Investing in Human Investing in Human Capital:Capital:
Strategies to Avoid Spending Too Much or Strategies to Avoid Spending Too Much or Too LittleToo Little
Jack J. Phillips, Ph.D.Jack J. Phillips, Ph.D.
Agenda
Describe the five strategies for determining the investment level for learning and development;Describe three ways in which human capital is valued, with examples;Explore potential shifts or adjustments in the approach to human capital; andShow how ROI is connected to human capital investment and valuation.
Human Capital PerspectivesHuman Capital PerspectivesTraditional ViewTraditional View Emerging ViewEmerging View
Expenses are considered Expenses are considered costscosts
Expenditures are viewed Expenditures are viewed as a source of valueas a source of value
Function is perceived as a Function is perceived as a support staffsupport staff
Functions is perceived as Functions is perceived as a strategic partnera strategic partner
Involved in setting HR Involved in setting HR budgetbudget
Top executives involved in Top executives involved in budgetbudget
Metrics focus on cost and Metrics focus on cost and activitiesactivities
Metrics focus on resultsMetrics focus on results
Metrics created and Metrics created and maintained by HR alonemaintained by HR alone
Top executives involved in Top executives involved in metrics design and usemetrics design and use
. . . and
Human Capital PerspectivesHuman Capital PerspectivesTraditional ViewTraditional View Emerging ViewEmerging View
Little effort to understand Little effort to understand the ROI in HCthe ROI in HC
ROI has become an ROI has become an important toolimportant tool
Measurement focuses on Measurement focuses on the data at handthe data at hand
Measurement focuses on Measurement focuses on the data neededthe data needed
Measurement is based on Measurement is based on what others measurewhat others measure
Measurement is based on Measurement is based on organization needsorganization needs
Programs initiated without Programs initiated without a business needa business need
Programs linked to Programs linked to specific business needsspecific business needs
Reporting is inputReporting is input--focusedfocused Reporting is outputReporting is output--focusedfocused
Motivating Forces• Cost control• Lack of
infrastructure• Instability• Access to
expertise• Short-term focus• Survival
Approaches1. Hire fully
competent employees
2. Use contract employees
3. Outsource major functions
Motivating Forces• Low cost industry• High labor use• Strong competition• Employees are
dispensable
Approaches1. Pay minimum
wages2. Provide few
benefits3. Keep training
simple4. Expect turnover
and address it
Human Resources Human Resources Development IssuesDevelopment Issues
TrainingTraining
Risk for PaybackRisk for Payback
Low Low
Short Short
Low Low
JobJob--related Skillsrelated Skills
Time for PaybackTime for Payback
Costs per EmployeeCosts per Employee
FocusFocus
Risk for PaybackRisk for Payback
Human Resources Human Resources Development IssuesDevelopment Issues
EducationEducation
Risk for PaybackRisk for Payback
Moderate Moderate
Medium Medium
Moderate Moderate
Preparation for Preparation for the next jobthe next job
Time for PaybackTime for Payback
Costs per EmployeeCosts per Employee
FocusFocus
Risk for PaybackRisk for Payback
Human Resources Human Resources Development IssuesDevelopment Issues
DevelopmentDevelopment
Risk for PaybackRisk for Payback
High High
Long Long
HighHigh
Cultural change and Cultural change and continuous learning continuous learning
Time for PaybackTime for Payback
Costs per EmployeeCosts per Employee
FocusFocus
Risk for PaybackRisk for Payback
Human Capital Investment Human Capital Investment BenchmarksBenchmarks
1. Human Resource Expenses (HR Department Costs/Budget)
2. Total Investment in Human Capital (Total HR expenses plus all salaries and benefits of non-HR staff)
3. HR Expenses by Function
4. HR Expenses by Process/Programming
5. Selected HR Costs
Motivating Forces• Desire to have best
practices• Benchmarking is
acceptable• Benchmarking is
used in all parts of organization
• Benchmarking can be low cost
• Benchmarking is low risk
Approaches1. Locate existing
reports2. Participate in
existing projects3. Create a custom
project4. Search the
literature
1 Determining What to Benchmark
2 Building the Benchmarking Team
3 Identifying Benchmark Partners
4 Collecting Benchmarking Data
5 Analyzing the Data
6 Distributing Information to
Benchmarking Partners
7 Initiating Improvement from
Benchmarking
Phases of the Phases of the Benchmarking Benchmarking
ProcessProcess
Motivating Forces• Fad chasing• Happy employee
dilemma• Quick fixes• Retention concerns• Competitive
strategy• Union demands• We can afford it!
