Human capital management: measurement and reporting

Section four of the Personnel Today Management Resources one stop guide on human capital management (HCM), covering: HCM metrics and reporting; an example report; and guidance on interpreting an HCM report. Other sections .

Use this section to Understand the principles of HRM measurement and reporting See what a real HCM report might look like Learn how to interpret HCM measurements

You might still be wondering why HCM has a particular emphasis on measurement and reporting. After all, the HRM function has managed to survive for many years without worrying unduly about how it measures itself, so why is it different now with the advent of HCM? The answer is quite simple.

As we have already acknowledged, the key stakeholders in HCM are financial analysts, fund managers and shareholders. These are the groups that are keen to see as much value created as possible and they are only interested in measurable, tangible value. Boards of directors, without having to convince such tough external critics before, were never too worried about what people measures they had in place.

The reporting requirement naturally follows on from this. If anyone wants to know how well human capital is being managed, they are bound to want to see a regular report just as they do an annual company report. More weight is being added to this requirement though through the CLR and concerns generally about corporate governance.

Measurement in HCM

It also has to be said that the human capital measures chosen are really the eyes to the soul of an organisation's strategy. Simple measures of numbers employed, grades and the diversity of the workforce will portray an organisation that sees no real substance or benefit in HCM. Added value measures (such as profit, margins, return on investment or capital) on the other hand, signify a genuine attempt to embrace what truly strategic HCM has to offer.

HCM is not meant to be a number crunching exercise. The measures for HCM already exist. The average cost of producing your goods and services is already an indicator of how well you manage your people. If the average cost of treating a patient in a hospital is currently £5,000, then pursuing an HCM strategy will aim to reduce that cost, year on year, indefinitely. How much and how steeply the cost will fall will, of course, depend on the industry concerned. But over time, the fall should be significant. In a hospital, it might be up to 50 per cent, whereas in a highly-competitive retail environment, where margins are wafer thin already, then a 5 per cent fall might be regarded as really significant.

Once the course is set, HCM then concentrates on dealing with all of the people issues that are likely to achieve this goal. So what are the types of indicators that will tell us whether the organisation is on course?

HCM indicators

In the sample HCM report, and the 10-year view below, there are detailed examples of what might change and what measures might be reported on. However, the key things to look for are:

HCM strategy

Is a clear HCM strategy in place? That is, could you ask any board director this and would you get a clear answer? Is the timescale long term? Have clear and significant goals been set?

Learning system

Has a learning system been installed? Is the organisation learning new ways of working, as well as learning from its mistakes? A system should be visible and tangible in the sense that you would see project review meetings with clear reporting procedures to ensure future projects do not have to go through the same learning curve every time. HCM organisations have to understand the difference between open and closed-loop systems and single and double-loop learning.

Zero-based training budget

Pre-determined budgets for people and training are a clear indicator that HCM is not working as it should. Even if zero-based budgeting is not in place, there should at least be a commitment that if an unexpected HCM priority arises, then the necessary resources will be found from somewhere (see  Beyond budgeting, details in Resources).

Value focus, not activity focus

Ask anyone how their work contributes to value, and if you receive blank looks or hypothetical answers (for example, 'this training programme should make me a better manager', or 'I'm running a team briefing to improve communication'), then HCM is not happening. The manager's training programme should have clear business objectives set at the start, and the team briefing should have an agenda that clearly identifies opportunities to discuss value.

Maturity

HCM maturity is a difficult concept to define and only experienced analysts would be able to spot the difference between an immature organisation and one that is maturing well. The HCM maturity scale below is intended to provide some insights (but see HR Strategy: Business Focused, Individually Centred for a full description, details in Resources ).

Briefly, the history of personnel and HR management can be traced from the early days of welfare and labour officers to the HR directors of today. However, while the activities of the 'HR function' have changed, we can ask to what extent have the attitudes of management changed? Is HR management about basic recruitment, pay and rations and a bit of training or does the organisation take a much more holistic, intelligent and mature view of how well it manages its people? The maturity scale identifies six distinct phases, which the organisation passes through on its way towards being a 'whole system' organisation, a learning organisation, and an organisation that maximises the value of its human capital.

