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Monday, January 21, 2013

How to Stop Wasting Your Human Capital

Leveraging the workforce is not an arcane, mysterious act. It is a matter of systematically and thoroughly applying some basic analytic practices.People | January 18, 2013 | CFO.com | US

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Jac Fitz-enz

At most organizations, human capital is woefully underutilized. In the aggregate, that mismanagement leaves billions of dollars on the table in expenses that could have been saved and lost profits that could have been reinvested. In short, our return on people (ROP) is second rate.

There are three options for reversing this defect. One is to restructure the standard human resources management model. The second is to introduce a systemic analytic process for managing human capital. The third is to do both.

Human Resources
Human Resources (Photo credit: zachstern)
Thirty years ago the quality movement remade America’s manufacturing system. It had a profoundly positive effect on our global competitiveness. At about the same time, I introduced quantitative measurement to the human-resources function. ... Now I am seeing some companies applying analytics to staffing, training, performance management, and retention, thereby realizing competitive advantages along with significant financial gain.


... From an analytic viewpoint, human capital must be treated exactly like every other asset. Although people employed are different than things owned, the principles of assessment, planning, execution, and evaluation are the same. The main difference is the mobility and independence of human capital. That difference seems to deter management commitment. However, when you have a repeatable, systematic approach, the effort required is reasonable and the return exceptional.
English: Human Capital Investment Model!!
English: Human Capital Investment Model!! (Photo credit: Wikipedia)

The Analytics Foundation
There are four basic elements of human-capital analytics systems: assessment, planning, execution, and measurement. When carried out thoroughly and with insight, they generate a database for descriptive and predictive analysis.


Assessment is, by far, the most important phase of the human-capital analytics model. It has two aspects: the external market and the internal environment. ... It begins with a pre-meeting survey of all executives who will be involved in the assessment phase. They are queried as to their views on market forces as well as the company’s operations and how these are affecting or will affect management of human capital in the near future. This is a necessary pre-planning drill that surfaces all elements that can be examined for future effects. It is the grist of the assessment mill whereby attendees at the meeting collectively produce an inventory of forces and factors. The example below shows the typical matters that are discussed.

            External Forces: State of the economy, labor availability, customer trends, competitor actions/plans, government regulations, technology trends, new markets
            Internal Factors: CEO’s vision, brand, culture, processes, leadership status, employee capabilities, financial state, technical ability, QIPS (quality-innovation-productivity-service) levels

In practice, there are seldom more than 10 variables in either external or internal areas that are deemed to be important. ...[The] greatest value is putting the key variables on the table for thorough discussion and agreement. This consensus building is concluded usually within two days. From it, a workforce planning committee is formed, usually headed by the chief human resources officer. But the CEO maintains oversight, since he or she has ultimate responsibility for sustaining a capable workforce. That is especially true for the leadership cadre.


Workforce planning is undergoing a makeover. ... In lieu of building competencies around invariably outdated and ignored job descriptions, the new planning program focuses on building workforce capabilities that can flex to serve the evolving needs.

Basic questions for planning include:

  • Which are our mission-critical capabilities?
  • How strong is our current bench in each of these?
  • What are the incumbents’ growth potentials?
  • How vulnerable are they to being hired away?
  • What would be the impact if these capabilities are not refilled quickly?     

    Note that we talk about human capabilities rather than changeable jobs. To answer workforce questions, we focus on the skills, knowledge, and behaviors that are essential requirements for performing any given job. Some are inherent and some can be developed. They include skill, commitment, motivation, flexibility, knowledge, engagement, creativity, and growth potential.

    The critical planning point is two-fold. First, how will these evolve as business and therefore workforce requirements change? Second, how will the source of change affect workforce requirements? Experience shows that if change comes from technological advances, workforce needs will be different than if change comes from government regulations, competitor actions, customer swings, or new market opportunities.

    Execution is the efficient and effective development of human capital. It is guided by the assessment and strategic workforce plan and is carried out through improving processes for staffing, deploying, developing, compensating, engaging, and retaining human capital. ... Services are designed by the HR department and executed in partnership with line and staff managers. Employee capability development is the responsibility of each manager. HR provides the technical guidance and services to support that.

    Performance Reference Model of the Federal Ent...
    Performance Reference Model of the Federal Enterprise Architecture, 2005. FEA Consolidated Reference Model Document. whitehouse.gov May 2005. (Photo credit: Wikipedia)
    Measurement (and its sibling, valuation) is the last phase in leveraging human capital. ...  Metrics have three levels: strategic, which are the concern of C-level executives; operational, which are the province of mid-management; and leading indicators, which help monitor predictive and prescriptive actions. The following are a few of the many metrics and leading indicators that companies are using.

    Strategic-level human capital “return on people” metrics:
    • Revenue per FTE
    • Profit per FTE
    • Total cost of workforce (TCOW)
    • TCOW as a percentage of operating expense

    Operating-level human capital metrics:
    • Cost to hire, cost per trainee, cost of turnover
    • Time to fill jobs, time to deliver services
    • New hire fit
    • Voluntary turnover rate
    • Training effectiveness
    • Manager and employee satisfaction levels

    Leading indicators:
    • Leadership rating by employees
    • Readiness level of backups for key positions
    • Learning-and-development spend per employee
    • Engagement level and performance effects
    • Mission-critical turnover rate
    • “Great place to work” rating

    Leveraging human capital is not an arcane, mysterious act. It is a matter of systematically and thoroughly applying the analytic management practices described above: assess, plan, execute and measure. Effective ROP reduces operating expense, generates revenue, and enhances competitive advantage.

    Dr. Jac Fitz-enz is widely known as the father of human capital strategic analysis and measurement. He is the founder of the Predictive Institute, a group of organizations and thought leaders formed to develop a new model for human capital management.
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