Valuing human resources: perceptions and practices in UK organisations
The Authors
Shraddha Verma, Department of Management Studies, University of York, York, UK
Philip Dewe, School of Management and Organizational Psychology, Birkbeck College, London, UK
Abstract
Purpose – This research aims to explore perceptions and practices in the area of valuing human resources. It focuses on the importance of valuing human resources, current measurement practices, barriers to measurement and the progress expected in this field.
Design/methodology/approach – This research uses a survey questionnaire design to identify and describe perceptions and practices in valuing human resources in three types of UK organizations: traditional companies; knowledge intensive companies; and local authorities.
Findings – While the majority of respondents regarded the measurement of human resources as important to their organization, little or moderate progress was expected in measurement practices over the next few years. The main reasons for this included a lack of organizational support, uncertainties as to what should be reported, lack of precision in current measurement practices and sensitivities around what should be reported.
Research limitations/implications – A limitation was in identifying who in the organization should receive such a questionnaire in order to improve the response rate.
Practical implications – Organizations need to be made more aware of the benefits and strategic importance of measuring human resources particularly in an era of resource-based strategies – competing through people.
Originality/value – The paper highlights that by reporting the data descriptively it can be used as a context for considering what issues need to be resolved and what barriers need to be overcome to take measurement beyond just recognizing its importance.
Article Type:
Research paper
Keyword(s):
Human resource management; Value analysis; Best practice; Competitive strategy.
Journal:
Journal of Human Resource Costing & Accounting
Volume:
12
Number:
2
Year:
2008
pp:
102-123
Copyright ©
Emerald Group Publishing Limited
ISSN:
1401-338X
Introduction
Human resources have been identified as one of their main sources of competitive advantage by many organisations in today's economy (Edvinsson and Malone, 1997; Stewart, 1997; Sveiby, 1997; Mayo, 2001; DTI, 2003; Verma and Dewe, 2004). This is true not only of knowledge intensive organisations, which are based on services and intangible outputs, but also increasingly of more traditional organisations, both in the private sector and in the public sector. However, human resources are still not recognised in the reporting mechanisms of most UK organisations, despite an interest dating back to the 1960s in techniques such as human resource accounting (HRA) and more recently, intellectual capital (IC) statements (Fincham and Roslender, 2004; Roslender and Dyson, 1992; Mourtisen et al., 2001a, b).
This research focuses on exploring the reasons why measuring human resources is important to organisations in the UK, identifying current measurement practices, barriers to measurement and the progress expected in this field in the medium term. The term measurement of human resources is used here in its widest sense. It is thought of as a range of techniques that provides a more balanced perspective encouraging as much concern about the long-term drivers of financial success as about current performance and value.
The research used a survey methodology to explore a range of issues surrounding the valuation and measurement of human resources. Questionnaires were sent to both human resource managers and finance/accounting managers in three types of organisations in the UK: traditional companies (i.e. companies in manufacturing and retail industries) in the private sector; knowledge intensive companies (i.e. companies in hi-tech, research and service industries) in the private sector; and local authorities in the public sector. In this paper, we present a descriptive account of the findings and focus our discussion around the issues that emerge in relation to the perceived importance of valuing human resources, current measurement practices, barriers to measuring human resources and the progress expected in this field in the short and medium term.
Literature review
HRA has been defined by the American Accounting Association (1973) as “the process of identifying and measuring data about human resources and communicating this information to interested parties”. Contrary to the dominant image of HRA of “putting people on the balance sheet”, the aim of HRA has always been wider than this. In fact, as outlined by Flamholtz (1999), HRA had three main roles: to provide organisations with objective information about the cost and value of human resources; to provide a framework to guide human resource decision making; and to motivate decision makers to adopt a human resources perspective. It is this wider definition of HRA that is used in this paper.
Interest in HRA can be traced back to the 1960s when Hansson (1964) first raised the issue of reflecting employees, an organisation's most important assets, on the balance sheet. In the 1960s and 1970s, there was growth in HRA research with the derivation of basic HRA concepts and the development and assessment of various human resource cost and measurement models. The human resource cost approach involved measuring and capitalising the cost of employees on the balance sheet with proposals based on historic cost, replacement cost, opportunity cost and, for sportspeople, contract costs (Brummet et al., 1968; Flamholtz, 1973, 1999; Jaggi, 1974; Morrow, 1996). Human resource measurement models also included monetary and non-monetary methods of measuring the worth of an organisation's human resources, both at the individual and group level (Lev and Schwartz, 1971; Flamholtz, 1971, 1972, 1999; Likert and Bowers, 1973).
