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HUMAN CAPITAL MANAGEMENT
HUMAN CAPITAL MANAGEMENT
HUMAN CAPITAL MANAGEMENT
HUMAN CAPITAL MANAGEMENT
HUMAN CAPITAL MANAGEMENT
HUMAN CAPITAL MANAGEMENT
HUMAN CAPITAL MANAGEMENT
HUMAN CAPITAL MANAGEMENT
HUMAN CAPITAL MANAGEMENT
HUMAN CAPITAL MANAGEMENT
HUMAN CAPITAL MANAGEMENT
HUMAN CAPITAL MANAGEMENT
HUMAN CAPITAL MANAGEMENT
HUMAN CAPITAL MANAGEMENT
HUMAN CAPITAL MANAGEMENT
HUMAN CAPITAL MANAGEMENT
HUMAN CAPITAL MANAGEMENT
HUMAN CAPITAL MANAGEMENT
HUMAN CAPITAL MANAGEMENT
HUMAN CAPITAL MANAGEMENT
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HUMAN CAPITAL MANAGEMENT

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  • 1. SAP White Paper mySAP ERP Human Capital Management HUMAN CAPITAL MANAGEMENT A MEASUREMENT BREAKTHROUGH ON THE HORIZON
  • 2. © Copyright 2004 SAP AG. All rights reserved. Citrix®, the Citrix logo, ICA®, Program Neighborhood®, MetaFrame®, WinFrame®, VideoFrame®, MultiWin® and other Cit- No part of this publication may be reproduced or transmitted in rix product names referenced herein are trademarks of Citrix Sys- any form or for any purpose without the express permission of tems, Inc. SAP AG. The information contained herein may be changed without prior notice. HTML, DHTML, XML, XHTML are trademarks or registered trademarks of W3C®, World Wide Web Consortium, Some software products marketed by SAP AG and its distributors Massachusetts Institute of Technology. contain proprietary software components of other software ven- dors. JAVA® is a registered trademark of Sun Microsystems, Inc. Microsoft®, WINDOWS®, NT®, EXCEL®, Word®, PowerPoint® and JAVASCRIPT® is a registered trademark of Sun Microsystems, Inc., SQL Server® are registered trademarks of Microsoft Corporation. used under license for technology invented and implemented by Netscape. IBM®, DB2®, DB2 Universal Database, OS/2®, Parallel Sysplex®, MVS/ESA, AIX®, S/390®, AS/400®, OS/390®, OS/400®, iSeries, pSeries, MarketSet and Enterprise Buyer are jointly owned trademarks of xSeries, zSeries, z/OS, AFP, Intelligent Miner, WebSphere®, SAP AG and Commerce One. Netfinity®, Tivoli®, Informix and Informix® Dynamic Server™ are trademarks of IBM Corporation in USA and/or other countries. SAP, R/3, mySAP, mySAP.com, xApps, xApp, and other SAP products and services mentioned herein as well as their respective ORACLE® is a registered trademark of ORACLE Corporation. logos are trademarks or registered trademarks of SAP AG in Ger- many and in several other countries all over the world. All other UNIX®, X/Open®, OSF/1®, and Motif® are registered trademarks product and service names mentioned are the trademarks of their of the Open Group. respective companies. Data contained in this document serves information purposes only. National product specifications may vary. 2
  • 3. CONTENTS Executive Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 The Paradox of Human Capital Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 The Need for Meaningful and Useful Measurements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Practical Experimentation in Enterprising Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Accenture Human Capital Development Framework™ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Next Steps in Human Capital Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 3
  • 4. EXECUTIVE OVERVIEW Globalization, rising customer and shareholder expectations, Leveraging case studies and relevant research, this first white and a volatile social and economic climate exert tremendous paper proposes a new approach to linking human capital pressure on executives to efficiently generate business results and management processes to financial performance. Businesses, outperform the competition by delivering top value through such as International Paper and Harrah’s Entertainment, are innovative products and services. Market accelerators and mostly reviewed to help the reader understand how these businesses are temporary competitive advantages have resulted in a new focus working to untangle the knotty relationship between investments from executives: how to better invest and leverage the source of in people and business results. The white paper concludes with their competitive advantage – their workforce. With 30% to 60% an overview of Accenture’s Human Capital Development of a company’s revenue spent on human capital management, Framework™ and the partnership between SAP and Accenture CEOs, CFOs, HR executives, and other business leaders want to help businesses understand the impact of human capital to understand how these dollars are being used to deliver on investments on shareholder value. The Human Capital Develop- business goals. ment Framework uses four distinct levels to measure human capital practices against business performance. Using a value These business drivers have resulted in a void in the ability to chain between human capital management and shareholder measure human capital investments against benefits to the value as a base, the tiers include human capital processes, human business. C-level and HR