Human capital management: making HCM work

Section three of the Personnel Today Management Resources one stop guide on human capital management (HCM), covering: the difference between HCM and HRM; how to get started with HCM and an introduction to HCM strategy, systems and processes. Other sections .

Use this section to Get a clear definition of what HCM is - and is not Understand the difference between HRM and HCM Learn the five steps to getting started on HCM Get advice on HCM strategy, systems and processes

While Section 1 and section 2 have provided the background and context for the introduction of HCM, now we need to look at the practical considerations in detail. So what exactly does practical HCM look like?

HCM - what exactly is it?

There is no single definition or proprietary model for HCM. One definition of HCM was clearly set out in the UK's Accounting for People Taskforce Report of October 2003 (www.accountingforpeople.gov.uk ). This defined HCM as "an approach to people management that treats it as a high level strategic issue and seeks systematically to analyse, measure and evaluate how people policies and practices create value".

Notice how many keywords there are in this definition:

High level - HCM is not something that can be delegated to the HR team or middle management. Its implementation demands sponsorship, ownership, commitment and involvement from the highest level.

Strategic - HCM has to be strategic because it has to be an integral part of the organisation's main long-term purpose of creating value and, therefore, organisation-wide. HCM cannot be piecemeal or ad hoc.

Systematically - it has to happen systematically, which means its success will be entirely dependent on the HCM systems in place.

Analyse - without clear and incisive analysis, the problems will be ill-defined and the solutions ineffective.

Measure - without a philosophy of management by measurement and the selection of the right measures, HCM will become a bureaucratic paper chase.

Evaluate - evaluation is both a mindset and a system, requiring closed-loop feedback systems that give the bad news as well as the good. The organisation has to learn from its mistakes and evaluation is a crucial part of changing the culture from one of blame or problem avoidance.

Value - measures on their own say very little until a true value has been assessed and this value means with pound signs.

As a working definition of HCM, the Accounting for People version works well. However, it could perhaps have emphasised the human side of the philosophy more. Consequently, another definition, from a more human perspective is that 'HCM is the total development of human potential expressed as organisational value'.

HCM is primarily a people development philosophy, but the only development that means anything is that which is translated into value.

Now here is the rub: if HCM is about creating value through people, then the focus has to be on the value, not on the HR practice. Moreover, a sacrosanct principle of measuring value or performance improvement is that you have to start with a baseline measure before initiating any HCM practices. So any HCM practices have to be designed with the end result, measurable value, in mind. This marks a complete mindset shift for existing HR practitioners. It is a move away from thinking of 'best practice HR' to thinking 'what value are we hoping to create and how would we measure that?'

You should, by now, be getting a much clearer picture of what HCM is, but it might also be a good idea to make sure that you do not get it confused with other issues. So, be crystal clear about what it isn't.

What HCM isn't - some common misconceptions

HCM isn't about measuring the HR function

One of the biggest misconceptions about HCM is that it is all to do with HR measurement and how well the HR department is doing. HR departments have been measuring many of their activities (HR staff per 100 employees, training days, HR costs etc) in the hope that it will be able to benchmark how well it is doing with other, similar organisations. This is not the purpose of HCM at all. In fact, HCM has no interest in comparative HR costs because it tells us nothing about comparative value generated. So HCM might lead to a cessation of much of what has been called HR benchmarking.

Yet, if HR departments really do help to make HCM happen, the value measures produced as a result should recognise their contribution to improved organisational performance and value generation. If anything, HCM is likely to result in less conventional HR measurement and see a steady shift to a different type of measurement.

Take recruitment as an example. Here are several ways in which existing HR departments try to measure the recruitment process:

Cost of recruitment (or cost per vacancy filled)

Time taken to fill a vacancy

Number of (suitable) applications received.

These are all input measures and might measure the efficiency of the recruitment process but tell us nothing about its effectiveness. So what about some other measures:

Length of service of new recruits

Stability rates (for example, how many staff were still employed six or 12 months after recruitment).

This looks like a more useful measure because it raises our confidence that the process is working if the staff you have chosen decide to stay. However, this is still not a true effectiveness measure. The only measures that say the recruitment effort is really effective are:

Performance levels of the new recruits

How much value the new recruits generate (sales, ideas, cost savings).