As well as the development of HRA models, research was carried out into the effect of HRA on decision making and the practical implementation of HRA systems in organisations. The research on decision making looked at both internal and external decision making and at the impact of HRA on attitudes and performance. In general, it was shown that the use of HRA data did affect decision making (Flamholtz, 1976; Tomassini, 1977; Oliver and Flamholtz, 1978; Elias, 1972; Hendricks, 1976). There was also a range of studies which looked at the implementation of HRA models in organisations. One of the first studies of HRA systems in practice was carried out at RG Barry by Brummet et al. (1968) and Pyle (1970). This was followed by other studies in a range of organisations including accounting firms, financial institutions, and local authority organisations (Alexander, 1971; Flamholtz, 1973, 1999; Frantzreb et al., 1974; Ogan, 1976; Flamholtz and Kaumeyer, 1980; Flamholtz and Geis, 1984).
Following this initial enthusiasm, however, interest in HRA began to fade in the late 1970s. A number of factors have been identified to explain this. These include:
- most of the relatively easy preliminary research on HRA had been completed with the remaining research being complex and relatively few scholars being available to carry out the research;
- the co-operation of organisations willing to serve as research sites for applied research studies was not easily forthcoming;
- the cost of the research was significant with uncertain benefits or benefits which would accrue to the field as a whole and not just to the organisations who participated in the studies;
- concerns over whether it was appropriate to quantify people and treat them in the same way as tangible assets such as plant and machinery; and
- concerns as to the reliability of some of the findings of the research and much of the HRA work going against the accounting concepts predominant in the 1970s, for example, questions as to whether people qualified as assets in accounting terms (Sackman et al., 1989; Flamholtz, 1999; Scarpello and Theeke, 1989; Roslender and Dyson, 1992; Roslender, 1997; Turner, 1996).
Nevertheless, despite this waning in interest, HRA “is not a subject that will willingly disappear” (Roslender and Dyson, 1992, p. 312), simply because of its potential to significantly influence the management of people (Flamholtz, 1999). Linked to this is the recognition that in today's economy, the greatest source of competitive advantage for many organisations is their workforce. This together with the changing nature of management where managers are now more likely to have to manage by facilitation and the growth and strategic importance of the human resource professional HRA is experiencing “something of a revival” (Dawson 1994, p. 35). HRA was now clearly viewed as something “of much greater importance than simply finding a means of putting people on the balance sheet” (Roslender and Dyson, 1992, p. 319).
Many concepts and techniques have been proposed by both academics and practitioners alike as a means of measuring human resources. These include return on investment, the IC index, Tobins Q, the human capital index, the balanced scorecard and economic value added (Mayo, 2001; Kaplan and Norton, 1996; Fitz-Enz, 2000; Roos et al., 1997; Tayles et al., 2002). Other proposals include the belief that human resources need to be measured in terms of their strategic management potential. This is expressed through such techniques as human worth management and human resource expense models (Cascio, 1998; Roslender, 1997; Fitz-Enz, 2000; Mayo, 2001). Other issues such as how human resource measurement systems should be designed, the link between human resources and accounting, the need to provide information to effectively guide and manage behavior and the need for accounting requirements to move away from a purely financial focus (Pfeffer, 1997; Roslender and Dyson, 1992; Turner, 1996; Roslender, 1997) have also been mooted.
The UK Government too has shown interest in the valuation of human resources. In 2003, the Department of Trade and Industry set up the Accounting for People taskforce to explore the case for encouraging organisations to report on performance in four areas: size and composition of the workforce; employee motivation; staff training and development; and remuneration and fair employment. The taskforce reported in November 2003. In its report, it recognised that the skills and commitment of employees are important to value creation in organisations and that HCM reporting was generally supported but also recognised that there were particular concerns that needed to be overcome. These included revealing data to competitors, possible misinterpretation by analysts and unhelpful media reporting, lack of clarity on what and how to report, how to deal with wide industry differences and requirements, concerns against an overly prescriptive approach such that organisations would not able to reflect their own circumstances and concerns of lack of common definitions and common reporting requirement making comparison difficult.
The report concluded by recommending an evolutionary approach leading to balanced and objective reporting with a robust process capable of review by auditors and recommended that employee matters should be incorporated in the operating and financial review (DTI, 2003; Roslender et al., 2004). In 2005, the government issued a statutory regulation (Statutory Instrument, 2005) amending the Companies Act 1985 to require quoted companies to prepare an operating and financial review which should include reporting on employee matters for all financial years commencing after 1 April 2005. However, the government decided not to implement these regulations and in January 2006 it repealed the requirement for quoted companies to prepare operating and financial reviews as part of the financial statements, indicating that further work on this issue was needed.
