Talent Management: Valuing Human Capital – A Practical Approach
CLO Magazine, May 2004
To say that one is talented indicates that one has an aptitude or gift enabling them to perform in an exceptional manner, relative to the rest of us. It is the job of the learning organization to mold individuals to maximize their potential, to help employees find their true talents and leverage them on the job, and to arm the workforce with the knowledge and skills necessary to perform in an exceptional manner. If the learning organization is able to accomplish this feat, they have increased the value of human capital.
The purpose of this article is to discuss the learning organizations role in the process of creating an exceptionally talented workforce and present some practical approaches to valuing the human capital effects of a talented workforce.
Identify Programs that Support Improvement in Human CapitalA key exercise is to identify the key learning initiatives that support talent management and the value of human capital. For example, at PeopleSoft University (PSU), the internal training arm of the software company, the major areas of emphasis identified by senior management had to do with new hire orientation, product and business skills training, and technical training. Therefore, PSU focused in these areas. Recently PSU has and will continue to focus on management and leadership programs to advance talent around performance management, people management, and team management.
There are tangible and intangible benefits of focusing on the right programs. For organizations like PSU, better assimilation of people into the culture of the workforce is critical. Higher job performance and productivity can be seen, the organization is able to recruit, develop and retain individuals and ultimately the greatest testimonial to a focus on talent is that the organization is profitable and has a solid position relative to competitors in the marketplace for its products and services.
Valuing Human Capital in TheoryNow that we have looked briefly at talent management, we need to understand how to measure and value the outcomes of increasing talent relative to the human capital.
Let’s use an analogy as an example and compare it to human capital. If one buys a computer for $3,000 the expectation is that the company will get $3,000 of value out of the computer. The computer may help a salesperson increase sales or help a plant floor operator increase quality but the goal is to improve the users job performance through the technology. The expectation is that at least $3,000 will be of benefit in exchange for paying a cost of $3,000 to acquire the computer.
Compare this analysis to a person, (i.e. human capital). If the fully loaded salary (wages, benefits, and overtime) of a newly hired employee is $50,000, the organization paying that expense expects $50,000 of value from the employee. This value could come from their contributions in one or more key business objectives such as sales, quality, productivity, cycle time, customer satisfaction etc. But, in general, the organization expects a return of at least $50,000 from the employee.
Now, say in our computer example our IT department added a $500 upgrade to it. The upgrade is intended to make the machine faster, more resistant to bugs, and more accurate in its processing computations. The business result is more productive employees, higher quality and reduced cycle-time for a user of the computer. The expectation is that the $500 spent on the upgrade will result in at least $500 returned in various benefits.
Compare this analysis with training. We use training to create a more talented workforce just as we add components to a computer to upgrade technology. Training and organizational development are proven tools to add knowledge and skills to our workforce. So, if an employee goes to a $1,000 training event over a week-long period, the goal is that the employee will leverage the training to help achieve various business results back on the job. Such results include increased sales, quality, customer satisfaction, productivity etc. The expectation is that the $1,000 spent on the training will result in at least $1,000 returned in various benefits.
In looking at this analogy we can see that the baseline value of human capital is inherent in the fully loaded salaries of the workforce. To the extent that training can be used as a strategic tool to enhance the talent of the workforce it is enhancing the value of the human capital.
Measuring Human Capital in PracticeSo now that we have seen how human capital can be tagged with a monetary value the next step is to actually measure how talent driven training programs can be linked to the increase in human capital.
First, it goes without saying that linkage to business results is critical (see exhibit 1 for a macro list of business results). If a sales program exists understanding how training helped increase sales would be logical. So to understand the business result performance metrics before and after training, isolating the change in the metrics to training (as opposed to other factors – see exhibit 2 for a macro list of root cause analysis variables) is vital. Finally, adjusting your isolated result for any bias, error, confidence or conservatism is always important, especially in building credibility with stakeholders relying on the metrics for decision-making purposes.
We’ve just described some of the guiding principles in the works of Dr. Jack Phillips and his ROI process as an analytical tool to measure the ROI on training relative to specific business results. Phillips guiding principles include elements of what he refers to as estimation, isolation and adjustment. These are the cornerstones to converting a benefit of training into a monetary figure for valuation and ROI purposes.