It is these last two measures that HCM is ultimately interested in. If new recruits do not perform to the standard required, then their recruitment has been a complete waste of money. Conversely, if an HR team raises the incidence of bringing better performing recruits into the organisation, its contribution is equivalent to that higher level of performance and this could be translated in to monetary value.

HCM isn't just what the Accounting for People Report says it is

It would also be wrong to think the Accounting for People Taskforce was the arbiter of what HCM is and can be. As a DTI/government-appointed body, its agenda was very much driven by the CLR and other government agenda items. Measurement and reporting were therefore quite high on the list, and quite rightly so, but to think that the main purpose of HCM is to produce an annual report, or OFR, would also be a mistake.

The ultimate measure of any successful organisation is its long-term value (consistently high share price, market capital, return on assets, profits). Investment analysts are already judging most commercial organisations on this basis. So, we could say that if any HCM practices already exist, then they are already included in present company accounts and annual reports (as with Toyota) and the difference is clear. The only problem is, if there are no organisations in a particular industry that have adopted an HCM strategy, then their annual reports cannot be used to distinguish the way they manage people.

Only this new perspective, of HCM measures and insights, will sort the wheat from the chaff. However, HCM measures are only a means to an end, they are not the end in themselves. Value will always be the only ultimate arbiter of HCM effectiveness. On their own, high ratings from highly-satisfied employees are not indicators of effective HCM.

HCM is not just about employee satisfaction surveys

This year's Sunday Times' list of '100 Best Companies to Work For' had an introduction from Patricia Hewitt, secretary of state for trade and industry, who, incidentally, appointed Denise Kingsmill to head up the Accounting for People Taskforce.

Hewitt commented that this list was ". . .a key benchmark against which UK companies can judge their performance as employers, and an opportunity for us all to recognise and celebrate those businesses that truly value their staff, look after their customers and work in partnership with the communities in which they operate."

This view is quite understandable from a government minister, and it might also be a view held by the HR profession at large. We might all want to believe that companies that look after their people perform the best but, actually, while we hope this connection holds true, it is quite difficult to reconcile with the Sunday Times list itself.

At the time the list was published, Microsoft - which came in at number 13 - was being found guilty by the EU of 'abusing its software monopoly' and fined between 500m euros and 1bn euros. This hardly fits with Hewitt's assertion that the list contains those who "look after their customers".

Also, Tesco, currently the UK's leading and probably most successful supermarket chain, does not feature in the list, whereas Asda does. Indeed, the Sunday Times list makes no attempt to show any actual correlation between the relative position of any particular business in its list and business performance or value creation. So this can create an entirely false impression to the unwary HCM advocate, and certainly does not substantiate Hewitt's final comment that "in a tight labour market, being a Sunday Times Best Company to Work For gives businesses a real competitive advantage."

Of course, anyone wanting to pursue HCM policies will certainly aim to engage their workforce and achieve high levels of employee satisfaction, but only to the extent that they are part and parcel of a concerted, strategic drive for value creation. A reasonable level of employee satisfaction may be a necessary pre-condition for HCM, but it is certainly not a sufficient condition.

HCM is not just about increasing the share price

You should be getting the impression by now that there is nothing simplistic about HCM or its measures and reporting functions. HCM has to be viewed in the round. Indeed, there is an obvious flaw in any school of thought that says share price and market capitalisation are good indicators of the value of HCM. Share price, on its own, is already rightly regarded by financial analysts as a rather unpredictable indicator of underlying business performance and has to be treated with particular caution in the field of HCM. The dot.com boom and bust clearly demonstrated that share price can be as much, if not more, to do with speculation as real business performance.

If Toyota's share price had not performed so well for so many years, it could not have been used as an indicator of its HCM practices either. More important though, share price, as with any other measure, has to be viewed as just one facet of a much bigger and more complex picture. In the sample HCM report shown in Section 4, it is very important to realise that no single indicator will tell the whole story. It is the interplay and inter-relationship between many indicators that will tell us whether the organisation's value is due, at least in part, to a clear-headed and progressive use of HCM practices.