The measurement of human resources is also a key component of IC statements. Definitions of IC have viewed IC as an organisational level asset obtained from the knowledge held within organisations, both tacit knowledge held by employees and codified knowledge. Authors continue to debate the concept of IC and explore its different components (Saint Onge, 1996; Sveiby, 1997; Edvinsson and Malone, 1997; Nahapiet and Ghosal, 1998; Stewart, 1997). There seems to be some consensus as to the components of IC, even though the terminology and definitions are slightly different. The approaches all aim to provide a broader picture of an organisation than is given by a purely financial focus. This is done by using a range of financial and non-financial indicators, very much along the lines of a balanced scorecard approach (Kaplan and Norton, 1996). Common to all the approaches, there is the recognition that it is neither possible nor desirable to put an absolute and correct value on IC. Instead, IC statements enable organisations to focus on stocks and flows of IC over time and to be better able to manage knowledge and IC. Recent research on IC has included investigating IC reporting in financial reports in a variety of countries (Abeysekera and Guthrie, 2005; Bontis, 2003; Bozzolan et al., 2003; Olsson, 2001) but with little research on IC reporting in the UK. Bozzolan et al. (2006) conducted a comparative study of IC practices in Italy and the UK and Unerman et al. (2007) published a report for the ICAEW on UK reporting of IC in four sectors using content analysis and interviews of senior executives in UK companies.
There has been much debate in the management and accounting literature about the measurement of human resources and the techniques that should be used to do so. However, despite this debate the measurement of human resources has not altogether translated into practice. Nevertheless, academics and practitioners alike share a common goal, that of developing measures that capture the very worth of people and report it in ways that allows for the growth and development of the people themselves and acknowledges in more tangible form the contribution they make to the organisation.
In order to extend this common goal, to focus the debate surrounding the measurement of human resources and to encourage researchers and practitioners to use these results to consider ways forward this research explores why measuring human resources is seen as important, the barriers to measurement, the types of measures that are currently used and which might be used in the future and the progress expected in this field in the short to medium term in organisations in the UK. The research methodology is presented next, followed by the presentation and discussion of the results and conclusion.
Methodology
This paper reports the findings of a questionnaire survey on the valuation and measurement of human resources carried out in 2003. The questionnaire employed was based on an earlier instrument developed by Toulson and Dewe (2004) to explore a range of issues surrounding the measurement of human resources and the practices used. The research project provided an opportunity to collect generic descriptive data for considering the state-of-the-art in relation to human resource measurement in the UK. The questionnaire was adapted for this research and included questions on the importance given to measuring human resources, existing measurement practices, what should be measured if not currently measured, barriers to measurement and the expected level of progress that may be made in valuing and measuring human resource in the short to medium term.
Both, checklists and open-ended questions were used in the survey instrument. In the case of the checklists, respondents were asked to consider various questions or statements and indicate on a five-point scale the view of their organisation. Questionnaires were sent to three types of organization: traditional companies, i.e. companies in the manufacturing and retail sectors in the private sector; knowledge intensive companies in the private sector; and local authorities within the public sector, to obtain a broad view of practice and perceptions relating to measuring human resources in organisations in the UK. The knowledge intensive companies came from a range of industries including accounting and auditing, advertising and media, biotechnology, communications, IT and computing services, legal services management consultancy and public relations, pharmaceuticals, and research and development. In these industries, the focus was on service, research and technological innovation and hence it was expected that the main source of competitive advantage within the industries would be the employees and their knowledge. This is in contrast to what may be the case in the more traditional sectors like manufacturing and retail, where the emphasis may be on more tangible products.
In total, 4,938 questionnaires were distributed; 1,000 questionnaires were mailed to human resource professionals in traditional companies, 1,000 to human resource professionals in knowledge intensive companies, 1,000 to accounting professionals in traditional companies, 1,000 to accounting professionals in knowledge intensive companies, 469 questionnaires to human resource professionals in local authorities and 469 questionnaires to accounting professionals in local authorities. The questionnaires were sent to larger organisations with 100 or more employees as the measurement of human resources was expected to be of more interest to these larger organisations.
