predicting financial performance with human capital metrics webinar on 07/29/13
TRANSCRIPT
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July 29, 2013
Human Capital Management Institute
Presents:
Predicting Financial Performance
with Human Capital Metrics
HUMAN CAPITAL
MANAGEMENT INSTITUTE
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About Human Capital Management Institute
HCMI Background:
Specialized in HR analysis &measurement
Deep expertise in Workforce Analytics &Planning
Board made up of CFOs and HR heads
What We Do:
Measure the immeasurable in humancapital
Transform workforce data into businessintelligence
Provide technology, consulting andtraining so HR can partner with Finance
2
SOLVE Workforce Intelligence Software w Strategic Consulting w Training
Best Practices w Workforce Analytics and Planning w Benchmarking
The Human Capital Management Institute (HCMI) was founded on the belief that organizations can andmust, find better ways of measuring their investments in human capital. Our vision of the future is one inwhich human capital measurement and information is as integral to business decision making asfinancial information is today.
We Bring Financial Discipline, Standards and Rigor to the HR Function
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HCMI Products and Services
Human Capital Financial Statements Human Capital Impact Statement
Human Capital Asset Statement
Human Capital Flow Statement
Workforce Quantifier ROI Calculator
ROI of Workforce Decisions
Cost of Turnover, Workforce Cost , Cost per Hire
Business Case for HR Interventions
Data Integration Blueprint Modular Talent Management Components
Detailed Data Dictionary + Metric Formulas
Key Analysis Segments and Dimensions
Human Capital Metrics Handbook Over 600 Metrics and Detailed Definitions
More than 100 KPI and Best in Class Metrics
Unique Metrics that Monetize Human Capital
Workforce Planning Link Workforce and Financial Metrics
Advanced Retirement Calculator
Forecast Skills, Costs, Talent and Productivity
CorrelationCoefficient(0-1)
FactorsLeadingto IncreasedTurnover
Job Title orPosition
Dissatisfaction With Compensation
High vs.Low TurnoverManager
Commute Distance
Driver#3
Driver#2
Driver#1
.50
.33
.27
.02
LowTurnoverImpact
HighTurnover
Impact
Some
TurnoverImpact
.11
WorkLocation
Numberof Jobsin Last3 Years .70
Hi red T hrough Empl oyee Referra l .19
Job Framework Mapping Integrated Taxonomy 15,000+ jobs
Map Critical Job Roles
Workforce Capability Assessment
Data and Systems Capability + Risk Analysis
Human Capital Measurement Standards
Span of Control Optimizer Tool Benchmark and Optimize Spans
Optimize Management Layers
Career Path Quantifier ROI of Career Path
Build, Buyor LeaseTalent Analysis
Analytic Engagement Projects High Performer Profiles
Engagement ROI and Sales Impact
Turnover and Retention Driver Analysis
Initial Reports&
Analysis
Data Gathering
First Good
Metrics
HR Data Warehouse
Drill-down,standardreportsScenarioAnalysis
ExternalBenchmarking
Contextfordecisions
Data
Driven Decision
Making!
Turnover,Headcount,Hiring
HRISsystem data
C
OEFormation
Data Errors
HR AnalyticsMandate
HR StandardsEstablishedLostHR
Credibility
HR data/systemsAssessed
HR Data Cleansedhistoricaldatascrubbed
Bus.Units
RejectAnalysis
Data Errors
Historicaldatastillbad
1stAnalyticsStudy
Advanced
AnalyticStudies
HR AnalysisValidated
Integrated HR
Databases
COELaunches
TrainingCourses
Bus. UnitsDemand
more
Analyticsjourneysteps
Setbacksalongthe way
Journeypathand goal
HR Roadmap Design Step by Step Actionable Deliverables and Insights
Map for, Systems, Data, Tools, Skills, Metrics + more
Training and Advisory Support Expert Guided Standard and Customized
Ongoing Advisory Support Services
Beginning and Advanced Training
SOLVEWorkforce Intelligence Software Integrated Dashboard, Advanced Tools, Metrics,
Data Blueprint and Predictive Modeling
Automated Completion of HCFS
Statistical Sales Predictor Predict Revenue by Economic/Workforce Factor
Link to economic drivers to workforce metrics
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Measuring Human Capital
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Value Creation in Todays MarketplaceAre we focused on managing the right things or just managing what we know how to manage?
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Intangible Capital ValueIn the Post Industrial Marketplace
Market value Is driven primarily byfactors that do not show up on abalance sheet. The largest beingIntellectual or Human Capital*.
