February 5, 2013
© Human Capital Management Institute
Presents:
Predicting Financial Performance with Human Capital Metrics
HUMAN CAPITAL MANAGEMENT INSTITUTE
About Human Capital Management Institute
HCMI Background:
Specialized in HR analysis & measurement
Deep expertise in Workforce Analytics & Planning
Board made up of CFOs and HR heads
What We Do:
Measure the immeasurable in human capital
Transform workforce data into business intelligence
Provide technology, consulting and training so HR can partner with Finance
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SOLVE Workforce Intelligence Software w Strategic Consulting w Training
Best Practices w Workforce Analytics and Planning w Benchmarking
The Human Capital Management Institute (HCMI) was founded on the belief that organizations can and must, find better ways of measuring their investments in human capital. Our vision of the future is one in which human capital measurement and information is as integral to business decision making as financial information is today.
We Bring Financial Discipline, Standards and Rigor to the HR Function
© Human Capital Management Institute
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HCMI Products and Services
© Human Capital Management Institute
Scenario: High Growth Scenario: Controlled Growth Scenario: Cost Savings
Current 5 Yr Projected Forecast Current 5 Yr Projected Forecast Current 5 Yr Projected Forecast
Headcount 60,000 96,631 10% Headcount 60,000 69,556 3% Headcount 60,000 46,427 -5%
Revenue $9,000,000,000 $15,861,075,149 12% Revenue $9,000,000,000 $11,486,534,063 5% Revenue $9,000,000,000 $9,000,000,000 0%
EBITDA $300,000,000 $577,624,375 14% EBITDA $300,000,000 $364,995,871 4% EBITDA $300,000,000 $300,000,000 0%
Total Expenses $8,700,000,000 $13,386,028,408 9% Total Expenses $8,700,000,000 $10,085,684,446 3% Total Expenses $8,700,000,000 $6,052,488,813 -7%
TCOW $4,713,000,000 $6,924,943,226 8% TCOW $4,713,000,000 $5,463,658,712 3% TCOW $4,713,000,000 $3,458,889,658 -6%
Selected Scenario: Controlled Growth
-8%-6%
-4%
-2%
0%
2%
4%
6%
8%10%12%14%
16%
18%
20%
Workforce Demand Growth Rate
-8%-6%
-4%
-2%
0%
2%
4%
6%
8%10%12% 14%
16%
18%
20%
Workforce Supply Growth Rate
-8%-6%
-4%
-2%
0%
2%
4%
6%
8%10%12% 14%
16%
18%
20%
Workforce Demand Growth Rate
-8%-6%
-4%
-2%
0%
2%
4%
6%
8%10%12% 14%
16%
18%
20%
Workforce Supply Growth Rate
-8%-6%
-4%
-2%
0%
2%
4%
6%
8%10%12%14%
16%
18%
20%
Workforce Demand Growth Rate
-8%-6%
-4%
-2%
0%
2%
4%
6%
8%10%12% 14%
16%
18%
20%
Workforce Supply Growth Rate
$9,000 $9,450$9,923
$10,419 $10,940 $11,487
$8,700 $9,135 $9,592 $10,071 $10,575 $11,104
$4,591 $4,865 $5,203 $5,565 $5,953 $6,369
$300 $312 $324 $337 $351 $365$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
Base Yr Yr 1 Yr 2 Yr 3 Yr 4 Yr 5
Projected Revenue Projected Total Expenses
Calculated TCOW Projected EBITDA
Millions
4.0% 4.0% 4.0% 4.0% 4.0%
2.6%1.7%
0.8%
-0.1% -1.0%
-3%
0%
3%
6%
Yr 1 Yr 2 Yr 3 Yr 4 Yr 5
Projected EBITDA Calculated EDITDA
6.0%
6.9% 7.0% 7.0% 7.0%
3% 3% 3% 3% 3%
0%
3%
6%
9%
Yr 1 Yr 2 Yr 3 Yr 4 Yr 5
Calculated TCOW Projected TCOW
Overall Scenario Forecast EBITDA Growth Rate TCOW Growth Rate
Human Capital Financial Statements • Human Capital Impact Statement • Human Capital Asset Statement • Human Capital Flow Statement
Workforce Quantifier™ ROI Calculator • ROI of Human Capital • Turnover Cost, Workforce Cost , Cost per Hire • Business Case for HR Interventions
Data Integration Blueprint • Modular Talent Management Components • Detailed Data Dictionary + Metric Formulas • Key Analysis Segments and Dimensions
Human Capital Metrics Handbook • Nearly 500 Metrics and Detailed Definitions • Over 100 KPI Best in Class Metrics • Unique Metrics that Monetize Human Capital
Workforce Planning Templates • Link Workforce and Financial Metrics • Advanced Retirement Calculator • Forecast Skills, Costs, Talent and Productivity
Career Path ROI Tool – Model of an “Appreciating Asset”
Employees as Assets versus Expenses
Staff Accountant
Mgr., Accounting
Dir., Accounting
Accountant
Sr. Accountant
CAGR: Compound Annual Growth Rate
Accounting Job Family Career Salary Progression
$46,400
$49,600
$59,800
$67,000
$79,100
$94,000
$40,000
$50,000
$60,000
$70,000
$80,000
$90,000
$100,000
0 1 2 3 4 5 6 7 8 9 10 10+
Years of Experience
Ba
se
Sa
lary
Staff Accountant
Accountant
Sr. Accountant
Mgr., Accounting
Dir., Accounting
Ave Annual Rate
Market Rates
(50%-75%ile)
CAGR = 10.0%
$130,000
CAGR = 6.6%
Entry level Staff Accountant
hired at 50%ile needs annual
salary growth of 10.0% to stay
with market(Assumes mkt growth of 3% annually
w progression to . Director in 10
years.)