Of the 4,938 questionnaires mailed, 288 responses were received, a response rate of 5.8 per cent. Baruch (1999) poses the question: what is a “reasonable and acceptable response rate”. To identify a reasonable response rate Baruch argues that a number of factors must be taken into account. These include, for example, the trend that over the years there has been a reduction in the level of response rate that may, according to Baruch (1999, p. 427) be explained by “a disbelief in the value of the social sciences”. Other reason for low-response rates include, for example the type of population, the sector being surveyed and the size of the organisation. The necessity and difficulty comes according to Baruch (1999) in explaining a low-response rate. While it might be possible to mount an argument that involved issues of sampling, population and sector, perhaps the more potent and somewhat disappointing reason may be that those receiving the questionnaire did not find measuring human resources an important enough topic to respond to. This in itself may represent a finding. In addition, these results, if used in a didactic sense as a source of understanding, and if using a descriptive approach to analysis and interpreting our results in a conservative way, it is still possible to inform. It is in this way that the results are presented and the context set for further research, analysis and explanation.
Results and discussion
The sample
Of those who responded 67.8 per cent were from the human resource function, 22.3 per cent from the accounting function and 9.9 per cent of the respondents were from other functions. About 38 per cent of responses were from traditional companies, 29 per cent from knowledge intensive companies and 33 per cent from local authorities. The analysis is first presented for the sample population as a whole and then, where appropriate, explored in terms of sector groupings and professional groupings. The low response from those in the finance/accounting professional group may suggest that measuring human resources is not currently a high priority. On the other hand, it may also suggest this group has not been sufficiently involved in this kind of work and one possible outcome from this research would be to call for a closer collaboration between the accounting profession and those working in human resources so that ideas can be shared and different techniques evaluated. Organisations in the sample employed on average 5,845 employees with a range of 5-123,000. Although, organisations with greater than 100 employees were targeted, nine responses from organisations with less than 100 employees were received. The issue of the role of measuring human resources in smaller organisations is an important one that may need to be the focus of further research.
The importance of measuring human resources
In this section, respondents were asked to identify how important the measurement of human resources was to their organization, what factors contributed to the importance of measuring human resources, to whom in the organisation this was important, and why human resources measurements were not undertaken.
Respondents were first asked to indicate (1 – not important to 5 – very important) how important measuring human resources was to their organisation. About 52.1 per cent of respondents stated that the measuring of human resources was very important or extremely important in their organisation. The remainder of respondents stated that the measurement of human resources was not important, somewhat important or of moderate importance.
Respondents were then asked to consider a list of 19 statements (Toulson and Dewe, 2004) about the importance of measuring human resources and then, to indicate on a five-point scale (1 – strongly disagree to 5 – strongly agree) the extent to which each statement reflected their organization's view. Results are presented in Table I.
As shown in the Table I, four reasons emerged as to the importance of measuring human resources that had the support of over 70 per cent of all respondents. These four reflected issues around accountability (human resources should be accountable, just like any other function), strategic planning (measurement helps with strategic planning, measurement of human resources gives management needed information about the people resources in the organization and if the resources are there to support business strategies) and competitive advantage (the knowledge and skills of our people is our most important source of sustained competitive advantage).
Of the remaining reasons for measuring human resources, ten received majority support (50-69 per cent) with the key theme reflecting the belief that the importance of measuring human resources gives a more strategic edge to planning and decision making particularly in relation to the achievement of organizational goals, the opportunity for management to take strategic actions and on identifying the impact of human resources on financial results. Although not explicitly stated, this may reflect the view that in order to value and reward human resources, their contribution to the key strategic plans of the organisation and to financial results must somehow be made visible. Interestingly, when looking at the five reasons that received little overall support (16-34.5 per cent) from respondents these seemed to reflect the view that measuring human resource should not be mandatory, would not raise the profile of human resources to the level of a strategic partner, not be an important indicator of future profitability or the potential for future profitability, and would not help to solve human resource problems. These results appear to reflect the view that until measures of human resources are developed the opportunity to make the case for the strategic important of human resources measurement cannot be credibly made and because it cannot be credibly made the support for measuring human resources is absent; a somewhat vicious circle.
Barriers to measuring human resources
In order to identify the main barriers to the measurement of human resources, respondents were given a list of 18 frequently mentioned reasons given by organisations as to why they do not measure human resources and asked to indicate on a five-point scale (1 – strongly agree to 5 – strongly disagree) whether they reflected their organization's views. The results are presented in Table II.
Only three reasons had the support of more than 50 per cent of the respondents and these, ranked in order of importance were lack of understanding of the measures by others in the organisation, uncertainty as to what information should be reported and that current human resource measures lack precision. For this sample, these three could be considered to represent the considerable barriers to the measuring of human resources and each needs to be addressed in order to make progress in practice.