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The Challenge of Measuring Human Capital
Compensation
Transfers
New HireTurnover
SuccessionData
Turnover
Training
Recruiting
EmployeeDat
a
Benefits
Span
of Control
Workforce
Planning
SuccessAdvanced
Analytic
Insights
Complexity of Workforce Data
Employee/Full-Time-Equivalent (FTE)
Jobs/Roles/Skills
Time - Tenure
Compensation ($ vs. Equity)
Frequency of Change
Promotions, Transfers, Hires,Terminations
Jobs/Roles/Skills
Time - Tenure
Measuring the Intangible
Lack of Standards
Lack of Analytic Skills
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Workforce Planning vs. Workforce Analytics
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Workforce Analytics
Workforce Planning
Present
Future
Past
Predictive Analytics
Trend Analysis
Workforce
Knowledge
Key
Performance
Indicators
Workforce Optimization
Future Scenarios
Workforce Planning
Planning and Analytics
Workforce Analytics
Workforce Planning and Analytics LinkageStrongWorkforce Analytics insights enable
future Workforce Planningsuccess.
http://images.google.com/imgres?imgurl=http://www.uiwp.uiuc.edu/porfolio_2008/erin_ludwick/BOOK.jpg&imgrefurl=http://www.uiwp.uiuc.edu/porfolio_2008/erin_ludwick/index.html&usg=__t-8VjUtG2hj0LmCE6OlCD3X5rpE=&h=435&w=700&sz=175&hl=en&start=1&sig2=nynuujnvKezjTJTPWKh2uQ&um=1&tbnid=q53S-NcvStTlnM:&tbnh=87&tbnw=140&prev=/images?q=open+book&hl=en&um=1&ei=zhIVS6OPA4e6tAO1sJiIBA -
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Human Capital Financial Statements (HCF$)
Greater Transparencyinto an organizations greatest asset: theworkforce
A Method to Value Knowledge Capital: measure knowledge capital,the 80% of market capitalization not captured by traditional financialstatements
Improved Investment Decisions: better information = moreinformed investment decisions
Standards in Human Capital Measurement and Reporting:enable advanced benchmarking capabilities for industry, geographic,specific job roles and more
Definitive Methodology for Quantifying WorkforceProductivity: quantifies productivity and talent management impactacross the talent management lifecycle
True Linkage of Human Capital to Financial Results
Deliver HR Value with Human Capital Financial Statements:
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Analysis Overview
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Background
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Analysis Period:
1996 - 2011Sectors:
12 Primary IndustriesSample Size:
22,100 Companies
Primary Human Capital Metrics Analyzed:
- Human Capital ROI Ratio - Return on Human Capital Investment - Total Cost of Workforce
- Total Cost of Workforce Percent of Revenue - Total Cost of Workforce Percent of Expenses
- Profit per FTE - Revenue per FTE
1. Accommodation & Food Services 2. Admin Support & Waste Management Services 3. Arts & Entertainment
4. Finance & Insurance 5. Health Care 6. Manufacturing 7. Mining 8. Professional, Scientific & Technical Services
9. Real Estate, Rental & Leasing 10. Transportation & Warehousing 11. Utilities 12. Wholesale Trade
Industries:
Focus: Year-over-year changes in human capital metrics and business performance.
Primary Hypothesis: Financially successful businesses (those that have risingshare prices which are higher than competitors) have flexible and adaptable humancapital programs.
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Do Human Capital Metrics Predict Stock Price?
A 10% gain in human capital metrics drivesstock price gains of 3% to 19%
Total Cost of Workforce (TCOW) is superior to
headcount metrics (i.e., FTE)
YES! Select human capital metrics predict stock price change for companies
across 12 industry sectors !
New metrics reveal surprise productivitywinners and losers
63.9%59.4% 59.1% 57.0%
53.0% 52.6% 52.0%49.6%
47.2% 45.2%
35.6% 35.2%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
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HC Metrics Correlation to Future Stock Price Changes (R-Squared)
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Analysis Highlights
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Traditional Financial Performance
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Highlights:
Finance & Insurance, Wholesale Trade, Transportation and Utilities improved
Accommodation & Food Services, Arts & Entertainment and Healthcare lag
Surprise - Transportation
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Is the Productivity Real?
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While revenue and profit per FTE are commonly used metrics, they are by no means the best
predictors of financial success. This is because they only show changes in revenue and profitrelative to headcount rather than showing cost changes in the workforce overall.
