BUS603: Managing People

To assess the efficiency of investment in human resources, it is important to provide a detailed cost-benefit analysis of the investments. In order to achieve a successful investment, it is necessary not only to correctly define the economic parameters of each project but also to take into account certain specific features and their impact on expected returns in due time and in the company's environment. In determining the expenditure related to investment in human capital, the efficiency evaluation should include all the cost associated with the identification and analysis of training needs, costs of developing and learning activities, renting costs, accommodation, information and communication technologies, the cost of teaching aids and materials, the cost of external trainers and lecturers, direct personnel costs for trainers and staff (such as travel and subsistence expenses, insurance and various other benefits provided by the employer) as well as other costs related to various forms and methods of education. These costs, as well as other costs of learning activity, are associated with specific phases of the process of vocational education, and therefore it is possible to divide them as suggested by experts into:

• Types - labour costs, depreciation of fixed assets, material consumption, operating costs and others
• Specific educational activities - such as language training, communication training, etc.
• Stages of the education process - such as identification and analysis, planning, implementation and evaluation of educational activities

To ensure economic efficiency of a selected educational activity, the company should first of all determine the optimum amount of the costs, dependent on the (minimum) number of employees in a given activity. The minimum number of trainees and the minimum volume (value) of revenues for the respective training can be defined by setting the profit threshold through the division of costs into fixed and variable. Investments in human resources may also include the costs of lost or unused opportunities that represent possible earning potential, in which the employees could gain, but which was omitted due to the educational activity. Furthermore, this cost may also include the loss of profit from unaccomplished work due to an educational activity. Generally, these costs are not economically evaluated; however, if the company is interested in evaluating the economic efficiency of educational activities correctly and objectively, they should take these costs into consideration.

The total expected revenues from educational activities for the company gained during a predetermined period of time depend on the success of all employees and their ability to apply gained knowledge as well as on the overall business performance in a given time. The main problems in determining profits of vocational education are as follows:

• Setting the period for assessing the effectiveness of education. As in education there is no universal way to determine the optimal time for evaluation of effects, it is important that a manager presents a specific activity period on the basis of their personal expert estimate.
• Determination of the effect of selected training activity on the so-called cash flow expected return. This profit is influenced by a number of factors, and that is often why it may cause a problem in proper assessment whether the examined effect is the after-effect of the educational activity or whether it results from other changes within the company.

Investment in human capital is profitable (effectively utilised), provided that the total expected return (cash flow) is higher than the costs invested, respectively. In other words, it is profitable if the rate of return of funds spent (r) is higher than that of investment, so-called interest rate (i). The company then reaches revenues from investment; if pays r > i, while investment in human capital is profitable until the rate of return of funds spent (r) is equal to interest rate (i). As a result of the downward trend of the additional revenues from the additional training and development of employees, the internal rate of return of investment (r) is limited. However, to assess the effectiveness of learning activity exclusively on the basis of its costs is not reliable. Generally, such a decision can be more expensive than reducing the cost of ineffective education. Therefore, it is preferable to choose the opposite approach in assessing the effectiveness which lies in tracking benefits (contributions) of training, which can represent positive change indicators, as presented in Figure 4.

For several decades, experts have been seeking, testing, and verifying methodology that efficiently objectively defines the value of human capital. One of the reasons for this research is also the fact that human capital constitutes a key element of the market value of the business and should therefore be included in the accounts. All this information is necessary for the acquisition, stabilisation, development, and optimisation of human capital. Careful measurement of the value of human capital will lead to the implementation of appropriate management strategies of human resources as well as to the evaluation of the effectiveness of personnel work. The basic objective in measurement of the value of human capital is its quantification, especially important for financial and management decisions of the company. Needless to say, the measurement and valuation of human capital are the basis for planning human resources in a company and for checking the efficiency of investment in this area.