Estimation is a process commonly used in business today. Sales people will estimate their future sales, accounting people will estimate the cost of a warranty or claim that is expected in the future. So can training personnel analyze the job performance impact that a training program will have on the job. Participant estimation, as it is commonly referred, is not estimating the performance solely related to training but asks participants to estimate job performance changes in general, including among other factors, training. Refer again to Exhibit 2 for those other factors.
For example, if one attends sales training, one might estimate an increase in job performance but that increase could be related to other factors such as a competitor going out of business that increases sales performance more so than training. So, estimates of performance change need to take into account many factors, not just training. Those factors include process changes, people changes, marketplace changes, technology changes and of course training.
When estimating the increase, the analyst should think carefully about all the factors mentioned. They may want to review historic data and forecast data to reasonably factor into their overall performance change.
Logically, the training department is keenly interested in the effect training had on the performance improvement. So, the next step is to isolate the estimated increase in performance to just training. In this part of the process, the analyst should estimate how much the training has or will influence job performance, relative to the other factors and assign a value to it. So if the sales person felt that training was the strongest factor that caused change or will be the driving force behind future change it would receive a higher value than not.
Finally, because the data may be based on estimates one must adjust any resulting metrics for this factor. Again, in other facets of business this is commonly done. Using analysis such as most likely, optimistic and pessimistic adjusts estimates for bias by the estimator and flaws in assumptions. You’ll often see sales forecasts reported in this manner.
Taken together, the principles of estimation, isolation and adjustment form a powerful model in tabulating a systematic, replicable, and comparable valuation model for linking training to business results. So how can it be applied to the actual valuation of human capital.
The key is to leverage estimation, isolation, and adjustment to derive the change in overall job performance relative to a particular skill set. First, an estimate of the change is derived, second a root cause analysis is done to factor out other reasons for the change, and third an adjustment factor is put in place. The resulting percentage is a monetary benefit factor that can be multiplied by the value of human capital (i.e. the fully loaded salary) to have a reasonable indicator of the increase in human capital from the talent driven initiative relative to the base value of human capital.
Let’s drive it home with an example. Say key executives go to a leadership program. The intent is to drive various business results but also impact overall performance that encompasses many intangibles as well such as increased communications, better delegation of tasks, more effective coaching and mentoring etc.
From a measurement perspective, the analyst should gather metric data from the participant, and possibly their manager, peers or subordinates on the change in job performance before versus after the training. It can be quantified in percentage terms. Second, you want to isolate the effects of training to the performance change. So you need to factor out those causes not tied to training. Referring to exhibit 2 you can see the variables to include in your isolation analysis. Finally, adjust for error. The process is not an exact science so be conservative.
The net percentage improvement in performance isolated to training, adjusted for bias and for time on the job can be derived from the above data collection exercise. This is then multiplied by the base value of human capital as measured by the fully loaded salary for an individual. This represents an indicator for the hard and soft dollars returned to the organization as a result of leveraging training as a strategic tool to improve on the job performance.
Taken as a single number it is not a meaningful nor constructive way to leverage the metric as an indicator of human capital value. But, if the metric is computed for each participant on each training initiative and then benchmarked internally and externally it is a powerful tool to measure the value of the human capital. For example, PeopleSoft University will tabulate this metric (in addition to an entire scorecard of metrics) by business unit. Eaton University will tabulate this metric by learning delivery (e-learning vs. Instructor-led training), New Horizons will tabulate this metric by customer, course offering, and center (see Case Study for more details on New Horizons). All of these organizations not only compare their valuations using these internal benchmarks but then compare against a benchmark database of over fifty million data points as a external point of reference.
If the organization leverages automation and technology, the process of valuing human capital relative to talent becomes practical, scaleable and replicable. These are very important to take into account when deriving human capital metrics.
Conclusion:The quest for talented workforces is never ending. Learning organizations should understand the role they play in helping achieve a talented workforce. Parallel to this, the learning organization should formulate a model to value the change in human capital and benchmark that against.
Exhibit 1- Macro List of Common Business Results Impacted by Training
1. Increased Revenues
2. Increased Quality
3. Increased Customer Satisfaction
4. Increased Employee Retention
5. Increased Productivity
6. Decreased Cycle Time
7. Decreased Cost
8. Decreased Risk
This is a high level list of outcomes that can result from a process improvement. Training is one element to a successful process improvement and should be measured for linkage to the business result change.
