Apex human capital index white paper

Whitepaper

APEX-Human Capital Index

Aventus Partners

Human Capital Index

APEX-Human Capital Index Whitepaper

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Valuation of Human Capital is a big challenge for any organization. As organizations focus more on leveraging their human capital, there is a need of a standard valuation tool for Human Capital. Human Capital as an asset class has the maximum impact on the value creating ability of an organization especially those rendering services. As popularly acknowledged it can also exit from the organization any time at its own will.

At Aventus Partners, we have developed a human capital rating tool - the “APEX-Human Capital Index”.

The objective of APEX-Human Capital Index is to provide a measurable and financially reliable tool for the interpretation of investments in Human Capital to returns on a consistent basis.

The Index consists of a set of human capital ratios and financial ratios. Human capital parameters play a vital role in the composition of APEX-HC Index and make up for 2/3rd of the total point weightage. The APEX-Human Capital Index is measured for 300 scale points in rating pattern from AAA to D where AAA is the highest rating while D is the lowest rating. There are 7 key parameters that collectively make the index namely –

Work environment, Organization pyramid dimensions, Skill induction and development, Remuneration, Retention, Human Capital contribution to business and Financial performance.

The Index is available on www.apexhc.com .


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Contents

Background ...................................................................................................................................................4

APEX-The Aventus Partners Human Capital Index........................................................................................4

Objective .......................................................................................................................................................5

Methodology.................................................................................................................................................5

Annexure –I (Sample Report)........................................................................................................................7

Year – 2006, Rating – BBB.........................................................................................................................7

Year – 2007, Rating – A .............................................................................................................................8

Year – 2008, Rating – A .............................................................................................................................8

Year – 2009, Rating – A .............................................................................................................................8

Year – 2010, Rating – BBB.........................................................................................................................9

Year – 2011, Rating – BBB.........................................................................................................................9

Annexure –II................................................................................................................................................10

Annexure –III...............................................................................................................................................10


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Background

Organizations frequently state that employees are their most valuable asset, and yet do not measure and record its value in their annual statements (annually/quarterly statements of financial position) and provide little or no information on this “most valuable asset” to investors or the public.

Regulatory authorities require extensive disclosure regarding all major assets including financial assets, physical assets, and technological/intellectual property such as patents. However, they do not require detailed disclosures of what, for most organizations, is their largest annual operating expense: the workforce. This draws a line between the commonly reported asset classes and human capital and creates the need for a method to measure the worth of organization based on its human capital value.

Most organizations focus purely on ROI on capital deployed and do not measure human capital return on investment (HCROI), although investment in human capital is a significant portion of their investments .

APEX-The Aventus Partners Human Capital Index

APEX-HC is an analytical tool that measures the value of human capital or talent pool in order to help service sector organizations analyse their talent capabilities and various other critical and at times hidden aspects of human capital. The tool can be effectively leveraged by the following groups of professionals:

Business Leaders in the services domain to understand the performance of their Human Capital from the business indicators

HR Professionals to understand which areas of the Human Resources function need to be augmented/redesigned/better utilized

Banks and Financial Institutions, so as to understand how Human Capital contributes to the financial performance of Services organizations and thereby arrive at more robust lending mechanism norms for these organisations/sectors

Private Equity players, to arrive at an optimum price discovery mechanism on their investment strategies in the services domain

High Net Worth and Retail investors, to discover a new asset class with potential for performance and discover new strategies of investment


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Objective

The objective of APEX-Human Capital Index is to provide a measurable and financially reliable tool for the interpretation of investments in Human Capital to returns on a consistent basis.

Methodology

APEX-The Aventus Partners Human Capital Index consists of a set of human capital ratios and financial ratios.Human capital parameters play a vital role in the composition of APEX-HC Index and make up for 2/3rd of the total point weightage. Human capital ratios are clubbed under 6 key parameters while financial ratios are clubbed under one parameter.

Data is collected from audited financial statements such as the balance sheet, the profit and loss account, the cash flow statement and their schedules. Some human capital related data is also collected from director’s reports’, management analysis section of annual reports’ and some from annexures. Data collection is followed by calculation of the ratios by putting the collected data under scrutiny.

Calculated ratio values that are derived are arranged on a customized ratio scale for all the selected years and then added to get the index rating point for a single year.The range of a scale is based on the importance of ratio to index, which is why rating points on the scale varies from ratio to ratio. Range of a scale varies from negative points to positive points, for instance if the scale is 9 for a ratio then the ratio will be measured on the scale of -9 to +9 points based on the value of the ratio. If the value of a ratio is negative, the rating will be measured on negative side and if ratio value is positive, rating will be on positive. The sum of all the ratios scale is 300 points.To assign a ratio value on a scale we take maximum and minimum value of ratio from given data and assign the maximum value to the highest end of a scale and assign negative values to the negative end of the scale. We also calculate the value of each key parameter based on the sum of all the ratios which falls under a particular key parameter and then assign a rank to it.