50th %ile
The ten-year cost savings is the area between the cost of External Hires compared to the career path of an Internal Staff Accountant
Cost Savings from Internal
Development
Internal Hiring Cost
Over Time
Correlation Coefficient ( 0-1)
Factors Leading to Increased Turnover
Job Title or Position
Dissatisfaction With Compensation
High vs. Low Turnover Manager
Commute Distance
Driver #3
Driver #2
Driver #1
.50
.33
.27
.02
Low
Turnover Impact
High
Turnover
Impact
Some
Turnover
Impact
.11
Work Location
Number of Jobs in Last 3 Years .70
Hired Through Employee Referral .19
Job Framework Mapping Tool • Integrated Taxonomy 15,000+ jobs • Map Critical Job Roles
Workforce Capability Assessment • Data and Systems Capability + Risk Analysis • Human Capital Measurement Standards
Span of Control Optimizer™ Tool • Benchmark and Optimize Spans • Optimize Management Layers
Career Path Quantifier • ROI of Career Path • Build, Buy or Lease Talent Analysis
Analytic Engagement Projects • High Performer Profiles • Engagement ROI and Sales Impact • Turnover and Retention Driver Analysis
Initial Reports & Analysis
Data Gathering
First Good Metrics
HR Data Warehouse
Drill-down, standard reportsScenario Analysis
External Benchmarking
Context for decisions
Data
Driven Decision
Making!
Turnover, Headcount, Hiring
HRIS system data
COE Formation
Data Errors
HR Analytics Mandate
HR Standards EstablishedLost HR
Credibility
HR data/systems Assessed
HR Data Cleansed historical data scrubbed
Bus. Units
Reject
Analysis
Data Errors
Historical data
still bad
1st Analytics Study
Advanced Analytic Studies
HR Analysis Validated
Integrated HR Databases
COE Launches Training Courses
Bus. Units Demand
more
Analytics journey steps
Setbacks along the way
Journey path and goal
HR Roadmap Design • Step by Step Actionable Deliverables and Insights • Map for, Systems, Data, Tools, Skills, Metrics + more
Training and Advisory Support • Expert Guided Standard and Customized • Ongoing Advisory Support Services • Beginning and Advanced Training
Solve Workforce Intelligence Software • SaaS Software with Online Metrics Library • Integrated Dashboard, Analytics Tools • Human Capital Financial Statements
Statistical Sales Predictor • Predict Revenue by Economic/Workforce Factor • Link to economic drivers to workforce metrics
Value Creation in Today’s Marketplace Are we focused on managing the right things or just managing what we know how to manage?
© Human Capital Management Institute 4
Intangible Capital Value In the Post Industrial Marketplace
Market value Is driven primarily by factors that do not show up on a balance sheet. The largest being Intellectual or “Human Capital*”.
<30% of value of Standard & Poor’s 500 index can be explained by tangible/intangible “book” assets.
Tangible Asset/Value Tangible asset management tools are
established and form the basis of modern “Finance” as a Decision
Support Science. (DCF, FCF, IRR, WACC, etc)
Standard and Poor’s S&P 500 Company Index
Well Measured
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.
Easy to Measure
The Challenge of Measuring Human Capital
Compensation
Transfers
New Hire Turnover
Succession Data
Turnover
Training
Recruiting
Em
ploy
ee D
ata
Benefits
Span
of Control
Workforce
Planning
Success Advanced
Analytic
Insights
Complexity of Workforce Data
Employee/Full-Time-Equivalent (FTE)
Jobs/Roles/Skills
Time - Tenure
Compensation ($ vs. Equity)
Frequency of Change
Promotions, Transfers, Hires, Terminations
Jobs/Roles/Skills
Time - Tenure
Measuring the Intangible
Lack of Standards
Lack of Analytic Skills
© Human Capital Management Institute 5
Workforce Planning vs. Workforce Analytics
© Human Capital Management Institute 6
Workforce Analytics
Workforce Planning
Present
Future
Past
Predictive Analytics
Trend Analysis
Workforce Knowledge
Key Performanc
e Indicators
Workforce Optimization
Future Scenarios
Workforce Planning
Planning and Analytics
Workforce Analytics
Workforce Planning and Analytics Linkage Strong Workforce Analytics insights enable
future Workforce Planning success.
