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Presents:

Human Capital Financial Statements

April 19, 2011

Human Capital Management Institute

About Human Capital Management Institute


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

HCMI Background:
Specialized in HR analysis & measurement Deep expertise in Workforce Analytics & Planning Board made up of CFOs and HR heads Over 40 years of experience

What We Do:
Measure the immeasurable in human capital Transform workforce data into business intelligence Provide Tools and Training so HR can Partner with Finance

Workforce Assessment w Strategic Consulting w Training Best Practices w Workforce Analytics and Planning w Benchmarking
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The Average FORTUNE 500 Company makes a $3 billion annual investment in Human Capital it cannot measure.
- Hewitt Associates

In most organizations, including large companies such as the Fortune 500, total human capital costs, also known as Total Cost of Workforce, average nearly 70% of operating expenses.
- A 2006 SHRM survey of over 700 companies including a significant number of Fortune 500 companies

Human Capital Management Institute

History of Accounting and Financial Statements


American Institute of Certified Public Accountants (AICPA) gave the Committee on Accounting Procedure (CAP) responsibility to issue accounting standards

Statements of cash and balance sheets were relatively common

mid 1800s

1938

1934
Modern financial reporting and the development of Generally Accepted Accounting Principles (GAAP) started with the Securities and Exchange Commission (SEC) Act of 1934
Human Capital Management Institute

1973
Financial Accounting Standards Board (FASB) established to improve standards of financial accounting and reporting for the guidance and education of the public

Purpose of the Traditional Financial Statement


Financial statements are used by many different stakeholders
Stakeholder Company Leadership Prospective Investors Financial Institutions
(banks and other lending companies)

Use Tool for business decision making that may affect an organizations continued operations and annual report to stockholders Assess the success and viability of investing in a business Decision to lend to a company or extend debt securities Ascertain the propriety and accuracy of information for legal, tax and audit purposes

Government Entities
(tax authorities)

Vendors who extend credit Media and the General Public

Assess the creditworthiness of the business Variety of reasons

But they leave out the company's most valuable asset: the workforce.
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Human Capital Measures Linked to Financial Performance


How do we go from Human Capital to Financials with actionable data?
Data Integration Model
Human Capital
Recruiting Training Mobility

+
Financials
Revenue

Quantifying the Talent Management Life Cycle


Recruiting & Hiring

Operations & Business


Days Worked Cycle Time

Customer
Satisfaction Net Promoters

Expenses Profits

Turnover & Retention

Engagement
Lead/Manage Retention

Assets
Liabilities

Leadership & Management

Training (L & D)

Quantity
Quality

Price/Margin
Retention Return rate

Mobility Career Path

Performance & Engagement

Human Capital Management Institute

Human Capital Financial Statements (HCF$)


Delivering Value with Human Capital Financial Statements:
Greater Transparency into an organizations greatest asset: The Workforce Method to Value Knowledge Capital by measuring the 81% of Market
Capitalization not on traditional financial statements, Intangible/Knowledge Capital

Improved Investment Decisions providing key information, investors can make


informed investment decisions

Standards in Human Capital Measurement and Reporting Leads to industry and


geographic based Benchmarking capabilities

True Linkage of Human Capital to Financial Results A Supplement to Traditional Financial Statements, not a substitute

Human Capital Management Institute

Human Capital Financial Statements (HCF$)

Human Capital Financial Statements answer the following questions:


1. How do you quantify the impact human capital has on financial performance? 2. How do human capital metrics integrate with commonly accepted financial metrics? 3. How do you measure total workforce costs to drive workforce effectiveness and efficiency? 4. How do you quantify value creation across the talent management life cycle?

5. What is the impact of training on profit, productivity and total human capital value?
6. What is the differential human capital value creation of different job roles? 7. How do you measure workforce flow, changes, and growth like a cash flow statement?

Human Capital Management Institute

The Human Capital Financial Statements (HCF$)


HCMI has developed three unique statements collectively known as Human Capital Financial Statements for organizations to disclose human capital information: Human Capital Impact Statement
Workforce Productivity Impact Summary Total Cost of Workforce Sub-Schedule Talent Management Impact Schedule

Human Capital Asset Statement


Human Capital Headcount Summary Human Capital Asset Cost Schedule Human Capital Training Value-add Schedule Return on Human Capital Investment Schedule Total Human Capital Value Schedule
Prior Year Workforce Primary Category Headcount 13,300 1,250 2,300 3,000 900 250 1,450 2,750 950 450 1,700 1,100 600 15,000 Employees - Management & Senior Leadership - Professional Staff - Sales Staff - Specialists and Technicians - Skilled Trade Staff - Operations Staff - Service Staff - Administrative Support Staff - Laborers and Helpers Contingent Staff - Temporary - Contractors Total or Average Workforce New Hires1 1,745
50 292 560 100 25 225 308 110 75

