When sipping that next cappuccino,
cunsicier that the recent market cap of
St.irbuck's Coffee Co. was 7,313 per-
cent greater than its fixed assets.
Google has a market cap that is 8,842
percent of its fixed assets. Even hos-
pitality organizations such as Star-
wood Hotels & Resorts Worldwide
Inc. — which possess lots of real
estate — and giant manufacturing
organizations such as General Elec-
tric Co. bave market cap ratios that
are sizeable when compared to tbeir
investments in property, plants and
equipment. (At the time this article
was written, Starwood had a market
cap-to-assets ratio of 177 percent, and
GE's ratio was 409 percent.)
There has been an increasing real-
ization that fewer and fewer of an
organization's assets are tangible and
fall neatly onto a line of the tradition-
al balance sbeet. items such as brand,
intellectual capital, culture, work-
force skills and innovation have
increasingly become major forces in
shaping an organization's current
and future success. Many services
w w w . f ina ncialexecuti ves .org
firms note that more tban 90
percent of their assets walk
out the door each night.
Even manufacturing firms
are competing to a greater
extent than ever before on
services and innovations
produced by their work-
force.
As such, the value of
human capital is too high to be solely By William A.
tbe responsibility of tbe human Schiemann
resources function, and CFOs can
play an important role in educating
and collaborating with HR to devel-
op better ways to measure and man-
age tbe value of the organization's
human assets. Armed with informa- w
tion and analysis from finance, HR is u
in a much better position to assess on
and compare the potential impact of
D
O
human capital Investments and focus
resources on those that will deliver m
PS
the greatest return on investment
(ROl) for the company
Consider these four key questions:
Why is it important to better
understand human capital?
may 2008 I financial executive 53
 How can the value of human cap-
ital be measured?
How can that information be
used to make important business
decisions?
What role can CFOs play in this
equation?
It's well known that in many
industries, geographies or functions,
human capital is becoming scarce.
Hawaii, for example, is facing severe
labor challenges, with unemploy-
ment rates across the islands barely
above 2.0 percent. North Dakota
can't find workers to support its agri-
culture and energy industries — tal-
ent aside, there are just not enough
people.
Hawaii's situation is a perfect
example of a trend that promises to
sweep the rest of the U.S. and many
other parts of the globe in the next
few years: talent
shortages (either in / Ç
numbers or skills)
that will drive up
costs and likely holds true as organizations compete
reduce customer satis-
faction — and thus
for talent
reduce financial Those that develop measures for
growth and profitabil-
ity. assessing their human capital can
Solutions such as
supplanting people
with technology —
ATMs for tellers and
complicated voice messages in iieu of
live operators — have not solved the
crisis. Most industries still depend on
people for their competitive advan-
tage, and most Western businesses
are increasingly dependent on servic-
es, innovation and human productiv-
ity to edge out their competition.
In many places, besides people,
skills are in short supply. In the
Houston area, the oi! and gas indus-
try faces a crisis of talent at a time
when growth has been strong. Rich
pension plans, modest retirement
needs and values that favor leisure
are creating a "triple-witching" event
that experts say wilt strip the indus-
try of 30 to 40 percent of needed
geologists, engineers and other high-
ly skilled professionals. While energy
companies have a voracious appetite
54 financial executive ! may 2008
for these key skills, there simply is
not enough talent locally, and in
many cases, globally.
This dearth of talent is due in
large part to the "baby boomer
effect," as well as a lagging indicator many instances of such relationships.
of a decades-long lack of engineering
and scientific training in the U.S. and major restaurant chain, measures of
other Western countries. In the talent
search, "the game has changed," said
a CEO of a major oil company. When
it came to raiding talent, he said,
there used to be an informal "hands-
off" rule. Not so anymore, as "those
rules have gone out the window. It
has gotten downright ugly."
Globalization has only exacer-
bated this situation. As China deals
with growing needs for technical
and middle-management skills,
Chinese executives are now raiding
India, Eastern Europe and even the
Manage what you measure
amid a shrinking workforce.
better manage and value
what they have.
U.S. for talent. And, while the
impending recession will likely
slow some talent problems for a
short time, the issue is certain to
return over the next five years, with
more firms unable to compete due
to lack of talent.
Why Measure?
Perhaps the best reason to measure
human capital is to consider the risks
of not measuring it. These include
unpredicted labor shortages, skills
mismatches that choke off growth,
talent fleeing to competitors and pro-
ductivity levels that are only 70 per-
cent of what they could be. Those
who measure and manage these fac-
tors will have a distinct advantage.
Another major advantage of hav-
ing the "right" measures lies in antic-
ipating the future through good lead-
ing indicators of impending produc-
tivity, retention, customer satisfaction
and financial performance. This
author and others have documented
For example, in a recent study with a
employee alignment, capabilities and
engagement were powerful predic-
tors of customer satisfaction and
financial performance across thou-
sands of restaurants.