However, respondents also seemed to be in general agreement (40-47 per cent) that their organization's view as to why they do not measure human resources would also include concerns about the lack of valid, widely accepted measures that are not overly confusing, the time and resources necessary to develop such measures and continuing concerns about quantifying people. Finally, there was less agreement as to whether to use hard or soft measures, who should be involved in the development of appropriate measures and the lack of expertise in measurement by human resource professionals. Again these results seem to reflect the uncertainty and almost anxiety surrounding the current status of human resource measures and the need for organizations to consider how to develop a strategic approach that focuses initially on what is trying to be achieved and how best those ambitions can be reached. Perhaps, these expressions of the barriers to measuring human resources reflects a “hard” approach and that initially at least, if progress is going to be made, organizations may be better off beginning with improving the objectivity of “soft” measures and using those measures as a means of securing commitment for future development of more complex approaches.
Who should be driving human resource measurement?
When respondents were asked to identify who in the organisation should drive the practice of valuing human resources, 50.2 per cent of the respondents stated that the human resource function should drive the practice of measuring human resources with only 2.1 per cent of respondents stating that this should be driven by the accounting function. About 35.3 per cent of the respondents stated that a multifunctional team should drive the practice of measuring human resources. Those respondents who identified the human resource function as the most appropriate function to drive valuation practices stated that this was because they had the knowledge, expertise and data to be able to do so. Respondents also indicated that if the human resource function did not get involved in the valuation of human resources, there might be a threat to the human resource function and the danger that other functions such as accounting would perhaps “take over”. Those respondents who stated that a multifunctional team including human resource and accounting professionals should drive the valuation of human resources indicated that this was desirable in order to obtain the expertise of both functions and to improve acceptance and understanding of human resource valuation across the organisation. Finally, in this section, respondents, where asked about how important they thought measuring human resources was perceived at different levels of the organisation. The results clearly identified that valuation was perceived as being of most importance to the human resource function.
However, the measurement of human resources was perceived as being important to all senior levels within the organisation, particularly senior management and the CEO. Nevertheless, these results also point to the perceived belief that the measuring of human resources was seen as relatively less importance by the accounting function illustrating what is, perhaps, an underlying theme in the literature that those who see measurement as important are somewhat reliant on a group of experts who are less convinced of the importance of measurement in the first place. While all is not lost more needs to be done it seems to engage accountants within organisations in the debate on valuing human resources.
Valuation/measurement practices
In this section, respondents were asked about the human resource measures that were utilized by their organisations. From a list of 33 measures, respondents were first asked their organization was currently using the measure and then (b) to indicate on a five-point scale (daily, weekly, monthly, quarterly and annually) approximately how often this measurement was taken and finally (c) if their organization was not using a measure should it do so in the future. Respondents were then asked to consider the list of measures a second time and to indicate on a five point scale (1 – not important to 5 – very important) irrespective of whether the measures were currently used by their organisations how important they considered each measure to be to their organization. The measures included those measures, which might predominantly be used by the human resource function such as job satisfaction, organisational commitment, competency levels, educational level and experience and measures of wider interest such as economic value added, training and educational costs, return on investment in human capital and IC. The respondents were asked to add to the list if the measures they used were not included (Table III).
Turning to currently used measures, it is not suprising, because of current legislative requirements, that absence and accident frequency rates are measured by more than 70 per cent of the sample. Other measures used by a majority of organizations reflect the sorts of measures traditionally associated with human resource data collection and include training and educational costs, turnover rates, people costs, client satisfaction surveys and competencies. Moderately used measures (e.g. average age, healthcare costs, job satisfaction, revenue per employee and cost per hire) continue to reflect a somewhat “soft” human resource measurement approach and one that seems to suggest that such measures are those that can easily be extracted from standard financial data. Little use, at least for this sample, appears to be made of measures (i.e. economic value added, value added per employee, return on investment in human capital and IC) that reflect the “hard” end of human resource measurement and cover resource-based issues such as competing through people and the worth of human capital. Overall, these results may simply indicate that, in practice, there is little agreement as to what should actually be measured, why it should be measured and how it contributes to the strategic direction of the organization.
As would be expected, when used the majority (52 per cent) of measures (e.g. client surveys, competencies, educational level, experience, healthcare, HR costs, job satisfaction and return on training) were reported annually with a third being reported (e.g. absenteeism, revenue per employee, training and development costs, training lost, turnover, turnover rate) monthly. The remainder (e.g. accident frequency rates, cost of people, cost per hire and time to fill jobs) were reported either monthly or quarterly. Once again, these results may reflect the ebb and flow of the human resource reporting cycle acknowledging legislative needs and financial reporting requirements.