There are many reasons why organisations find it difficult to progress along this scale but, from a human capital perspective, the main hurdle to overcome is literally to get the board to see people as capital or a means for competitive advantage. Only organisations that get past or over this hurdle and reach Stage 4 can hope to make the most of HCM.

Performance management system

For HCM to work there must be an effective employee performance management system in place. This should identify employee performance levels and ensure that underperformance is managed as well as encouraging superior performance. Any performance management system dictates that there must be performance measurement ('if you can't measure it, you can't manage it') and this, in itself, demands that managers promote and employees accept a performance culture. There is no room in an HCM organisation for any complacency.

Continuous improvement philosophy

Because of HCM's drive to maximise the value of people, it has to adopt a continuous improvement philosophy (HCM has much in common with TQM). It is the pursuit of perfection and zero defects, but it fully acknowledges and accepts that such a journey will be very long, requiring unswerving commitment.

HCM reporting

We have made many references to measures and the requirement to report on HCM. Now we need to start actually putting some measures together and producing a report. You can set out to produce as accurate a report as possible, or you can aim to paint a particular picture of what the organisation is doing. Either way, the report will have to serve two basic purposes:

Satisfy any legal reporting requirements

Convince readers of the report that the organisation is well managed.

People performance reporting

The first area we are going to look at is probably the most important from a purist HCM point of view - the performance of your people and how you manage that performance. Effective performance should translate into high value (as long as the right systems and processes are in place, which we will come to later).

The basic building block for the performance charts in Figures 7, 8 and 9 (see below), is a simple rating scale (1 to 10, with 10 being the best score) of an individual's performance (see Measuring and Managing Employee Performance, details in Resources ). Collecting this score for, say, 1,000 employees would produce a frequency distribution curve like the continuous curve shown in Figure 7 below. In simple terms, this would tell us that most of the 1,000 employees would be performing at an acceptable level, a few would be unacceptable and a few would be producing a superior performance.

Once this graph is produced, the aim of HCM is to shift the whole curve to the right by improving everyone's performance - be it through better rewards, training, development or selection practices. Underneath the curve are some simple descriptions of each point on the rating scale.

An immature organisation would not be able to produce this curve even if it had the data. This is because it would not be able to get its staff to accept it, and it would probably be seen as a threat. Its inability to use performance curves would be a clear HCM contra-indicator. Instead, it would opt for very broad-brush ratings (shown A to D) on the chart, where it would agree, in advance, how many employees fit into each group. Another clear contra-indicator.

Organisations ready for HCM, however, should have no problem producing and publishing this information because everyone would see it as a basis for a meaningful dialogue on how they could improve. It would be viewed as constructive and a means for increasing value. There would already be plenty of data for constructing this chart - for example, sales figures for each member of the salesforce, arrests for each police officer on the beat, and the amount of paperwork completed by each member of the administration team. So data gathering is not the issue here; it is having a culture that welcomes real performance measurement and review.

Even if you work in an organisation that is afraid to use this data, the concept of performance curves can still be used to discuss serious people issues. The graphic paints such a telling picture that it has several powerful applications. It is, of course, preferable to collect real data but look what can be done with the same concept but viewed from different HCM angles.

Look at Figure 8 below. This asks whether your organisation is tapping the complete talent pool available in the employment market. It shows that if you are not, then you are missing out on some high-flying talent and substituting it with raw material of inferior quality.

Again, you should be able to produce this chart by looking at the performance levels of any disadvantaged minorities or overlooked groups. Take, for example, a police officer from an ethnic minority. How well do they perform in comparison to the average white officer? If the answer is that the performance levels are higher, then police forces could be accused of under-utilising their human capital. Of course, these concepts are not new but producing a graphical case to support the argument is very powerful. Moreover, providing objective evidence in this way should produce a much better resolution to any problems.

Similarly, if we look at Figure 9 below, we can see that the chart is constructed in such a way as to question whether the 'glass ceiling' is still in place. Are the standards accepted from male managers lower than those for women? Are inferior male managers being substituted for their more capable female counterparts?

