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

Setting the Investment LevelSetting the Investment Level

Let Others Do

It!

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

Setting the Investment LevelSetting the Investment Level

Invest the Minimum!

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

Setting the Investment LevelSetting the Investment Level

Invest with the Rest!

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

Setting the Investment LevelSetting the Investment Level

Invest Until it Hurts!

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

Setting the Investment LevelSetting the Investment Level

Invest as Long as

There is a Payoff!

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)

The ResultsThe ResultsThe Results

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.

Sample of Sample of Published ROI Published ROI

StudiesStudies