Financial Acumen for HR

Transcription

1 Financial Acumen for HR Human Capital Management Institute October 23, 2014 Human Capital Management Institute 1

2 Jeff Higgins Chief Executive Officer Human Capital Management Institute Our Speaker Jeff is the CEO of the Human Capital Management Institute, a driving force in Workforce analytics at leading companies who transform workforce data into a source of value creation via planning and predictive modeling. With his unique combination of experience as both a senior HR executive and former CFO, Jeff helps organizations around the world rapidly advance their analytics & workforce planning journey. He is a regular speaker at HR events, a member of the Human Capital Institute National Advisory Council on Talent Leadership and a founding member of the PwC Saratoga Institute advisory council on metrics. Human Capital Management Institute 2

3 About Human Capital Management Institute We believe organizations can and must, find better ways of measuring their investment in human capital. Our vision of the future is one with human capital information as impactful to business decision making as financial information is today. We Bring Financial Discipline, Standards and Rigor to Workforce Analytics HCMI Background: Specialized in HR analysis & metrics Deep expertise in Analytics & Planning Board made up of CFOs and HR heads Over 40 years of experience What We Do: Answer complex human capital questions Quantify human capital Transform workforce data to intelligence Enable HR and Finance to talk SaaS Analytics & Workforce Planning Software Consulting Training Benchmarking Human Capital Management Institute 3

4 Questions about Financial Acumen What is the Language of Business? What does Management Care About Most? What is HR is most afraid to talk about? Human Capital Management Institute 4

5 Key Financial Acumen Elements 1. Speaking the language of business 2. Appreciating vs. depreciating Assets 3. Materiality: Is it really enough to care about 4. Return on Investment (aka cost vs. benefit) 5. Capital vs. expense (buy computer or run training?) Human Capital Management Institute 5

6 Asking the Right Questions What If you could answer the following? 1. Which workforce HR metrics link to business results? 2. What is our workforce productivity? 3. What size and cost of workforce can we afford? 4. Is quality of hire (i.e. Top Talent ) better than cost per hire? 5. Is it better to build, buy or rent talent? Human Capital Management Institute 6

7 Value Creation in Today s Marketplace Introduction Are we managing the right things or just managing what we know how to manage? Tangible Asset/Value Measures well established for modern Finance as a Decision Support Science Well Measured Easy to Measure Intangible Capital Value Market value driven by factors Not on a balance sheet Intellectual or Human Capital* Not well Measured Hard to Measure Source: Ocean Tomo Research, Inc., 2011 Human Capital = employee knowledge, training, productivity, experience, culture, leadership, development, performance, creativity, etc. Human Capital Management Institute 7

8 SHOW ME THE MONEY! 15% productivity gain and lower costs ($55.0 Billion Package Delivery Co. ) Predicting sales stars pre hire {$1.0 Billion Bank} ROI of sales training {$2.0 Billion Retail Co.} Location optimization for talent growth { West Coast Regional Bank} Employee engagement to revenue impact {$1.0 Billion public Airline} 40% voluntary turnover reduction {public, financial services co.} ROI of internal vs. external hires {public bank} $1.1 Billion Annual $264 Million Annual $1.1 million per sales person $250 Million Annual $250k per Salesperson $200 Million 10 years $96 Million Annual $5 per flight premium $12 Million Annual majority sales + operations positions $6 Million Annual Human Capital Management Institute 8

9 The Why of Traditional Financial Statements Financial statements are used by many different stakeholders Stakeholder Company Leadership Prospective Investors Financial Institutions (banks and other lending companies) Government Entities (tax authorities) Vendors who extend credit Media and the General Public Use Tool for business decision making that may affect an organization s continued operations and annual report to stockholders Assess the success and viability of investing in a business Decision to lend to a company or extend debt securities Ascertain the propriety and accuracy of information for legal, tax and audit purposes Assess the creditworthiness of the business Variety of reasons But they leave out the company's most valuable asset: The Workforce. Oops! Human Capital Management Institute 9

10 Standards: Accounting vs. HR Accounting Generally Accepted Accounting Practices (GAAP) + International Financial Reporting Standards (IFRS*) Standard Setting Boards (i.e. PCAOB**) Standards for widely used metrics and terms Standard Disclosures and Financial Statements (Income Stmt, Balance Sheet, Cash Flow Stmt) Common Basis for Analysis and Insight HR 1 st Limited ISO US and Industry pending Practices ISO Int l and standard Benchmarks (limited Government reporting requirements) SHRM Technical Advisory Group (TAG) + special SHRM*** Taskforces but currently (4-5 Currently) no Board? HR disagrees on basic things (i.e. what to include HR disagrees on basic things (i.e. what to in voluntary turnover, what is a promotion) include in voluntary turnover, what is a promotion) ISO TC 260 TAG Taskforce formed to manage Companies disclose only headcount, no HR Standards standard reports Standards Best Practice are coming Companies to HR! using Internally *IFRS = International Financial Reporting Standards ** PCAOB = Public Company Accounting Over-site Board *** SHRM = Society for Human Resource Management Human Capital Management Institute 10

