Human Capital Index of an Organization - Drawing a Lesson From Human Development Index of the UNDP

Posted by - Ketan Bhatt

To start with, let us have a brief appreciation of the United Nations' Development Program (UNDP) and its Human Development Index (HDI).

The UNDP is the United Nations' global development network headquartered in New York. It advocates for change and connects countries to knowledge, experience, and resources to help people build a better life. The HDI is a composite measure of human development of a nation. It measures and reflects average achievements in a country in three basic dimensions of the human development: a long & healthy life (health), access to knowledge (education), and a decent standard of living (income).

The first Human Development Report in 1990 asserted in its opening sentence, "The real wealth of a nation is its people", and laid out a vision of economic & social progress that is fundamentally about people enlarging their choices & capabilities. At the core, the HDI implies that unless people can take part meaningfully in the events and processes that shape their lives, national human development paths will be neither desirable nor sustainable.

Also, the HDI clearly brings out a positive correlation between past public investments in social and physical infrastructure and advancement on the human development front.

The analogy for an organization is the investments in the soft infrastructure, i.e. development of the knowledge, skill, competencies, etc. of the employees, and in the hard infrastructure, i.e. well-designed workstations, environment-friendly and LEED certified offices & factories, use of latest technology, etc.

Then, how about adopting the HDI model for developing a Human Capital Index (HCI) of an organization? Ultimately, an organization is a definite micro subset of a nation. Let us evolve the dimensions of the HCI based on the three dimensions of the HDI, i.e. a long and healthy life, access to knowledge & a decent standard of living, and assign them suitable proportion in the HCI.

Before proceeding, let us note that an organization would need to capture relevant data, period-on-period, for developing and measuring its HCI for benchmarking either internally or externally. Also, where cost measurement is not possible or as correct as desired, the organization can make suitable assumptions using proper techniques. An organization can also have HCI either grade-wise or unit-wise or business-wise, with suitable modifications.

(1) A long and healthy life (health)

An alike for an organization would be a long and an enjoyable stint of the employees along with a good work-life balance. The sub-dimension of a long & an enjoyable stint can represent 40% in the HCI and can show the average tenure (in months) of the permanent employees associated at a given point of time. For the data on the work-life balance, an annual random survey could be conducted on the employees (3 or more years with the organization) and the first set of data could become an internal benchmark because the industry data on such an aspect are generally not available. The organization can track the sub-dimension of the work-life separately.

(2) Access to knowledge (Education)

A corresponding measure for an organization would be the requisite access for the employees to the required information, data, training, knowledge & other development-oriented initiatives and theirs costs. This dimension can represent 40% in the HCI. The cost related sub-dimension, i.e. average spend per employee per year, can represent an absolute 10% in the HCI, and the other sub-dimension, i.e. number of man-days spent by an employee per year towards acquisition of the new information, data, training & knowledge, can represent an absolute 30%.

(3) A decent standard of living (Income)

A comparable item for an organization could be the compensation, benefits, and other related amenities (that are quantifiable). This dimension can represent 20% in the HCI and it can capture an average cost per employee per year (on an annualized basis) towards the compensation, benefits, and other related amenities.

Now, having elaborated on the proposed constituents, let us try to build the HCI against an internal yardstick for a dummy organization called Mars & Moons Limited as of 31 March 2014, for the period 1 April 2013 to 31 March 2014.

(1) The real average tenure of all the permanent employees was 39 months against an expected average of 50 months. So, the tenure ratio is 0.78, i.e. 39 divided by 50.

(2-A) The average spend per employee per year was Rs.9543/- against the budget or a benchmark figure of Rs.11000/-. Hence, the cost ratio is 0.86, i.e. 9543 divided by 11000.

(2-B) The average man-days spent by the employee was 5 against the internal benchmark or the budget of 7 man-days. Thus, the man-days ratio is 0.71, i.e. 5 divided by 7.

(3) The average cost per employee per year (on an annualized basis) towards the compensation, benefits, and other quantifiable amenities was Rs.305300/- and the budgeted figure was Rs.320000/-. Therefore, the cost ratio is 0.95, i.e. 305300 divided by 320000.

Based on the above ratios and proportions allocated, the HCI would be computed as follows.

= 0.78 X 40% + 0.86 X 10% + 0.71 X 30% + 0.95 X 20% = 0.80

Sounds interesting and exciting, hopefully!

The whole attempt here-in-above is to evolve a Human Capital Index (HCI) founded on the philosophy of the HDI, for a business organization. The fundamental premise is that the maintenance & development of the Human Resources at the macro (the nation) and micro (an organization) levels, are intricately interrelated.

Like "the real wealth of a nation is its people", "the real wealth of any organization is its employees". Therefore, it could be a worthwhile exercise to build the HCI and use it period-on-period for measuring the impact of the investments made by the organization in its soft and hard infrastructure.

In fact, if the HCI concept is found meaningful, then the organization can also construct its Diversity Index as diversity is becoming a business buzzword, nationally as well as globally.

Each theory in any field would have its flaws and the proposed HCI is not an exception. But then aren't HR Professionals disciplined and conditioned for being creative or groundbreaking and risk- or chance-takers?

Notes/Qualifications:

(1) The sources of information about the HDI are http://www.hrdguru.com and related websites.

(2) If any of the ratio goes above 1 and if the excess above 1 is justifiable, then the ratio could be construed as 1. However, if the excess above 1 is not justified, then for every additional 0.1, 0.05 can be subtracted from the absolute score of 1 to arrive at the final ratio.

(3) The hypothetical data used in this article are merely for illustration.


 

 

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