Predicting Financial Performance with Human Capital Metrics Webinar

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February 5, 2013 © Human Capital Management Institute Presents: Predicting Financial Performance with Human Capital Metrics HUMAN CAPITAL MANAGEMENT INSTITUTE

description

HCMI has identified a handful of human capital metrics that actually predict financial and stock performance better than traditional financial metrics. These results remain consistent across industries and over multiple periods of economic change. Unbelievable? It is actually more shocking that these metrics are not leveraged by the investment community, and companies are not required to report them.

Transcript of Predicting Financial Performance with Human Capital Metrics Webinar

Page 1: Predicting Financial Performance with Human Capital Metrics Webinar

February 5, 2013

© Human Capital Management Institute

Presents:

Predicting Financial Performance with Human Capital Metrics

HUMAN CAPITAL MANAGEMENT INSTITUTE

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About Human Capital Management Institute

HCMI Background:

Specialized in HR analysis & measurement

Deep expertise in Workforce Analytics & Planning

Board made up of CFOs and HR heads

What We Do:

Measure the immeasurable in human capital

Transform workforce data into business intelligence

Provide technology, consulting and training so HR can partner with Finance

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SOLVE Workforce Intelligence Software w Strategic Consulting w Training

Best Practices w Workforce Analytics and Planning w Benchmarking

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

© Human Capital Management Institute

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HCMI Products and Services

© Human Capital Management Institute

Scenario: High Growth Scenario: Controlled Growth Scenario: Cost Savings

Current 5 Yr Projected Forecast Current 5 Yr Projected Forecast Current 5 Yr Projected Forecast

Headcount 60,000 96,631 10% Headcount 60,000 69,556 3% Headcount 60,000 46,427 -5%

Revenue $9,000,000,000 $15,861,075,149 12% Revenue $9,000,000,000 $11,486,534,063 5% Revenue $9,000,000,000 $9,000,000,000 0%

EBITDA $300,000,000 $577,624,375 14% EBITDA $300,000,000 $364,995,871 4% EBITDA $300,000,000 $300,000,000 0%

Total Expenses $8,700,000,000 $13,386,028,408 9% Total Expenses $8,700,000,000 $10,085,684,446 3% Total Expenses $8,700,000,000 $6,052,488,813 -7%

TCOW $4,713,000,000 $6,924,943,226 8% TCOW $4,713,000,000 $5,463,658,712 3% TCOW $4,713,000,000 $3,458,889,658 -6%

Selected Scenario: Controlled Growth

-8%-6%

-4%

-2%

0%

2%

4%

6%

8%10%12%14%

16%

18%

20%

Workforce Demand Growth Rate

-8%-6%

-4%

-2%

0%

2%

4%

6%

8%10%12% 14%

16%

18%

20%

Workforce Supply Growth Rate

-8%-6%

-4%

-2%

0%

2%

4%

6%

8%10%12% 14%

16%

18%

20%

Workforce Demand Growth Rate

-8%-6%

-4%

-2%

0%

2%

4%

6%

8%10%12% 14%

16%

18%

20%

Workforce Supply Growth Rate

-8%-6%

-4%

-2%

0%

2%

4%

6%

8%10%12%14%

16%

18%

20%

Workforce Demand Growth Rate

-8%-6%

-4%

-2%

0%

2%

4%

6%

8%10%12% 14%

16%

18%

20%

Workforce Supply Growth Rate

$9,000 $9,450$9,923

$10,419 $10,940 $11,487

$8,700 $9,135 $9,592 $10,071 $10,575 $11,104

$4,591 $4,865 $5,203 $5,565 $5,953 $6,369

$300 $312 $324 $337 $351 $365$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