Next in this section respondents were asked if their organization was not using a measure, should it do so in the future? The interesting finding here is that the theme that seemed to emerge when respondents were asked to identify those measures that their organization “should use in the future” suggested measures that capture the abilities, talent and development of employees. The top five ranked “should use” measures included: return on training, competencies, potential leadership ability, job satisfaction and time to fill jobs. Overall, these results seem to suggest that for many organizations current measurement practices are concerned with identifying the well-being of employees, the investment in training and the potential of employees in terms of competencies and leadership ability. This idea of the importance of measuring the well-being and investment in employees carries through into the final set of questions in this section where respondents were asked to indicate irrespective of whether the measures were currently used by their organization how important they considered each measure to be to their organization. While these results could overall be describing a level of uncertainty as to what, why and how to measure different facets of human resource activity what is encouraging is that the use of human resource measures that express an investment in people could well be describing a first phase in the measurement process and once confidence in these measures is established the organizational culture may we more welcoming of more advanced measures (Table IV).
Differences between human resource respondents and accounting respondents
The analysis now moves from describing results from the sample as a whole to exploring potential within sample differences. Within sample differences were first explored by comparing human resource with accounting respondents and then comparing differences in responses between sectors. Turning to differences between accounting and human resource respondent two-tailed t-tests were first used to investigate differences in relation to their organizations views on the importance of measuring human resources. Of the 33 items significant differences emerged in relation to four. Across all four human resource respondents gave more importance to these items than their accounting counterparts. The four items included “by identifying the value-added contribution of human resources, the impact of human resources on financial results can be developed”, “to earn credibility and receive needed resources, human resources need to speak in financial terms”, “measurement of human resources gives investors needed information about the value of the business and its potential for future profitability” and “measurement of human resources gives management needed information about the people resources in the organisation and if the resources are there to support business strategies”.
These results illustrate perhaps what could be described as a tension that underlies the measurement of human resources. In order to maintain credibility, human resource professionals need to measure their activities in financial terms. To do this, they need the support of their accounting colleagues but as these results suggest these colleagues are somewhat more flegmatic and, even if measures were available, they are lees likely to place importance on them in terms of the information they could provide. On the other hand, as Armstrong (1989, 1995) suggests, human resource professionals by relying on the application of standard accounting “cost-effective” procedures to measure their strategic worth, run the risk of “handing over” to others outside their profession control as to what are the significant human resource priorities.
Two-tailed t-tests were also used to investigate whether there were any statistically significant differences between human resource respondents and accounting respondents in terms of the perceived barriers to measuring human resources. Of the 18 items, seven statistically significant differences emerged between the two groups. In all cases, accounting respondents were more likely to agree that these were reasons organizations give to justify why they do not measure human resources. Again, the results could be interpreted as illustrating that accounting professionals are less likely to accept that human resource measures are sufficiently well developed enough and more problematic to warrant their application. The seven items where accounting respondents were significantly more likely to agree included the view that “current human resource measures lack reliability”, “current human resource measures are too complex”, “current human resource measures are too difficult”, “current human resource measures are confusing”, “human resource people do not have the necessary expertise to measure”, “uncertainty as to who should be involved in the development of appropriate measures” and “that existing personnel and company policy do not facilitate the use of human resource measures”.
Sector differences
The next step was to investigate, again using two-tailed t-tests, differences between sector groups (traditional, knowledge intensive industries and local authorities) in relation to their organizations views on the importance of measuring human resources. A number of significant differences emerged. Turning first to differences between traditional organisations and local authorities, local authority respondents rated as less important the view that “the knowledge and skills of our people is our most important source of sustained competitive advantage”, “the language of business is dollars. To earn credibility and receive needed resources, human resources need to speak in financial terms”, and “measurement of human resources gives investors needed information about the value of the business and its potential for future profitability”. Understandably perhaps, local authority respondents, because of their civic and community roles may be less likely to rate the importance of measuring human resources in terms of the “language of business”, investors and profitability. These results may suggest more about the way the questions were asked than the commitment of local authority respondents to measuring human resources.
Exploring the significant differences between local authority and knowledge intensive organisations, there seemed to be less importance given by knowledge intensive organisations respondents to reasons that concerned identifying the value-added contribution of human resources (by identifying the value added contribution of human resources, the impact of human resources on financial results can be developed) and “encouraging the alignment of human resource plans with business plans”. However, knowledge intensive respondents rated as significantly more important than their public sector counterparts the view that the “knowledge and skills of our people is our most important source of sustained competitive advantage”, and that to earn credibility and receive necessary resources, human resources need to speak in financial terms'. It is interesting to speculate on the basis of these results as to whether knowledge intensive organizations simply accept as a given, because of the nature of the business they are in, the strategic importance of their human and IC and so regard any financial reporting as reflecting the worth and value of their human resources.