Source: KnowledgeAdvisors Metrics that Matter tool
Exhibit 2 – Macro Root Causes of Change in Business Results
1. Exhibit 2 – Macro Root Causes of Change in Business Results
2. Technology
3. Externalities
4. Procedures/Policies
5. Incentives
6. Training
The list above is meant to help identify the significant macro variables that are responsible for a change in a business result. Going through these factors in your analysis to determine the effects of training on a business measurement outcome will facilitate the isolation process.
Source: KnowledgeAdvisors Metrics that Matter tool
New Horizons is the largest IT training company in the world. New Horizons has over 5, 000 employees worldwide including 2,000 instructors. As a global operation they must create a talented workforce that is decentralized yet is a cohesive network to the end customer. They do an exceptional job of this by ensuring that all levels of management are deeply involved in the development, coaching and mentoring of the network members. For example, they recently rolled out an internal sales program that included management coaching as a major component of the rollout. It put heavy emphasis on the importance of senior management buy in and support and signified that cultivating talent is not just about sending people to training but embedding learning and knowledge sharing into the fabric of day to day business operations.
As a result of the way New Horizons educates its employees they have seen several specific, tangible results. For example, the New York City New Horizons center unearthed incredible opportunities to deliver customized services to several clients not only as a result of the training but also because of measurement and valuation of human capital. This office realized over $15,000 in additional revenue from this focus on measurement. The New York City center, like all New Horizons centers around the world, gathers quantifiable data from each customer about their training services. That data is not only satisfaction and quality data, but impact and ROI driven data. That measurement data was presented back to the client resulting in these tangible opportunities. This center estimates a 10% increase in overall revenue as a result of using a rigorous measurement system (they use Metrics that Matter by KnowledgeAdvisors) that measures quality and generates excellent touch points with the customer increasing customer retention.
Another tangible benefit of New Horizons rigorous approach to cultivating talent and then formally and consistently measuring it is seen in the form of a higher quality product and service. Instructors in the New Horizons Miami center review measurements on their performance in a real time manner and can compare that performance to other instructors within the network and to a benchmark outside the network. This has allowed instructors to make timely and innovative adjustments to the way they teach.
New Horizons centers have rallied around the measurement results. Each center measures internal and external training for satisfaction, effectiveness, job impact, business impact, and value gain in human capital. Tactically, adjustments in the business are made daily resulting in higher than ever customer satisfaction ratings. At a corporate level, the metrics are used to set standards of performance. The results of a measurement focus are a high level of assurance by New Horizons that their training is effective (based on Level III job impact metrics) and customers who would come back to New Horizons (98% of customers state they would buy again).
New Horizons has been a thought leader and innovator within the learning space by educating and evangelizing the need to provide stakeholders of learning initiatives with metrics that go beyond the basics (i.e satisfaction and quality) to measure the change in the value of human capital.
A critical success factor for New Horizons was leveraging measurement models based on industry proven methodology. New Horizons is very knowledgeable about the measurement techniques of Dr. Donald Kirkpatrick and his Four Levels of Evaluation. Further, New Horizons is linked with Dr. Jack Phillips and his ROI Process.
Secondly, they leveraged technology and automation to wrap around the industry accepted methodologies to make their measurement process practical, scaleable and replicable. On a daily basis they gather thousands of data points from around the world and use technology to collect, store, process and report that data so it is easily available for analysis.
In conclusion, New Horizons is a best practice example of a large, complex training operation that looked beyond the complexities and challenges of cultivating a talented workforce and placing a value on human capital. Through senior management commitment and support they have put in place one of the most robust measurement and valuation processes in the industry that is being replicated by peer organizations, academic institutions, and corporate universities around the world.
Jeffrey A. Berk
jberk@knowledgeadvisors.com
Jeffrey A. Berk is Vice President of Products and Strategy for KnowledgeAdvisors. KnowledgeAdvisors is a corporate learning business intelligence firm that helps organizations gain the knowledge to improve human performance, better educate its workforce and reduce costs across the enterprise. Its proprietary measurement technologies and benchmarking expertise help companies more successfully measure human performance change due to training.