therefore to a greater degree more unpredictable. Thus HCM can never be en exact science but can nevertheless get an organisation much closer to using their employees as a more profitable resource than currently the case.
