What Financial Analysts Think of Human Capital


A perspectives article with this title from the December issue of Talent Management Magazine prompted the following response from me via the Workforce Intelligence Consortium Linked In discussion group. My response received some positive feedback, so I thought I would share it here.

Hmm. Let’s see if I get the article’s message: HR is measuring more things and this is good. However, the measures relate to drivers of business outcomes, not to business outcomes themselves. Moreover, HR struggles with how to make the connection between what it measures and business outcomes.

I believe the last part about difficulty in making the connection since the connections are not simple accounting connections (increase profit by reducing expense) but statistical connections. Demonstrating a compelling link between an human capital measure and a business outcome is not easy – you need to apply some rigorous math and then boil everything down to a bullet points and not dwell too long on qualifying your claims.

In this respect, both HR and business leadership (and perhaps investors,too) can do better. HR needs to upgrade its skills with respect to statistics and quantitative modeling so that it can make more compelling arguments with respect to human capital influences on business outcomes. This is where human capital analytics come into play. However, business leaders need to invest some more time in understanding the nuances behind the connections that HR does make. Human capital influences will never be deterministic and any predictive analytics need to be thoroughly qualified – the predictions are based on likelihoods, not certainties. I’m often surprised how business leaders will consider uncertainty in strategic business planning, but are surprised when human capital measures and analyses are denominated in probabilistic terms. Investors need to do a better job of identifying what exactly they are looking for in terms of human capital risk. They also need to recognize that the inherent complexity of the connections between human capital measures and business outcomes may render them less useful from an investor perspective.

With respect to the first point about HR making connections to drivers of business outcomes and not business outcomes themselves, I don’t buy it as an issue. If A impacts B and B impacts C, you need to understand A and B in order to understand C. I think too many articles harp on HR’s lack of business sense. Let’s move beyond selling copy and recognize that most HR leaders are savvy business people as well.

All this being said, I would love to hear about what business outcomes (as opposed to drivers of business outcomes) are not being addressed by HR measurement.

 

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About thenelsontouch

Amit is the founder and managing director of Nelson Touch Consulting, a management consultancy that specializes in maximizing the return on human capital through strategy, incentives and analytics.
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