These types of charts can satisfy several different HCM agendas. Not only those supporting a diversity agenda, but also hard-nosed analysts seeking maximum value. At last, HCM brings together the ethical diversity and hard business value arguments onto one common platform. In HCM, they should be mutually inclusive, not mutually exclusive.

Working example of an HCM report

The Accounting for People Report did not prescribe what should be included in an OFR from an HCM perspective, and until the CLR is completed, we can only guess what might be recommended. However, there is no reason why each organisation cannot decide what it wants to report on over and above any future legal requirement. Consequently, the example provided below is for illustrative purposes only. However, it should be said that it goes much further than the examples provided in the Accounting for People Report, and provides some analytical insights into what this sort of information might reveal.

Internal and external reporting

Much of the information shown is relatively easy to measure and already available in most commercial organisations. Deciding what to report internally will be a matter for their own judgement. Although it has to be said that any reluctance to provide detailed indicators of HCM would, in itself, be an obvious HCM contra-indicator. Any organisation that is unwilling to share such information with its employees has not really embraced the sort of open and honest communication philosophy that one would associate with an HCM strategy.

How much they want or need to report on, externally, is obviously another important consideration. Any board of directors would be understandably reluctant to display any information that was of a highly sensitive, commercial or competitive nature. Whatever mandatory information they will have to include in their report, they will be able to choose what additional information they wish to reveal. However, it might be naïve to think that many organisations will choose to reveal any more information than they have to unless they think it will enhance their reputation and share price.

Notes on the sample report

Please note that this is not meant to be a report that adheres to existing accounting conventions. If it did, it would tell us very little about human capital.

As with all P&L accounts, balance sheets and annual reports, they can be massaged to create a particular impression. What no observer can legislate for is inaccurate or misleading information being presented, hence the requirement for auditing of company accounts. It is likely, therefore, in the long run, that if the OFR reporting requirements on HCM are fully developed, there will have to be an audit process established to verify the veracity of the report. Certainly, according to an article in Personnel Today (18 May 2004), the head of the Accounting for People Taskforce, Denise Kingsmill, was reported as saying draft regulations had gone further than she had expected. So it sounds like the Government is taking its new regulations, to be introduced in 2005, really seriously.

Regardless of the possibility of HCM auditing, an experienced analyst will see through inconsistencies in company reports and at least highlight some serious questions that need to be asked. No single piece of detail in a report should be given too much weight. It is the overall picture, determined by an in-depth analysis of a range of variables and factors, which should provide an impression and a level of confidence that the organisation is managing its human capital well.

There is already one standard in the business-reporting field, the S&P (Standard and Poor's) rating, that is well respected by business analysts. The business pages often refer to a 'AAA' S&P rating, and when a business is seriously in trouble, a rating can be downgraded to 'junk' status. Rating scales are only as useful as their current level of credibility with market observers. So it will be with HCM. If no one believes that the figures are telling them anything useful about the management of human capital and its impact on organisational value, they will simply be ignored.

Interpretation

A sample HCM report
	Company - XYZ plc	2003/4	2004/5
1	Turnover - sales (£1,000's)	£100,000	£105,000
2	Operating costs (£1,000's)	£ 90,000	£96,000
3	Operating profit (£1,000's)	£ 10,000	£9,000
4	Share price high/low/average (£)	5.50/4.50/5.00	5.60/5.00/5.30
5	Market value/capitalisation (£1,000's) - share price x total shares	£1,000,000	£1,060,000
6	Book value (£1,000's)	£300,000	£270,000
7	Intangible value (IV) - market minus book value (£1,000's)	£700,000	£790,000
8	Number of employees	10,000	9800
9	Added value per employee (3 ÷ 8)	£1000	£918
10	Operating cost per employee	£9000	£9795
11	IV per employee	£70,000	£80,612
12	Number of key employees	300	295
13	Staff turnover (last 12 months)/target	12%/8%	10%/8%
14	Staff turnover - unplanned/unwanted	4%	8%
15	Average length of service (years)	4.00	3.75
16	Stability 3/12/36 months (%)	95/88/60	90/85/55
17	Inexperienced workers (< 6 months)	1080	950
18	Key employees left this year	12	15
19	New key employees added	6	8
20	Key employee staff turnover	4%	5%
21	Key employee average LOS (years)	6.0	5.5
22	Job offers turned down - actual/%	120/10%	150/15%
23	Key employee job offers turned down - actual/%	12/60%	5/4%
24	Average time taken to fill a vacancy (months)/target - all employees	3.0/2.5	4.0/2.5
25	Average time taken to fill vacancy (months)/target - key employees	9.0/6.0	8.0/6.0
26	Inexperienced worker - estimated value loss	£25,000	£25,000
27	HR function activity/spend - Box 1/2/3	75/5/20	70/15/15
28	Training and development activity/spend - Box 1/2/3	55/5/40	70/20/10
29	Performance Management System - in place (years)/% jobs covered	1.0/10%	2.0/50%
30	Learning System - in place (years)	1.0	2.0
31	Innovation - ideas implemented per annum as % of total employees/value (£1,000's p.a.)	300%/£2,000	275%/£2,500
32	Organisation structure - type	Traditional silo	Silo/Matrix
33	Employee engagement (survey)	75%	80%
34	Process changes - number/time taken	5/3 months	25/2.5 months
35	Quality assurance system	PDCA	PDCA
36	Unionisation	80%	80%