Base Yr Yr 1 Yr 2 Yr 3 Yr 4 Yr 5

Projected Revenue Projected Total Expenses

Calculated TCOW Projected EBITDA

Millions

4.0% 4.0% 4.0% 4.0% 4.0%

2.6%1.7%

0.8%

-0.1% -1.0%

-3%

0%

3%

6%

Yr 1 Yr 2 Yr 3 Yr 4 Yr 5

Projected EBITDA Calculated EDITDA

6.0%

6.9% 7.0% 7.0% 7.0%

3% 3% 3% 3% 3%

0%

3%

6%

9%

Yr 1 Yr 2 Yr 3 Yr 4 Yr 5

Calculated TCOW Projected TCOW

Overall Scenario Forecast EBITDA Growth Rate TCOW Growth Rate

Human Capital Financial Statements • Human Capital Impact Statement • Human Capital Asset Statement • Human Capital Flow Statement

Workforce Quantifier™ ROI Calculator • ROI of Human Capital • Turnover Cost, Workforce Cost , Cost per Hire • Business Case for HR Interventions

Data Integration Blueprint • Modular Talent Management Components • Detailed Data Dictionary + Metric Formulas • Key Analysis Segments and Dimensions

Human Capital Metrics Handbook • Nearly 500 Metrics and Detailed Definitions • Over 100 KPI Best in Class Metrics • Unique Metrics that Monetize Human Capital

Workforce Planning Templates • Link Workforce and Financial Metrics • Advanced Retirement Calculator • Forecast Skills, Costs, Talent and Productivity

Career Path ROI Tool – Model of an “Appreciating Asset”

Employees as Assets versus Expenses

Staff Accountant

Mgr., Accounting

Dir., Accounting

Accountant

Sr. Accountant

CAGR: Compound Annual Growth Rate

Accounting Job Family Career Salary Progression

$46,400

$49,600

$59,800

$67,000

$79,100

$94,000

$40,000

$50,000

$60,000

$70,000

$80,000

$90,000

$100,000

0 1 2 3 4 5 6 7 8 9 10 10+

Years of Experience

Ba

se

Sa

lary

Staff Accountant

Accountant

Sr. Accountant

Mgr., Accounting

Dir., Accounting

Ave Annual Rate

Market Rates

(50%-75%ile)

CAGR = 10.0%

$130,000

CAGR = 6.6%

Entry level Staff Accountant

hired at 50%ile needs annual

salary growth of 10.0% to stay

with market(Assumes mkt growth of 3% annually

w progression to . Director in 10

years.)

50th %ile

The ten-year cost savings is the area between the cost of External Hires compared to the career path of an Internal Staff Accountant

Cost Savings from Internal

Development

Internal Hiring Cost

Over Time

Correlation Coefficient ( 0-1)

Factors Leading to Increased Turnover

Job Title or Position

Dissatisfaction With Compensation

High vs. Low Turnover Manager

Commute Distance

Driver #3

Driver #2

Driver #1

.50

.33

.27

.02

Low

Turnover Impact

High

Turnover

Impact

Some

Turnover

Impact

.11

Work Location

Number of Jobs in Last 3 Years .70

Hired Through Employee Referral .19

Job Framework Mapping Tool • Integrated Taxonomy 15,000+ jobs • Map Critical Job Roles

Workforce Capability Assessment • Data and Systems Capability + Risk Analysis • Human Capital Measurement Standards

Span of Control Optimizer™ Tool • Benchmark and Optimize Spans • Optimize Management Layers

Career Path Quantifier • ROI of Career Path • Build, Buy or Lease Talent Analysis

Analytic Engagement Projects • High Performer Profiles • Engagement ROI and Sales Impact • Turnover and Retention Driver Analysis

Initial Reports & Analysis

Data Gathering

First Good Metrics

HR Data Warehouse

Drill-down, standard reportsScenario Analysis

External Benchmarking

Context for decisions

Data

Driven Decision

Making!

