What is Human Capital Analytics? The Essential HR Guide
Like many different Human Resource methods, Human Capital Analytics is one way organizations try to understand the impact their employees make within their business through data.
While the HR function is relatively new, it has seen rapid change in the last 20 years, and today, there is a massive drive toward data-driven decisions. In theory, Human Capital Analytics makes organizations better prepared to analyze and use their people data more efficiently, but there are some downsides. Let’s dive in.
What is Human Capital Analytics?
Historically, organizations have looked at ways to reduce the costs of HR processes rather than focusing on their results. Human Capital Analytics (HCA) emerged from accountancy and economics as a way for businesses to assess the financial value of human resources.
The founding father of the HCA model was Dr. Jac Fitzenz. He argued in his article titled ‘The Measurement Imperative,’ that human resources activities and their impact on the company’s bottom line could be measured. A radical idea at the time, Dr. Fitz-enz believed that companies would only achieve their fullest potential once they could describe Human Capital’s role in creating corporate value and demonstrating its investment return.
While trying to understand the value HR brings to organizations, otherwise known as Return on Investment (ROI), Dr. Fitzenz categorized Human Capital into two different values: Economic and Financial.
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- Economic value is the value employee performance has on the company in a positive yet noncash way. Examples of this include market reputation, customer satisfaction, or being the best company to work for. All of these areas impact the business’s bottom line.
- Financial value is the value employee performance has on the company’s monetary resources, such as cash, stock, or bonds. According to Dr. Fitzenz, economic value should eventually become financial. For example, high customer satisfaction will lead to a more extended partnership and, therefore, more money for the business.
HR experts, including Dr. Fitzenz, believe that HR should be a business function similar to the sales or IT department and should have a set of operational metrics that track HR’s effectiveness in creating value for their organization. This is a shift from what most organizations see HR – as a support function.
HCA can be considered a classical approach to understanding Human Capital’s impact on a business through data because it is not often used anymore. However, it is still necessary to understand as it gave way to newer approaches, such as People Analytics, which encompass much more than what HCA focuses on.
Learn more about the shift to People Analytics below.
The levels of analytics used in Human Capital Analytics
Next, let’s explore how the data is examined. There are three levels that Human Capital Analytics are divided into, namely, Descriptive, Predictive, and Prescriptive.
- Descriptive analytics: Descriptive analytics takes current and historical data and translates it into something understandable. This sort of analytics helps understand the past but does not make predictions for the future. You can think about it as asking what is happening or what happened. For example, you can use descriptive analytics to create headcount reports to understand who was hired and who left your business or to see how long it took to hire a specific role.
- Predictive analytics: Predictive analytics is relatively self-explanatory. It uses historical data to predict the likelihood of future outcomes. While predictive analytics has been around for a while, with modern technology such as Artificial Intelligence and Machine Learning, businesses are using this form of analytics to increase their profit and competitive advantage. For example, in HR, predictive analytics can be used to predict how many people you will need to hire in the following years, which candidates will fit your culture the best, and how long new hires will stay in your company.
- Prescriptive analytics: Prescriptive analytics is the most complex type of analytics. Simply put, it is the process of using all relevant data to determine the best course of action. Today, the best way to accurately understand prescriptive analytics is through Machine Learning. By using ‘if’ and ‘else’ statements, you can build algorithms to analyze vast amounts of data, and it will make a recommendation based on your specific requirements. Your team can use prescriptive analytics to create suggestions for training strategies that improve employee productivity and engagement.
Learn more about these 3 levels of analytics.
The limitations of the human capital economic value method
In its most concise description, the purpose of Human Capital is to understand the economic value of your employees within your organization.
Suppose HR is responsible for knowing and improving on these metrics. In that case, HR can move from a support department to a business function, thereby improving the HR department’s business standing. This is precisely what FitzEnz argued.
He proposed several Human Capital metrics related to standard accounting and financial analysis measures to achieve this credibility. The goals of each metric serve a different purpose, but all relate to how much economic value your employees bring:
Formula Description Human capital revenue factor Revenue / number of full-time equivalent (FTE employees) Human capital profit index Revenue – purchased services per FTE Human economic value added (Post-tax profits – costs of capital) / FTE Human capital cost factor Total pay and benefits costs + pay costs for contingent workforce + costs of absenteeism + costs of turnover Human capital value added Revenue – (expenses – pay and benefits) / FTE Human capital return on investments ratio Revenue – (expenses – pay and benefits) / pay and benefits Return on investment of human capital initiatives formula (e.g. Training) Revenue generated – costs of program) / costs of program
However, there are limitations to this method:
First, these metrics are very simple and give us few answers. For example, if we look at the human economic value added (HEVA), the formula only gives us the average ‘economic value added per worker, but it does not tell us how the employee added ‘economic value’ to the organization or how to create more economic value.