executives struggle with what to capital capabilities, key business performance drivers, and measure and how to clearly tie these metrics to business perform- business results. ance. In a recent meeting between some of SAP’s most thought- leading human capital management (HCM) customers, the THE PARTNERSHIP BACKGROUND inability to properly measure the contribution of the workforce SAP has joined the Accenture Institute for High Performance and HCM strategies and programs against business performance Business to support its research in understanding the impact of ranked among the top of their focuses and concerns. human capital investments on shareholder value. This research alliance stands to improve the model and to accelerate its inte- THE WHITE PAPER OBJECTIVES gration with next generation HCM software – software that This white paper marks the first of a series of three collaborative will be engaged by leading-edge companies to test its promise, white papers by SAP and the Accenture Institute for High and to furthering the cause of measurement in human capital Performance Business. They will address the concept that the management. economic benefit an organization realizes from human capital investment is in direct proportion to the quality of its human capital processes. The outcomes of those processes are critical capabilities, like leadership, managerial competency, workforce adaptability and proficiency, and employee engagement. 4
  • 5. INTRODUCTION Today’s global business climate is marked by extreme geopolitical and economic uncertainties. Global market acceleration is forcing WHAT ARE YOUR TOP TO WHAT EXTENT DO YOU KNOW THE STRATEGIC PRIORITIES RETURN ON YOUR AGGREGATE businesses to respond to customers faster than ever with value- FOR 2003 ? INVESTMENTS IN HUMAN CAPITAL? added products and services, while they struggle to maintain 1. Attracting and retaining skilled staff temporary competitive advantages. These businesses are under To a great extent extreme pressure to increase revenue and drive profitability, while 2. Increasing customer care 2% and service Not at all To a considerable decreasing costs, optimizing resource utilization, and tightening extent 14% 3. Improving workforce corporate governance. Organizations know they must adapt their 14% performance business and IT systems to survive, innovate, and grow. And, 4. Changing leadership and behind it all, executives remain firmly convinced that people are management behaviors their most important asset. 5. Changing organizational culture and employee To a modest extent To a minimal attitudes extent 30% Most executives today find themselves at a loss to demonstrate 40% that investments in people lead to improved business results High-Performance Workforce Survey of 189 senior financial executives conducted Study 2002/2003; Survey of 200 by CFO Research Services in fall 2002. (see Figure 1). Commonly used metrics, such as economic value CEOs, COOs, CFOs, CIOs, and Figures are % of respondents. senior HR executives conducted added (EVA®), return on investment (ROI), and earnings before by Accenture interest and taxes (EBIT), tell us little about how an organiza- tion’s human assets are performing. They tell us even less about Figure 1 whether an organization has either 1) the depth of talent to compete in an uncertain global economy or 2) the people However, new theory and practice in human capital management development processes needed to support the organization’s are directly addressing this impediment. In this white paper, commercial, technical, and social challenges. Indeed, it seems through case studies and a thorough review of research, Accenture the biggest impediment to effective intervention in the domain and SAP propose an innovative approach to linking human capital of human performance is the lack of meaningful measurements management processes with financial performance. Particular and convincing evidence that human capital investments attention is drawn to enterprising organizations – specifically, improve a company’s financial performance. International Paper Company and Harrah’s Entertainment. These companies are working to untangle the knotty relationship between investments in people and business results. Further, the white paper concludes with an overview of Accenture’s Human Capital Development Framework and its imminent and future implications for the practice of human capital management. 5