Current Year
% Chg 13.1% 4.0% 12.7% 18.7% 11.1% 10.0% 15.5% 11.2% 11.6% 16.7% 26.8% 21.4% 36.7% 14.7%

Turnover2 % Chg -510


-10 -70 -150 -25 -10 -80 -120 -20 -25
-3.8% -0.8% -3.0% -5.0% -2.8% -4.0% -5.5% -4.4% -2.1% -5.6% -8.8% -9.1% -8.3% -4.4%

Retirement 3 % Chg -140


-15 -50 0 -30 0 -20 -25 0 0
-1.1% -1.2% -2.2% 0.0% -3.3% 0.0% -1.4% -0.9% 0.0% 0.0% 0.0% 0.0% 0.0% -0.9%

4 5 Subtotal % Chg Promotions % Chg Transfers % Chg

Headcount % Chg 14,450 1,300 2,500 3,400 1,000 250 1,600 2,900 1,000 500 1,950 1,200 750 16,400
8.6% 4.0% 8.7% 13.3% 11.1% 0.0% 10.3% 5.5% 5.3% 11.1% #### 9.1% 25.0% 9.3%

Human Capital Flow Statement


Talent and Headcount Flow Summary Human Capital Job Value Schedule

14,395
1,275 2,472 3,410 945 265 1,575 2,913 1,040 500

8.2% 2.0% 7.5% 13.7% 5.0% 6.0% 8.6% 5.9% 9.5% 11.1% 17.9% 12.3% 28.3% 9.3%

50
20 30 -25 68 -25 20 -8 -40 10

0.4% 1.6% 1.3% -0.8% 7.6% -10.0% 1.4% -0.3% -4.2% 2.2% -2.9% -2.7% -3.3% 0.0%

5
5 -2 15 -13 10 5 -5 0 -10

0.0% 0.4% -0.1% 0.5% -1.4% 4.0% 0.3% -0.2% 0.0% -2.2% -0.3% -0.5% 0.0% 0.0%

455
235 220

-150
-100 -50

0
0 0

2,005
1,235 770

-50
-30 -20

-5
-5 0

2,200

-660

-140

16,400

Human Capital Management Institute

The Human Capital Impact Statement


Quantifying Workforce Productivity
Human Capital Impact Statement Summary
Revenue
Net Operating Revenue Total Workforce Headcount (FTE) Revenue per FTE

Prior Year
$1,400,000,000 15,000 $93,333

Current Year
$1,540,000,000 16,400 $93,902

Variance
$140,000,000 1,400 $569

% Chg
10.0% 9.3% 0.6%

Key Metrics:
Revenue per FTE Profit per FTE Avg. Market Cap. per FTE Total Cost of Workforce Human Capital ROI Ratio Return on Human Capital Investment

Costs
Total Expenses Total Operating Expense Total Cost of Workforce (TCOW) TCOW Percent of Revenue TCOW Percent of Total Expenses TCOW Percent of Operating Expenses $1,170,000,000 $725,000,000 $779,950,000 55.7% 66.7% 107.6% $1,285,000,000 $795,000,000 $861,000,000 55.9% 67.0% 108.3%
$115,000,000 $70,000,000 $81,050,000 0.2% 0.3% 0.7% 9.8% 9.7% 10.4% 0.4% 0.5% 0.7%

Profit
EBITDA(1) Net Operating Profit Profit per FTE $310,000,000 $143,750,000 $9,583 $340,000,000 $159,375,000 $9,718
$30,000,000 $15,625,000 $135 9.7% 10.9% 1.4%

Productivity and ROI of Human Capital


Total Market Capitalization (2) Average Market Capitalization Value per FTE Human Capital ROI Ratio Return on Human Capital Investment $2,156,250,000 $143,750 1.29 18.4% $34,570,000 $2,390,625,000 $145,770 1.30 18.5% $41,294,200
$234,375,000 $2,020 0.00 0.1% 10.9% 1.4% 0.1% 0.4%

TOTAL WORKFORCE PRODUCTIVITY IMPACT:

$6,724,200

19.5%

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The Human Capital Impact Statement


Total Cost of Workforce

Quantifying the Talent Management Life Cycle


Workforce Productivity Impact Across the Talent Management Life Cycle: Talent Management Lifecycle:
Recruiting & Hiring

