A new perspective for understanding workforce investment, risk, and value
Considering how much company spend and risk is tied to employees, it’s surprising that organizations seldom use the same rigor for human capital investments as they do for business investments. All too often, the question we hear business leaders ask is, “How do I reduce human capital costs?” What leaders should be asking is: “How do I ensure that I get appropriate value from the money I’m willing to invest in my people?”
Part of the challenge is that the C-suite looks at human capital investments through different lenses. CFOs consider things like the ratio of spend to value, measuring ROI, and increasing the value of human capital as an asset. CHROs are concerned with ensuring the organization has the right talent for current and future business strategies and is seen as an employer-of-choice. The Human Capital Balance Sheet™ is a way to reconcile these perspectives, gain visibility into how human capital investments can translate into value for the organization and provide opportunities for increased collaboration across the C-suite.
One of the reasons companies can have trouble optimizing human capital investment is they start with a limited view: Human Capital Investment = Labor Spend = Compensation & Benefits. This overly simplistic equation misses the mark in several ways:
- It fails to consider all of the facets of the workforce that drive value.
- Compensation and benefits barely scratch the surface of what it costs to drive productivity.
- It’s not risk adjusted, so it makes it look like all costs and risks are equal.
An expanded view
Consider how the very definition of an organization’s workforce has changed significantly over the last 10 to 15 years and will likely keep evolving as the open talent economy matures and the future of work unfolds. In addition to full-time payroll employees, the workforce mix now includes a range of part-time, contingent, gig, outsourced, crowdsourced, and even robot members. All of these workers—and how and when you use them, compensate them, reward them, develop them—should factor into discussions of human capital productivity and value.
Taking this broader view can help you evaluate the effectiveness of the human capital programs you have today. Many organizations have a range of programs, practices, and point solutions that were introduced over time and haven’t been evaluated individually or holistically to determine if they are (1) adding value and delivering meaningful ROI and (2) the best use of the limited pool of investment dollars. Analytics solutions are available to help in this effort and can reveal opportunities to not only save costs but also improve the market-competitiveness, employee perceptions, and overall effectiveness of your human capital offerings.
Navigating the Human Capital Efficient Frontier
The idea is to be able to make human capital decisions using the same business-driven rigor typically applied to other investment decisions the business makes. Using this approach, you start to reach what we call the “Efficient Frontier”—a way to approach human capital decision making that directly links workforce investments to value as you define it for your organization and specific functions. For example, a business might look at value in terms of revenue or share price. A health care provider might look at patient outcomes or quality metrics.
The Human Capital Efficient Frontier™ enables you to link an (expanded) definition of the workforce, a definition of investment and labor, and a definition of the value you get from your workforce, either across the board or in certain business units or functions. Then, workforce investment decisions are measured against that value.
To capitalize on the Efficient Frontier, you’d first eliminate programs that are obviously not driving value. Then you could begin to look at how to strategically reallocate the money saved to focus on programs that increase the value of human capital as a balance sheet asset.
Source: Deloitte Consulting LLP
Optimizing the Human Capital Balance Sheet
Taking a balance-sheet approach to understanding all the dimensions of your human capital assets is a way to both build human capital as an asset and reduce inefficiency in labor spend. When the Human Capital Balance Sheet is optimized:
- Wasteful spend is substantially reduced or eliminated
- The cost of programs that drive minimal value are reduced or eliminated
- Investments in labor are value-driven and clearly linked to an appropriate measure and rate of return
- Inherent risks are understood and factored into decision making and expected outcomes
- Decisions are informed by the business strategy and market conditions
As you’ll notice, these optimization criteria and outcomes ring true for virtually any area of the business, meaning human capital investments can (finally) be viewed and measured in business terms. This gives all of the organization’s leaders—whether in HR, finance, IT, operations, business units—common ground and a common language to evaluate human capital decisions as they do other business decisions.
We will be examining the elements of the Human Capital Balance Sheet in more detail in follow-on posts, as well as featuring it in an upcoming Dbriefs webcast. Stay tuned for more insights on this new perspective for balancing workforce investment, risk, and value.