The list of measures included in this report is not exhaustive, and different organisations might want to emphasise different aspects, such as rate of innovation or a steeply declining operating cost curve. The crucial point to remember is that any HCM report will be open to a range of interpretations. The overall impression should be of a well-managed organisation, getting good value from its people. It should also convey continuity from year to year so that the confidence the market has in the business grows over time. No business analyst likes to receive a nasty shock (such as a sudden loss of key people) because it shatters any confidence it had in the sound management practices of the leaders of the business. That is why the narrative to accompany the report will always be equally important. But what picture should such a narrative paint? Some sections of the report are highlighted and here are some interpretations.

Lines 1 to 11 - Represent nothing particularly new. Most of the figures shown are already produced for most annual reports. However, referring to 'employee value' and 'intangible value' is intended to put an HCM slant on the whole report.

Lines 12 to 25 - Concerned with the organisation's ability to bring the people it needs on board and to keep them. Staff turnover is always a reasonable indicator of basic organisational health. The notion of 'key' employees is included here though. A key employee is one that brings an inordinate amount of value to the business. Senior managers obviously spring to mind because of the impact their decisions will have. Of course, organisations that have employees who bring a great deal of value will also lose that value if they leave. New product developers or those with high levels of expertise would also come into this category. HCM analysts would be very worried if they saw a large or fast outflow of key employees.

Line 18 - Any increase in the loss of key employees is serious news.

Line 22 - 23 - It seems to be getting more difficult to get people to join, but at least something is being done to attract more key people.

Line 26 - Worthy of mention because it actually puts a pound sign on the value lost when an employee leaves. Of course, how this is calculated would vary from one organisation to another, and this would never be an exact science. But then exactly the same could be said of the calculations of 'goodwill' that accountants make on a regular basis. As we pointed out above, it is the credibility and acceptance of the figure that is important. If the business says a lost employee is a loss of £25,000, then managers should sit up and take notice and put more effort into managing and retaining such people.

Lines 27 and 28 - The only specific references to HR and training department activities using a simple reporting and prioritising mechanism called the 3 Box System. The 3 boxes are:

Box 1 - Must have

Box 2 - Added value in £'s

Box 3 - 'Nice to have' or 'take it or leave it'

Box 1 - Any of the activities in this box are 'must have' activities, either to manage risk, comply with legislation/regulations or maintain the organisation's minimum standards. Good examples would be health and safety procedures, legislative requirement training for financial services staff and informing all new staff about not speaking to the press. Box 1 activities help to keep the organisation's head above water.

Box 2 - Activities designed clearly and specifically to add value. A process improvement initiative, installing a new reward scheme to generate higher levels of performance or problem solving training for supervisors. Box 2 activities help the organisation to swim faster and more fluently. The value of Box 2 should be represented in clear pounds signs (costs saved from improved processes, more sales from the sales team, lower error rates from production supervisors).

