Human capital has recently been the topic of many, many conversations. Everyone appears to be concerned with how to develop their human capital – and for good reason! Developing your human capital ensures that your workforce is being effective and efficient, and ultimately, improving your company’s overall performance.
Human capital is what your employees possess in terms of their knowledge, skills, experiences, and commitment invested in the organization. In fact, human capital includes the knowledge, education, vocational qualifications, professional certifications, work-related experiences, and even the competencies of your workforce.
Armed with this definition, we can now tackle our topic. Measuring human capital: why and how to measure it!
Measuring human capital: Why, oh why?
Simply attempting to measure and develop your human capital just because it is “good practice” will never help you achieve your goals. You need to know why you are doing it in order to get the most out of it.
On that note, here’s a few reasons why you should measure your human capital.
1. To determine your human capital’s ROI
As with any other resource, your human capital is an asset that you invest in, and expect to get a return on. Once you calculate what your return is on your human capital investment, you will be able to judge the efficiency and effectiveness of your human capital.
2. To identify gaps in human capital
It’s quite simple really: when you measure what you have, you will be able to see what you don’t have! The gap becomes even clearer when you consider your organization’s overall objectives.
For example, if your company’s objective is to be the best service provider in the IT industry, then having exceptional IT skills is an essential attribute that your human capital needs to possess. But if your organization’s objective is to be the highest grossing retailer, then exceptional IT skills probably isn’t going to be at the top of your list!
3. To bridge the gap in your human capital
Just like with any other analyses, their overall objective is identifying what you have, what you are lacking, and then determining how to bridge the gap between the two in order to achieve your organization’s goals.
It is critical to keep in mind your organization’s objectives during all of your analysis, and especially when bridging any gaps in human capital. You should ensure that how you bridge the gap supports your company’s goals. For example, you might think that any gap could easily be resolved with the right training program. However, if your company’s corporate strategy is to be the lowest cost provider, then spending a large sum of money on a training program might not be the best answer.
Now that we have a clear understanding of why it’s important to measure human capital, it’s time to find out how to measure it!
How to measure human capital
We have already mentioned that human capital is considered a resource; an asset. Just as land, equipment, bonds, and stocks are all assets, so is your human capital.
However, unlike other assets and resources, human capital is an intangible one, just like intellectual property or patents are. Intangible assets are no less valuable than tangible ones, it’s just that their value cannot be discerned by touch.
That being said, it is easy to see why there is no one, straightforward way of measuring human capital. Not only because it is intangible, but also because they are many variables that affect it. One measure, however, that is relatively more straightforward is measuring your human capital’s return on investment (ROI). And here is how to do it.
Measuring your human capital’s ROI
All you need to do to measure your human capital’s return on investment is use the following formula:
“Total Organizational Profits” is what your company has made in profits after it covered all of its expenses, while “Investment on Human Capital” refers to the amount of money your organization has put in to develop its human capital; i.e. recruitment and selection, training and development, compensation, etc…
Use this measure to determine if your ROI is sufficient, and if it is comparable to that of other companies in the same industry.
Remember that ROIs differ from one company to the next depending on their size, strategy, and industry, but bench-marking is always considered good practice!
Other human capital measurements
Because human capital refers to the knowledge, skills, experiences, other attributes, and commitment invested in the organization, these are what you should focus on to improve your human capital’s ROI. While there isn’t any concrete measurements for human capital, here are a couple of other ways that can help you out.
1. Skills Inventory
A skills inventory is a recording of the skills, capabilities, qualifications, trainings, and certifications of your employees. The skills inventory may also include your employees’ preferences, career goals, and other developmental information. The purpose of the skills inventory is for an organization to have a database of its resources for more effective HR management.
While the main purpose of a skills inventory might not be measuring human capital, having a database of the information can certainly help you! Sort, arrange, and compare your employees’ skills with what is required for their positions, and then identify the gap and determine how to bridge it.
It is not only essential to ensure that your employees have the knowledge, skills, and experience to successfully perform their job, you also need to focus on their “other attributes”. Of the “other attributes”, the predominant factor that is also the most often considered is personality.
An individual’s natural reflexes, tendencies, attitudes, and innate traits are what differentiate a good employee from a great one. Use psychometric testing to measure your human capital’s “other attributes”, identify the gap, and provide you with insight on how to best bridge it.
Many recent studies have shown that over half the organizations today believe that HR is more influential than it was five years ago. Executives are now recognizing HR’s ability to making strategic contributions to the organization’s overall objective.
Start making that contribution in your organization! Identify your human capital’s ROI, determine how to improve it, and use effective tools to guide you.
Now that you know why you need to measure human capital, make sure you have all the rights steps to assure its optimal development!