Historically the assumption has been made that measuring headcount is a good proxy formeasuring cost of workforce, however as our analysis and the below example illustrates, this is afallacy.
The Case for TCOW:
For example, an organization with 100,000 employees at the end of 2010 and 100,000 employees at the end
of 2011 would appear to have effectively controlled workforce cost by managing total workforce headcount.
However, due to increases in benefits, wages, and changes in the workforce such as bonuses, promotions and
mix of jobs hired, organizations with flat headcount growth can easily (and often do) experience 10% or
greater increases in Total Cost of Workforce (TCOW).
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A New Relationship: Better Productivity Metrics
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Contrary to the previous revenue and profit per FTE metrics, not all sectors improved duringthe analysis period.
Finance and Insurance and Arts & Entertainment both declined from 1996 to 2011.
Highlights
SURPRISE Finance &Insurance, is going thewrong way!
By these measures,Mining is a Big Winner
Most sectors areclustered
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Mining 2012 Update
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However, Human Capital ROI Ratio and
Return on Human Capital Investmentdecreased 45% and 20% respectivelyfrom 2011 to 2012
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
Dollars
(Thousands)
Year
Mining - Traditional Financial Metrics
Median Revenue per FTE Median of Profit per FTE
-
1.00
2.00
3.00
4.00
5.00
6.00
Ratio
Year
Mining - Workforce Productivity Metrics
Median Human Capital ROI
Median Return on Human Capital Invest.
Revenue per FTE increased 22%from 2011 to 2012, almost nochange in Profit per FTE
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Stock Price and HC ROI Ratio CAGR
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Highlights
Rate of Change: CAGR vs. Actuals
Macro Economic Variables Must be Considered
Insight: Relative Company Performance
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Financial Services & Insurance BreakdownRevenue and Profit per FTE
Highlights
Commercial & SavingsBanks are middle of thepack
Sales Financing (i.e. GECapital), + InvestmentBankinglook like stars
Who is falling behind?
2011 Performance
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Financial Services & Insurance BreakdownHuman Capital ROI Ratio, Return on Human Capital Investment
Highlights Sales Financing is a top
performer (i.e. GE Capital)
Investment Banking is aSurprise from 1996 - 2011
21.8% Revenue per FTE Gain
(-29.2%) Human Capital ROIRatio Loss
(-19.0%) Return on HumanCapital Investment Loss
2011 Performance
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Note: in USD $$ Data for 2010, 2011 and 2012 Years KPI = Key Performance Indicator TCOW= Total Cost of Workforce FTE = Full Time Equivalent
Case Study: Productivity Metrics ComparisonBank of America, Wells Fargo and HSBC
2012 Financial KPIs 2010 - 2012 KPI Change Rate
2010 2012 Productivity
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1 2
3
No Clear Winner
Wells and HSBC
Outperform BofA
Wells Looks Like
the Star
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Summary
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Superior Metrics to Manage Human Capital
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Overall, high-performing sectors seem to enjoy one or more of the following factors:
1) Lower human capital intensity
2) Greater potential and to increase revenue and profits without equivalent increases in humancapital costs.
3) Increased demand and/or pricing for commodities (see Mining and Utilities) due to globaldemand, industry deregulation, or other factors.
4) Substantial automation of one or more core human capital labor elements.
Market Share Example:
Average Stock Price = $60/Share Shares Outstanding = 35 Million
5% increase in HC ROI Ratio and Return on HC Investment 5% Decrease in TCOW Percent of Revenue
Projected Value Creation (Market Cap) = $116.6 Million
Includes Accommodation & Food Services, Transportation & Warehousing and Transportation, Support & Waste Mgmt Services
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Human Capital ROI Ratio
HC ROI Ratio = (Revenue (Total Expenses - Total Cost ofWorkforce)) / Total Cost of Workforce
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Description:
Net operating profit impact of each dollar invested in human capital.
Note: It is recommended that the metric "Total Cost of Workforce", which includes the total costs of employeesplus all contingent headcount (contract and temporary workers), is used in calculating Human Capital ROIRatio. If Total Cost of Workforce detailed information is not available, this metric may also be calculated usingthe total costs of employees as an alternative.
Best Use:
Organizations tracking Human Capital ROI Ratio can effectively measure the linkage of overall trends inmarket value over time (for publicly traded or other organizations for whom a relative market value isobtainable). Ideally, this metric should be used for long term strategic predictions rather than short termmeasurement as market value can fluctuate dramatically due to uncontrollable events as well as industry andmarket changes.
