Newsletter May 2007

Return on Talent - A New Metrics that Could Put HR in the Drivers Seat

The McKinsey Quarterly (www.mckinseyquarterly.com) recently published an article from Lowell Bryan, director in McKinsey’s New York Office. In this article, the author argued that "Return on Equity (ROE)" is a measure of the last century and should be replaced or at least complemented by the new measure "Return on Talent (ROT)" to support decision making.

There are several reasons to support his point:

To start with, the proportion of intangibles of the value of companies has increased dramatically. Talent, as a major driver of the intangible value, should therefore play a more prominent role in companies‘ annual reports.
Arguably, talent is more scarce than capital in most cases. Therefore, making the most of it seems very reasonable.
The number of employees is a much clearer measure than the equity, which is strongly influenced by financing strategy, accounting policy and numerous artificial valuation rules. (Certainly there are different ways to count staff as well, such as Full Time Equivalents vs. Headcount and the question how to count agency staff. But these issues can be managed comparatively easily.)

When looking at profit as ROE * Equity, using capital as efficiently as possible is the most likely outcome. When looking at it as Profit per Employee * number of employees, using talent as efficiently as possible becomes the new strategy. The author argues that this is likely to be beneficial for the long-term financial performance oft he company.

Profit per employee should not be boosted just by making the company more capital intensive or shedding the less profitable employees. As long as the least profitable employees still pay for the capital necessary to support their work, they should stay. This means that the new metrics looks at 3 measures: the profit per employee as the primary figure, the number of employees and the return on capital to be used as a sanity check.

With this new metrics in place, the HR function can finally argue how investing in employees drives shareholder value - if only HR professionals are prepared to make their work more transparent and put numbers to it.

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