Human Capital Financial Statements (HCF$™)
• Greater Transparency into an organization’s greatest asset: the workforce
• A Method to Value Knowledge Capital: measure knowledge capital, the 80% of market capitalization not captured by traditional financial statements
• Improved Investment Decisions: better information = more informed investment decisions
• Standards in Human Capital Measurement and Reporting: enable advanced benchmarking capabilities for industry, geographic, specific job roles and more
• Definitive Methodology for Quantifying Workforce Productivity: quantifies productivity and talent management impact across the talent management lifecycle
• True Linkage of Human Capital to Financial Results
Deliver HR Value with Human Capital Financial Statements:
© Human Capital Management Institute 7
Analysis Background
© Human Capital Management Institute 8
Overview
© Human Capital Management Institute 9
Analysis Period: 1996 - 2011
Sectors: 12 Primary Industries
Sample Size: 22,100 Companies
Primary Human Capital Metrics Analyzed:
- Human Capital ROI Ratio - Return on Human Capital Investment - Total Cost of Workforce
- Total Cost of Workforce Percent of Revenue - Total Cost of Workforce Percent of Expenses
- Profit per FTE - Revenue per FTE
1. Accommodation & Food Services 2. Admin Support & Waste Management Services 3. Arts & Entertainment
4. Finance & Insurance 5. Health Care 6. Manufacturing 7. Mining 8. Professional, Scientific & Technical Services
9. Real Estate, Rental & Leasing 10. Transportation & Warehousing 11. Utilities 12. Wholesale Trade
Industries:
Focus: Year-over-year changes in human capital metrics and business performance. Primary Hypothesis: Financially successful businesses (those that have rising share prices which are higher than competitors) have flexible and adaptable human capital programs.
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Do Human Capital Metrics Predict Stock Price?
• A 10% gain in human capital metrics drives stock price gains of 3% to 19%
• Total Cost of Workforce (TCOW) is superior to
headcount metrics (i.e., FTE)
YES! Select human capital metrics predict stock price change for companies across 12 industry sectors !
• New metrics reveal surprise productivity winners and losers
63.9%59.4% 59.1% 57.0%
53.0% 52.6% 52.0% 49.6% 47.2% 45.2%
35.6% 35.2%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
R-Squared Value by Industry SectorR-Squared predicts future stock price changes (possible values between 0 - 1) R-Squared
© Human Capital Management Institute
HC Metrics Correlation to Future Stock Price Changes (R-Squared)
Traditional Financial Performance
© Human Capital Management Institute 11
Highlights:
• Finance & Insurance, Wholesale Trade, Transportation and Utilities improved
• Accommodation & Food Services, Arts & Entertainment and Healthcare lag
• Surprise - Transportation
Is the Productivity Real?
© Human Capital Management Institute 12
While revenue and profit per FTE are commonly used metrics, they are by no means the best predictors of financial success. This is because they only show changes in revenue and profit relative to headcount rather than showing cost changes in the workforce overall.
Historically the assumption has been made that measuring headcount is a good proxy for measuring cost of workforce, however as our analysis and the below example illustrates, this is a fallacy.
The Case for TCOW:
For example, an organization with 100,000 employees at the end of 2010 and 100,000 employees at the end
of 2011 would appear to have effectively controlled workforce cost by managing total workforce headcount.
However, due to increases in benefits, wages, and changes in the workforce such as bonuses, promotions and
mix of jobs hired, organizations with flat headcount growth can easily (and often do) experience 10% or
greater increases in Total Cost of Workforce (TCOW).
A New Relationship
© Human Capital Management Institute 13
Contrary to the previous revenue and profit per FTE metrics, not all sectors improved during the analysis period.
Finance and Insurance and Arts & Entertainment both declined from 1996 to 2011.
Highlights
• SURPRISE – Finance & Insurance, is going the wrong way!
• By these measures, Mining is a Big Winner
• Most sectors are clustered
Stock Price and HC ROI Ratio CAGR
© Human Capital Management Institute 14
Highlights
• CAGR vs. Average Year over Year Growth Rate
• Macro Economic Variables
• Insight: Relative Company Performance
Financial Services & Insurance Breakdown Revenue and Profit per FTE
Highlights
• Commercial & Savings Banks are middle of the pack
• Sales Financing (i.e. GE Capital), + Investment Banking look like stars
• Who is falling behind?
