Posted by Crunchr ● 2/4/19 10:34 AM

Calculating the Value of Human Capital

Human Capital – An Asset or a Cost?

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Today it is relatively easy to understand the fact that the intangibles i.e. workforce accounts for about 80 percent of value generate by a business. However, the irony is organisations – large or small – consider their workforce as a cost rather than an asset. These costs are tucked away neatly in the cost of goods sold and are not shown on the balance sheet.

Amongst other things, HR plays a central role when it comes to reducing these costs, turnover and vacancies. Because we are still grappling with matrices and measures for human capital, we are unable to provide evidence of the real value that human capital creates for a business. Thus, the conversation around our workforce is confined to the running cost instead of value.

Organisations are now caught in a fix when they try to articulate the role played by human capital to deliver the business strategy. This concern has opened a host of conversations around the need to measure the true value human capital brings to a business.

Measuring the Return on Human Capital
The workforce of a company is often one of its largest costs and measuring the true return on investment (ROI) on human capital has been challenging. There have been several initiatives to measure and analyse the workforce, but they differ from business to business and country to country making it a challenge to accurately benchmark and be globally relevant.

One of the key reasons being that there is no stipulate to report human capital. As with Accounting there are set standards that are published each year under the IFRS (International Financial Reporting Standard), which prescribes how to account for everything in a business. However, for the HR to establish standards around human capital has been a long and taxing endeavor.

The Embankment Project
One of the recent efforts of knitting all the value that is created by intangibles of a business has been the Embankment Project for Inclusive Capitalism (EPIC). EPIC was a joint effort by the Coalition for Inclusive Capitalism, EY and 31 companies, asset managers and asset owners with approximately USD 30 trillion of assets under management. They all came together in pursuit of a single goal; to identify and create matrices to measure and demonstrate the long-term value generated by intangibles within organisations.

Rethinking how Human Capital adds value to organisations
EPIC has sought to synthesize the standards to measure and report on key areas related to Talent i.e. Human Value. Project participants concluded there was a need for comparable metrics in three key areas of Talent where a company’s actions could influence its long-term prospects i.e. Human capital deployment, Organizational culture and Employee health. EPIC encourages reporting these key matrices of Human Value.

Ultimately, this will assist organisations to understand and evaluate the role that human capital plays in a business. This opens space for data-driven decision making when it comes to strategic workforce planning. By providing many relevant key metrics that are recognized globally, this initiative has proven to be an important first step towards creating a consensus on how businesses really create value – and how to measure that value in a way that is useful to businesses and investors alike.

Measuring human capital initiates a data-driven approach to identifying effective people management practices, which, if done correctly, can assist in starting with Workforce Analytics and ensure capturing the true value of human capital for a business.

 

 

Topics: Blog