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Feature

Frank DiBernardino
Managing Principal and Founder
Vienna Human Capital Advisors LLC

The Missing Link: Measuring How People Drive Enterprise Value

Simply put, the board and the CEO want a clear, credible, and simple picture of how much bang the organization’s getting for the money it invests in people and human resource programs.

By Frank DiBernardino

Boards and C-suite executives take great pains to measure and monitor returns on their company’s investments. And they share a common frustration: how to measure the financial impact of human resource investments — people and programs. Controlling the money going into human capital is one thing; measuring and maximizing the value coming out is quite another.

Even though people costs far surpass financial capital costs in the majority of American businesses, many continue to manage human capital as a necessary expense rather than the hefty monetary investment it really is. Directors are hungry to know how human capital outlays add value to the enterprise; but, with traditional HR metrics, this level of understanding is elusive.

The missing link? Human capital metrics that are tied to the income statement and balance sheet.

For decades, turnover rates, costs per hire, and per full-time employee (FTE) statistics have been measuring disjointed efficiencies, while Directors and CEOs really need a measure of effectiveness, in terms of ROI and impact on enterprise value. Simply put, the board and the CEO want a clear, credible, and simple picture of how much bang the organization’s getting for the money it invests in people and human resource programs.

A Breakthrough Approach
It is time for a change in approach — away from anecdotal evidence and per FTE numbers toward business intelligence models that can provide a clear line of sight between investments in people and the corporate bottom line.

Readily available data can be used to isolate and measure the financial performance of the human capital investment, observe effects and trends, pinpoint opportunities for improvement, and predict the impact of policy changes. All that is needed are the right formulas and analytical tools.

Time-honored financial formulas employed worldwide to calculate ROI, productivity, and liquidity can be modified for human capital applications. Using these specialized formulas, relevant data can be pulled from the corporation’s general ledger to determine if the organization’s human capital is being put to its most effective use. Is the investment adding to or destroying enterprise value?

Benefits of Having the Right Data
Such a financial approach has several benefits:

Assessment: Financially based human capital analytics make it possible to track the performance of this asset over time, create statistical reports that are familiar and user-friendly, and compare actual results to the organization’s internal goals and benchmarks.
Understanding: The right data and analytics can create a simple comprehensive, organization-wide picture of correlations and trends, demonstrate the impact of investments and policy changes, and identify the drivers of business results — across units and even across an industry peer group.
Strategy: The right data and analytics make it possible to predict how human capital performance can be improved and to what extent policy changes can impact profits and shareholder value.
Consistency and Reliability: Clear links between an organization’s human capital and financial system ensure that human capital numbers are auditable, standardized, and consistently defined over time. Straightforward measurement methods are resistant to being “gamed,” inspire confidence, and build collegial and collaborative relationships across business units and functions.

The implications can benefit every aspect of an organization’s growth and development. Not only does this approach help the company work better from the inside, but it makes the organization more attractive from the outside.

An Achievable Goal
HR leaders have long needed a credible and compelling way to demonstrate to the CEO and the board the financial impact on the company of human resource strategy initiatives. Using hard financial data and customized formulas, it’s now possible to achieve that goal.

So…can the CEO and board directly and credibly measure the financial impact of the large investment in human capital? By using the right financial data and formulas, and analytic approach, a board can measure how people drive enterprise value.

Frank DiBernardino is managing principal and founder of Vienna Human Capital Advisors LLC, a firm that provides human capital management solutions and services for helping companies better leverage their people assets for greater business growth and productivity. Earlier this year the firm introduced the Vienna Human Capital Performance Index™ as a decision support tool for chief human resource officers to draw clear associations between human capital assets and bottom-line business performance. (James Kristie, editor of Directors & Boards, serves on the firm’s advisory board.)

DiBernardino has more than 25 years of experience as a senior human resources adviser working with organizations in manufacturing, health care, pharmaceuticals, transportation, financial services, publishing, and academia, among others. His background includes strategic planning, client relationship management, consulting practice leadership, labor negotiations, underwriting, staff development, and management.

Most recently, he served as a principal at Mercer Human Resource Consulting and was also a founding principal at Foster Higgins, an employee benefits consulting firm. He pioneered the concept of Personal Financial Security as the overarching theme for a 10-year public policy strategic plan adopted by the American Benefits Council. He served on the board of directors of the American Benefits Council and the Employers Council on Flexible Compensation.

He can be contacted at frank.dibernardino@viennahca.com.