“Unaltyics” Award Nominee #2

Earlier this year, we launched the 2011 Human Capital Unalytics Award to recognize half-baked thinking in the field of human capital analytics.  We now have a second nominee to consider for the award.

If analytics represent the use of data, analysis and systematic reasoning to make human capital decisions, then these awards are for the opposite – the misuse of data, poor analysis and fuzzy reasoning to make human capital decisions.  Hence:  “unalytics” – short for un-analytics.

Nominee #2 is a US-based human capital institute “founded on the belief that organizations can, and must, find better ways of measuring their investment in human capital.” There is no argument there and it is only proper that Nominee #2 has joined the global struggle to link human capital investments to business outcomes.

Everyone has rightly moved beyond the obsession around demonstrating the value or efficiency of the human resources function.  All the attention is now focused on identifying and measuring the business impact of organizations’ “most valuable asset.”

One strategic front in this struggle is involves the hearts and minds of investors and financial analysts. The race is on to identify a handful of key human capital metrics that will be embraced by the likes of FASB (the Financial Accounting Standards Board) for inclusion in public companies’ financial statements. These winning metrics would offer investors information on the quality of a company’s human capital stock, allowing them to make smarter investment decisions.

Into this heroic struggle steps Nominee #2, Icarus-like in its eagerness to reduce the impact of workforce productivity to a single mathematical formula. In a white paper (what’s that?)  entitled Human Capital Financial Statements, Nominee #2 presents its total workforce productivity impact formula and components as follows.

The equation certainly looks impressive, with many variables and multi-lettered subscripts. Could this be the basis for a unified theory of human capital business impact?

It might be if sufficient explanation were provided to support the argument. However, we are left to fend for ourselves and so here we go. Let’s deal head on with some equation fundamentals and then move on to the underlying mathematics and economics to see if we can appreciate Nominee #2’s contribution.

Asterisks might be acceptable in an Excel formula, but they don’t necessarily represent the multiplication operation in mathematics. The asterisks need to be dropped altogether or replaced by “.” – that’s how multiplication is represented in equations.

Equations are meant to simplify relationships, so we suggest the use of single letters to represent variables? Perhaps replace TWPI with I (even though I is typically reserved to represent investment); TWH with H for headcount; and TCOW with C for cost? We will use these symbols from now on.

In an equation that involves different periods, the variables’ time labels are typically subscripted. TWPIn should therefore read TWPIn.  Furthermore, if you are talking about a “period n,” relative to other periods, either before or after it, you cannot throw into the mix “current year” variables. In other words, the “current year” has to be related to the “period n.”   To understand this better, let’s simplify the equation by replacing the terms in parentheses with letters for now:

Ostensibly, n can take on integer values 1, 2, 3, 4, etc. But if CY stands at 2011, the equation cannot hold – one right-hand-side value (e.g., for CY=2011) is equal to many left-hand-side values (e.g., n=1, n=2, etc.). You have to relate n to CY.

Perhaps you could replace both with t? But this doesn’t feel right; surely there was a sequence of events.

Perhaps n can be replaced by t+1 and CY can be replaced by t? Danger! This becomes a recursive equation and can be hard to compute.

The bottom line is that we have no idea how the variables are related to each other across time, even though a specific temporal relationship has to exist since we are talking about cause (human capital input) and effect (business outcome).

Although R, P and M (for revenue, profit and market capitalization) are subscripted with vfte (for variance per FTE workforce), we are told in the accompanying text that that these variables – “revenue, profit and market capitalization per full-time equivalent [are] integrated measures of financial performance represented as a ratio of the organization’s full-time equivalent (FTE) workforce.”

So there’s no variance going on at all – these are basically per-FTE figures. I think we can dispense with the cumbersome vfte notation and just define R, P and M as revenue-per-FTE, profit-per-FTE and market capitalization-per-FTE.

Uh-oh. Profit is a function of Revenue. At a high level, Profit = Revenue – Expense. If this were a fundamental equation of workforce productivity impact, then every term should be independent – i.e., not a function of another variable.  We’ll let that slide.

Now that we are no longer distracted by the notation, let’s talk units. One way to ensure an equation is correct is to check that you have the same units on both sides. Unfortunately, we are not told what units TWPI is denominated in. Let’s see if we can figure it out by working out the units on the right-hand-side of the equation.

The right-hand side has two terms. The first term has two components: (R+P+M) and H. The first component’ units are $/FTE. The second component’s units are heads. Oh wait – if only we had denominated H in terms of FTE’s, then the FTE’s in the numerator and denominator would cancel, leaving us with $. Perhaps Nominee #2 meant to define TWH as FTE? Let’s assume he did.

The second right-hand-side term also has two components: (Cr-Rr) and Ccy. Since C and R in the first term have the subscript r, denoting percentage change per period, C and R must be in %. But Ccy is in $.

Oops. You can’t add $ and %$. We are in a very Yeatsian situation: “things fall apart; the [equation] cannot hold.”

Ok, so the math doesn’t work. Perhaps the economics will? Unfortunately, economics don’t make sense if the math fails to compute.

Nominee #2, you have well and truly stumped us. Congratulations – not yet – there are many contenders yet to come!

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.
This entry was posted in Analytics, Statistics. Bookmark the permalink.

1 Response to “Unaltyics” Award Nominee #2

  1. Pingback: Human Capital « Donal de Paor's Blog

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