The APEX-Human Capital Index is measured for 300 scale points in rating pattern from AAA to D where AAA is the highest rating while D is the lowest rating1. There are 7 key parameters that collectively make the index namely - Work environment, Organization pyramid dimensions, Skill induction and development, Remuneration, Retention, Human Capital contribution to business and financial performance. These 7 key parameters are measured on weighted rating system which varies from “Very Good” to “Very Low” based on the score of each parameter2. These 7 key parameters and the final index ranking make the output part of the index3. To measure an organizations’ human capital value, we

1 Criteria of rating is given in Annexure-II2 Ranking criteria is given in Annexure-III3 Sample Output of index is in Annexure-I


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require two or more years’ sequential data for that specific organization. In order carry out the organization’s valuation we compare the rating of two companies for the same year and going deeper in the valuation process we compare key parameters rankings. Both comparisons give us a clear picture of company’s position in market in terms of human capital as well as effect of each key parameter on market position.


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Annexure –I (Sample Report)

Company X Rating report – Last six year rating of company X ranges from BBB – A

Year – 2006, Rating – BBBCompany X made adequately high investment in Human capital which led to the adequately high level of returns. There is a lot of space for improvement of human resource policies and procedure andinvestment in human capital to move up to Rating AAA.

Key components and their assessment –

1. Work Environment – Very Good2. Organization Pyramid Dimensions – Average3. Skill Induction and Development – Very Low4. Remuneration – Very Good5. Retention – Average6. Contribution to Business – Very Good7. Financial Performance – Very Good

120

150

180

210

240

270

300

2006 2007 2008 2009 2010 2011

Company X Rating

Rating Points


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Year – 2007, Rating – ACompany X made significant investment in Human capital which led to a high level of returns. There is room for improvement of human resource policies and procedure and investment in human capital. The quality of investment made in human capital is good.


1. Work Environment – Good2. Organization Pyramid Dimensions – Good3. Skill Induction and Development – Low4. Remuneration – Very Good5. Retention – Good6. Contribution to Business – Very Good7. Financial Performance – Good

Year – 2008, Rating – ACompany X made a high investment in Human capital which led to a high level of returns. There is a space for improvement of human resource policies and procedure and investment in human capital. The quality of investment made in human capital is good.


1. Work Environment – Good2. Organization Pyramid Dimensions – Good3. Skill Induction and Development – Good4. Remuneration – Very Good5. Retention – Average6. Contribution to Business – Very Good7. Financial Performance – Good

Year – 2009, Rating – ACompany X made a high investment in Human capital which led to a high level of returns. There is a space for improvement of human resource policies and procedure and investment in human capital. The quality of investment made in human capital is good.


1. Work Environment – Good2. Organization Pyramid Dimensions – Very Good3. Skill Induction and Development – Good4. Remuneration – Good5. Retention – Average6. Contribution to Business – Very Good7. Financial Performance – Good


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Year – 2010, Rating – BBBCompany X made adequately high investment in Human capital which led to the adequately high level of returns. There is a lot of space for improvement of human resource policies and procedure and investment in human capital to move up to Rating AAA.


1. Work Environment – Good2. Organization Pyramid Dimensions – Average3. Skill Induction and Development – Very Good4. Remuneration – Good5. Retention – Average6. Contribution to Business – Very Good7. Financial Performance – Good

Year – 2011, Rating – BBBCompany X made adequately high investment in Human capital which led to the adequately high level of returns. There is a lot of space for improvement of human resource policies and procedure and investment in human capital to move up to Rating AAA.


1. Work Environment – Average2. Organization Pyramid Dimensions – Low3. Skill Induction and Development – Very Good4. Remuneration – Good5. Retention – Low6. Contribution to Business – Very Good7. Financial Performance – Good


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Annexure –IIAPEX-Human Capital Index rating criteria –

Rating Criteria (Maximum 300 points)

AAA ≥271

AA ≥241

A ≥211

BBB ≥181

BB ≥151

B ≥121

CCC ≥91

CC ≥61

C ≥31

D <31

Annexure –IIIKey Parameter ranking criteria –

Rank Criteria

Very Good ≥81%

Good ≥61%

Average ≥41%

Low ≥21%

Very Low <21%


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Aventus Human Capital Partners LLP

40/48, Ground Floor, Pocket 40,EPDP Road, CR Park, New Delhi-110019

Phone +91 11 40561242-45Fax +91 11 40561241

www.aventus.in

Delhi I Bangalore I Kochi

All information contained in this document is sourced from our clients or other public sources. It may include opinions of Aventus Partners and its clients as well. While every effort is made to achieve accuracy in the information contained in this document Aventus Partners is not legally responsible for any content of this document or any consequent actions. We advise that all persons reading this document make their own judgments’ and seek any information desired by them from their own sources.

© 2012, Aventus Partners