While Saudization is gaining momentum and companies are trying their best to hire and train local work force, the term "human capital" is common in organizations. Management's role in this important resource is often unclear. This lack of clarity adds to the mystery of human capital investment.
The investment in question is, of course, human capital. As extreme as it seems, this scenario plays out in organizations each year as they invest in their work force. Budget approvals are granted on faith, with the assumption that the requested investment will pay off.
There is far too much mystery about the connection between the investment in employees and the success that follows. This mystery causes some organizations to invest too much or too little -- either of which can bring disaster. However, executives can develop an optimum investment in human capital by considering suitable strategies to train the locals.
As executives continue to try to understand the importance of investing in human capital, they have developed both intuitive and empirical reasons for investing in human capital. Three approaches have evolved. The first approach is to use logical deductions, intuition, and common sense -- in other words; it's easy to see the value of employees. Employees are necessary; they add to the market value and are the last source of competitive advantage. This approach is based on intangibles.
The second approach is empirical, examining the connection between investment in human capital and organizational performance (macro analysis). The third approach presents data on the impact of specific human capital programs, using return on investment as a measure (micro analysis). The use of ROI has become an important management tool for placing a value on human capital initiatives, programs, and solutions. The ROI methodology can be used to show executives the monetary benefits directly connected to human capital expenditures (compensation, benefits, and training), particularly for programs that are highly visible, strategic, and expensive. This systematic, comprehensive measurement and evaluation process generates six types of measures:
1. Reaction and satisfaction. This data are generated from participants and used to measure nearly all HR functions and programs, usually through generic questionnaires and surveys. Although this level of evaluation is important as a customer satisfaction measure from program participants, a favorable reaction does not ensure that participants have learned to implement the HR program.
2. Acquisition of knowledge and skills needed to implement plan or program. These measurements focus on what participants learned during the HR program. A learning check is helpful to ensure that participants absorb new skills, knowledge, and know-how to make the HR program successful. However, a positive measure at this level is no guarantee that the program will be implemented successfully.
3. Application and implementation. Measuring application and implementation is necessary to determine if participants implement the HR program successfully. The frequency and use of skills are important measures at this level. This measure includes all the steps, actions, tasks, and processes involved in the implementation of the program. Although the evaluation is important for gauging the success of the program's implementation, it still does not guarantee a positive business impact on the organization.
4. Business impact related to the human capital expenditure or program. This measurement focuses on the actual business results achieved directly from the HR program. Typical business measures include output, quality, costs, time, and customer satisfaction.
5. Costs. Although the HR program may produce a measurable business impact, there still is a concern that the costs for the program may be too high. A fully loaded cost profile is recommended, involving a tabulation of all direct and indirect costs.
6. Return on investment in the expenditure or program. The ROI measurement is the ultimate level of evaluation, comparing the HR program's monetary benefits with the costs, usually presented as a percentage or benefit/cost ratio.
ROI is measured with the same type of formula the finance staff would use to measure any type of investment -- the ROI on investing in building equipment, for example. This methodology, created by the ROI Institute, is based on a comprehensive measurement and evaluation process that has been implemented by more than 2,000 leading organizations in 44 countries worldwide. The first step in the process is selecting an evaluation framework, which is essentially a categorization of data. The next step involves drawing up a process model detailing how data will be collected, processed, analyzed, and reported to various target audiences. The third step is the development of operating standards, ensuring that the results of the study are stable and free of influence from the individual conducting the study. Implementation is the fourth step, in which the ROI process becomes a routine part of training and performance. Finally, the impact the specific program evaluated had on the organization should be communicated to the entire organization.
As Saudization and human capital investment continues to grow in the Kingdom, companies will seek strategies to guide decision making about this critical investment. Calculating the ROI on human capital expenditures will play a substantial role in shaping decisions about an organization's human capital investments and will help Saudi companies to train the local youths accordingly.
By Mohammed Habeebulla
© Arab News 2006