Box 3 - The 'nice-to-have' or 'take-it-or-leave it' box is for those activities that are neither mandatory or focused on value. All organisations sponsor some activities that intuitively seem to make sense or have some face validity. However, because there is no clear line of sight to any value creation, they become unfocused and the probability of these activities adding any value are minimised, not maximised. Unfocused diversity policies, team-building events, away days, e-learning initiatives, 'knowledge management' and leadership courses are all good examples of Box 3 activities.

Yet all of these activities take time and money so they can be represented as a percentage of time or resource utilisation (or budget).

How to use the 3 Box System

Divide all HR/training activities into the 3 boxes (for example, preparing contracts goes in Box 1, sales training Box 2 and 360-degree feedback in Box 3), and then allocate both the time and money spent on each. Then add up the totals in each box and show as a percentage of the total time/money spent in each box so that you produce a 'split' between Box1/Box2/Box3. A normal, acceptable split might be 70/25/5. The 55/5/40 split on training is a serious cause for concern.

Lines 29 and 30 - Relate to two of the most important systems in any organisation purporting to follow an HCM philosophy, performance and learning systems. The three questions that need to be asked are:

Is there a system in place?

Is it an effective system?

How long has it been in place?

See Section 3 for what constitutes an effective system, but in this example, it is still relatively early days. Two years would be a minimum to embed either a learning or decent performance management system. A company that maintains these systems for more than five years would be achieving a significant advantage over their less prescient competitors.

Line 31 - Picks up on the question of innovation and uses a simple formula of: Number of employees x one idea = 100%

Of course, you need a system to measure ideas created and implemented.

So 300% means, in this case, a total of 30,000 ideas. That is, on average, every employee providing three ideas that are implemented. However, it could also mean 1,000 of your employees providing 10 ideas each. A more detailed break down could be used internally, with the aim of getting all employees thinking about innovation.

Line 32 - Organisation structures can be described in many ways. This only gets a brief mention here, but any HCM analyst would want much more detailed narrative on what this structure was really like and how well it seemed to work in practice. Moving to a silo/matrix does not make much sense, so do the organisation designers know what they are doing?

Line 33 - Surveys to assess employee engagement are now well established and credible instruments. However, they are not, on their own, a clear indicator of value creation. They are an indicator of a necessary rather than a sufficient condition for HCM.

Line 34 - Most organisations find changing business processes a difficult and problematic task, and yet changing processes is a key source of added value through efficiency and the smooth flow of work and customer service. Here, the company has just started to learn this lesson but it still takes, on average, two-and-a-half months to achieve a process change.

Line 35 - Quality assurance systems are critical in HCM. Also, the effectiveness of the system would have to be assessed (for example, what sort of objectives and measures are being set for the PDCA cycle?).

Line 36 - The existence of heavy unionisation is a clear contra-indicator of HCM.

The 10-year view of what HCM can achieve

As we pointed out in Section 2, one key indicator of serious HCM is the long timescale. One form of narrative is to demonstrate how the measures and indicators might change over, say, a 10-year period. A working sample (simulation) of what two organisations would look like over 10 years - one doing HCM, the other doing just HRM - is shown in the table below.

If you were planning to launch an HCM strategy, this suggests what that might mean. Of course, this exercise is entirely hypothetical and there are an enormous amount of variables to consider. But the same could be said about a strategy to develop new drugs. The new drug discovery process can take between 10 and 15 years and there are no guarantees of success, but it does not stop pharmaceutical companies investing very heavily in it. The whole point of this example is to paint a very clear picture of what you should expect to happen in HCM rather than just adopting an 'act of faith' approach. It also tries to indicate the size of the difference in added value (profits) that should be achievable. After all, if you are not hoping for big improvements, no one will want to introduce an HCM strategy (see Section 2 - So what is HCM worth?)

Key assumptions include each company has to have the same technology, pay similar salary levels and there is no inflation. Prices are indexed from a base of 100 in year 1. Customer service is a percentage satisfaction score. Figures that change are shown in bold but most percentages shown are rounded up or down for ease of reading. It is also worth noting that Company A is not meant to be a 'bad' company, just one that does not see its people as a key source of added value and sustainable competitive advantage.

Both companies start in year 1 on a completely equal footing.

