HR: Value or Expense?
Measuring Future Business Relationships
By
Paul Toulson and Philip Dewe
Introduction
The success of future business relationships will be built on the value-added through
such relationships, and this is a challenge so far as the HR function is concerned
because under current financial reporting conventions HR is in the main recorded as
an expense. There has been much said about HR in the changing business context
from a production to a knowledge-based economy. The rhetoric is about the change
from the traditional role, which was operational acting as an employee advocate,
ensuring that procedures were followed, and keeping the firm within the law.
Personnel (as it was known) did not participate in setting the strategic direction of the
organisation.
During the 1980s, its renaming as HR reflected its more strategic role, but was still
considered to be somewhat “fuzzy” because it dealt with the soft side of the business.
It was not accountable in the same terms as other functional areas, like production,
marketing, sales, and finance, because it was not considered to be a function whose
performance could be measured or quantified in dollar terms or business metric.
Jac Fitz-enz1 refers to this as the subjectivity myth in HR. His view, shared by other
commentators, was that the subjectivity myth has been responsible for the
marginalisation of HR when it has come to competing for resources in the
organisation, especially in times of bottom line pressures. The answer to this was for
HR people to get real with demonstrating their contribution to the business in terms of
business metric.
However there has been also the growing realisation by many CEOs, in the
transformation from a production to knowledge economy, that value in this century is
created by and through people. The latest United States research suggests that the top
management issues concerning CEOs (of customer loyalty and retention, increasing
flexibility and speed, the competition for diverse and talented workforces) require
HRM to be involved in the earliest stages of strategy development and
implementation, rather than just reacting to it.
The principal notion in a knowledge economy is the recognition that it is only through
highly capable and committed employees that organisations gain a competitive
1
Fitz-enz, J. (1984). How to measure human resources management. New York : McGraw-Hill
Book Company
advantage. The realisation that knowledge has become a critical appurtenance for
gaining a competitive advantage in the new economic landscape has resulted the
recognition of the value of people The CEO of Hewlett Packard emphasised this in a
recent address to tertiary graduates by saying “…the most magical and tangible and
ultimately the most important ingredient in the transformed landscape is people” and
this has been substantiated by research results that unequivocally suggest the
importance of human capital for firm performance.
Bontis, Dragonetti, Jacobsen, & Roos (1999)2 suggest that there are a range of tools
available in the metrics of managing intangible resources, the most of which are
human resource accounting, economic value-added, the balanced scorecard, and
intellectual capital. Each of these approaches is based on the recognition that the
value-creating capacity of an enterprise is based on the knowledge and capabilities of
its people. There has been little research undertaken into HRA in New Zealand. That
which has been undertaken has been the subject of student research. So we thought it
was timely to do some baseline research.
The Present Study
So the aim of this paper is to give you a brief synopsis of the results of a baseline
study that we conducted on samples of the memberships of HRINZ, Institute of
Chartered Accountants, and the Institute of Directors to establish:
(a) What New Zealand organisations are doing to measure HR results?
(b) How critical do they consider HR measurement to their management and success?
This benchmark study was designed to capture not just what managers perceptions
were about the importance of measuring HR, but also to document the techniques that
organizations are using and the extent to which different techniques should be used.
The sample consisted of 517 members of the three participating Institutes grouped in
to the following three broad groupings: HR Management (175 or 33.8%);
accounting/finance management (108 or 20.9%): and, senior line management (234
or 45.3%).
Results
A number of points are clear from the analysis of the survey data.
In Part 2 of the survey form, the respondents were asked to rate 16 statements about
the importance of measuring human resources. The top five reasons for measuring
human resources are expressed as a percentage of the total sample. These percentages
reflect the number of respondents who either agreed or strongly agreed that the reason
reflects their organization’s thinking:
 Human Resources should be accountable just like every other function (89.6%).
2
Bontis, N., Dragonetti, N.C., Jacobsen, K., & Roos, G. (1999). The knowledge toolbox: A review
of the tools available to measure and manage intangible resources. European Management Journal,
17(4), 391-401.

The knowledge and skills of our people is our most important source of sustained
competitive advantage (84.7%).

Understanding the value of our people focuses us on our future human resource
needs, which is crucial both for setting long term strategies and for helping us
achieve them (76.7%).

