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strategy and business
 / Summer 2008 / Issue 51(originally published by Booz & Company)


The Talent Lie

Rarely are corporate HR programs subject to the same kind of analysis and effectiveness tests that are applied to the other key assets of a corporation. For example, HR seldom knows or asks about the return on investment of its various policies, practices, and programs. HR people typically lack the analytic skills to assess the cost-effectiveness and impact of their programs and to determine the likely effect of proposed changes in job designs, orga­nization structure, and HR-related policies. The HR function also often lacks a true “decision science” process (an analytic means of weighing choices and reaching optimal outcomes) when it comes to allo­cating human capital or planning learning and development programs for key talent.

The paucity of analytics is particularly apparent in the areas of rewards and talent management. HR generally does not calculate the return on such key reward-related decisions as how to allocate stock options, when to change benefit programs, and how to build a pay-for-performance program. Usually little, if any, data is available about the return on training programs, developmental coaching, and most other talent development practices and programs. Again, the contrast with tangible assets is obvious. There is good information in most organizations about the performance of equipment, products, and services against key financial indicators. The information is used to make decisions about the allocation of financial capital and the contin­uation of activities. But decisions about human capital are made without good data, and often on an ad hoc or intuitive basis.

Irrelevant Information Systems
There is an old saying that what gets measured gets attended to. The implication of this for human capital is very straightforward. The quality of an organization’s people will be a central focus only if it has HR measures that are as relevant, rigorous, and comprehensive as the measures that pertain to financial assets and physical capital.

To be effective, a human capital information system needs to track the contribution of people to the organization’s most critical and stra­tegic objectives. It needs to provide a good indication of how productive individuals are and how their productivity relates to organizational performance. It needs to measure the condition of the organization’s competencies and capa­bilities, especially those that are needed for superior performance.

It is particularly important for the HR department to have information technology resources that will enable it to produce the kind of comprehensive, real-time quantitative data that can be used by leaders to make fact-based decisions about talent management. This in­cludes comprehensive data on the condition and use of the organization’s human capital. HR leaders should not just generate and analyze this data, they should apply it to most critical decisions. The executive committee and the board should do the same.

But boards and executives are not the only ones who need human capital information. Given that an organization’s intangibles account for an increasing percentage of its market capitalization, it makes sense for investors to request and receive information about an organization’s human capital. Again, the comparison to financial capital is clear. If human capital is an organization’s key asset, then investors both need and deserve to receive regular up­dates on the condition of that asset. They should have access to infor­mation on turnover rates, money spent on development, employee engagement, and the organization’s competencies and capabilities.

The human capital metrics and analytics that are actually available to investors do not meet this standard. They tend to lack the precision and comprehensiveness of the financial metrics that are reported. Occasionally an organization in­cludes in its annual report an accident rate or a turnover rate, but hard data about human capital is rarely presented in any systematic way in public documents.

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