How to get a triple AAA HCM rating

Hopefully this section has given you plenty of practical food for thought, but it might also make you seriously consider how HCM fits with any other management initiatives or models that you are currently pursuing. There is no reason why HCM cannot work in harmony with some of these, so let us look at some of the more popular models (in alphabetical order) and see how you can integrate them with an HCM strategy. The organisations that do this well should be the ones that will one day earn themselves an 'AAA' HCM rating.

Balanced business scorecard

HCM fits perfectly with balanced scorecards, especially those based on the Kaplan/Norton model of four perspectives: financial, customer, internal efficiency and learning/innovation (see Figure 10 below).

The learning/innovation perspective is often referred to as the 'people box' ,and this is the one that has always presented the most difficulties in terms of measurement. Norton himself confessed in a foreword to The HR Scorecard that in his experience of working with organisations, "the worst grades are reserved for their understanding of strategies for developing human capital. There is little consensus, little creativity, and no real framework for thinking about the subject. Worse yet, we have seen little improvement in this over the past eight years." This is a fascinating admission because if the 'balanced' scorecard requires measures in all four boxes or perspectives, then if the people measures have been missing, one can only assume that the scorecard cannot have worked so far.

Some academics (like Ulrich) have tried to remedy this by producing HR scorecards but they have failed to resolve the issue of causality. Ulrich's own model is based on the employee-customer profit chain notion but this assumes employee satisfaction leads to business performance. There is no study that actually proves this. Hence, the HCM report offers just what is needed to fill the gap that has so rightly been identified by Norton.

Timescale in years	Financial services Company A	HRM	HCM Indicators	Financial services Company B
Year 1	1,000 Employees £100m turnover £90m costs £10m profit Prices 100 Customer service 85	Company A has a professional HR director who has been following 'best practices' in recruitment, rewards and training.	Company B has a professional HR director who has been following 'best practice' in recruitment, rewards and training. Total profits over 10 years	1,000 Employees £100m turnover £90m costs £10m profit Prices 100 Customer service 85
Year 2	1,000 Employees £110m turnover (up 10%) £95m costs (up 5%) £15m profit (up 50%) Prices 100 Customer service 85	A new interest-paying current account is launched and proves to be successful but at a high development and marketing cost. Sales are up by 10%.	A new HR director is appointed who plans to develop an HCM strategy but the first action is to shed 50 jobs due to over-manning. The cost savings are passed onto customers through prices.	950 Employees (down 5%) £105m turnover (up 5%) £87m costs (down 3%) £18m profit (up 10%) Prices 98 Customer service 87
Year 3	950 Employees (down 5%) £120m turnover (up 9%) £92m costs (down 3%) £28m profit (up 80%) Prices 100 Customer service 86	Reduce headcount and install new job evaluation scheme and employee attitude survey. New account continues to do well.	Improved people performance through targeted training based on sales. Improved processes reduce operating costs.	950 Employees £110m turnover (up 5%) £84m costs (down 3%) £26m profit (up 45%) Prices 98 Customer service 87
Year 4	950 Employees £120m turnover (=) £92m costs (=) £28m profit (=) Prices 100 Customer service 86	No changes	Improved people performance - due to new structure and innovations reduce costs.	950 Employees £112m turnover (up 2%) £82m costs (down 2%) £30m profit (up 15%) Prices 98 Customer service 87
Year 5	950 Employees £115m turnover (down 49%) £92m costs (=) £23m profit (down 17%) Prices 100 Customer service 84	Losing some customers to Company B so plan to introduce a new product.	Savings passed onto customers in low prices. New systems and processes introduced. Organisation starting to work as a 'whole'.	950 Employees £114m turnover (up 2%) £81m costs (down 1%) £33m profit (up 10%) Prices 96 Customer service 90
Year 6	950 Employees £120m turnover (up 5%) £92m costs (=) £28m profit (up 21%) Prices 100 Customer service 86	A new account is launched and proves to be successful. Regain in market share as sales are up by 5%.	Better customer service levels due to smoother and more responsive processes.	950 Employees £114m turnover (=) £81m costs (=) £33m profit (=) Prices 96 Customer service 92
Year 7	950 Employees £120m turnover (=) £92m costs (=) £28m profit (=) Prices 100 Customer service 86	No changes but notice pressure of competition from Company B.	Product development cycle shortened and new improved product launched.	950 Employees £120m turnover (up 5%) £80m costs (down 1%) £40m profit (up 21%) Prices 96 Customer service 92
Year 8	900 Employees (down 5%) £118m turnover (down 2%) £87m costs (down 5%) £31m profit (up 11%) Prices 95 Customer service 84	Cost cutting strategy aims to reduce prices in response to Company B. Small loss of sales before price falls have an impact.	Serious cost cutting strategy launched - target is 20% over 3 years but not at the expense of customer service levels and not passed on in price reductions.	950 Employees £122m turnover (up 2%) £75m costs (down 6%) £49m profit (up 10%) Prices 96 Customer service 92
Year 9	900 Employees £121m turnover (up 3%) £87m costs (=) £34m profit (up10%) Prices 95 Customer service 84	Price advantage reaps some rewards.	Cost strategy on target with all employees fully trained in problem solving and cost reduction techniques.	950 Employees £122m turnover (=) £70m costs (down 6%) £52m profit (up 6%) Prices 96 Customer service 92
Year 10	900 Employees £109m turnover (down 10%) £87m costs (=) £22m profit (down 4%) Prices 95 Customer service 84	Loss of customers to Company B through significant price differential.	Costs still on target but 6% passed on to customers in price reductions.	950 Employees £134m turnover (up 10%) £66m costs (down 6%) £68m profit (up 30%) Prices 90 Customer service 94
	£247 million	Total profits over 10 years	Total profits over 10 years	£359 million