When comparisons between traditional company respondents and their knowledge intensive counterparts were explored, knowledge intensive respondents appeared significantly more likely to place less importance on measures that “helped solve human resource problems”, “encouraged the alignment of human resource plans with business plans”, “helped strategic planning” and “helped identify the impact of human resources on financial results”. Again, because presumably any financial reporting by knowledge intensive organization is a report on the state of the value, worth and contribution of their human resources then it is not so much a question of something being less important but something that is integrated into the way they behave and the processes they operate through and therefore something that is already taken into account. What is clear from these results is that more in depth work needs to be done to explore these sector differences and these would need to be addressed in terms of the development of appropriate human resource valuation models.
Finally, two-tailed t-tests were used to explore whether any significant differences emerged across different sector groups in relation to the reasons that organizations give to justify why they do not measure human resources. The results suggest that local authority respondents are more likely to agree than the traditional organisation respondents that human resource measures are confusing, and that they do not have enough available financial resources to measure human resources, have concerns as to quantifying people, unsure as to whom in the organization the information should be reported to, and feel that there would be a lack of understanding of the measures by others in the organization. Again, it is interesting to speculate as to whether these results reflect the nature of the role of public sector organizations and their accounting conventions and therefore a call to further explore what public sector models of human resource measures would prevail.
Similarly, when differences between public sector and knowledge intensive respondents were explored public sector respondents were more likely to agree that they found human resource measures confusing and had concerns as to how human resource information would affect decision making in the organization. Finally, in comparison to their traditional organization respondents knowledge intensive respondents were more likely to agree that there is a lack of understanding of the measures by others in the organization. When the sector group results are considered in total then, at the very least, they suggest that more work needs to be done when developing different human resource measures to ensure there is a fit between what is being measured and the characteristics of the sector, the role, goals and strategies of the sector, the concerns and anxieties in respect of sector goals and the need to recognize that a universal prescriptive approach to measurement may not suit all.
Valuing human resources: the way forward
In the final section of the questionnaire, respondents were asked about future plans in relation to valuing human resources. Both, forced choice and open-ended questions were used in this section. In terms of the former, respondents were asked to indicate in terms of the next year, the next two to five years or over five years whether their organization has any plans to introduce human resource measures. This question was immediately followed by three open-ended questions that asked respondents to:
- indicate what plans were being considered;
- the steps their organization is taking to implement human resource measures; and
- why barriers they thought prevented their organization from doing as much as it could in the area of human resource measurement.
Respondents were asked to give their opinion using a five-point scale (1 – no progress to 5 – significant progress) as to what progress they thought would be made in HRA in the next five years. This question was immediately followed by an open-ended question asking respondents to explain their answers.
In relation to future plans, 39.6 per cent of the respondents stated that their organisations had plans to introduce human resource measures in the next year, 22.2 per cent in the next two to five years and 9 per cent in over five years. Those that did have plans were then asked to write in and outline their plans. Respondents that did give brief details of plans were generally at the stage of deciding which measures should be used and how often. In all cases, the measures were to be reported internally to senior management. Respondents did not include details of specific measures but did outline plans that involved pilot studies, the acquisition of appropriate software to facilitate the capture of human resource information and the use of techniques that involved something around a balanced scorecard type approach.
Plans for measuring human resources and the steps being taken were all set against a theme that captured the mantra that measuring human resources was important because employees are important. Nevertheless, the plans for, and the motivation and drive to measure human resources were influenced by sector imperatives. Private sector respondents for example indicated that the drive for profits in an increasingly competitive market would be a key driver for the valuation of employees while local authority respondents indicate that the difficulty in recruitment and retention of staff, together with government led requirements would drive employee valuation in the local authorities. However, the view that the valuation of employees was the latest management fad and that measures already used were adequate was also expressed suggesting that support for the valuation of employees was not universally and unambiguously accepted.
In relation to the open-ended question concerning barriers to implementation of human resource measures a number of themes emerged. These included a lack of time and resources, the complexity and difficulty of measuring human resources in practice, concerns as to quantifying people, letting accounting take over, professional jealousies, resistance to change and political pressures. There was also issue the that measures should not be calculated for there own sakes but to improve the business and that it would be difficult to persuade a board of this due to their lack of understanding of measures, up front costs and uncertain long-term benefits. These themes suggest that in the future emphasis will need to be given to both conceptual issues such as developing appropriate measures or techniques for valuing employees and managerial issues such as gaining the commitment and interest of business leaders and others through education and training, understanding what priorities to set, what measures to introduced and why, what steps should be taken in implementing such measures and what and how the results are going to be used.
