If you can't measure it, you can't manage it." True or false? This credo has ruled the Western corporate world for the past two decades. Some argue it has meant that number crunchers have managed to sideline and undervalue all talent apart from their own. The only thing that has "counted" has been financial capital and those who count it. Increasing short-term profit has often been a matter of cutting staff with little regard to an individual's contribution and long-term sustainability - an action based on the false premise that most employees make identical contributions to profit.
However, the global skills shortage, estimated to be costing companies half a trillion dollars a year in staff turnover, has triggered a rethink. Human capital is still treated as a cost, stacking the deck against investment in talent relative to other forms of investment. But, where once the selective use of numbers were used as a tool of destruction, they are regaining their function of enlightenment.
A growing body of evidence suggests that the way a company manages its people has a tangible effect on its share price; companies that manage staff well are likely to outperform those that don't by between 30 and 50 per cent. This, in turn, has led to the recognition that one of a company's biggest risks is its people.
Consultants and business academics, spurred by the findings, have discovered the fertile counting fields of human capital.
They have unearthed more than 200 key performance indicators and introduced a vast range of accounting and predictive modelling systems to measure intangible assets, including qualitative tools to calculate human resources costs.
Human capital indices, scorecards, triple-bottom reporting, return on investment of human capital, dashboard risk alerts, strategy maps and social network analysis tools that map connections between people and their knowledge represent just a fraction of the gauges available to businesses and institutions to measure human capital.
Companies can measure workforce vulnerabilities; predict vacancies, resignation trends and leadership needs; track critical skills and predict which people will be lost and why; measure churn, turnover costs and supply and demand; and assess a range of human capital risks including organisational exposures.
Not surprisingly, many companies find the array of options bewildering. Most experts agree measurement needs to be contextualised and interpreted. It's not about the numbers but the story they tell.
International management consultant CK Prahalad says just because you can measure it doesn't mean you should. Companies can reduce the complexity of human capital management simply by keeping an eye on strategy and risks. Unless it fits your business plan, measurement can be a waste of money.
Independent board director and corporate governance consultant ¿Julie Garland McLellan says it comes down to strategy.
She says management has to ask: "What do I want to do with this company? What must my people do to achieve that strategy?" They should then list the necessary skills to do that, from the top to the bottom of the organisation, and then decide where to invest or train.
"Human capital is obviously an investment. Take training, for example. As CEO of a multinational energy company, I was faced with the question: 'What if I train my people and they leave?' and my response was: 'What if I don't train them and they don't leave, what will I look like in five years' time?' A CEO's job is all about profitability and growth. If I didn't invest in people, there would be no growth," Garland McLellan says.
Companies have to decide how they can differentiate themselves from their competitors and what training and skills are needed to achieve this.
"You have to track the proposition and if it is real, not just propaganda, value will come from the investment. It is absolutely critical because in a competitive environment you can't afford to be left with the dregs of humanity."
She says the same applies to risks. Companies should list their risks, such as business and sovereign risks, and see how human capital fits the profile.
"One approach is to list the top 10 strategic and risk factors in one year as points on a slide. Monitor these closely and use dashboard alerts for parameter breaks.
"It also is important to track retention and set targets. Absenteeism is excellent to track as it may reflect absences related to job interviews.
"Then you have to take action to achieve your human capital goals, remembering lead times of at least six months usually apply for any initiative."
Les Pickett, chief executive of ¿Pacific Rim Consulting Group, says companies need to address more than historic human capital indicators for measurement to be effective.
"Human capital cuts across all functions, so it can't be viewed in isolation," Pickett says. "Senior management and the board must critically view the impact of human capital practices and initiatives on the total business enterprise."
He says human capital strategies and their evaluation should be embedded into both the strategic and operational aspects of the business. Senior executives need to ask: "Why do we have a human resources department?" and "What do we get for our investment?"
"We use a framework that gives a rating on core issues affecting success. It provides senior management with a clear focus by identifying the critical human capital issues that will provide the best return on their investment," Pickett says.
"The process can flush out things that people don't want to talk about and provides a basis for critical discussion."
Pickett emphasises the need for management to address the relationship between finance people, human resources, and internal and external audit staff. For example, the tendency of finance to cut payroll to reduce the bottom line makes it hard for human resources to make progress strategically, he says.
"And, of course, when staff numbers are cut indiscriminately, it's usually the good people who leave, not the donkeys. This jeopardises the company's competitive position and strategic goals."
The approach to budgets also needs to be revisited. Budgets often are not aligned with business plans but to historic actuals for the previous year.
"Budgets sometimes can become a bit of a moving feast," Pickett says.
"If performance against budget doesn't look good or it is too hard, the budget is sometimes changed. By linking the budget to strategy, people are more likely to be held accountable to a figure."
He says many small to medium-sized companies don't have a human resources department so it is critical to have the right people - one wrong appointment can send the company broke and they don't have the luxury of carrying non-performers.
"Effective human capital measurement also provides an opportunity for human capital benchmarking - an area in which many Australian companies lag world best practice," he says.
Other consultants say it is important to remember it is possible to manage things you can't measure. Nor does measuring human capital necessarily make it easier to manage. Perhaps businesses need to learn to be more comfortable with ambiguity.
Managing people is a talent in itself and true talents don't have a great need for numbers - they think and observe faster than that. According to Douglas Adams' Hitchhikers' Guide to the Galaxy, it took the computer Deep Thought 7.5 million years to compute and check the answer to Life, the Universe and Everything. The answer was 42, yet the reader is none the wiser.
The Ultimate Question, however, was unknown, suggesting it is more important to ask the right questions than to seek definite answers.
* Corporate culture has moved from seeing people as a cost that can be cut or increased without affecting long-term results, to being core to results and sustainability.
* There are a myriad of indicators to help companies gauge how well they are managing their human capital, however, they should not be held to the axiom that what can't be measured can't be managed.
* Human capital goals should be embedded into the strategic and operational aspects of the business.
Fairfax Business Media
Join the CIO New Zealand group on LinkedIn. The group is open to CIOs, IT Directors, COOs, CTOs and senior IT managers.