Corporate Social Responsibility

More recently there has been great interest raised in the whole area of corporate social responsibility (CSR). In Europe, this has been encouraged and promoted by the social agenda of the EU and its EFQM model (see below). In the UK, the Government has its own website to address this and it is actively promoted by the DTI, the architects of the Accounting for People Taskforce (see www.societyandbusiness.gov.uk), stating that "The Government sees CSR as good for society and good for business". Unfortunately, they also openly acknowledge that the real business case is yet to be substantiated.

This is where the value agenda of HCM comes into its own. Companies that make high profits but do not manage their people well could do a great deal better. By maximising the potential of their people, they will offer many development opportunities to employees and make even greater profits. This will raise the game for all companies in the same market so they too will have to start to get the best out of their people through HCM or they will not survive. Higher profits means higher taxes available for a better social agenda. HCM could well help to make a clear business case for a CSR agenda. HCM is based on a win-win philosophy.

Employee-Customer Profit Chain

The employee-customer profit chain concept is extremely simple and many organisations, particularly in the retail sector, profess to adopting this as a business model. This is why we see so many companies now checking the attitudes and satisfaction of their employees on an annual basis through employee surveys. However, some organisations do not use it as part of a holistic, strategic approach.

Toyota is obsessed with providing its customers with what they want and realises that customers only get excellent value if every aspect of the organisation is working well together. The engagement of employees is a key element in this but it is of limited use on its own.

HCM should help organisations using the profit chain concept to make sure every aspect of their business works in harmony towards the goal of customer value.

EFQM - European Quality Award/Excellence Model

The EU has produced a very sophisticated model, which incorporates elements of all the other management methodologies mentioned here. They are all encapsulated in their excellence model (Figure 11, or go to www.efqm.org/model_awards/model/excellence_model.htm)

As with the scorecard approach, each box has to have measures and there is a specific box for 'people'. The HCM report can feed directly into this, thereby plugging another critical gap in progressive management thinking.

Investors in People

The UK's Investor in People standard has been running since 1991, and is designed to encourage organisations to build people development into their business planning processes.

Despite the fact that thousands of organisations have signed up to this standard and achieved accreditation, the weakness in the scheme is its failure to offer a workable method for measuring the difference made to business performance. This, in turn, is due to the absence of a simple training evaluation model that enables this to happen.

The HCM approach described in this guide provides the basis for that model by emphasising the need for pre-training, business measures.

It appears that HCM has so much to offer so many organisations that are following a wide range of systems and methods. Perhaps HCM really is the last piece in the modern management jigsaw and an opportunity for HRM professionals to transform themselves and the organisations they work for.