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By: Ralf Bovers
Executives are under pressure to deliver, and everything in an organization – including human capital – needs to be measured for its return on investment, as Dr Max Blumberg, Founder of the Blumberg Partnership explains.
As management guru Peter Drucker is often quoted as saying, “If you can’t measure it, you can’t improve it.” The maxim still holds true for leaders of organizations, particularly when it comes to delivering value to shareholders; if they can’t measure their returns, they can’t improve them.
At the executive level in an organization, the main focus is on return on investment, explains Dr Max Blumberg, Founder of the Blumberg Partnership. The CEO is under pressure to deliver healthy returns. If they do, they keep their job and investors are happy. If they don’t, investors will pull their funds, the company’s value will drop and the CEO will most likely be fired, Dr Blumberg says.
If a public company, for example, is targeting a 12% return, then everything the company invests in needs to aim for that benchmark. The return on tangible assets, intellectual capital and financial capital needs to be measured, but this can be easier said than done. “With the case of tangible assets and financial capital, this is easy to do,” says Dr Blumberg. A physical asset like a building could generate a rental income, for example. Or with financial capital, the cost of issuing a bond could be compared with taking out a bank loan.
When it comes to measuring intellectual capital and humans, things get tricky. With humans, how do you measure the return on investment? “If you invest $300,000 in someone to do an MBA – you have no idea what they are going to generate. They could cost you thousands, or they could earn you millions,” says Dr Blumberg, who is also a visiting professor at Leeds University Business School, and a research affiliate at the University of Southern California.
There are some ways of measuring returns with people. A consultant with an MBA could bring in higher fees, or star salesperson could close big-ticket deals. Many roles in organizations, however, don’t generate revenue. With tangible assets, the returns can be plotted neatly on a graph, but humans tend to be inconsistent and unpredictable, comments Dr Blumberg. CEOs need to provide consistent returns, and, in some respects, it is easier to manage machines, he says. It could be tempting for the board to invest in machines instead of human capital, precisely because it easier to measure their returns.
In a world of increasing robotics and artificial intelligence, many roles could be automated in the near future. “Depending on your industry, the productivity of machines in the next 50 years will outperform humans,” says Dr Blumberg. However, in some areas – such as research and development – the investment in intellectual capital will need to continue. The key is for organizations, Dr Blumberg says, is being able to measure whether this deployment of resources is effective.
The danger for HR teams, Dr Blumberg notes, is that if they cannot demonstrate the value of their human capital investments, they risk being replaced with some kind of automation instead.
An effective HR operating model is one that supports the strategy of the organization and the objectives of the executive team. Ideally, HR should start out with the question of what is needed to deliver the business outcomes. Dr Blumberg explains how this works with the Human Capital Profiler, a model that he uses in his consultancy work with organizations. The profiler has four levels: people processes, workforce capabilities, organizational capabilities and business outcomes.
If a consultant were to go into an organization, for example, they would consider the Level 1 business outcomes, which are typically a return on invested capital (ROIC), revenue growth, future value, capital efficiency, sustainability, social impact and total return to shareholders. If a company is not achieving these objectives – it is not profitable, for example – the consultant could start by delving into Level 2 and looking at the organization’s strategic capabilities (Level 2) that are needed to reach those goals, such as developing innovation, product quality and the right customer base. The areas that need to be changed could lie, for example, in Level 3, the workforce capabilities (such as employee experience and talent management). Or there could be room for improvement in Level 4, which comprises the people processes such as career development, reward and recognition, and recruitment.
Things tend to go wrong in organizations, explains Dr Blumberg, when HR projects and initiatives focus on tactical workforce capabilities rather than developing strategic capabilities that support the business objectives. Many HR teams tend to focus on things like retention, turnover, or employee engagement, for example. This, however, is not the language of the business executives who are more likely to be focused on sales, profit, and whether they are getting a return on their human capital investment.
Does measuring human capital in this way mean that organizations could be at risk of reducing their people to numbers, treating them as assets, and effectively dehumanizing them? Not at all, argues, Dr Blumberg. In fact, with analytics, the case is made for investing in human capital; people analytics demonstrates – and measures – the value that humans have.
At the moment, comments Dr Blumberg, many decisions at the executive level are made randomly, and based on gut feelings. “With people analytics you can make a scientific decision,” says Dr Blumberg. Analytics can show where investments are paying off, and where more resources should be allocated. And, to paraphrase Drucker, if the returns can be measured, they can be improved. And hopefully the CEO will keep their job a bit longer…
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