Talent Management Segment


Recruiting and Hiring Mobility

Prior Year Current Year Productivity Productivity Impact Impact

Advanced metrics at each talent management life cycle stage:


Example Quality of Hire Index
New Hire Turnover Percent of Job Requirements Met

Turnover & Retention Leadership & Management

Training (L & D)

Leadership and Management Training Performance and Engagement Turnover and Retention

25%
90 Day New Hire Turnover Rate

20%
Applicant Percent of Job Recommendations Met Applicant Percent of Job Requirements Met

New Hire Satisfaction Survey 25%


Supervisor Survey Score Employee Survey Score

New Hire High # of Qualified Performer Rate Applicants

20%
Percent of High Performers

10%
Total Qualified Applicants

Quality of Hire Index


Internal + External Best Hire Source

Mobility Career Path

Performance & Engagement

Overall Productivity Impact

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The Human Capital Asset Statement + Human Capital Flow Statement


Key Assumptions:
1. Workforce Value Increases Over Time
Exceptions exist which is why differentiating workforce job roles #3 below is critical

2. The Workforce Create Value Far Greater than its Cost


(See Human Capital ROI Ratio and Return on Human Capital Investment)

3. Certain Job Roles Create More Organizational Value than Others


(See #1 above, differentiated workforce value is foundational to the Human Capital Asset Statement)

4. Training is More of an Investment than an Expense


Therefore it is treated as a capital asset and depreciated in the Human Capital Asset Statement

5. Captures Workforce Total Value Add both annual and accumulated 6. Quantifies the Total Value of the Workforce
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The Human Capital Asset Statement


Measuring Human Capital: an Organizations Most Valuable Asset
Human Capital Headcount Deployed
Employees
- Management & Senior Leadership - Professional Staff - Sales Staff - Specialists and Technicians - Skilled Trade Staff - Operations Staff - Service Staff - Administrative Support Staff - Laborers and Helpers

Prior Period
13,300
1,250 2,300 3,000 900 250 1,450 2,750 950 450

% of Total 88.7% 8.3% 15.3% 20.0% 6.0% 1.7% 9.7% 18.3% 6.3% 3.0% 11.3% 7.3% 4.0% 100.0%

Current Period
14,450
1,300 2,500 3,400 1,000 250 1,600 2,900 1,000 500

% of Total 88.1% 7.9% 15.2% 20.7% 6.1% 1.5% 9.8% 17.7% 6.1% 3.0% 11.9% 7.3% 4.6% 100.0%

Variance
8.6%
4.0% 8.7% 13.3% 11.1% 0.0% 10.3% 5.5% 5.3% 11.1%

Contingent Staff
- Temporary - Contractors

1,700
1,100 600

1,950
1,200 750

14.7%
9.1% 25.0%

Total Workforce

15,000

16,400

9.3%

Total Retained Human Capital Value


- Management & Senior Leadership - Professional Staff - Sales Staff - Specialists and Technicians - Skilled Trade Staff - Operations Staff - Service Staff - Administrative Staff - Laborers and Helpers - Contingent Staff

Prior Period
$114,085,191 $47,570,395.54 $95,688,967 $3,200,000 -$820,000 $18,141,980 $41,025,572 -$9,325,500 -$3,550,000 $0

Percent of Total 33.5% 14.0% 28.1% 0.9% -0.2% 5.3% 12.0% -2.7% -1.0% 0.0% 89.8% 10.2% 100.0%

Current Period
$122,597,851 $51,871,882 $114,895,893 $3,750,000 -$1,750,000 $20,585,366 $45,733,106 -$10,046,500 -$4,000,000 $0

Percent of Total 31.6% 13.4% 29.6% 1.0% -0.5% 5.3% 11.8% -2.6% -1.0% 0.0% 88.5% 11.5% 100.0%

Variance
7.5% 9.0% 20.1% 17.2% 113.4% 13.5% 11.5% 7.7% 12.7% 0.0%

Retained Human Capital Value Add

(3) (4) (5)

$306,016,607 $34,570,000 $340,586,607

$343,637,598 $44,666,667 $388,304,264

12.3% 29.2% 14.0%

Annual Workforce Productivity Impact TOTAL HUMAN CAPITAL VALUE ADDED

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Human Capital Flow Statement


Provides an exact report by category and critical role of workforce size, gains, losses, tenure and talent level Breaks down workforce flows across the talent management lifecycle.