The paradigm shift between HRM and HCM

We have looked at what HCM is and isn't, and we have started to identify some differences between HCM and what has come to be known as HRM. However, the first big question for any HR professional is do you want to develop your career in the direction of HCM, or are you happy enough to stay as an HR practitioner? Second, if HCM is your chosen career route, will it just entail the development of some new knowledge and skills? The answer to that question is a categorical 'no'. HCM is not just part of a continuum, it represents a completely different paradigm of the way organisations should manage people. It requires a very fresh perspective from those who have worked in HR for some years.

In order to illustrate how this new paradigm differs so markedly from HRM, here are some of the most telling indicators and distinguishing features.

By this stage, you should have a clear picture of the scope of HCM and the challenges this may represent for you in your current role. Bearing in mind that HCM is always meant to be playing 'the long game', there is very little point in rushing into it or hoping to achieve too much too quickly. The history of HR is littered with the 'corpses' of failed initiatives. So where should you start with HCM if you are going to make the most of what could be a fantastic opportunity for you, personally, your organisation, its employees, and society at large?

HCM	HRM
In HCM, people are value adders not overheads	People are a significant cost and should be managed accordingly
Focus on value in £'s	Focus on HR practices - competencies, 360°, job evaluation, leadership development HR
Context dependent (unique to each organisation)	Focus on best practice HR, regardless of the organisational context
The most important stakeholders in HCM are external - the City, government, shareholders	The most important stakeholders in HRM are internal - managers and employees
HCM specialists need to know the difference between the book value and market capitalisation of their organisation and be comfortable with financial analysts' questions	HRM does not see any direct connection with market capitalisation and regards financial analysis of organisational performance as outside their remit
Line of sight to value - everyone can see why they are asked	Act of faith - best practices should lead to results
Causality (clear cause/effect relationship) between HCM practices and results	Correlation - studies and surveys, after the event, to try and show a correlation
Business output measures are the only measures of HCM effectiveness	Input measures - costs and ratios are used to benchmark with other HR functions
Use of business measures as the basis for designing any HCM policy or activity	HR team only accept accountability for HR measures (for example, the number of appraisals completed)
HCM is clearly seen and respected as an equal business partner at senior levels	HR team is seen as a support service to the line
Employee performance management role	Performance management is the role of line managers
HCM has to be holistic, organisation wide and systems based	HR is based around the function and HR team performing a discrete and separate role from other functions
HCM prepares an OFR and shows value	HR prepares internal report only

So where do I start?

HCM really is a new and significant departure for HR. Of course, many organisations have already started calling their HR efforts 'HCM', but there is little evidence that HCM is anything but a new badge for HR. Certainly none of them can answer the question of how much their HRM/HCM strategy is actually worth in market value.

So, if you accept that you are going to start out on a new journey towards HCM, where might those first tentative steps take you?

Step 1 - Check whether your board even knows about the subject

HCM needs board commitment. You will not secure the requisite commitment unless the board really understands the potential value that HCM could bring. Produce some graphs (see Figures 7, 8 and 9 in Section 4).

Ask what other possible strategies the organisation has at its disposal to gain a significant and lasting competitive advantage. Ask your finance director to explain how Toyota can be so far ahead of Ford and GM when they all have access to the same capital markets and technology. This should generate some interest, but if no clear explanations are forthcoming, then you could suggest that managing people as human capital might create part of that value gap. The main issue is therefore how to achieve the best monetary value from human potential, and the emphasis should be on the 'human' - HCM is meant to be the most mature way for an organisation to operate.

If the board is still not interested, you could suggest that the CLR might lead to a significant change in company reporting requirements (the OFR), and if it does not embrace the principles of HCM, then maybe the board's reputation will suffer accordingly. HCM is, after all, only for the ambitious. If the board is quite relaxed about its current market position and is not looking for significant value gains, then maybe that is the end of the road. In which case, as an ambitious HR professional, you might need to go elsewhere to gain the HCM experience you need.