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Return on Human Capital Investment
Return on HCI = Total Operating Profit / Total Cost of Workforce
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Description:
Return on Investment (Profit) expressed as a percentage of the total dollar amountinvested in human Capital.
Best Use:Organizations tracking Return on Human Capital Investment can effectively measure the linkage of overalltrends in market value over time (for publicly traded or other organizations for whom a relative marketvalue is obtainable). Ideally, this metric should be used for long term strategic predictions rather than shortterm measurement as market value can fluctuate dramatically due to uncontrollable events as well asindustry and market changes.
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Should include:
Employee compensation (salaries/wages, incentives, overtime, + equity & other pay)
Contingent temporary/contract labor (costs)
Employee benefitsand perks (costs)
HR function (costs, e.g., recruiting, training & support)
Retireeor inactive workforce costs (costs)
Total Cost of Workforce (TCOW)
Total Cost of Workforce =
Total Compensation Costs +
Benefits Costs +
Other Workforce Costs
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Next Steps
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l
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SOLVE: Analytics in 3 Easy Steps
29 Human Capital Management InstituteSource Systems
1. Load data
2. Run Scenarios for ROI and Intelligence
3. Save and Present Results
Data Integration
Blueprint
Dashboards
HumanCapital
FinancialStatements
Metrics
Analytics w ROI
HRTransactions
Standards
Workforce PlanningSOLVEWORKFORCEINTELLIGENCESOFTWARE
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What you Get withSOLVE
CEO/COO CFO
CHRO
HR Function Leads
CIO
Workforce Productivity
ROI of the Workforce
Human Capital Financial Statements
Tools to Control Workforce Cost
Automatic HR Data Warehouse
Data Integration Blueprint
Integrated Talent Mgmt Scorecard
HR Power Tools (i.e. ROI Calculator)
HR Talent Management Dashboards
Workforce and HR KPI Metrics
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SOLVEOverview
Step 2) Scenario Manager
and SOLVE Wizard
Step 4) Workforce ROI
Step 5) Workforce Planning
Step 6) Career Path
Step 3) Human Capital
Financial Statements
Step 7)
Drill to Detail
Step 8) Advanced
Index Metrics
(In Development)
Step 9) Location
Optimization
Step 1)Dashboards
Step 1) Analyze workforce trends andidentify opportunities.
Step 2) Manage scenarios, set projections
leveraged across all tools.
Step3) Model Detailed TCOW, RCOW,
Productivity and Human Capital ROI.
Step 4) Calculate cost savings and ROI.
Validate scenario feasibility. ProjectRevenue, Profit, TCOW and Total Comp.
Step 5) Forecast and plan multiple
scenarios, drill into position groups andlocations. Identify pain points. Model HC,skills, cost productivity and talent.
Step 6) Calculate ROI of Career Paths.
Step 7) Drill to detail for specific locations,job groups and business units.
Step 8) Configure custom index metrics toanswer tough talent management questions.
Step 9) Model relocation analysis to
optimize workforce costs at the Location,location and position level. Includesexternal supply analysis and benchmarks.
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Question and Answer
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Contact Information:
Human Capital Management Institute
Joseph Morrissey, VP Sales
Grant Cooperstein, VP Analytics
For more information about the following products and services, please visit the links below:
SOLVE Workforce Productivity Reports Human Capital Financial Statements
Training Human Capital Metrics Handbook Thought Leadership
Workforce Intelligence
Consortium Group@HCMI
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http://www.hcminst.com/mailto:[email protected]:[email protected]://www.hcminst.com/products-services/solve-hr-management-software/http://www.hcminst.com/http://www.hcminst.com/products-services/human-capital-financial-statements/http://www.hcminst.com/training/http://www.hcminst.com/products-services/human-capital-metrics-handbook/http://www.hcminst.com/thought-leadership/human-capital-management-white-papers/orgplus-total-cost-of-workforce/http://www.hcminst.com/thought-leadership/human-capital-management-white-papers/orgplus-total-cost-of-workforce/http://www.hcminst.com/thought-leadership/human-capital-management-white-papers/orgplus-total-cost-of-workforce/http://www.hcminst.com/products-services/human-capital-metrics-handbook/http://www.hcminst.com/training/http://www.hcminst.com/products-services/human-capital-financial-statements/http://www.hcminst.com/products-services/human-capital-financial-statements/http://www.hcminst.com/http://www.hcminst.com/http://www.hcminst.com/products-services/solve-hr-management-software/mailto:[email protected]:[email protected]://www.hcminst.com/