Also, just like economic indica-
tors, there are good human capital
indicators, such as employee
engagement, employer (not prod-
uct) brand or alignment. These indi-
cators may provide key information
about emerging trends, such as
declining talent availability, higher
turnover of strong performers,
unionization vulnerabil-
ity and emerging ethics
risks.
Can Human Capital Be
Measured?
There are two major ways
to measure human capi-
tal. One involves a "Holy
Grail" quest for the per-
fect number — one that
could be entered on the
balance sheet. However,
that one number, even if
found, would not provide much
more than a static indicator of human
capital value — and is not something
that would help much with key busi-
ness decisions.
Various indices of labor invest-
ment and return, with varying trade-
offs, have been proposed. Yet, there
are high risks to standardized meas-
ures of human capital. Measures
such as revenue per employee (or
labor dollar) can provide some broad
guidance, especially when compared
to firms in a comparable market
niche. But even then, those firms may
have different strategies; one may
leverage labor more while another
leverages technology more.
Nordstrom Inc., for example, cre-
ates a distinct brand through its cus-
tomer-intimacy model, which
www.financialexecutivps.org
 Figure 1
Shareholder
Equity
Customer
Equity
Turnover
People Equity
Alignment
Capabilities
Engagement
People
Drivers
T
HR
Drivers
T system for reviewing these measures
People
Initiatives, Investments
requires higher labor investments
than, say, Wal-Mart Stores Tnc.'s low-
cost, supplier-driven model, which
leverages human capital differently.
An alternative approach to manag-
ing human cipital is through the con-
cept "People Equity." People Equity
has shown to be highly predicfi\'e of
key outcomes: employee retention,
operational effectiveness, customer
satisfaction, quality, internal service
and financial performance.
People Equity is comprised of
three components, each of which is
crucial to the current and potential
value of the workforce:
Alignment of the workforce with
the business strategy;
Capabilities to meet customer
requirements; and
Engagement of the workforce —
tlie levels of raw energy, commit-
ment and advocacy.
In essence. People Equity drives
customer equity, which, in turn,
drives shareholder equity (see Figure
1 above). While there are various
ways to measure People Equity, one
that's been proven most cost-effective
is the use of strategic employee sur-
veys. There is a parallel with customer
surveys, which, over the past five or
so years, have been reengineered to
predict customer buying patterns ¿md
www.financialexecutives.org
Source: Metrus Group
loyalty, sales growth, market share
and financial performance.
Employee surveys, when construct-
ed to capture the alignment, capabili-
ties and engagement (ACE) dimen-
sions, are similar in that they predict
people, customer, operational and
financial performance. ACE dimen-
sions are good indices of how well the
organization is executing its strategy.
Typically, when alignment is low,
the organization is spending more
labor dollars to accomplish its goals
and its employees arc engaged in too
many low- or no-value activities.
Organizations in which capabilities
are low are deficient in the talent,
information or resoLirces required to
meet customer expectations — for
which they may pay a hefty penalty
in the marketplace. And, when
engagement is low, top performers
leave more frequently, productivity
levels are suboptimal and dysfunc-
tional outcomes, such as grievances
and labor strife, are more plentiful.
Five Steps CFOs Can Take
The tollowing are steps CFOs anci
other financial leaders can take to
ensure they are making the optimal
investments at their firms:
1. Make sure there is a good human
capital strategy in place — one that
pivots off the organization's human
capital differentiators.
2. Insist on having good metrics in
place to capture those human capital
factors. Such metrics should include
both leading and lagging human cap-
ital success factors.
3. Make sure the organization's infor-
mation systems capture the ACE
characteristics — the three big driv-
ers of humiui capital value.
4. Ensure that measures exist for of
the drivers of ACE — these could be
training, core values, leadership
skills, supervisory practices and
more.
5. Be sure there is a strong tracking
quarterly — along with customer and
financial performance.
Instituting these measures will
put the organization on the road to
powerful human capital measure-
ment that provides both insight and
foresight to distinguish the firm in a
world of increasir\g competition and
scarce resources.
WILLIAM A. SCHIEMANN (loschiemann
@nietriis.coiu) is CEO and founder of
Metrus Group, a Somervillc, N./., consult-
ing firm specializing in strategic perform-
ance measurement. He's published dozens
of articles and is co-author o/Bullseye!
Hitting Your Strategic Targets Through
High Impact Measurement.
TAKEAWAYS
--^ With the realization that fewer of
an organizational assets are tangible,
items such as brand, intellectual capi-
tal, culture, workforce skills and inno-
vation have increasingly become major
forces in shaping an organization's cur-
rent and future success.
» CFOs can play an important role in
education and collaboration with
human resources to develop better
ways to measure and manage the val-
ue of an organization's human assets.
» An effective approach to human
capital management is through the
concept of "People Fquity" People
Equity has shown to predict employee
retention, operational effectiveness,
customer satisfaction, quality, internal
service and financial performance.
may 2008 i financial executive | 55