In response to how much progress there was likely to be in the medium term, 19.1 per cent of the respondents considered that there would be little or no progress in HRA over the next five years, 65.3 per cent of the respondents considered that some or moderate progress would be made in the next five years. Only 13 per cent of the respondents considered that there would be significant progress in the valuation/measurement of human resources in the next five years. Of the ones that did indicate significant progress, most of these come from knowledge intensive companies. This may be for two reasons: the first is that people are the main source of competitive advantage in these companies and that their goals, objectives and success are already somewhat reflected in the way financial data are reported; and the second is that in the other sectors, perhaps, measurement has been seen as less important in general particularly in relation to other competing business priorities and hence they will be implementing measures from a lower starting point and therefore see little immediate progress.
Summary and conclusions
This research set out to explore current perceptions and practices in the area of valuing human resources focusing on the importance of, and reasons for, valuing human resources, identifying current measures being used, identifying the barriers to valuation of human resources and the progress expected in this field. A survey questionnaire was sent to both the finance/accounting function and to the human resource function in three types of organisations, traditional companies in the private sector, knowledge intensive companies in the private sector and local authorities in the public sector. While the response rate suggests that these results need to be considered cautiously, they at least inform our understanding of issues concerning the importance and role of human resource measurement.
Overall, the majority of those responding view the measuring of human resources, albeit for different reasons, as important. This difference in views leads to a number of underlying themes that can be distilled from the data. The first seems to reflect a view that in order to be perceived as credible, human resources need to be expressed in “the language of business”. However, this proves to be a somewhat vicious circle for until measures of human resources are developed that are generally regarded as reliable and valid, the opportunity to make the case for the strategic importance of human resources measurement cannot be made with any credibility. Since it cannot be made, credibly support for measuring human resources cannot be garnered even though the importance of measuring human resources may be recognized; a somewhat vicious circle. But it seems that all is not lost. A second theme that emerges from the data draws attention to what may be a distinction between “soft” and “hard” measures of human resources. The use of traditional human resource measures (i.e. job satisfaction surveys, training costs, absenteeism rates, etc.) reflect ‘soft’ measures that express what can be described as an attempt to capture the “investment in people”. This could well be describing a first phase in the measurement process and once confidence in these measures is established and gives rise to a better understanding of why human resources should be measured the organizational culture may become more willing to explore the use of more advanced measures.
Another theme to merge from the data is the need to further explore how the views of those involved in accounting and finance can be reconciled with those involved in the management of human resources. Perhaps, here too there is an interesting paradox. Human resource managers need the support of their accounting colleagues to be able to develop and initiate human resource measures. To gain this support, however, they need first to be able to convince their accounting colleagues that such measures are important, reliable and valid. In order to do this, they need to work with these colleagues to develop such measures. Here lies the rub because those whose help they need are not entirely convinced as to the merits of measurement in the first place. So to make progress human resource managers must gain the support of their accounting colleagues but their accounting colleagues need convincing that measurement is worthwhile. As human resource managers cannot do the latter without help from the very colleagues who appear somewhat unconvinced, this might be a circle that is difficult to square.
Finally, despite the interest in this area the final theme appears to suggest that only moderate progress may be made in the medium term, largely because of the perceived difficulties confronting those wishing to measure human resources in practice. In order for greater progress, more needs to be done at both the practical and empirical level. More research is needed into valuation methods and models, the utility of using a range of measures, including soft measures, how best to deal with concerns over quantifying people, and how best to deal with sector differences. As well as developing appropriate measures which would gain acceptance by most organisations research and practice needs to be directed towards issues such as gaining the commitment to valuing employees by senior management, which will, no doubt, involve persuading management of the benefits of the process compared to the costs involved, how systems to value employees, when developed, are implemented into organisations and the consequences, both intended and unintended of how the systems operate in practice. If the rhetoric that “people are our most valuable assets” is to be replaced by the reality, then all those in the organization need to work together so that any expression of human potential reflects the reality of the working lives of those we study.
Table IImportant reasons for measuring human resources
Table IIReasons preventing the valuation/measurement of human resources
Table IIIMeasures currently used most by UK organisations
Table IVWhich measures are deemed most important to their organization
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Corresponding author
Philip Dewe can be contacted at: p.dewe@bbk.ac.uk