  • 6. THE PARADOX OF HUMAN CAPITAL MANAGEMENT Global human resources executives recently convened by SAP 2. External pressure, in the form of government initiatives and were in near unanimous agreement concerning this point: their impending regulations, may soon require companies – partic- ability to justify investments in people – in training and, more ularly those doing business in Europe – to publicly report their broadly, in new approaches to learning, knowledge management, investments in people and training. Equally as important, lob- leadership development, and performance management – has bying has intensified among trade unions, nongovernmental been severely constrained by the absence of metrics. Credible organizations (NGOs), and activist groups to urge companies metrics are needed to adequately reflect the myriad ways human to be more responsive to the situation of the unemployed, to capital affects business performance – and to convince numbers young people in search of first jobs, and to geographic regions conscious CFOs of that reality. adversely affected by globalization. In discussing a solution to the absence of metrics, those same 3. Technological capabilities, particularly in the form of enter- executives pointed to three sources of pressure to create such prise software packages and human capital management appli- a solution: cations, are making it possible – though not yet practical – to better measure, track, and manage human capital and to deliver 1. Internal pressure, such as the growing emphasis by top training and job-related information in more costeffective ways. management on shareholder value and financial management, is forcing human resources executives to make a business case Human capital is defined as individual, as well as collective, skills, for every investment. talents, and capabilities. Despite unanimous agreement in the applied literature and among academia that human capital is In recent years, the dominant theme has been cost cutting and essential to enterprise success (see Figure 2), there is no indis- efficiency, which has led to dramatic upsurges in outsourcing putable proof documenting the link between employee engage- in the hopes of reducing administrative expenses. However, ment, human capital management practices, intermediate more and more leadership teams are asking whether their business outcomes, and total shareholder return. Of importance people – and their collective skills and abilities – are adequately to managers is the fact that the academic literature lacks the positioned to support expansion and competition in an increas- granularity and the operational focus needed to help them ingly complex global economy. decide precisely where to invest their limited time and money to maximum benefit. 1) Brian Becker, Mark Huselid, and Dave Ulrich, The HR Scorecard: Linking People, Strategy and Performance, Cambridge, MA: Harvard Business School Press, 2001. 2) Marcus Buckingham and Curt Coffman, First Break All the Rules, New York: Simon and Schuster, 1999. 6
  • 7. Nonetheless, partial evidence abounds: from Becker, Huselid, and their competitors may lead employees to blur “engagement” – Ulrich (2001),1 for example, it is known that companies investing which connotes involvement and superior contribution – with in “strategic human resource management” seem to achieve bet- pay satisfaction. ter financial performance than those that use more traditional approaches. Correlation is not the same as causation: does strate- Research organizations like the Saratoga Institute and EP-First, gic HR management drive superior financial performance, or as well as a number of human resources consultancies, collect does superior financial performance make it possible to take a valuable data on metrics, such as investments in training and more strategic approach to HR management? ratios of human resource budgeting to employee head count; but, they have yet to link this data with shareholder value. Similarly, studies of employee attitudes strongly suggest that Perhaps this is because they do not collect the data on operational profitable companies are those whose employees feel engaged in performance, which includes productivity, quality, or customer their work and respected by their managers. See, for example, satisfaction, that would make it possible to assess the effect of the highly suggestive studies undertaken by Gallup’s research human capital variables on the factors that create shareholder team.2 value. Some have linked a specific human capital initiative or human resource practice – that is, the use of 360-degree performance Again, however, correlation does not mean causality: the ability of reviews – to overall financial performance, but they have failed to tie profitable companies to provide better pay and amenities than the broader context of human capital to shareholder value. “100 BEST” (2001) VS. S&P 500 GROWTH OF $50,000 INVESTED ON 1/1/97, THROUGH 12/31/01, KAM HYPOTHETICAL PORTFOLIO VS. S&P 500** ANNUALIZED STOCK MARKET RETURN (*net performance after deduction of all fees) 40% 150,000 35% KAM* S&P 500 30% 125,000 PORTFOLIO VALUE ($) 25% 36% 33% 30% 20% 100,000 15% 75,000 10% 5% 18% 18% 11% 50,000 0% 10 Year 5 Year 3 Year 25,000 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 S&P 500 “100 Best” Source: FORTUNE, January 8, 2001 * As defined by The 100 Best Companies to Work For in America (by Robert Levering and Milton Moskowitz, 1984 and 1993), ** Performance of a portfolio of companies that lead their industries in investments in human capital. Compiled and reported by Knowledge Asset Management, 7316 Wisconsin Ave. Ste. 450, Bethesda, MD 20814, Toll-Free 866.526.5261, info@knowledgeam.com Figure 2 7