2011 Performance
© Human Capital Management Institute 15
Financial Services & Insurance Breakdown Human Capital ROI Ratio, Return on Human Capital Investment
Highlights
• Sales Financing is a top performer (i.e. GE Capital)
• Investment Banking is a Surprise from 1996 - 2011
21.8% Revenue per FTE Gain
(-29.2%) Human Capital ROI Ratio Loss
(-19.0%) Return on Human Capital Investment Loss
2011 Performance
Note: in USD $$ Data for 2009, 2010 and 2011 Years KPI = Key Performance Indicator TCOW= Total Cost of Workforce FTE = Full Time Equivalent
Case Study: Productivity Metrics Comparison Bank of America, Wells Fargo and HSBC
2011 Financial KPIs 2010 - 2011 KPI Change Rate
2010 – 2011 Productivity
© Human Capital Management Institute 17
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Superior Metrics to Manage Human Capital
© Human Capital Management Institute 18
Overall, high-performing sectors seem to enjoy one or more of the following factors:
1) Lower human capital intensity
2) Greater potential and to increase revenue and profits without equivalent increases in human capital costs.
3) Increased demand and/or pricing for commodities (see Mining and Utilities) due to global demand, industry deregulation, or other factors.
4) Substantial automation of one or more core human capital labor elements.
Market Share Example:
• Average Stock Price = $60/Share • Shares Outstanding = 35 Million
• 5% increase in HC ROI Ratio and Return on HC Investment • 5% Decrease in TCOW Percent of Revenue
• Projected Value Creation (Market Cap) = $116.6 Million
Includes Accommodation & Food Services, Transportation & Warehousing and Transportation, Support & Waste Mgmt Services
Key Human Capital Metric Formulas
© Human Capital Management Institute 19
Human Capital ROI Ratio
HC ROI Ratio = (Revenue – (Total Expenses - Total Cost of Workforce)) / Total Cost of Workforce
© Human Capital Management Institute 20
Description:
Net operating profit impact of each dollar invested in human capital.
Note: It is recommended that the metric "Total Cost of Workforce", which includes the total costs of employees plus all contingent headcount (contract and temporary workers), is used in calculating Human Capital ROI Ratio. If Total Cost of Workforce detailed information is not available, this metric may also be calculated using the total costs of employees as an alternative.
Best Use:
Organizations tracking Human Capital ROI Ratio can effectively measure the linkage of overall trends in market value over time (for publicly traded or other organizations for whom a relative market value is obtainable). Ideally, this metric should be used for long term strategic predictions rather than short term measurement as market value can fluctuate dramatically due to uncontrollable events as well as industry and market changes.
Return on Human Capital Investment
Return on HCI = Total Operating Profit / Total Cost of Workforce
© Human Capital Management Institute 21
Description:
Return on Investment (Profit) expressed as a percentage of the total dollar amount invested in human Capital.
Best Use:
Organizations tracking Return on Human Capital Investment can effectively measure the linkage of overall trends in market value over time (for publicly traded or other organizations for whom a relative market value is obtainable). Ideally, this metric should be used for long term strategic predictions rather than short term measurement as market value can fluctuate dramatically due to uncontrollable events as well as industry and market changes.
Should include:
• Employee compensation (salaries/wages, incentives, overtime, + equity & other pay)
• Contingent temporary/contract labor (costs)
• Employee benefits and perks (costs)
• HR function (costs, e.g., recruiting, training & support)
• Retiree or inactive workforce costs (costs)
Total Cost of Workforce (TCOW)
Total Cost of Workforce =
Total Compensation Costs +
Benefits Costs +
Other Workforce Costs
© Human Capital Management Institute 22
Next Steps
© Human Capital Management Institute 23
SOLVE: Analytics in 3 Easy Steps
24 © Human Capital Management Institute Source Systems
1. Load data
2. Run Scenarios for ROI and Intelligence
3. Save and Present Results
Data Integration Blueprint
Dashboards
Human Capital
Financial Statements
Metrics
Analytics w ROI
HR Transactions
Standards
Workforce Planning SOLVE WORKFORCE INTELLIGENCE SOFTWARE
Question and Answer
© Human Capital Management Institute 25
Contact Information:
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Human Capital Management Institute
Presenter information:
Joseph Morrissey, VP Sales [email protected]
Grant Cooperstein, VP Analytics [email protected]
Harish Sidda, Consultant [email protected]
For more information about the following products and services, please visit the links below:
SOLVE Workforce ROI Calculator Human Capital Financial Statements
Training Human Capital Metrics Handbook
Workforce Intelligence Consortium Group
@HCMI
© Human Capital Management Institute