Human Capital Flow Statement


4000 3500 3000 2500 2000 1500 1000 500 0

Human Capital Flow Chart


547
2,000 260 200

311

350

29

517 35

302

169

426

1,626

Promo In

Demotions In

Rehire

Transfer Out

Involuntary Term

External Hire

Transfer In

Promo Out

Beginning Headcount

Voluntary Term

Demotion Out

Human Capital Management Institute

Terminations Other

14

Ending headcount

Case Study: BroadTek Communications

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The Human Capital Impact Statement


Case Study: BroadTek Communications
Revenue
Net Operating Revenue Total Workforce Headcount (FTE) Revenue per FTE Total Expenses Total Operating Expense Total Cost of Workforce (TCOW) TCOW Percent of Revenue TCOW Percent of Expenses TCOW Percent of Operating Expenses

Prior Year
$4,114,540,000 4,645 $885,800 $2,788,752,921 $2,262,997,000 $447,661,952 10.9% 16.1% 19.8% $1,316,652,800 $573,155,422 $123,392 $6,304,709,642 $1,357,311 3.96 128.0% $355,630,545

Current Year
$4,444,560,000 4,750 1 $935,697 $2,809,406,376 $2,377,839,600 $467,567,712 10.5% 16.6% 19.7% $1,511,150,400 $680,017,680 $143,162 $6,800,176,800 $1,431,616 4.50 145.4% $700,578,523

Variance
$330,020,000 105 $49,897 $20,653,455 $114,842,600 $19,905,760 -0.4% 0.6% -0.1% $194,497,600 $106,862,258 $19,770 $495,467,158 $74,305 0.54 17.4% $344,947,978

% Chg
8.0% 2.3% 5.6% 0.7% 5.1% 4.4% -3.3% 3.7% -0.6% 14.8% 18.6% 16.0% 7.9% 5.5% 13.5% 13.6%

Costs

Profit
EBITDA(1) Net Operating Profit Profit per FTE

Productivity and ROI of Human Capital


Total Market Capitalization (2) Average Market Capitalization Value per FTE Human Capital ROI Ratio Return on Human Capital Investment

3 3

TOTAL WORKFORCE PRODUCTIVITY IMPACT:

97.0%

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The Human Capital Impact Statement


Case Study: BroadTek Communications
$1,400 $1,200 $1,000 $800 $600 $400 $200 $0

2010 Financial KPIs

25.0% 20.0% 15.0% 10.0% 5.0% 0.0%

2009 - 2010 KPI Variance

ClearTel

RayFi

BroadTek

ClearTel

RayFi

BroadTek

Revenue per FTE Profit per FTE Total Cost of Workforce per FTE Productivity Gain(Loss) per FTE 15.0% 10.0% 5.0% 0.0% -5.0% -10.0%

Revenue per FTE Profit per FTE Total Cost of Workforce per FTE

2009 2010 Productivity Variance

3
Note: All Dollars in Thousands

Human Capital ROI Ratio ClearTel RayFi

Return on Human Capital Investment BroadTek

Data for 2009 and 2010 Fiscal Years

KPI = Key Performance Indicator

FTE = Full Time Equivalents

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The Human Capital Asset Statement


Case Study: BroadTek Communications
Step #1: Measure Changes in Workforce Headcount
Total Employees Sales Staff and Service Staff = Core Workforce Administrative + Laborers and Helpers = Non-Core Workforce

Step #2: Quantify Differential Value of High vs. Low Value Add Roles
Core Job Roles add Greater Value Critical Job Roles add Greater Value

Human Capital Headcount Deployed


Employees
- Management & Senior Leadership - Professional Staff - Sales Staff - Specialists and Technicians - Skilled Trade Staff - Operations Staff - Service Staff - Administrative Support Staff - Laborers and Helpers

Prior Period
4,395
610 1,310 730 515 115 210 550 250 105

Percent of Total 94.6% 13.1% 28.2% 15.7% 11.1% 2.5% 4.5% 11.8% 5.4% 2.3% 5.4% 100.0%

Current Period
4,535
615 1,405 805 530 105 210 560 220 85

Percent of Total 95.5% 12.9% 29.6% 16.9% 11.2% 2.2% 4.4% 11.8% 4.6% 1.8% 4.5% 100.0%

Variance
3.2%
0.8% 7.3% 10.3% 2.9% -8.7% 0.0% 1.8% -12.0% -19.0%

Contingent Staff Total Workforce

250 4,645

215 4,750

-14.0% 2.3%
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Human Capital Management Institute

Measuring Critical Job Roles


Case Study: BroadTek Communications Low Value Add
Roles that are administrative in nature Roles that do not make decisions Typically easier to outsource