  • 8. THE NEED FOR MEANINGFUL AND USEFUL MEASUREMENTS Interviews with senior HR executives, CFOs, business unit finan- What is needed is a measurement framework that is sensitive to cial directors, and financial analysts yield two recurring themes differences in business models – especially when an organization regarding the measurement of human capital investments on houses more than one business model, as is often the case in financial performance. multiproduct enterprises. First, measures need to be meaningful from an operational Second, measures need to be useful from a planning and perspective; that is, following the conventional wisdom that investment perspective. Beyond tracking the performance of “what is measured gets managed,” both human resources and human capital management practices in the short run, executives financial managers want measures that reflect the way value is want a way to determine where they should be investing for the created in the organization. Benchmarks like per capita spending future. They need to know the kinds of skills employees will need on training may tell you whether your organization is spending to achieve the organization’s longer-run strategies, and they need more or less than your competitors; but snapshot pictures like to know the human resources, training, learning, and knowledge those do not tell you whether your spending is aligned with your management capabilities it will take for the organization to business model or whether you are getting the right return on acquire, develop, and retain employees with those skills. your investment. As opposed to a high-volume, low-margin production and marketing strategy, pursuing a low-volume, In terms of time, a measurement approach cannot simply be high-margin strategy ought to lead to significant differences in about monitoring the present and making sense of the past; it how much you spend on human capital development, as well as must also give insight and guidance for the future. For example, how you structure and organize your delivery of HR services. HR executives and their counterparts in finance and operations Operating Return on Margin Invested Capital (ROIC) Capital Efficiency Spread CUSTOMER Weighted SATISFACTION Average Cost of Total Return to INNOVATION HUMAN Capital (WACC) CAPITAL Shareholders PRODUCTIVITY (TRS) QUALITY Organic Growth Growth Growth Through M&A Figure 3 8
  • 9. want to assess the people-related risks associated with new tech- The left-hand side of Figure 3 is familiar to CFOs and financial nologies: Do we have the skills we will need to be successful with analysts, the center is familiar to line managers, and the righthand this new technology? Do we have the capacity to grow those side is familiar to the HR community. If “people are our most skills in our own organization or will we have to go outside? important asset” becomes anything more than management Do we have the depth of leadership talent to be able to meet the rhetoric, it will be because these pieces of the puzzle came together, challenge of rapid, transformational change? The same can be said united by purpose. By way of explanation, Figure 3 separates total for risk analysis in mergers and acquisitions, in organizational shareholder return (on the left side of the diagram) into two major restructuring, and in coping with game-changing external events components – “spread” and “growth”: like deregulation: executives need and want to better understand • Spread represents that part of value creation that derives from what their human capital capabilities are and where they should being more efficient than competitors are in the use of capital, be investing resources to greatest future benefit. in pricing strategy, and in operations. • Growth represents the part of value creation that comes from It is easy to see that static measures of HR efficiency will not cultivating new products and services, often through suffice. Accenture and SAP believe it is necessary to widen the innovation, and from achieving superior market position and view – a view that goes beyond conventional metrics and meas- market share through acquisition. urement techniques to address what it takes to manage human capital today and tomorrow, and to manage it in a fashion that is An organization’s relative emphasis on spread versus growth is a aligned with an organization’s strategic objectives. To illustrate matter of both competitive environment and strategy; but, this point, look at Figure 3. behind its ability to create value is a finite set of capabilities or performance drivers – that is, the organization’s ability to innovate, to satisfy customers, and to produce quality. However, behind those capabilities and beyond all its fixed assets, the most critical performance driver is an organization’s people, their knowledge and skill, and their ability and willingness to execute. 9
