Assessing the value of human capital (HC), the most important asset of any organization, has long been easier said than done. Because it is such an intangible asset, assigning a value on a balance sheet is a perennial challenge. There are no generally accepted standards for measuring the value of people, unlike the readily available tools for quantifying the value of tangible assets such as equipment, office furniture or accounts receivables.
Standard Human Capital Valuation Metrics Remain Lacking
As human capital management has come to the forefront of today's innovation-driven, talent-driven and knowledge-based economy, and as smart organizations make huge investments in developing their people, CFOs struggle with measuring the return on their human capital investments. CFOs certainly recognize the truth of that ancient, much-parroted truism, "people are our most valuable asset," and invest in HCM accordingly, but they don't have standard metrics to assign a value to the people they are investing in.
The CFO of iRobot explained the HC valuation problem in an article for CFO Magazine, "It's a fair point that the balance sheet doesn't recognize the value of human capital, and certainly not the full value of your intellectual property. For a high-growth technology company like ours, there is significant intrinsic value in the know-how and innovation of our people, which is why we've traded over the last couple of years at a fairly attractive multiple."
But understanding your HC's perceived value is still more guesswork than most numbers-driven CFOs would like.
Tangible and Intangible Assets
Not knowing the value of something can create obvious problems. So while your business has metrics to measure its other most important indicators, such as sales revenues and production costs, ironically, there are few standard measurement metrics for the most important drivers of business success.
You can estimate and report the value of your organization's patents, trademarks and other forms of intellectual property. It's not always easy, or without the possibility interpretational differences, but it's possible to determine the value of those intangible assets. So if you can decipher the value of human capital's intellectual creations (innovations), why is it so much harder to determine the value of a great engineer who can drive innovation or a great leader who can inspire entire organizations?
According to a CFO Research Services report, nearly all CFOs recognize the critical impact of human capital in key business areas such as driving customer satisfaction, product/service innovation, growth and overall profitability. Despite their clear agreement on the importance of human capital for business success, and their continued willingness to invest resources in developing their people, only 16 percent of surveyed CFOs reported feeling that they truly understood the return on their human capital investments. When any group of investors does't understand their return on investment, but invest generously nonetheless, there's clearly a need for standardized metrics.
Luckily, help may be on the way.
HCM Metrics to the Rescue?
CFOs and CHROs will need to combine forces to introduce HC valuation metrics and HC reporting standards that are truly representative of your organization. As an article in Strategic Finance Magazine points out: "to be truly valuable, human capital analytics and metrics need links to business results and reinforcement through compensation, communications, training, and ongoing reporting. This is an area where collaboration between the CFO and CHRO can create strategic value within an organization."
For example, the Human Capital Management Institute (HCMI) has developed a number of HC reporting tools called Human Capital Financial Statements to express the value of human capital in various ways. One such tool is called the Human Capital Impact Statement, which the HCMI says "quantifies the workforce impact on financial results. Using the Human Capital Impact Statement, organizations can build and show a business case and quantify the impact of HR, as well as assess historical and projected future impacts of workforce decisions and changes upon the organization's financial results."
While it's clear that more tools are becoming available, such as ongoing initiatives from the Society for Human Resource Management (SHRM) to develop Human Resource Management Standards, much work remains to be done before CFOs will have internationally accepted human capital reporting standards. Nevertheless, people will remain your organization's most critical components. It should, therefore, continue to be a major priority to investigate and incorporate methods to assess just how valuable those people are to your organization's continued success.
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Boston-based Chuck Leddy is a freelance journalist who has contributed regularly to The Boston Globe and Harvard Gazette. He also trains Fortune 500 executives in business-communication skills as an instructor for EF Corporate Language Solutions in Cambridge, MA.