Turnover, Headcount, Hiring

HRIS system data

COE Formation

Data Errors

HR Analytics Mandate

HR Standards EstablishedLost HR

Credibility

HR data/systems Assessed

HR Data Cleansed historical data scrubbed

Bus. Units

Reject

Analysis

Data Errors

Historical data

still bad

1st Analytics Study

Advanced Analytic Studies

HR Analysis Validated

Integrated HR Databases

COE Launches Training Courses

Bus. Units Demand

more

Analytics journey steps

Setbacks along the way

Journey path and goal

HR Roadmap Design • Step by Step Actionable Deliverables and Insights • Map for, Systems, Data, Tools, Skills, Metrics + more

Training and Advisory Support • Expert Guided Standard and Customized • Ongoing Advisory Support Services • Beginning and Advanced Training

Solve Workforce Intelligence Software • SaaS Software with Online Metrics Library • Integrated Dashboard, Analytics Tools • Human Capital Financial Statements

Statistical Sales Predictor • Predict Revenue by Economic/Workforce Factor • Link to economic drivers to workforce metrics

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Value Creation in Today’s Marketplace Are we focused on managing the right things or just managing what we know how to manage?

© Human Capital Management Institute 4

Intangible Capital Value In the Post Industrial Marketplace

Market value Is driven primarily by factors that do not show up on a balance sheet. The largest being Intellectual or “Human Capital*”.

<30% of value of Standard & Poor’s 500 index can be explained by tangible/intangible “book” assets.

Tangible Asset/Value Tangible asset management tools are

established and form the basis of modern “Finance” as a Decision

Support Science. (DCF, FCF, IRR, WACC, etc)

Standard and Poor’s S&P 500 Company Index

Well Measured

Not well Measured

Hard to Measure

Source: Ocean Tomo Research, Inc., 2011

• Human Capital = employee knowledge, training, productivity, experience, culture, leadership, development, performance, creativity, etc.

Easy to Measure

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The Challenge of Measuring Human Capital

Compensation

Transfers

New Hire Turnover

Succession Data

Turnover

Training

Recruiting

Em

ploy

ee D

ata

Benefits

Span

of Control

Workforce

Planning

Success Advanced

Analytic

Insights

Complexity of Workforce Data

Employee/Full-Time-Equivalent (FTE)

Jobs/Roles/Skills

Time - Tenure

Compensation ($ vs. Equity)

Frequency of Change

Promotions, Transfers, Hires, Terminations

Jobs/Roles/Skills

Time - Tenure

Measuring the Intangible

Lack of Standards

Lack of Analytic Skills

© Human Capital Management Institute 5

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Workforce Planning vs. Workforce Analytics

© Human Capital Management Institute 6

Workforce Analytics

Workforce Planning

Present

Future

Past

Predictive Analytics

Trend Analysis

Workforce Knowledge

Key Performanc

e Indicators

Workforce Optimization

Future Scenarios

Workforce Planning

Planning and Analytics

Workforce Analytics

Workforce Planning and Analytics Linkage Strong Workforce Analytics insights enable

future Workforce Planning success.

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Human Capital Financial Statements (HCF$™)

• Greater Transparency into an organization’s greatest asset: the workforce

• A Method to Value Knowledge Capital: measure knowledge capital, the 80% of market capitalization not captured by traditional financial statements

• Improved Investment Decisions: better information = more informed investment decisions

• Standards in Human Capital Measurement and Reporting: enable advanced benchmarking capabilities for industry, geographic, specific job roles and more

• Definitive Methodology for Quantifying Workforce Productivity: quantifies productivity and talent management impact across the talent management lifecycle

• True Linkage of Human Capital to Financial Results

Deliver HR Value with Human Capital Financial Statements:

© Human Capital Management Institute 7

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Analysis Background

© Human Capital Management Institute 8

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Overview

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Analysis Period: 1996 - 2011

Sectors: 12 Primary Industries

Sample Size: 22,100 Companies

Primary Human Capital Metrics Analyzed:

- Human Capital ROI Ratio - Return on Human Capital Investment - Total Cost of Workforce

- Total Cost of Workforce Percent of Revenue - Total Cost of Workforce Percent of Expenses

- Profit per FTE - Revenue per FTE

1. Accommodation & Food Services 2. Admin Support & Waste Management Services 3. Arts & Entertainment

4. Finance & Insurance 5. Health Care 6. Manufacturing 7. Mining 8. Professional, Scientific & Technical Services

9. Real Estate, Rental & Leasing 10. Transportation & Warehousing 11. Utilities 12. Wholesale Trade

Industries:

Focus: Year-over-year changes in human capital metrics and business performance. Primary Hypothesis: Financially successful businesses (those that have rising share prices which are higher than competitors) have flexible and adaptable human capital programs.