  • 10. PRACTICAL EXPERIMENTATION IN ENTERPRISING COMPANIES Paper making and gaming might not appear to share much in After undertaking a critical review of International Paper’s common; after all, one is a traditional manufacturing industry ability to be both efficient and effective – particularly in the way with a long history of focusing on efficiency and volume it manages its human resources – Carter and Karre concluded production, and the other seeks to enrich customers’ experience that the company had to commit itself to an ambitious agenda and enhance customer satisfaction. Nevertheless, in the case of of transforming HR if it wanted to link HR activities to critical International Paper and Harrah’s Entertainment, senior execu- business results. tives are searching intently for the most effective ways to engage employees in their jobs and, by extension, improve the ability Figure 4 depicts the course they set for the HR function inside of their companies to win in an increasingly competitive global International Paper. From their own self-designated Level 1 – economy. In this context, what makes both companies distinctive where Karre admits many of International Paper’s facilities were is the integral role they accord to human capital management situated in 1999 – the company strives to advance to Level 3, which in pursuing competitive success. Of course, cost containment is a state in which HR is not just a “fast reactor” to business clearly plays a role for International Paper and Harrah’s, but more strategy, but a real contributor to shaping the organization’s profound is the way these companies weave people development business objectives. into their core processes of value creation. International Paper is a global forest products, paper, and packaging company with primary markets and manufacturing Level 3: Level 3 HR Goals: Leading • Strategic business partner operations in the United States, Canada, Europe, the Pacific Rim, Change • Driving culture change • Helping create the new and South America. Revenues in 2002 reached nearly $25 billion. business model In most of its major markets, International Paper is the dominant Level 2 HR Goals: • Developing leadership talent player. However, to remain competitive, International Paper has Level 2: 2002 • Linking performance man- focused considerable attention in the past few years on trimming Building agement to business results Capability • Engaging employees costs in all its operations, including human capital management • Change leadership (HCM), through process redesign, improvement of its core 2001 Level 1 HR Goals: Level 1: • Administrative excellence information systems, and outsourcing. HR • Employee champion Fundamentals • Increasing service at reduced cost Through it all, senior executives like Jerry Carter, senior vice Time president for human resources, and Paul Karre, global vice president for human resources, recognized that real breakthroughs Figure 4 in performance were only likely to come about through a com- bination of efficiency and effectiveness – with the latter having to By Karre’s reckoning, and that of Karre’s key managers in do with positioning the right people, with the right skills, in the International Paper’s major business units, employee engagement right places, at the right times. is central to being both efficient and effective. Engaged, involved, 10
  • 11. and committed employees not only strive to make the best possible facilities (usually pulp mills and conversion plants) with high- use of existing resources, but they also seek out the skills and employee engagement scores also tend to be among the highest knowledge necessary to be effective. HR’s responsibility is to performers in ROI, productivity improvement, and safety. enable employee engagement through 1) training and support of all levels of management, 2) identification of the kinds of skills What is important to note about International Paper’s approach and behaviors needed to achieve critical business results and positive is its emphasis on the linkage between human capital processes; employee experiences, and 3) investments in the activities and workforce capabilities or attributes, like employee engagement; processes essential to the future growth of the business. and operational outcomes, like facility ROI, productivity, and safety. Unlike other organizations investigated by Accenture and Given the pivotal role that employee engagement plays in Inter- SAP that relate employee satisfaction directly to financial per- national Paper’s human capital strategy, it is not surprising that formance, International Paper recognizes that a truly realistic they monitor employee attitudes closely. In association with assessment of the impact of human capital management has to Gallup, Inc., Karre and his colleagues have implemented a take into account those linkages and intermediate outcomes. focused employee survey virtually every year for the past five years. More importantly, they have also begun to explore the Thus, rather than ask whether happy employees make for more relationship between employee engagement and valued opera- profitable operations, International Paper asks, “how does tional outcomes, like safety, productivity, and return on invest- employee engagement impact safety or productivity – the things ment. The results have been very positive (see Figure 5). Those that lead to more profitable operations?” They also recognize that the impacts of human capital practices are often timelagged; by determining how long it takes for an intervention to have a 100 measurable impact, they are much better positioned to calculate the payback on investments in human capital. 