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How measuring human capital value added can bring a competitive advantage

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How measuring human capital value added can bring a competitive advantage

Change is a constant in business and in the last two years, change has been exponential. People are navigating new channels, new tools, new customer behaviour and new workplaces so it’s reasonable for many business leaders to question some of the metrics being measured.

Many digital native businesses have got the jump on being able to measure detailed or customized metrics because they were set up to be data-driven. Yet, there are plenty of traditional businesses that are aware of the value of data and are taking advantage of easy-to-use analysis tools, so that they can measure all forms of performance including how their people are directly contributing to the business.

Many companies are also customizing financial statements and choosing to include more granular metrics within their profit and loss or income statements. So by measuring and displaying, for example, operating profit per unit sold or operating profit per customer inside integrated financial reporting can help companies better align metrics with overall business goals. And measuring and displaying information by unit or by customer helps everyone focus on their priorities.

To become an advanced user of KPIs or put another way, to analyze extended data streams it is recommended to first determine what metrics you want to measure, then know what data sources are needed to create an accurate measurement and then adjust your decision making as a result of what the KPIs show.

Let’s take a company that wants to prioritize employees or headcount as a metric. The company brings information relating to employees into the source data so it can calculate revenue per employee and operating profit per employee then to extend this analysis further, it is also possible to measure human capital value added (HCVA).

What is Human Capital Value Added (HCVA)?

HCVA is a measure of the extent to which employees add value to the business and is a telling metric for the current global work environments. How do we measure something like HCVA? Well, the calculation is relatively straightforward:

HCVA = (Revenue - (Total Costs - Employment Cost))/ FTE

The HCVA metric measures employees' profit contribution once costs have been removed. This metric can be embedded in the profit and loss statement and monitored, managed and reported by month, by division and compared to previous years. The HCVA looks at the human impact on revenue by numbers and by visuals.

Recent workplace upheavals triggered by the Covid pandemic and worsening economic outlooks has made people question what’s important in their office culture or the type of work they are doing. Companies are experiencing high resignations or an inability to retain good talent, and are under increasing pressure to focus on staff satisfaction and improve HCVA metrics.

Some of the criteria that can positively impact the value human capital adds to business include:

  • A stimulating working environment;
  • Access to right tools and efficient processes;
  • Access to knowledge and guidance;
  • Continuous investment in training and development.

As good talent is difficult to find, it is important for businesses to keep an eye on talent management and to find new ways to increase productivity so that people stay loyal to your business. HCVA can also be planned and represented in budgets, this means talents costs and benefits can be modelled and mapped then compared to HCVA actuals.

If your HCVA is dropping then it might be worth looking into further employee data and determining if people are taking their allocated annual leave, if not, perhaps they are burnt out or under stress, or you may need to employ more people or change processes within your business.

Include HCVA in your financial planning and analysis

Defining, developing, and extending KPIs need to be on the top of every company’s to-do list. Leaders should be ready to begin a company-wide conversation that includes human resources, finance and sales about what extended data streams need to be analyzed to drive organizational change.

Phocas FP&A software makes it easy to included detailed metrics such as HCVA or other business drivers in your regular FP&A activities, ensurign your team can retain its best and brightest people. Get a demo of Phocas today to see how easy integrating detailed financial metrics into your planning really is.

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Written by Phocas Software
Phocas Software

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