Approaches1. Pay above-market
wages2. Provide above-
market employee benefits
3. Implement most new fads/ programs
4. Provide all types of employee services
The Relationship Between OverThe Relationship Between Over--Investing and PerformanceInvesting and Performance
Under Investin
g Over Investing
Fina
ncia
l Per
form
ance
Investment in Human Capital
Optimal
Motivating Forces• Need to show HR
contribution• Increasing cost of
human capital• Secure funding• Business partner• Improve processes
Approaches1. Measure success
of each HR program
2. Collect up to six types of data
3. Use ROI routinely4. Involve
stakeholders5. Use the data
Business Impact and ROIBusiness Impact and ROI
Participants and stakeholders involved react to the HR
program
Level 1
Reaction and Satisfaction
Participants learn what they must do to make the HR
program successful
Level 2
Learning
Business Impact and ROIBusiness Impact and ROI
Participants apply the skills and knowledge and implement
the HR program
Level 3
Application and Implementation
The consequences of application and implementation
are captured as business impact measures
Level 4
Business Impact
Business Impact and ROIBusiness Impact and ROI
Business impact measures not converted to monetary
values are listed as intangible benefits
The return on investmentcompares the monetary benefits with the costs of the HR program
Level 5
ROI
The costs of the HR program
are tabulated
Valuing Human Capital:Valuing Human Capital:Three ApproachesThree Approaches
1.1. What we know from Logic and IntuitionWhat we know from Logic and Intuition
2.2. What we know from Macro Level What we know from Macro Level ResearchResearch
3.3. What we know from ROI AnalysisWhat we know from ROI Analysis
1. Logic and Intuition1. Logic and Intuition
Automation has limitationsAutomation has limitations
People People areare necessarynecessary
Stock market mysteryStock market mystery
Accounting dilemmaAccounting dilemma
Last source of competitive advantageLast source of competitive advantage
Superstar PhenomenaSuperstar Phenomena
Superstar CharacteristicsSuperstar Characteristics
People People areare the differencethe difference
Good and greatGood and great
Great places to workGreat places to work
Most admired companiesMost admired companies
2. Macro Level Research2. Macro Level Research
HR Effectiveness IndexHR Effectiveness Index
Gallup StudiesGallup Studies
The Service Profit ChainThe Service Profit Chain
WatsonWatson--Wyatt StudiesWyatt Studies
Deloitte & Deloitte & ToucheTouche StudiesStudies
. . . . and many others. . . . and many others
3. ROI Analysis3. ROI AnalysisMicro Analysis ToolMicro Analysis Tool33--5,000 studies per year5,000 studies per year41 Countries / 25 Languages41 Countries / 25 LanguagesVariety of ApplicationsVariety of ApplicationsROI Certification (2,500)ROI Certification (2,500)ROI NetworksROI NetworksROI StandardsROI StandardsROI Best PracticesROI Best Practices
Valuing Human CapitalValuing Human CapitalThe Complete PictureThe Complete Picture
Micro AnalysisMicro Analysis(ROI Studies)(ROI Studies)
Macro AnalysisMacro Analysis(Relationships)(Relationships)
Logic & IntuitionLogic & Intuition(Intangibles)(Intangibles)
Develop EvaluationPlans and
Baseline Data
Develop EvaluationPlans and
Baseline Data
Collect Data During
SolutionImplementation
EvaluationPlanning Data Collection
Collect Data During
SolutionImplementation
LEVEL 1: REACTION,SATISFACTION, ANDPLANNED ACTIONS
Collect DataAfter
Implementation
LEVEL 2:LEARNING
Collect DataAfter
Implementation
LEVEL 3: APPLICATION/IMPLEMENTATION
DevelopObjective of Solution(s)
LEVEL 4:BUSINESS IMPACT
DevelopObjective of Solution(s)
ROI ProcessROI Process
CaptureCosts ofSolution
CaptureCosts ofSolution
Isolate the Effects of
Solution
Isolate the Effects of
Solution
Convert Data To Monetary
Value
Convert Data To Monetary
Value
Calculatethe Return
OnInvestment
Calculatethe Return
OnInvestment
GenerateImpactStudy
GenerateImpactStudy
IdentifyIntangibleMeasures
Data Analysis
IdentifyIntangibleMeasures
LEVEL 5: ROI
Reporting
INTANGIBLE BENEFITS
ROI StandardsROI Standards1. When a higher-level evaluation is conducted, data
must be collected at lower levels.2. When an evaluation is planned for a higher level, the
previous level of evaluation does not have to be comprehensive.
3. When collecting and analyzing data, use only the most credible source.
4. When analyzing data, choose the most conservative among the alternatives.
5. At least one method must be used to isolate the effects of the solution.
6. If no improvement data are available for a population or from a specific source, it is assumed that little or no improvement has occurred.
. . . and
7. Estimates of improvements should be adjusted for the potential error of the estimate.
8. Extreme data items and unsupported claims should not be used in ROI calculations.
9. Only the first year of monetary benefits should be used in the ROI analysis for short-term solutions.
10.Costs of the solution should be fully loaded for ROI analysis.11. Intangible measures are defined as measures that are
purposely not converted to monetary values.12.The results from the ROI methodology must be
communicated to all key stakeholders.
ROI StandardsROI Standards
ROI Best PracticesROI Best Practices
1. The ROI methodology is implemented as a process improvement tool and not a performance evaluation tool for the HR staff.
2. ROI impact studies are conducted very selectively, usually involving 5-10% of HR programs.
3. A variety of data collection methods are used in ROI analysis.
4. For a specific ROI evaluation, the effects of HR are isolated from other influences.
5. Business impact data are converted to monetary values.
. . . and
ROI Best PracticesROI Best Practices
6. ROI evaluation targets are developed, showing the percent of programs evaluated at each level.
7. The ROI methodology generates a micro level scorecard.
8. ROI methodology data are being integrated to create a macro scorecard for human capital.
9. The ROI methodology is being implemented for about 3-5% of the HR budget.
10. ROI forecasting is being implemented routinely.11. The ROI methodology is used as a tool to
strengthen/improve the HR/HC process.