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The Importance Of Human Capital

Why CFOs need to recognize the ROI of their most important asset - people

18Apr

Human capital is one of the key drivers of corporate success and sustained competitive advantage. If you and your rivals are on a completely even footing in every area of the business, it is human capital that can set you apart. This is uniformly recognized by CFOs, who consistently rank talent among their top agenda areas. However, this recognition may not seem immediately obvious, and there is a misconception prevalent among other departments that financial leaders appreciate neither the value of talent, nor the work HR departments do to recruit and retain it.

One of the key reasons it may appear under-appreciated is the difficulty in quantifying ROI, and what this means for the approval of major human capital investment. While CFOs may consider talent identification and organizational development as important, very few describe their understanding of the ROI on investments in human capital as anything better than ‘moderate’. Without this understanding, the investment is often perceived as being high-cost with an indeterminate return, which makes it difficult to verify whether employee education, training, and better recruitment will yield long-term benefits.

This situation is untenable. The nature of the workforce is evolving and, along with general changes to the business environment, this means companies need to have a greater handle on their own workforces more than ever before. CFOs will have to take increasing responsibility for human capital management, and ensure sufficient investment is made in the technology to promote it.

We are currently seeing a number of trends that suggest a need for more analysis of human capital as a risk and asset. Firstly, as companies become ever more service oriented, they will have to rely increasingly on the intellectual capital of their workers. In a digital, service-led workforce, employees expect - and are often expected - to be generalists, the ROI of which is even harder to ascertain than when workers had more defined, limited role. Technology has also brought about other major workplace changes, such as the Cloud and video conferencing software, which have enabled workers to work remotely.

There is also the issue of demographics, and the well-publicized skills shortage existent across all industries and functions. Baby boomers are now retiring from leadership positions and taking their experience with them. They are largely being replaced by Gen-Xers, whose previous roles are being taken by Millennials. This new influx will need to be trained adequately for the roles that they are taking, and investment must be available for this. Millennials also have different expectations about what they want from employment, often seeing roles more as steps on a ladder from which they can learn before they move on elsewhere. This means that greater budgets must be available for courses and training, and CFOs will need to adjust their expectations as to what they will see in return. Rapid advancements in technology also mean that Millennials entering the workforce are not simply being trained to take the exact role they are filling, but there are tools available that mean it can be done completely differently.

CFOs will have to completely re-evaluate their compensation models to suit this shift in the workforce, and ensure funds are allocated that make their business as attractive as possible to retain and recruit the best candidates. Understanding the ROI is, thankfully, far easier now thanks to advancements in analytics and data science. These tools are enabling CFOs to see in real time how staff are performing and how training has had an impact. It can also help in recruitment, making it far easier to pinpoint the best candidates, and at a lower cost than before.

Take the example of Foot Locker. In 2010, the company saw that employee turnover in its retail athletics stores was too high, which was costing them a fortune. Subsequently, the company adopted analytics to profile those retail salespeople who were most likely to stay with the company on a long-term basis. They then used a cloud-based software system to scan applicants’ online assessments and determine how closely candidates’ behaviors aligned with this profile. According to the retailer, this system has helped to improve employee retainment, and the company’s store managers can spend less time on the hiring process.

The ability to measure the ROI on human capital should help to convince the board of where investment is needed, for both the human capital itself, and the technologies to best exploit it. Financial leaders must work alongside HR departments to understand how to make the most of these tools, and share any data needed to build an overall picture of the staffing decisions that are working, and those that are not.

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