11 Measurement Trick #31 Measurement Best Practices: 1.Metrics that are actionable 2.Metrics that identify, quantify, and clarify issues across the employee cycle 3.Metrics that link to business results 4.Metrics to capture leading versus lagging indicators Human Capital Management Institute 11

12 What to Include in a Business Case 1. Compelling Questions Ask the Right Questions 2. Objective Measures and Facts Historical Data, Key Metric Indicators, Segmented Data 3. Powerful Visuals Charts Chart(s) that Show Insight (i.e. Story) and Drive Action 4. Use Qualitative Story Telling Two of our Top 3 Salespeople came from other industries 5. Link to Business Impact (ROI/Cost/Profit) The Cost Savings is a range of $1.0 to $3.0 Million Human Capital Management Institute 12

13 Components of a Business Case 1. A Business Need or Imperative Why A defined problem/opportunity or question(s) to be answered 2. Quantitative Analysis What Current state assessment Alternatives Evaluated, (be sure to include do nothing) Cost Benefit Analysis or ROI What do we get 3. Risks List key risks what we miss out on (address What if we do nothing ) 4. Timing, Resources, Process When, include roadmap or project plan (must have 90 day deliverables) How, the process to be used (e.g. GE s six sigma process) Who, document who will do it (champion, oversight, partners) Human Capital Management Institute 13

14 Employee Sales Production Case Study: Training and Sales Performance High At all levels of tenure, training by the sales manager significantly increases employee sales production. Employees completing some courses have 45% higher sales production than those completing no courses. Employees completing all courses have 75% higher sales production, $250k USD than those completing no courses. over $180M in the year after training is completed**. 20% of EEs 10% of EEs 70% of EEs Average r 2 =.63 Low < 3 Months 3-6 Months 6-12 Months Months Months 36+ Months Employee Tenure Annual Difference Between All and No Courses No Courses Some Courses All Courses Human Capital Management Institute 14

15 Best Practices of HR Analytics Programs Focus on solving business issues first before HR issues Find the talent you need to execute Focus on questions rather than answers or available data Aim small; seek out quick wins (define formulas, publishing KPIs, etc) Integrate workforce data to business data (financial, customer, operations etc..) Tell a complete story: Quantitative with strong numbers Visual with powerful visual charts Qualitative with a story and real world examples from the business Human Capital Management Institute 15

16 3 Steps to Financial Acumen Preparation, Preparation, Jump Already! Human Capital Management Institute 16

17 Contact Information: Human Capital Management Institute Jeff Higgins, CEO For more information on products and services: SOLVE Software Human Capital Training and Financial Statements Consulting Human Capital Workforce Data Workforce Metrics Handbook Integration Blueprint Planning Workforce Intelligence Consortium Human Capital Management Institute 17

18 Appendix Human Capital Management Institute 18

19 Total Cost of Workforce (TCOW) The Bottom Line = Controlling Workforce Costs Total workforce Direct business costs + HR, including: Total Cost of Workforce = + Employee compensation (salaries/wages, incentives, overtime, equity & other pay) + Contingent temporary/contract labor (costs) + Employee benefits and perks (costs) Why is it important? + HR function (costs e.g., recruiting, training & support) + Retiree or inactive workforce costs* (costs) 1% TCOW savings at a Fortune 500 co. = $30 million Workforce costs are the largest cost (average 70% of operating expenses) What gets poorly measured, gets poorly managed Control/Benchmark business unit and organizational performance TCOW as a % of Revenue TCOW as a % of Total Expenses Human Capital Management Institute 19

20 Human Capital ROI Ratio Human Capital ROI Ratio = Total Operating Revenue (Total Expenses Total Cost of Workforce) Total Cost of Workforce Description: Net operating profit impact of each dollar invested in human capital or the total cost of the workforce. NOTE: If Total Cost of Workforce is not available, total costs of employees can be used as an alternative. Best use: Organizations tracking Human Capital ROI Ratio can effectively measure the linkage of overall workforce changes to trends in the organization s market value over time. This metric is optimized when analyzed by employee productivity, performance, turnover, and future workforce changes in support of optimizing overall market capitalization along with value provided per FTE employee or worker. Human Capital Management Institute 20

21 Return on Human Capital Investment Return on Human Capital Investment = Total Operating Profit Total Cost of Workforce Description: Return on investment in terms of net operating profit, expressed as a percentage of the total dollar amount invested in human capital workforce costs. Best use: "Leading" - Return on Human Capital Investment is a strongly linked leading indicator of (for publicly traded or other organizations for whom a relative market value is obtainable), Organizations measuring or tracking this metric can effectively measure the linkage of overall or large scale workforce changes to trends in the organization's market value over time. NOTE: this metric is optimally used for long term strategic predictions rather than short term measurement since organizational market values can fluctuate dramatically due to uncontrollable events as well as industry and market changes. Human Capital Management Institute 21