The ROI of Human Capital: Measuring the Economic Value of Employee Performance

by Jac Fitz-Enz

Overview

Everyone in business agrees: People are a company's greatest asset. Yet with today's employee costs typically exceeding 40 percent of corporate expenses, senior executives, line managers, and HR professionals alike long to move beyond feel-good platitudes and quantify human value.

Jac Fitz-enz, founder of the prestigious Saratoga Institute and often called the father of human performance benchmarking, has perfected a method for assessing, in hard numbers, the financial worth of an organization's people. In his breakthrough new book, Roi of Human Capital: Measuring the Economic Value of Employee Performance, Fitz-enz gives everyone who manages others the precision tools and insights to calculate the payoff of any investment in their workforce.

"People are the only element with the inherent power to generate value," Fitz-enz points out. "All other variables-cash and its cousin credit, materials, plant and equipment, energy-offer nothing but inert potentials. They cannot add anything until some human being leverages that potential by putting it into play."

Applying a unique combination of management expertise and quantitative metrics, Roi of Human Capital reveals how to gauge every person1s bottom-line contribution to a company—and to multiply value-added on three essential levels:

Enterprise - analyzing five fundamental indicators tied to the goals of every organization: cost, time, volume, errors, and human reactions.

Process - enhancing work functions in terms of service, quality, and productivity.

People - optimizing the five crucial components of managing human capital: planning, acquiring,maintaining, developing, and retaining people.

With formulas and scorecards for measuring and monitoring at every step, Fitz-enz shows how to integrate these levels into a single, end-to-end system of human capital valuation reporting. Along the way, he presents dozens of vivid, real workplace examples, reflecting timely issues-including the dilemma of America's current and continuing labor shortage and the implications of technology, outsourcing, using contingent workers, and merging with or acquiring another company.

Underlying the guidelines and techniques of Roi of Human Capital is the fundamental question: How can a company maximize its human capital to gain a competitive edge and increase profitability? Backed by more than two decades of international research, Fitz-enz offers a clear answer: productivity soars when people are fulfilled in their work. The author pinpoints two key drivers of fulfillment for workers at every level: knowledge and recognition. Ever practical, he emphasizes that investment in people is critical, but it must be monitored. "Faith in people is a wonderful thing." he writes, 'but you have to manage."

Wise, witty, and humane, THE ROI OF HUMAN CAPITAL is a unique and vital resource for all who manage people with a stake in their company's success.

Product Details

ISBN-13:	9780814413357
Publisher:	AMACOM
Publication date:	02/23/2009
Sold by:	Barnes & Noble
Format:	eBook
File size:	2 MB

About the Author

JAC FITZ-ENZ (San Jose, CA) is founder of the Saratoga Institute, known worldwide for its pioneering research and reports on performance measurement and improvement, and of the consulting firm Human Capital Source. His other books include The ROI of Human Capital, winner of the Book of the Year Award from the Society for Human Resource Management.

Read an Excerpt

Excerpt

Guiding Principles

"You may be flexible on strategy, but must remain consistent on principle!"

—Anonymous

Throughout the writing of this book, I made notes about the principles that underlie my thinking and experience. Originally, my thought was to place them in the book where their point would fit in the text. However, I now believe that it makes more sense to put them all in one place. As you review these principles, please pause for a moment on each one and ask yourself what the point is behind it. Why did I decide that it would be useful to reinforce these issues?

The Foundation Stones of the Human Capital Measurement Pathway

Principle 1: People Plus Information Drives the Knowledge Economy

You've heard it before and you'll hear it again: This is the Information Age, and people are the most important resource. It is true—profoundly true—with implications that are still difficult to fully grasp. Imagine going into the twenty-first century without current telecommunications technology. It would be impossible to sustain the growth of the world market without the rapid movement of information. And, as we increasingly automate our organizations, we change our cultures. Since communication is so central to a culture, new channels and media force a culture change. Bringing people and organizations along as fast as technology is the primary challenge.

Principle 2: Management Demands Data; with Relevant Data We Start Managing

To say that we have no data is not accurate. We collect data constantly through our senses in interaction with our colleagues and our environment. However, we need relevant information with which to make good decisions. Many decisions are made without adequate data. Sometimes it can't be helped. An apparent emergency springs up, and we must respond. Nevertheless, this does not provide an excuse for the lack of a human capital information database and reporting system. People who have the best information are the winners.

Principle 3: Human Capital Data Shows the How, the Why, and the Where

Since people are the only self-determining assets, it follows that they are the cause of everything that happens. If something goes well, it is due to the behaviors of the people involved. If it blows up, literally or figuratively, that is also the result of human behavior. It must follow, then, that in order to know how to improve something, we must know how people are dealing with it. Cost, time, quantity, and quality data on human capital provide the base for effective action.