Additionally, these metrics are hard to measure accurately when we consider future people management initiatives that may change how teams work together or overall customer satisfaction. Too often, assumptions are used to calculate the end value, but then it is no longer accurate.
The shift to People Analytics
What is People Analytics
Due to the limitations of HCA, the model further evolved to People Analytics. Whereas HCA focuses on the economic value your employees bring to the organization, People Analytics focuses on solving business issues through your people.
People Analytics is also cross-functional. In addition to HR, it also includes finance, customer, marketing, and other data sources to create actionable insights.
For example, when HCA only tells you the average ‘economic value added per worker, People Analytics uses data to understand employee performance but also how to optimize it in your organization. According to Harvard Business Review, this is essential because high employee performance positively impacts your bottom line.
People Analytics also transitioned the HR department away from prescriptive analytics to predictive analytics. Now businesses can be better prepared to make data-informed decisions when hiring, creating employee training, and impacting retention.
Why is People Analytics more effective at driving value?
Ten years ago, only a few resource-heavy companies, such as Google, were using People Analytics to process large data sets to make data-informed decisions within HR. However, the value it brought was undeniable. As a result, today, many organizations involve analytics in recruiting and retention processes while also discovering interesting insights during the processes.
7 Benefits People Analytics brings:
1. Enhances talent acquisition: Companies often find hiring the right talent who fits the right roles challenging. Companies waste a lot of money and resources when someone is employed and they don’t work out. In fact, according to research from the U.S. Department of Labor, it can cost employers 30% of an employee’s first-year salary when you’ve hired the wrong person. When utilizing People Analytics, you can look at your historical and current data to rank candidates based on their skills and the potential to fit within your role and organization, saving you time and money.
2. Improved retention rates: Retaining your employees is essential to the growth of your organization. When you have high turnover rates, it negatively impacts your team’s productivity and morale. People Analytics gives businesses more insight into retention rates and can suggest possible employee losses before they happen, allowing your team to take action to prevent these.
3. Grow diversity, equity, and inclusion: Looking into your people data helps you assess where your business currently stands within diversity and inclusion, where there are areas for improvement, and gives insights on what can be done to grow it further.
4. Better employee experience: Employees’ thoughts about their organization are essential for motivation, productivity, and your bottom line. Employee experience focuses on how the staff feels about every stage of their employment, from their first to their last day at their company. People Analytics can help HR understand employees’ feelings of belonging within the business, their performance, and areas of improvement to facilitate a more satisfactory working environment.
5. Identifying skill gaps: Through data, your team can quickly find skills your business lacks and identify any knowledge gaps within teams or departments. In addition, People Analytics can help determine which employees should be upskilled so that your team doesn’t need to hire new talent to compensate for the missing skills.
6. Improved productivity: Your company’s profit is highly impacted by employee productivity. Engaged and motivated employees are more productive and accomplish more. By using People Analytics, the HR department can look into collaboration and productivity of the department and then create effective communication and collaboration strategies.
7. Financial insights: People Analytics is highly beneficial when your team wants to know the cost of turnover or total compensation within your business, among other things. Once you have an idea of these costs, you can also find areas where you can save money.
Examples of how People Analytics can improve business value
As mentioned earlier, Google was one of the first companies to implement People Analytics into their decision-making. Today, they still heavily rely on it.
One example is their People Innovation Laboratory, also known as PiLab. Through cross-functional data, the PiLab determines what Google employees need in order to be happy, healthy, and satisfied in their work environment. Through this understanding, Google implements new benefits and perks such as free lunches, inspirational lectures, and so on.
IBM is another example of a company using People Analytics to make informed decisions. They use data through machine learning to make informed decisions in hiring. For example, by using historical data, they know how long it will take to fill a role and how many resources the role will need. Additionally, they can determine how well a candidate will fit by matching the resume and job requirements.
Human Resources has seen a considerable shift in how to make decisions. Human Capital Analytics is a classical approach to assess the return on investment your employees bring to the business.
Although revolutionary at the time it was developed, there has been a shift from HCA to People Analytics in the last few years. Through People Analytics, organizations shifted from ROI to solving business challenges through its people and creating a genuine business need for the Human Resources department.