80 Percent of results 60 Harrah’s Entertainment operates casinos in more markets in achieved by top quartile the United States than any other casino company and conducts facilities 40 business through a wholly owned subsidiary, Harrah’s Operating 20 Company, Inc. (HOC), and through HOC’s subsidiaries. Revenues in 2002 exceeded $4 billion. In recent years, under 0 Return on Productivity Safety the leadership of CEO Gary Loveman and vice president of HR Investment Improvement (2001) Marilyn Winn, Harrah’s has staked its financial well-being on a (2001) (2001) fairly simple proposition: customer satisfaction is the most critical success factor in the gaming business and employee Top 25% Middle 50% Bottom 25% Gallup Employee Engagement Scores behavior is the most important determinant of customer satis- faction. The results have been impressive: over the past three years, Harrah’s operating margins, as well as its total return to share- Figure 5 holders, have outpaced competitors and the market as a whole. 11
  • 12. While perhaps not a revolutionary concept in service-oriented What is not obvious from the service value chain is that great industries, these ideas have been applied with discipline and service is time-sensitive. That is, to produce customer satisfaction, intensity in Harrah’s. And, characteristic of masters at the top of great service has to be there reliably in every customer interaction their game, Harrah’s management has sought everywhere to – the last as well as the first. In addition, all the ingredients that simplify the way they communicate their message – even as they go into making great service have to be forecasted, measured, explore the complexities of the processes of customer satisfaction. and evaluated on an ongoing basis. As senior vice president and casino general manager Tom Jenkin points out, “If the last person Take, for example, the “service value chain” as depicted in Harrah’s a customer interacts with is the valet who brings around their car internal training materials (see Figure 6), which identically and if that interaction is not positive, it does not matter how well reflects the ideas presented a few years ago in a Harvard Business we did at registration or in the gaming areas or at the cashier.” Review article coauthored by CEO Loveman. Harrah’s service Moreover, according to HR vice president Marilyn Winn, if value chain posts a clear linkage between “Great Service” and Harrah’s suffers a breakdown in recruiting, training, scheduling, overall financial performance. or evaluating employees, the likelihood of great service being produced also plummets. GREAT SERVICE Harrah’s, known for the discipline and ingenuity with which it CUSTOMER SATISFACTION studies customer profiles and spending habits, has recently turned its attention to measuring and evaluating service delivery CUSTOMER LOYALTY (see Figure 7). It is important to note that at each phase of service GROWTH SHARE OF WALLET delivery, both individual employee behaviors and HR processes SAME STORE SALES are being measured. OPERATING INCOME For example, effective workforce planning – forecasting models intended to insure that enough people are available to work in Figure 6 line with the day and the season – is essential if the right balance between staffing (efficiency) and proper customer experience (effectiveness) is to be achieved. However, forecasting tools can- not help if recruitment, orientation and training, performance feedback, and management coaching processes have failed to prepare employees to perform. Thus, HR’s Marilyn Winn and customer satisfaction vice president John Bruns have initiated parallel measures of individual performance and human capital management process performance. 12
  • 13. The results of their investigations are quite promising. For instance, when Winn reviewed the cost of employee turnover, she did not just look at it in terms of training and recruitment expenses; instead, she calculated the impact on customer satis- faction and, by extension, on the ability of Harrah’s to retain its most profitable clientele. By halving employee turnover, Harrah’s was able to increase customer satisfaction, retain prized customers, as well as convert lukewarm clients into loyalists. Efforts such as these helped Harrah’s remain profitable during a recessionary period that battered many of its competitors. More- over, Bruns devised a simple, but telling scorecard that traces out the impact of individual performance on “moment of truth” interactions between employees and customers, on customer satisfaction scores, and ultimately, on revenues. A next step will be to focus the analysis back on HR practices to determine which activities in employee recruitment, compensation, training, super- vision, and evaluation most directly affect how well employees perform in those moments of truth. BEFORE DURING AFTER HR Processes Service Delivery Customer Revenue/ Measures Satisfaction Profit Staffing Forecasting Management Scheduling Accountability Great Service Service Standards Experience Full and Productivity Capacity to Serve Service Customer Recovery or Work Environment Focus Behavior Measures Dissatisfaction Defections Figure 7 13