Measurement of human resources gives management needed information about
the people resources in the organization and if the resources are there to support
the business strategies (74.3%).

Through measuring the effectiveness of a particular programme and the impact it
will have on the level of knowledge within the organization, management can
make better informed decisions. (72.2%).
Almost half (47.6%) of those surveyed believed that the measuring of human
resources was very or extremely important to their organization. Not surprisingly
measuring human resources was also perceived, by those surveyed, to be very
important across a range of levels within the organization from those in human
resource management (50.0%), to the CEO (44.4%), to partners (33.2%) and senior
management (32.8%).
A factor analysis of the 16 statements relating to the importance of measuring human
resources suggested that there are in fact two principal reasons that stand out as
reflecting organizational thinking on why measuring human resource management is
important. They are: “measurement reflects the strategic and competitive importance
of human resources” and “to achieve credibility human resource management must be
expressed in financial terms.”
Nevertheless to many of those surveyed “current human resource measures lack
precision” (58.8%) or “current human resource measures are not widely accepted “
(50.56%). Three principal reasons appear to justify why organizations do not measure
human resources. These are: “human resource measures lack precision,” “ human
resource measures are too difficult,” and “human resource people lack expertise.”
From the literature we compiled a list of 32 possible measures that organizations may
use to measure human resources. In the third part of the questionnaire, participants
were asked to consider each measure and indicate if their organization is currently
using the measure.
Rank ordering across the whole sample, the six most frequently used measures were:
accident frequency rates (60.3%), client satisfaction surveys (60.1%), absenteeism
rates (56.3%), training and education costs (56.3%), cost of people (53.9%) and
competencies (53.2%). The point to note here is that these results reflect what is
being measured and not how the information from such measures is being used. The
point to note here is that these results reflect what is being measured and not how the
information from such measures is being used.
Not surprisingly, the most infrequently used measures may well reflect some of the
difficulties associated with developing appropriate methods and perhaps, the
significance given to the human resource function and the idea that its activities
should be measured in someway. Most of the organizations surveyed do not, for
example, measure training cost, return on investment in human capital, value added
per employee, time to fill jobs, return on training and seniority. Again could it be that
failure to utilise such measures simply reflects how little emphasis is given to the
evaluation of many human resource activities once more illustrating the vicious circle
that human resource people find themselves in when it comes to establishing their
credibility and their contribution to the “bottom line.” By not making such measures
human resource people cannot fully establish their credibility and because they cannot
establish their credibility human resource people cannot get the resources to be able to
develop their measurement skills.
Three different types of human resource measures can be identified. These include:
“human resource costs/information,” “return on investment,” and “individual
attributes/potential.” In terms of how important each measurement type is those
surveyed believed that measuring “individual attributes/potential” to be more
important than “return on investment” or “human resource costs/information.”
Finally some comparisons were made across the three groups: human resource
managers, line managers and accounting/finance managers. In the main, when these
three groups were compared in terms of their attitudes towards measuring human
resources then human resource managers (not surprisingly) where significantly more
likely to believe in the importance of such measures and less likely to perceive
barriers to measurement than accounting/finance managers. It is also interesting to
note that at times line managers were more positive in their attitudes towards
measuring human resources than accounting/finance managers. The question that
arises from these results is “what has to be done to change the attitudes of accounting
and finance managers when it is these managers who possess many of the necessary
skills to aid measurement and develop innovative practice?”
Some Conclusions
All in all these results suggest that the measuring of human resources is viewed as
important. The reason for this view can be attributed to the growing strategic
importance of human resource management and the need for human resource
managers to establish their credibility by making the function more accountable in
financial terms.
The difficulties of human resource managers achieving this should not be
underestimated. They are perceived as not having the necessary expertise to carry out
appropriate measurement and that many of the measures used lack precision and are
too difficult.
Nevertheless different measurement approaches are used. Whether they are actually
providing human resource information that establishes the importance of the human
resource function in financial terms or its credibility is a moot point. The difficulties
are made more difficult by the attitudes of others in the organization particularly those
accounting and finance managers who are less likely to see the importance of such
measurement. Nevertheless the importance of measuring human resources seems
established. It is now for human resource managers to establish that measurement can
be done, is within their expertise, and that if resource based strategies do reflect an
organizations only competitive advantage, then to convince others that measuring
human resources is crucial to the success of such strategies and the survival of the
firm.