Step 2 - Signal that HCM is a radical departure from conventional HRM

Step 1 is to check understanding and, if necessary, to whet the board's appetite. Only then can you suggest that if it wants all the benefits to be had from HCM, it has to adopt a completely fresh approach and a different mindset to the way it intends to manage its people. The board will, of course, ask for examples of what this might mean so here are a few to start the discussion:

There should be no fixed training budget anymore. If people are being seen as value adders, then the board should be prepared to sanction any spend that aims to add value through training and development. In return, you will have to start demonstrating the return on investment (ROI) on that spend, by using the same financial calculations used by the finance and operational departments.

All the talk about performance management has to be finally made a reality. HCM might be about getting the best value out of people, but that does not mean you should shy away from dealing with areas of underperformance. How can you talk about maximising human capital while you tolerate passengers? This again means you have to have a robust employee performance measurement and management system in place.

On the reward front, there are two options. You agree to pay market rates and then really concentrate on employee engagement, motivation and retention (the Toyota option). Alternatively, you take the lid off your rewards policy on the basis that you have to be prepared to put your money where your mouth is for those who generate the most value. There's no room for fat cats in HCM though.

It is also about time you wrapped up many existing HR policies and practices under the one umbrella of talent management, and put someone in place that has clout and really knows what they are doing. The head of diversity will have to go because this will now be under the auspices of the head of talent management - which is where it should always have been anyway.

This should be enough for the board to start noticing the difference between HCM and HRM. In fact, the old HR practices it had accepted will now start to look decidedly jaded by comparison.

Step 3 - Get a board sponsor

This step should be quite obvious. To give HCM the weight it needs, the ideal sponsor is the chief executive. This does not mean they have to get directly involved in the planning, design or implementation of HCM strategy. However, when any senior manager is resisting HCM, the CEO should be prepared to either take the time to convince them, help to push through the required changes or, if necessary, decide they will have to part company.

There is a high probability that you will have to call on this level of commitment and drive from the CEO because HCM is going to fundamentally change the way the organisation works. So you should perhaps advise them of this before embarking on Step 1. Of course, any experienced CEO who understands the full implications of HCM will already be fully aware of this.

Step 4 - Developing a team of HCM consultants

The biggest immediate problem for most HR departments will be finding HCM professionals. HCM is such a new discipline that there are no fully-trained HCM specialists on the market. The only other option therefore is to develop those who have the necessary capabilities. So what capabilities are we talking about?

Financial and commercial acumen - to analyse a balance sheet or a P&L and come to some conclusions about what is required from an HCM perspective.

Systems thinking - so they can develop effective HCM systems to ensure what needs to happen, happens.

Process analysis - to identify where value leaks out through inefficient processes, and also an ability to re-design processes to stop the leaks.

Value chain experts - who have an intimate understanding of the value creation chain and know how to influence it.

Organisation structure analysts - who can spot when there are too many layers of management, remove the interdepartmental barriers that need to be removed, provide clear reporting lines, and ensure that accountability is accepted by those who have authority.

On top of all of this, such HCM professionals will need to have an unusual blend of high numeracy with great people skills. They are likely to come from an operational background, but will already have a reputation for getting the best out of whatever people they have inherited. They will be high performers who can see that to bring the same level of performance throughout the organisation will require deep-rooted, structural changes and fresh perspectives.

Step 5 - Start producing some HCM figures now

Probably the most immediate practical step of all though is to start producing the sort of data that a future OFR might require. The emphasis here needs to be talking value not cost. Look for outputs not inputs. So don't measure staff turnover in terms of recruitment and training costs, measure lost revenue opportunities through losing experienced people. Look at customer service level changes that are directly connected to customers meeting too many new faces.

Start drafting your first HCM report (see sample). The physical act of putting something down on paper is the best way to force yourself to decide what information you will need and whether the data already exists to produce it. It also means you have to start visualising the finished product. What should it look like? If you are charting changes in employee attitudes or satisfaction, do you need a corresponding chart tracking their performance (see the performance charts in Figures 7, 8 and 9 in Section 4 ). If this is difficult then maybe this, in itself, will encourage you to re-visit the design of such surveys and take a fresh view as to what you are trying to prove or demonstrate.

