Developing Human Capital © Andrew Mayo 2008 1 Andrew Mayo, Professor of Human Capital at Middlesex University,President of the HR Society and Director,

Developing Human CapitalDeveloping Human Capital © Andrew Mayo 20081

Andrew Mayo, Professor of Human Capital atMiddlesex University,President of the HR Society

andDirector, Mayo Learning International Ltd

January 15 2008

So what’s the Difference between Human Capital and Human Resources?

WEST LONDON BRANCH


Are peopleour greatest

asset?


CUSTOMER STRUCTURAL HUMANor “Relationship”) (or “Organisational” (or “Competence”) CAPITAL CAPITAL CAPITAL

THE VALUE OF THE ORGANISATION

FINANCIAL AND PHYSICAL CAPITAL (tangible assets)

“INTELLECTUAL CAPITAL” (intangible assets)


But not all peopleBut not all people

a) have the same opportunity to add value

b) within the same job add the same amount of value


SHOULD WE BE MORE SOPHISTICATED WHEN WE SHOULD WE BE MORE SOPHISTICATED WHEN WE LOOK AT OUR HUMAN RESOURCES?LOOK AT OUR HUMAN RESOURCES?

A means of production – a “machine-substitute”

A “maintenance worker” – keeping things going

Direct provider of value to a stakeholder

Creator of more/different future value

Cat Type of resource Indicators

1

2

3

4

Cost per unitProductivity

#: direct#Cost:unit of value

Value yield/cost

RoI over a period

Note: some roles combine these contributions


Another way of dividing our Human CapitalAnother way of dividing our Human Capital

Difficult to Replace

Low Value Added

Easy to Replace

Low Value Added

Difficult to Replace

High Value Added

Easy to Replace

High Value Added

MOTIVATE RETAIN

OUTSOURCE SUBCONTRACT?


PEOPLE…PEOPLE…

Human CapitalHuman Capital

• costs• headcount• labour resource• need regulation• need management• need satisfaction

Human ResourcesHuman Resources

• assets with value• diverse individuals • value creating• need guidance• need objectives• need engagement


PEOPLE RELATED MEASURESPEOPLE RELATED MEASURES


Linking the value, motivation and contribution of people

FOUR MEASUREMENT AGENDAS FOR HR FOUR MEASUREMENT AGENDAS FOR HR ((often confused)often confused)

The effectiveness and contribution of the HR function

The latter is not dependant on an HR function. But a prime focus of HR’s strategic contribution should be to maximise it.

Statistics and ratios about the workforce (and any financial implications)

The RoI of specific HR initiatives

Human CapitalHuman Capital

The HR FunctionThe HR Function

VALUE FOR MONEY

VALUE FOR MONEY

VALUE FOR STAKEHOLDERS

VALUE FOR STAKEHOLDERS


Some Basic PrinciplesSome Basic Principles

• There are different audiences for HUMAN CAPITAL measures - which can be categorised into external and internal

• The External (investors, journalists, competitors, governments) are interested in confidence, benchmarking and compliance

• Internal (senior management and managers) are interested in comparative performance and performance improvement

• To be useful internally, people measures must be linked to performance and be relevant to specific groups


“What counts can often not be counted

- and what can be counted often does

not count.”Albert Einstein

But what gets measured gets attention, and gets managed.........


A Dilemma in People Management

We know all the costs of our “human resources”

We often say they are our “most important assets”

But we don’t know how to balance the costs with any quantitative measure of their value


More Challenges …More Challenges …

1. How do we recognise the intrinsic diversity in the value of people, and find a way to quantify it through understanding their personal human capital?

2. How do we set up a framework of people-related measures that will form an intrinsic part of an organisation’s performance measurement system?

3. How do we quantify the value – financial and non financial - that is added to each stakeholder through the people that we have?

4. How do we ensure that value is increased, and not lost, when organisations merge and restructure?


Budget statement

Profit and Loss Account

People Plan Report

People Monitor

££Balance Sheet

Assets and Liabilities

Balance Sheet

Assets and Liabilities

Where we Have Been Where we are NowWhere we Have Been Where we are Now

A NEW BUSINESS MODELA NEW BUSINESS MODEL


ORGANISATIONS ONLY EXISTORGANISATIONS ONLY EXISTTO CREATE VALUE FOR THEIRTO CREATE VALUE FOR THEIR

STAKEHOLDERS STAKEHOLDERS

This is the only true measure This is the only true measure of performance of performance


Money

People

Technology

Tools

Processes

Systems

LeadershipPolicy and Strategy

Values Culture

Value Provided

ToStakeholders

THE VALUE CHAINTHE VALUE CHAIN

Measure ofValue In?