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Do Human Capital Metrics Predict Stock Price?

• A 10% gain in human capital metrics drives stock price gains of 3% to 19%

• Total Cost of Workforce (TCOW) is superior to

headcount metrics (i.e., FTE)

YES! Select human capital metrics predict stock price change for companies across 12 industry sectors !

• New metrics reveal surprise productivity winners and losers

63.9%59.4% 59.1% 57.0%

53.0% 52.6% 52.0% 49.6% 47.2% 45.2%

35.6% 35.2%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

R-Squared Value by Industry SectorR-Squared predicts future stock price changes (possible values between 0 - 1) R-Squared

© Human Capital Management Institute

HC Metrics Correlation to Future Stock Price Changes (R-Squared)

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Traditional Financial Performance

© Human Capital Management Institute 11

Highlights:

• Finance & Insurance, Wholesale Trade, Transportation and Utilities improved

• Accommodation & Food Services, Arts & Entertainment and Healthcare lag

• Surprise - Transportation

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Is the Productivity Real?

© Human Capital Management Institute 12

While revenue and profit per FTE are commonly used metrics, they are by no means the best predictors of financial success. This is because they only show changes in revenue and profit relative to headcount rather than showing cost changes in the workforce overall.

Historically the assumption has been made that measuring headcount is a good proxy for measuring cost of workforce, however as our analysis and the below example illustrates, this is a fallacy.

The Case for TCOW:

For example, an organization with 100,000 employees at the end of 2010 and 100,000 employees at the end

of 2011 would appear to have effectively controlled workforce cost by managing total workforce headcount.

However, due to increases in benefits, wages, and changes in the workforce such as bonuses, promotions and

mix of jobs hired, organizations with flat headcount growth can easily (and often do) experience 10% or

greater increases in Total Cost of Workforce (TCOW).

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A New Relationship

© Human Capital Management Institute 13

Contrary to the previous revenue and profit per FTE metrics, not all sectors improved during the analysis period.

Finance and Insurance and Arts & Entertainment both declined from 1996 to 2011.

Highlights

• SURPRISE – Finance & Insurance, is going the wrong way!

• By these measures, Mining is a Big Winner

• Most sectors are clustered

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Stock Price and HC ROI Ratio CAGR

© Human Capital Management Institute 14

Highlights

• CAGR vs. Average Year over Year Growth Rate

• Macro Economic Variables

• Insight: Relative Company Performance

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Financial Services & Insurance Breakdown Revenue and Profit per FTE

Highlights

• Commercial & Savings Banks are middle of the pack

• Sales Financing (i.e. GE Capital), + Investment Banking look like stars

• Who is falling behind?

2011 Performance

© Human Capital Management Institute 15

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Financial Services & Insurance Breakdown Human Capital ROI Ratio, Return on Human Capital Investment

Highlights

• Sales Financing is a top performer (i.e. GE Capital)

• Investment Banking is a Surprise from 1996 - 2011

21.8% Revenue per FTE Gain

(-29.2%) Human Capital ROI Ratio Loss

(-19.0%) Return on Human Capital Investment Loss

2011 Performance

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Note: in USD $$ Data for 2009, 2010 and 2011 Years KPI = Key Performance Indicator TCOW= Total Cost of Workforce FTE = Full Time Equivalent

Case Study: Productivity Metrics Comparison Bank of America, Wells Fargo and HSBC

2011 Financial KPIs 2010 - 2011 KPI Change Rate

2010 – 2011 Productivity

© Human Capital Management Institute 17

1 2

3

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Superior Metrics to Manage Human Capital

© Human Capital Management Institute 18

Overall, high-performing sectors seem to enjoy one or more of the following factors:

1) Lower human capital intensity

2) Greater potential and to increase revenue and profits without equivalent increases in human capital costs.

