Decreasing ROI on Human Capital

PwC Saratoga publishes an executive summary every year that picks out noteworthy new data from its US Human Capital Effectiveness Report.  The report covers more than 200 unique metrics related to the effective management of human capital from more than 300 organizations in 12 industry sectors.  The average organization in this year’s report has yearly revenue of $5.5 billion and 19,500 employees.  While PwC Saratoga gathers information globally, this report covers data from US operations only.

This executive summary is not a difficult read – it includes some case studies – and it contains some pretty sobering statistics.  For example:

The revenue per FTE (full-time equivalent) has been declining steadily since 2008 –  by 18% — and has only marginally improved over 2006 levels. During the same time period, labor cost per FTE has grown nearly 14%:

It doesn’t take an MBA to understand that when costs rise and revenue falls:  you have a big problem.  And when labor costs rise and productivity declines, HR has a big problem.

The continued growth in labor costs per employee could be surprising to some given the relatively flat increases that trended during the recession.  According to this survey data, however, even during the darkest days of the recent recession, compensation costs per FTE (without healthcare or other benefits) increased year over year.  Surprising no one, though, health care costs increased year over year with the exception of 2009-2010.

The bottom line is that while the all-in cost of labor is going up, the revenue produced by that labor is decreasing, thus the diminishing ROI of human capital in the U.S.

While this might look like bad news for HR – do they really understand the dynamics of business? – it actually creates the beginning of the business case for increased investment in workforce planning, productivity and engagement.

Turning these trends around will take clear-eyed assessments of the current state, deep knowledge of solutions and the ability to connect the dots between multiple organization and environmental dynamics, compelling fact-based business cases for new investment and the courage to take bold action.

Want to be a strategic business leader?  This may be your best opportunity yet!

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7 Comments

Filed under Average Wage, Business Case, Business Success, China Gorman, Connecting Dots, FTE, Full Time Equivalent, HR Credibility, Human Capital ROI, PwC Saratoga

7 responses to “Decreasing ROI on Human Capital

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  7. Um, this is what happens in a recession. Revenues fall while costs per unit rise (that’s more or less the definition). A less sexy, but equally accurate headline would have been “Recession Has Predictable Results”.

    While ‘per employee average cost’ is interesting, companies operate on gross revenues.

    This view of the data begs the question of how gross labor costs have been handled at the organizational level. The stats do not necessarily suggest that HR is asleep at the switch or that more workforce planning would help. They could just as easily mean that all of the layoffs focused on keeping more experienced workers. They generally have higher wages and the net of a layoff is often to raise the average per employee wage.

    If your contraction strategy resulted in declining costs per increment of revenue, you would have to seriously wonder if you were letting really valuable people go senselessly. And, that’s the real grain of truth here – really valuable people are more expensive.

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