Efficiency?

Measure ofValue Out?

OUTCOMEINPUT


How can we connect the key measures How can we connect the key measures that relate to human capital?that relate to human capital?

Performance =Performance = f( human capital value) x (engagement)f( human capital value) x (engagement)


Key Point One: Most organisations have some bits and pieces of measures. BUT

they are usually stand alone and unconnected, and it is rare indeed for

people to tackle the question of how we value people themselves

Key Point Two: If we want to make a difference, we must look at groups of people who share a “common value

chain” i.e have similar characteristics and whose role is to produce the same

kind of value added


People are a cost, BUT they also have value in themselves: – their capability,experience, motivation, effort

They use this to add value to other stakeholders ofthe organisation, - owners, customers, suppliers,Governments, communities, and so on

How do we (Management + HR) maximise the value of the people people available to us?

OUR PEOPLE - TWO KEY QUESTIONSOUR PEOPLE - TWO KEY QUESTIONS

How do we (Management + HR) help to maximise the value that people add to our other stakeholders?other stakeholders?


But there’s a third set of But there’s a third set of questions…..questions…..

What is it about the working What is it about the working environment itself that will environment itself that will optimise this value chain?optimise this value chain?

And how do we “measure” And how do we “measure” that?that?


The Value of People The Value of People

Current Value reflects their cumulative capability as of today and their performance

Future Value reflects their potential to do something bigger or broader in the future


Quantifiying the Value of People Quantifiying the Value of People

• We cannot get a useful monetary value of people

• But we can identify the key factors that make people in a particular group valuable to us

• The factors can be rated on a suitable scale, for example 0.1 to 2.0 where 1.0 is a median – or on a 1-10 scale

• Then by weighting the factors we can create an index of value

• The resulting analysis becomes a basis for “human capital management”


“Human Capital Index” = 1.470

““Human Capital Index” - ExampleHuman Capital Index” - Example

Component Factor Weighting Weighted value value

Contribution 1.7 0.35 0.595Potential 1.0 0.20 0.200Capability 1.5 0.30 0.450Values Alignment 1.5 0.15 0.225


The Value in a GroupThe Value in a Group

EmployeeCapability

factor(20%)Contributionfactor (30%)

Valuesfactor (15%)

Potential

factor(15%)

A 1.7 1.725

B 0.7 0.805

C 1.4 1.115

D 1.6 1.485

1.0 1.0 0.945

Average peremployee 1.28 1.215

1.6

1.0

1.8

0.8

1.6

0.8

1.1

1.7

0.8

1.5

1.6

1.0

0.8

1.24

0.9

1.19

1.1

1.22

1.9

0.7

0.9

1.5

1.20

Personalattitudes(20%)

E

“HC“ Index (100%)


THE “HUMAN CAPITAL SUMMARY” ENABLES US THE “HUMAN CAPITAL SUMMARY” ENABLES US TO…..TO…..

• track the increase or decrease of our “human capital” • understand the value that is associated with an employee cost (within a group)

• understand the relative value of individuals and teams

• helps focus action towards increasing our human asset value

• analyse the distribution of the factors that make people valuable to us

TRULY STRATEGIC!!

TRULY STRATEGIC!!


Maximising Human Capital ValueMaximising Human Capital Value(= talent management)(= talent management)

acquisition retention growth

For the four key processes of:

what are the indicators of being successful? (“outputs”) what are the “drivers” of being successful? (“inputs”)

exiting


What is employee engagement?What is employee engagement?

An engaged employee:

•Is 100% committed to the achievement of “our” departments’ results

•Cares enough give “discretionary effort” (beyond the call of their contract)to the organisation

•Is unlikely to leave the organisation


The Towers Perrin model of The Towers Perrin model of engagementengagement

Emotional Engagement

I would recommend my company to a friend as a good place to work

My company inspires me to do my best work

I am proud to tell others I work for my company

My job provides me with a sense of personal accomplishment

I really care about the future of my company

Rational Engagement

I understand how my unit contributes to the success of my company

I understand how my role is related to my company’s overall goals, objectives, and direction

I am willing to put in a great deal of effort beyond what is normally expected to help my company succeed

I am personally motivated to help my company be successful


An environment which maximises An environment which maximises engagement - engagement - output and input indicatorsoutput and input indicators

INDICATORS OF COMMITMENT/ENGAGEMENT

• sickness and reasons• attrition and reasons

• opinion surveys

• leadership• nature of the workplace

• nature of the workgroup

• management style

• investment in learning

• the challenge of the work itself

• rewards and recognition


1. Do I know what is expected of me at work?2. Do I have the materials and equipment I need to do my work right?3. At work, do I have the opportunity to do what I do best every day?4. In the last seven days have I received recognition or praise for good work?5. Does my supervisor, or someone at work, seem to care about me as a person?6 Is there someone at work who encourages my development?7. At work, do my opinions count? 8. Does the mission/purpose of my company make me feel like my work is important?9. Are my co-workers committed to doing quality work?10. Do I have a best friend at work?11. In the last six months have I talked to someone about my progress?12. At work, have I had opportunities to learn and grow?