3) Increased demand and/or pricing for commodities (see Mining and Utilities) due to global demand, industry deregulation, or other factors.

4) Substantial automation of one or more core human capital labor elements.

Market Share Example:

• Average Stock Price = $60/Share • Shares Outstanding = 35 Million

• 5% increase in HC ROI Ratio and Return on HC Investment • 5% Decrease in TCOW Percent of Revenue

• Projected Value Creation (Market Cap) = $116.6 Million

Includes Accommodation & Food Services, Transportation & Warehousing and Transportation, Support & Waste Mgmt Services

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Key Human Capital Metric Formulas

© Human Capital Management Institute 19

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Human Capital ROI Ratio

HC ROI Ratio = (Revenue – (Total Expenses - Total Cost of Workforce)) / Total Cost of Workforce

© Human Capital Management Institute 20

Description:

Net operating profit impact of each dollar invested in human capital.

Note: It is recommended that the metric "Total Cost of Workforce", which includes the total costs of employees plus all contingent headcount (contract and temporary workers), is used in calculating Human Capital ROI Ratio. If Total Cost of Workforce detailed information is not available, this metric may also be calculated using the total costs of employees as an alternative.

Best Use:

Organizations tracking Human Capital ROI Ratio can effectively measure the linkage of overall trends in market value over time (for publicly traded or other organizations for whom a relative market value is obtainable). Ideally, this metric should be used for long term strategic predictions rather than short term measurement as market value can fluctuate dramatically due to uncontrollable events as well as industry and market changes.

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Return on Human Capital Investment

Return on HCI = Total Operating Profit / Total Cost of Workforce

© Human Capital Management Institute 21

Description:

Return on Investment (Profit) expressed as a percentage of the total dollar amount invested in human Capital.

Best Use:

Organizations tracking Return on Human Capital Investment can effectively measure the linkage of overall trends in market value over time (for publicly traded or other organizations for whom a relative market value is obtainable). Ideally, this metric should be used for long term strategic predictions rather than short term measurement as market value can fluctuate dramatically due to uncontrollable events as well as industry and market changes.

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Should include:

• Employee compensation (salaries/wages, incentives, overtime, + equity & other pay)

• Contingent temporary/contract labor (costs)

• Employee benefits and perks (costs)

• HR function (costs, e.g., recruiting, training & support)

• Retiree or inactive workforce costs (costs)

Total Cost of Workforce (TCOW)

Total Cost of Workforce =

Total Compensation Costs +

Benefits Costs +

Other Workforce Costs

© Human Capital Management Institute 22

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Next Steps

© Human Capital Management Institute 23

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SOLVE: Analytics in 3 Easy Steps

24 © Human Capital Management Institute Source Systems

1. Load data

2. Run Scenarios for ROI and Intelligence

3. Save and Present Results

Data Integration Blueprint

Dashboards

Human Capital

Financial Statements

Metrics

Analytics w ROI

HR Transactions

Standards

Workforce Planning SOLVE WORKFORCE INTELLIGENCE SOFTWARE

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Question and Answer

© Human Capital Management Institute 25

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Contact Information:

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Human Capital Management Institute

Presenter information:

Joseph Morrissey, VP Sales [email protected]

Grant Cooperstein, VP Analytics [email protected]

Harish Sidda, Consultant [email protected]

For more information about the following products and services, please visit the links below:

SOLVE Workforce ROI Calculator Human Capital Financial Statements

Training Human Capital Metrics Handbook

Workforce Intelligence Consortium Group

@HCMI

© Human Capital Management Institute