Be as proactive as possible. It is much better to shape the information you provide to what your own organisation needs rather than wait for it to be dictated to you. In such a young 'science', those who take the initiative may set the standard. In other words, be more strategic.

HCM strategy, systems and processes

Strategy

Most HR directors would suggest that they have an HR strategy, but it is one of those terms that seems to mean a lot of different things to a lot of different people. For some, their 'strategy' is merely a plan that has been produced after the big strategic business decisions have already been made. HCM strategy, however, demands that it is fully integrated with business strategy formulation. If HCM can reduce the company's cost base by 10 per cent, then those savings could be passed onto customers in price reductions and this, in turn, could provide a significant competitive advantage.

HCM is not just something that can be bolted on to an existing business strategy. The new measures that will be produced will, in fact, start to fundamentally change behaviours at all levels in the organisation. Alongside these measures will be the introduction of new systems and processes to really embed HCM. See Figure 5 below.

This value, measurement, behaviour cycle is a composite of other classic cycles and some fundamental management principles. It is, first and foremost, a strategic business planning cycle. It incorporates the Plan Do Check Act (PDCA) cycle - used by Toyota and many other organisations as part of their total quality, continuous improvement methodology. It includes Kolb's experiential learning cycle: where positive experiences reinforce the right behaviours. And it also enshrines the maxim that 'what gets measured gets done'. This combination makes it incredibly powerful as a solid basis for HCM.

This cycle is a model for adoption by the board. It starts with a declaration (vision) of what value is required by the organisation, using the four variables of added value. Then a strategy has to be produced to turn the vision into reality, eventually by means of the business plan. The key measures take place at operating plan level (for example, if the vision includes improving customer service, the operating plan must include customer service measures). This is also the time to ensure that someone is accountable for each measure. This is where the measures drive behaviour towards the original goal of value specified by the board.

The final part of this cycle is the feedback loop. It is a closed loop system crucial to HCM. Whether the measure improves or not, it has to be fed back to the board. This will only happen in the right way if the old seeking-to-blame culture has already been eradicated. Feedback is crucial because it either reinforces the right behaviours when the objectives are achieved or it helps the organisation to learn when the objectives have not been met. Either way, the organisation wins.

Setting added value measures (profit on extra sales due to improved customer retention) across several departments (sales, marketing, after sales) ensures that everyone has to work co-operatively and cannot hide behind their own narrow, divisive targets.

Systems

An organisational system is a means for making sure that what you plan to happen actually happens. Think of what a traffic light system is meant to achieve - it ensures that cars do not run into each other at intersections. An HCM strategist, though, would be interested in systems that add value through people. So what does this look like in practice? If you want your people to share knowledge, you will need a 'knowledge sharing system'. If you want everyone to learn from their mistakes, you need a 'learning system'

You can check very quickly whether you have a learning system - just ask what happened the last time a serious mistake was uncovered? Was it dealt with systematically? Had the same mistake been made before? Was the aim to blame someone rather than to really learn for the future? While you are considering this you will also need to put a process in place.

Processes

A process is a series of steps that turns inputs into outputs. So was there a well-recognised procedure to follow that involved everyone concerned? In this case, there would need to be a process that started with a clear output in mind (avoidance of a recurrence of the same mistake), and then collected the inputs together to achieve this end. The inputs would be those originally involved, any paperwork or current system that seemed to have gone wrong. It would also take time, effort and cost and requires an expert in process analysis to lead and chair.

So if systems and processes are this important, what type do you need to make HCM really work? Here are a few of the key ones:

Learning system

Knowledge (intellectual capital) management system

Talent identification system

Performance management system

Employee engagement system

Communication system

Reward and recognition system

Employee development system.

It is a salutary lesson to consider what happens when systems and processes are poorly designed or non-existent. Employees can only perform as well as the systems allow. Most governments have become very concerned about 'joined-up government'. In other words, where several, separate agencies are involved in a particular issue, mistakes can be made when ultimate accountability is not held by any one particular agency. It is also very inefficient if the activities of several agencies overlap.

Re-designing organisations and the systems and processes they use is the only way forward. Consequently, HCM really does have a significant part to play in the future of the whole of the public sector.