Buckingham “First Break All the Rules”…from a million pieces of Gallup data

12 Questions needing a positive answer12 Questions needing a positive answer


Having decided on our measuresHaving decided on our measureswe now need to integrate them,we now need to integrate them,correlate them, and understandcorrelate them, and understand

cause and effectcause and effect


People as Assets

x =

The value of thepeople we have, using our chosen index

Commitmentand engagement

Contribution to added value

The measures of value forstakeholdersor ofproductivity

The People Monitor – Group XX

Success indicators

Input measures

The factors thatlead to engagementof this group

The measures ofcommitment and

engagement

Maximising the value

Measures of humancapital management processes – both inputsand success indicators

“GREAT PEOPLE” IN A “GREAT GREAT RESULTS PLACETO WORK”

In each of these

focus on what

is important,

the “80%”, that

makes the most

difference


People as Assets

x =

The value of thepeople we have, using our chosen index

Commitmentand engagement

Contribution to added value

The measures of value forstakeholdersor ofproductivity

The People Monitor – Group XX

Success indicators

Input measures

The factors thatlead to engagementof this group

The measures ofcommitment and

engagement

Maximising the value

Measures of humancapital management processes – both inputsand success indicators

“GREAT PEOPLE” IN A “GREAT GREAT RESULTS PLACETO WORK”

Getting these

measures need not

be a complex

exercise!


THE HUMAN CAPITAL BALANCE SHEET

ASSETS LIABILITIES

Factors on theOperating Statementthat are at or ABOVEtarget

Factors on theOperating Statementthat are BELOW target

OUR PEOPLE• • MOTIVATION/ENVIRONMENT• • VALUE ADDED• •

OUR PEOPLE• • MOTIVATION/ENVIRONMENT• • VALUE ADDED• •

The Monitor is like an “Human Capital Operating Statement” - The Monitor is like an “Human Capital Operating Statement” - we can also have:we can also have:


Assessing the Value of Customer Service Officers at Lloyds TSB

CSOs as Assets CSO MotivationDrivers

CSO Contributionsto Added Value

Businesscapabilities

Competenciesand behaviours

Performance

Task achievement Team/ workgroup Customer service Recognition

Change in CSOperformance leadingto….

Improved servicedelivery on scorecard

MEASURES + MEASURES = MEASURES

Set benchmarks Quarterly PM

assessments Specific HR data Review Use interventions

Set benchmarks Quarterly CSO

surveys Specific HR data Review Use interventions

CAREsurveys/ complaints

Observations of CSOs Mystery shoppers Review

•Work on perception versus reality of good service•Improve People Development focus of scorecard•Improve management capability through coaching

HR Team-Manager Interventions

Improves CSO

PerformanceTaken from Evaluating the Role & Contribution of HR, Careers Research Forum, 2004


3900

0

1000

2000

3000

4000

5000

15.4

18

14

15

16

17

18

19

STANDARD CHARTERED BANKSTANDARD CHARTERED BANK%

Pro

fit

mar

gin

incr

ease

Hong Kong: Profit margin

16% higher profit margin growth

Bottom quartile branches

Top quartile branches

31

54

0

10

20

30

40

50

60

Ghana: Deposit growth

Dep

osi

t g

row

th (

%)

74% higher deposits





1.9x more likely to stay

Kenya: Intention to stay

% ‘s

tro

ng

ly a

gre

e’



36x higher loss in less engaged branches

Zambia: Customer fraud

$ p

er a

nn

um

49%

91%

0%

20%

40%

60%

80%

100%


A difference of £35million a year

Average monthly shrinkageby employee engagement groups

(per square foot, Feb ‘01 to Jan ‘02)

Employee Engagement GroupsLOWER THREE QUARTILES BEST QUARTILE

Higher Employee Engagement Results inHigher Employee Engagement Results inLess Shrinkage – Higher Profit at B&QLess Shrinkage – Higher Profit at B&Q


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Documents

Developing Human Capital © Andrew Mayo 2008 1 Andrew Mayo, Professor of Human Capital at Middlesex University,President of the HR Society and Director,