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People: The dynamic new source of business value

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There’s a change in the business climate that will quickly shape how stakeholders view the success or failure of organizations. In the past, we measured growth by fiscal responsibility, and this core mantra delivered success for decades. As long as a company was profitable and playing within the rules of the game, shareholders were happy. Soon we’ll see that simply turning a profit is an outmoded performance standard.

There are new drivers in play.

Today the economy in most if not all developed countries is shifting from nuts-and-bolts industrial production to one based on far less tangible assets: knowledge, technology, intellectual property, and services. That means that the workforce – an organization’s “human capital” – is the main source of the firm’s value creation and where value is created, investment follows. Thus, human capital is now viewed as an investible business asset and for investors it’s more and more imperative that this value be captured, quantified, and reported on.

As more companies begin to rely on workforce analytics they must overcome long-standing hurdles, including data problems, staffing skills, and discomfort with data-driven decisions about the workforce. Early adopters of workforce analytics in the past aimed their effort at saving or avoiding costs. But the goal now is to use analytics to drive revenue and profit.

The HR ecosystem has never been more critical to driving business value.

Operational, strategic, and investor decisions influence revenue and profit. HR professionals and business executives must therefore collaborate to combine workforce and financial data that support those decisions.

In November of 2018, the International Organization for Standardization (ISO), the world’s largest non-government organization for developing voluntary business standards, released new guidelines regarding human capital management. ISO recommends 23 core metrics that companies should be capturing and reporting. These range from simple demographic measures, such as age or gender, to slightly more complex metrics like the ratio of income to human capital.

HR leaders need a deep understanding of these key drivers of their business to help them make better decisions. That understanding comes through data gathered from multiple systems—applicant tracking, payroll, finance, performance, management learning, ERP, and HRMS. This is the data that is needed to generate reporting for HR leaders on workforce productivity. It’s also fundamental in providing benchmarking comparisons, predictive analytics, what-if analysis, human capital financial statements, and workforce planning reports.

By measuring productivity, turnover, recruiting, performance, engagement, management, learning and diversity, HR leaders can make better informed decisions and more accurately predict the impact of investments in human capital.

Finance can’t ignore human capital performance data.

Management must be equipped to better inform board members on the key drivers of human capital decisions, providing roadmaps and scenario analyses to support strategic human capital decisions using the new ISO standard reports.

Studies have shown there is a direct correlation between the measurement of human capital and the financial health of an organization. One study conducted by the Investor Responsibility Center Institute and Harvard Law School found 92 other studies related to the relationship between HR policies and the financial outcomes of an organization. Their conclusions show a direct correlation between human capital performance and financial performance, leading them to recommending human capital metrics should be included in standard investment reviews.

The evidence of improved financial outcomes should also not be ignored. A report conducted by Bersin by Deloitte (via the Wall Street Journal) found companies with well-performing talent analytics exceeded their competitors by 30% over a three-year period. Likewise, a CEB analytics survey found organizations could increase gross profit margin by 4% by moving into a leadership position in workforce analytics that also resulted in a savings of roughly $12 million for every $1 billion in revenue.

The Board needs people analytics front and center.

If you believe talent is a key opportunity for difference making, then it follows logically that the board should be very much concerned about it and on top of it. Not just at the CEO level—where they are involved—but deeper into the organization.

Board members are now seeking greater clarity on how management is planning to meet a wide range of new public disclosure metrics. Board charters have been expanded at many companies to focus on human capital, and more organizations are using quantitative analysis to gauge their efforts, including strategic risks and rewards. These companies place more emphasis on measuring the effectiveness of the workforce, while increasing the role of monitoring the risk of human capital at the board level.

It’s not enough to simply collect data—organizations need to know how to analyze it and use it across the enterprise to shape business strategy to satisfy employees and investors. It’s vital that HR focus on building proper infrastructure for people analytics, partner with finance, and the C Suite, and develop a culture where data and analytics are front of mind.

Investors are going to expect this.

Board members would be prudent to encourage management to be well prepared for the day when they may want or need to report to the investment community on any human capital measures or objectives that management focuses on in managing the business.

ISO 30414 provides a roadmap for reporting and a common language for HR, Finance, management and board members. The U.S. Securities and Exchange Commission (SEC) is considering adopting standards that are similar to IOS 30414 (the decision is currently pending), and it’s very likely that regulators elsewhere will follow suit. Voluntary adoption of the ISO Standard is rapidly becoming a best practice for organizations seeking to accelerate and improve decision making, while satisfying investors increasing expectations.

When it comes to the growth of your business, keeping your investors happy can often be a challenge. The landscape for what constitutes a “healthy” business has changed dramatically, and if your organization can’t adapt, it will struggle to compete with those who can. It’s critical to review now and take action to future-proof your business to the meet the reporting demands that will certainly be required by investors in the not too distant future.

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