Principle 4: Validity Demands Consistency; Being Consistent Promotes Validity

The principal criticism of human capital measurement is that it is neither as consistent nor as accurate as financial information. This is because people have started measurement programs by adopting unproven external metrics or by making up their own. When the system is not standardized, everyone who comes along is free to change it to suit their personal needs. Then there is no way to compare their view with that of others, since the definitions are idiosyncratic. They build a modern Tower of Babel. However, when a standard set of metrics is established and used consistently over a long period, they are as accurate as a financial system.

Principle 5: The Value Path Is Often Covered, and Analysis Uncovers the Pathway

One of the major barriers to measuring qualitative, intangible human capital factors is the belief that we cannot demonstrate cause and effect. Many unknown and unknowable forces constantly in action make it impossible to prove anything in business. Nevertheless, being clear about our destination, knowing the positive and negative forces along the way, and understanding the process necessary for the journey increase the odds that we will travel by the most expeditious route and arrive ahead of the hunch players.

Principle 6: Coincidence May Look Like Correlation but Is Often Just Coincidence

It is a great temptation to claim that factors moving in parallel are correlated. Unfortunately, often what we observe is only a random variation. This error can be avoided if we start our observation from valid principles. Believing that two things that are basically unconnected to each other are related is the basis for most misperceptions. To produce a true correlation, we must first demonstrate the probability that A and B have something to do with each other. Starting from this base avoids false conclusions.

Principle 7: Human Capital Leverages Other Capital to Create Value

People make things happen. Equipment, processes, and intellectual property are leveraged not by their inherent capability but by the actions of human beings. Employee skill, knowledge, and motivation generate the incremental values that lie within the potential of organizational assets. Management provides the structural capital at the best cost possible. Employees give life to that capital and create value through interaction with coworkers and outside stakeholders.

Principle 8: Success Requires Commitment, and Commitment Breeds Success

The history of sustained excellence in business shows that commitments were made to a long-term core strategy. That strategy described the organization's dedication to dealing with employees, customers, suppliers, competitors, and other stakeholders, including community and government. Frequent oscillations between divergent philosophies and behaviors are a recipe for failure. Despite accounts of sensational results in isolated and short-term situations, the rule is inviolable. Building an institution of value is the only management practice that guarantees long-term excellence.

Principle 9: Volatility Demands Leading Indicators, and Leading Indicators Reduce Volatility

Walking into the future with our eyes glued to the results of the past is a very dangerous act. The wide-open, volatile, global marketplace of the twenty-first century allows everyone to compete. Cyclonic changes in technology make yesterday's processes obsolete overnight. The instantaneous access to information and the annual doubling of knowledge demand a constant view of the horizon. We absolutely must have intelligence systems that provide clues to what is coming. That includes intelligence on human, structural, and relational capital. It is as vital to a successful future as a healthy lifestyle is to extended longevity.

Principle 10: The Key Is to Supervise, and the Supervisor Is the Key

All evidence points to personal relationships as the cornerstone of employee performance. The talented employee depends on the supervisor for guidance, support, and development. Throughout one's career, the supervisor is the principal route for two-way communications. This person interprets what is happening and what is coming. This person describes how change will affect the employee. This person defends the employee and is the primary channel through which employee ambitions are fulfilled.

Principle 11: The Future Is Harder to Prepare for Than the Past

I leave you with this business koan. Think about it. Let me know what it says to you (my personal e-mail: [e-mail]).

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Excerpted from The ROI of Human Capital by Jac Fitz-enz. Copyright © 2000 by Jac Fitz-enz. Excerpted by permission. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.

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Table of Contents

1. Human Capital: The Profit Lever
2. How to Measure Human Capital'sContribution to Enterprise Goals
3. How to Measure Human Capital's Impact on Process Improvement
4. How to Measure Human Resources' Value Add
5. End to End Human Capital Value Reporting
6. The Next Generation: Trending, Forecasting and Predicting
7. How to Value Improvement Initiative Results
8. How to Leverage Your Human Capital ROI
9. Making a Quantum Leap
10. Guiding Principles
11. Summing Up and Looking Ahead

What People are Saying About This

From the Publisher

"Praise for The 8 Practices of Exceptional Companies:

"Fitz-enz continues his 20-year crusade to demonstrate the need to move from a "human resources' to a "human capital' mind set—with a focus on the big-ticket best practices."—Robert H. Hunter, Managing Partner, Andersen Consulting

"Solid business wisdom that allows for humanity and humor." —Booklist"

Editorial Reviews

...is absorbing and a pleasure to read.

GetAbstract.com

…an important new business book….The ROI of Human Capital will serve as an excellent reference and guidebook for HR professionals and business leaders, especially CEOs and CFOs, who need to understand how HR contributes to their bottom line. It can serve as a roadmap for HR professionals who want to plan their organizational strategy in a way that will be embraced by the executive team. This work will be invaluable as a framework for executive dialog on HR issues.

HR Magazine

Winner of the 2001 Society for Human Resource Management Book Award

"Well worth reading by more than the HR crowd. Solid business wisdom that allows for humanity and humor." Booklist

From the Publisher