  • 14. ACCENTURE HUMAN CAPITAL DEVELOPMENT FRAMEWORK Using the background research on organizations like Inter- The Accenture Human Capital Development Framework uses national Paper and Harrah’s Entertainment as a starting point, four distinct levels or tiers of measurement in arriving at an the Accenture Institute for High Performance Business – work- assessment of an organization's human capital practices. These ing closely with the Accenture Human Performance Service Line tiers (see Figure 8) reflect the four key variables that influence – developed the Accenture Human Capital Development the relationship between a company's human capital assets and Framework to estimate the business impact of human capital its financial performance: initiatives and guide their implementation. In developing the • Tier 1, business results, consists of measures of organizational approach, three objectives were established: performance, such as traditional financial analyses featuring 1. Identify and measure the human capital factors that affect EVA, sales growth, price earnings (P/E) ratio, and return on organizational performance, whether they do so directly or capital. indirectly, immediately or with a lag • Tier 2, key performance drivers, directly contributes to busi- 2. Develop a repeatable measurement scheme – that is, one that ness unit or enterprise results. Key performance drivers are the can be carried out over successive time periods in a single intermediate organizational outcomes, such as productivity, organization and, therefore, allow that organization to track quality, innovation, and important customer metrics, includ- its performance over time ing customer satisfaction and customer retention, which are 3. Establish a database enabling companies to benchmark in key often captured on a balanced scorecard. human capital development areas against their competition, • Tier 3, human capital capabilities, consists of the most and to predict return on investment from specific human immediate and visible people-related qualities, including capital investments and interventions employee attitudes and abilities, which are necessary for achieving critical business outcomes. Their influence is felt The core of this argument is simple: the economic benefit an through key performance drivers. organization realizes from human capital investment is in direct • Tier 4, human capital processes, consists of practices that proportion to the quality of its human capital processes. The lead to robust and effective human capital capabilities. Includ- outcomes of those processes are critical capabilities, like leader- ed in this tier are core HR processes, including competency ship, managerial competency, workforce adaptability and profi- management and performance appraisal, and broader human ciency, and employee engagement. capital processes, such as learning and knowledge management. 14
  • 15. BUSINESS RESULTS Tier 1 Economic P/E Ratio Sales Growth Return on Capital Value Added® KEY PERFORMANCE DRIVERS Tier 2 Productivity Quality Innovation Customers HUMAN CAPITAL CAPABILITIES Tier 3 Leadership Workforce Workforce Workforce Human Capital Employee Engagement Adaptability Proficiency Performance Efficiency HUMAN CAPITAL PROCESSES Tier 4 Competency Career Performance Succession Planning Recruiting Workforce Workplace Management Development Appraisal Leadership Development Planning Design Rewards and Employee Human Capital Learning Knowledge Human Capital Recognition Relations Strategy Management Management Infrastructure Figure 8 Of the four measurement tiers, Tier 4 is, in many respects, the Thus, embedded in each of the Tier 4 variables, is a multi- most distinctive. Unlike other approaches to evaluating HR dimensional maturity scale grounded in industry best practices organizations or assessing the return on human capital invest- and modified as a result of employee evaluations. ments, it focuses explicitly on the maturity of an organization’s human capital development processes. That is, rather than look The Accenture Human Capital Development Framework can be only at levels of spending, such as the training budget per deployed in three distinctive ways: employee, to get a sense of an organization’s approach to human 1. As a diagnostic assessment that highlights areas for capital development, Tier 4 measurements seek to understand performance improvement or value creation how complete the underlying practices are, and how well aligned 2. As part of a recurring measurement activity – one aligned they are with the organization's competitive strategy and mission. with an organization’s core planning processes 3. As part of a large-scale organizational transformation, where This approach is inspired by advances in the world of quality – in the goal is to reshape traditional HR, learning and training, both manufacturing and software development. For example, and development functions to bring them in line with a new total quality techniques, including capability maturity and business strategy other models, have enabled companies to achieve dramatic improvements in the reliability and repeatability of key processes. 15