High Value Add


Roles that establish strategy Roles that make critical decisions that impact the business Roles that manage a team or key business processes

Core
Roles that are revenue generating Roles that are key to bringing in future revenue Roles that are customer facing Roles that directly support revenue generation / or manage cost

2009

2010

2009

2010

54.5%

48.5%

18.5%

23.5%

Non Core
Roles that indirectly supports revenue generation Roles that are not customer facing

2009 22.5%

2010 21.5%

2009
4.5% 6.5%

2010

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Linking Productivity to Financials


Example: Workforce Category and Job Group
Workforce Category Sales Job Group
Sales Manager Sales Engineer

Workforce Metric
Revenue per FTE
Customer Satisfaction Engagement, Billable Days, Training Investment per FTE Engagement, Performance Rating

Key Business Outcome


Revenue
Revenue, Customer Retention Productivity, Profit, Cost

Consultant

Professional
Developer

New Product ROI, Cost

Operations

Call Center Rep

% of 1st Calls Resolved, Customer Satisfaction

Unit Volume Output

Human Capital Management Institute

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Linking Performance and Productivity by Job Role

Performance

Productivity

Not Sure

Typically

Always

Accountant Customer Service Sales Positions

1X 2X 3X+

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Human Capital ROI Ratio Impact Matrix


X = Human Capital ROI Ratio Multiplier. Example 1.2 Human Capital Ratio * 1.0X = (1.0 * 1.2 or 1.2)

Employee Performance Level

1.0
Job Importance 1.0 .7X .5X .25X
Low

1.0X 1.0X 1.0 .7X .5X


Okay

3.0 X 2.0X 1.0X 1.0 .7X


Good

4.0X 3.0X 2.0X 1.0X 1.0X


High

5.0-10.0X 4.0X 3.0X 2.0X 2.0X


Stars

Critical High Important Average

Low

Typical Job Category Impact*


Primary Workforce Category Typical Job Importance Level Top Management Important to Critical Sales Staff Average to Critical Service Staff Average to Critical Professional or Executive Staff Average to Critical Operations Staff Average to Critical Specialist & Technicians Average to Critical Administrative Support Staff Low to Average Laborers & Helpers Low to Average

*Relative Impact and Importance of a job role or job category varies considerably by industry, region and business model

Human Capital Management Institute

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Workforce Image Map (WIM) A Story of 2 Technology Companies (Software)


Primary Workforce Category
Top Management Management Sales & Marketing Staff Product Research and Development Staff Consulting, Training & Service Staff Other Professional Staff Call Center Staff Administrative Support Staff Contingent Workforce Software Tech Co Comparison Total Total Workforce Tech Co. A 50 550 1,250 850 1,200 300 350 200 250 Total Workforce Tech Co. B 50 550 3,000 100 300 300 0 200 500

Tech Company A Headcount

Tech Company B Headcount

5,000

5,000

Which Company has the most High Value Add Job Roles?

Co. A vs. Co. B


3,700 vs. 3,450 74% vs. 69%

Too much of any one Category Creates an Unsustainable Imbalance


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Introducing Workforce Intelligence Consortium


www.workforceic.com

A partner-driven organization dedicated to translating insights into actionable workforce management technology with industry-specific content

Quantify
Identify and solve workforce challenges that impact bottom line results

Integrate
Comprehensive integration of workforce, customer, and financial data

Predict
Optimize workforce costs and conduct advanced workforce analytics and planning

Evaluate the financial impact of workforce decisions Identify ROI for Engagement, High Performance, Internal Mobility, Time to Productivity/ Profitability and more Utilize the advanced Cost of Turnover calculator

Employ a comprehensive data blueprint Leverage defined standards and metrics that create meaningful output Implement data disciplines to ensure reliable metrics and measures

Optimize the Total Cost of Workforce by industry Model Industry Specific Issues for Productivity, Skills, capabilities, performance, tenure, and training Evaluate your Organizations Most Critical Job Roles: Measure and Predict the Impact of Changes and ROI

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Next Steps:
For more information about HCMI and the Human Capital Metrics HandbookTM, visit
http://www.hcminst.com/hcmi.html

For inquiries about the Workforce Intelligence Consortium, contact Cheryl Farley, Program Director at
cheryl.farley@hcminst.com
Presenter information: Jeff Higgins, CEO HCMI at jeff.higgins@hcminst.com

Workforce Intelligence Consortium Group

@HCMI
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Human Capital Management Institute

Question and Answer

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Thank you

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