The issue of investment in human resources has been analysed by several authors; however, so far there has not been compiled any unified and comprehensive methodology that would clearly stipulate the methods of measurement of the value of human capital. The main problem in setting the methodology is the measurement of human capital as an intangible asset. The reason is, in the field of labour and human resources, there are many factors (e.g. employees' characteristic features) that are hard to quantify or are very difficult to measure. When evaluating the efficiency of investment into the training of human resources, it is necessary to determine the possible factors that influence the effectiveness of these investments. Among these factors, the quality of the implementation of individual stages of education, teaching methods, and applied approaches in the process of evaluating educational activities represents the major issues. Further, this group of factors includes subjects of education and their attitude to various activities, interest in and support for the management of the enterprise via application of acquired knowledge and skills of employees, linking educational programme and business objectives as well as corporate culture. When integrating all these factors, the company should also take into account the following two very important issues:

• The time to achieve full return on investment. Setting of such a period significantly affects the nature and objective of the training programme. The point is that the company (after the return on investment) may benefit from additional training of staff until the end of employees' working life.
• Nonmaterial, qualitative benefits. The company shall understand that not all benefits are measurable in financial terms. These nonmaterial benefits reflect improvements in areas such as communication, motivation, attitude, and teamwork, which are essential for a company's success. In order to properly measure these benefits, interviews with managers and employees, the analysis of effects, and also other methods may provide useful information about the benefits of education.

Therefore, conducting a detailed assessment and monitoring of achievements are especially important in terms of determining the overall economic efficiency of investment in human resources. Moreover, evaluation of selected indicators of human resources should not be the last step in implementation of investments in human resources, but one of the first. Such evaluation should be included into the needs analysis, definition of objectives, and subsequent analyses necessary for the training and development of employees. It is essential to first decide whether an investment in human capital should be carried out or not. Thus, when formulating objectives of education, the efficiency of investment should be estimated at least in general terms. Failing to present the objectives could lead to unprofitable investment.

In spite of the many recommended indicators, criteria, and methods of assessing the effectiveness of investment in human resources available at the market of consulting and advisory companies, no such indicators should be applied without thorough knowledge of the specific company and its specifics. Each recommended methodology should be tailored to meet the specific criteria of assessment. Bonta and Fitz-enz proposed indicators, which enable effective evaluation of human capital in the company. Their methodological approach distinguishes the main areas of the value of human capital, which are human capital efficiency, its value, the investment into human capital as well as the loss of human capital. For each of the areas, there are variables that can be measured and quantified. They are presented in Figure 5.

Indicator sales per employee is the aggregate result of work of the department of human resources, which also affects the development of human capital in the company. Human capital return on investment (HCROI) is an indicator of return on investment in human capital, including salary and compensation of employees for work, which represents another indicator or return on investment. Effectiveness of this procedure is based on the assumption that the value of employees to the enterprise is determined by wages (paid to employees as an equivalent compensation for their work). In addition to the salaries, investment in human capital also includes the costs of training and development activities. On the other hand, the loss of human capital is usually associated with reducing the value of a company's intellectual capital, and it should therefore be as low as possible. When considering indicators of investment effectiveness in human capital, there are five most commonly used indicators of personnel when the overall company is taken into consideration:

1. Human economic value added (HEVA) - represents the share of one employee on creating economic value added.
2. Human capital value added (HCVA) - it is similar to HEVA; employee share in added value, with the added value of creating revenue net of costs (excluding the cost of employee benefits and labour costs).
3. Human capital cost factor (HCCF) - reflects the total cost of human capital.
4. Human capital return on investment (HCROI) - indicator reflects the amount of gross profit EUR per one euro of direct costs of human capital.
5. Human capital market value (HCMV) - the market value of human capital gives personnel managers information on the amount of EUR net market value per one employee.

Based on the research carried out on more than 10,000 companies, the most famous consultants PricewaterhouseCoopers and Saratoga recommend key indicators to measure the effectiveness of human capital. They are included in Table 1.

According to Dubcová and Foltínová, these indicators measuring human capital are financially dependent on the overall business results, and their selection and use depend primarily on business strategy as well as on strategies in the field of planning and management of company's human resources.