  • 16. Once data is collected, an assessment is generated that represents These assessments can be compared across business units in the – in numbers, graphs, and against benchmarks – an organization’s same enterprise. And, as the number of Accenture Human ability to use human capital to generate business results (see Capital Development Framework applications increases, the Figure 9). Each attribute in the model is graphically colored to Accenture Institute for High Performance Business will grow a reflect the current state or maturity of each factor in the model: benchmarking database of unprecedented depth and value – red represents an immature capability, yellow represents a mature one that represents economic returns on investment, not indirect capability, and green represents a highly mature capability. In measures, which is currently the case. Because the assessment is addition, Tiers 3 and 4 are numerically scored to represent built around a predictive capability model, recommendations to maturity, with low scores indicating an absence of capability or improve in a specific factor area are clear. These recommenda- maturity, and high scores indicating an extensive level of tions help the company focus management action on human capability or maturity. capital processes that can, in turn, drive improvements. BUSINESS RESULTS Tier 1 Economic Value Added® P/E Ratio Sales Growth Return on Capital 3 2 4 3 KEY PERFORMANCE DRIVERS Tier 2 Productivity Quality Innovation Customers 4.9 3.4 1.9 2.4 HUMAN CAPITAL CAPABILITIES Tier 3 Leadership Workforce Workforce Workforce Human Capital Employee Engagement Adaptability Proficiency Performance Efficiency 3.6 2.4 3.3 4.7 3.0 4.4 HUMAN CAPITAL PROCESSES Tier 4 Competency Career Performance Succession Planning Recruiting Workforce Workplace Management Development Appraisal Leadership Development Planning Design 3.3 4.3 3.0 3.5 3.7 4.1 4.7 Rewards and Employee Human Capital Learning Knowledge Human Capital Recognition Relations Strategy Management Management Infrastructure 4.5 4.4 2.8 2.4 3.9 1.3 4-5 High Scores 3-4 2-3 1-2 Low Figure 9 16
  • 17. NEXT STEPS IN HUMAN CAPITAL MANAGEMENT To date, the Accenture Institute for High Performance Business In the absence of adequate data, it is difficult to imagine being has completed development of the Accenture Human Capital able to explain variations in financial performance using human Development Framework and beta-tested it at a handful of capital variables – let alone predict a company’s future financial organizations. Accenture is now entering the second and most performance based on its current human capital capabilities. challenging stage of the effort – demonstrating empirically that Executives are painfully aware of the inadequacies of existing investments in human capital assets and processes affect a com- techniques used to guide their investments in people. Tools such pany’s growth potential and its value to shareholders. Fortunately, as EVA, ROI, and EBIT tell them little or nothing about how an SAP has joined with Accenture in supporting the research, organization’s human assets are performing. engaging leading-edge companies in testing its promise, and in furthering the cause of measurement in human capital man- However, the Accenture Human Capital Development Frame- agement. This research alliance stands to improve the model and work offers executives, for the first time, a comprehensive tool to accelerate its integration with next generation HCM software. to assess human performance, to align HR and learning strategy with business strategy, and to make human capital investments Each new application of the Accenture Human Capital that generate real business value. Supported by a growing data- Development Framework will expand our database of company- base on human capital and shareholder value, the Accenture specific information regarding all four key variables: human Human Capital Development Framework promises to empower resources practices, workforce capabilities, business outcomes, an organization to diagnose its strengths and weaknesses in key and financial performance. This database will enable Accenture human capital practices. At the same time, it will prioritize and SAP to do something that has not been done before: to investments and track performance, and, ultimately, it will rigorously and comprehensively link human capital capabilities empirically establish the link between human capital investments, with business results. business practices, and shareholder value. 17
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  • 20. www.sap.com /contactsap 50 067 523 (04/02)

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