What Should Human Resource Accounting Systems Count?
When most people think about an accounting system, thoughts of ledgers and numbers usually pop into mind. And accounting systems for human resources are no exception; the cost of a company's human resources is certainly one of its largest financial commitments. But exactly what are those "costs"? Are they salaries, benefits, training? Do they include development costs, cost for employee time away from the job during training? The answer to all these questions is yes--sort of.
Certainly it's important for human resource professionals to know how much their operations cost, if only for their own knowledge and budgeting purposes. But our respondents all agree that this information is most important in terms of establishing measures for how their operations are affecting the organization's bottom line. Upper management doesn't want to know how much a particular training program costs unless you can show that the money being spent on that program is offset by improved productivity and subsequently higher revenues. As one of this issue's "Four by Four" respondents pointed out, "Accounting for costs and effectiveness are the only two ways [human resource professionals] really have to determine whether they have done their jobs."
As you read the responses below, you'll notice that some of the participants take a very broad approach to what an accounting system should entail while others take a more detailed view. But you'll also notice that all the respondents stress that these systems cannot be separate unto themselves. Rather, they must be based on corporate objectives and be tied into the organization-wide accounting strategy.
I resist the notion that training people are accountable for the use of what they help people learn on the job.
Henry Dahl is director of corporate employee development and planning at the Upjohn Company, Kalamazoo, Michigan.
Human resource accounting--I don't really know what that means. It used to mean that people would put the employee investment on a balance sheet and then track the value of that over time. Theoretically that makes sense; practically it doesn't. The definition that I think works best is that human resource accounting is whatever anybody wants to do to measure the cost benefits of managing human resources.
I look at what human resources means to the total organization, and I'm trying to do it in a way that is similar to the way financial people compute return-on-capital investment. Financial people determine capital investment and measure the return on that investment by various return-on-assets ratios. We should ask that same question on the people side: What return are we getting on all the dollars that we are spending for people--human resources--each year?
This is a way of looking at human resources as an economic resource of the organization similar to capital. Some human resource professionals reject this application because they have difficulty quantifying employees as human resources; they believe we should be looking at human beings as individuals, which shouldn't be quantified. But management needs and asks for ways to relate the performance of human resources to the accomplishment of business objectives and strategy.
1. The goal of human resource people should be to help management get the best return it can on the dollars it spends for people. Some people in training and development focus on the training side of things rather than on helping the organization gain a competitive edge through its human resources.
We need to look at the whole picture--not just training. We should be asking how much the organization gains from all aspects of human resource management: from better knowledge and skills, from intelligent hiring, from having optimum reward systems, from having a well-designed organizational structure, and so on. Training is one piece of the whole, and it should support total human resource management.
2. We must know what people cost our organizations. When I meet with groups I ask them if they agree that the ultimate purpose of human resource management is to help the organization get the best return it can on the dollars spent for people. Most people agree. Then I ask them if they know how much money their organization spends on people per year. In a group of 200, maybe two will raise their hands. Then I ask if they know what return their organization got on the dollars spent for people last year. Usually I get no response.
Ask yourself two questions: How much money is the company spending for people? What return are we getting on those dollars? Answering these questions helps your management understand the need to find ways to improve the return on that investment.
3. When devising a human resource accounting system to measure the return on human resource expenditures, be sure to consider relating cost of employees to value added. Value added presents a very useful way of showing the value or benefit resulting from the organization's performance and use of resources.
Value added is calculated by subtracting purchased goods and services from sales. Relating value added to the number of employees in an organization provides a useful measurement of return on investment in human resources.
Human resource management--line and staff--should aim to increase the ratio of value added per employee. One component of this is to ensure that each employee possesses the knowledge and skills required to do his or her job effectively.
4. I resist the notion that training people are accountable for the use of what they help people learn on the job. The only way we can be held accountable is if we have the authority to manage the people. Certainly, the end point of development and training is whether or not a person has the skills and knowledge he or she needs to do the job. But a person's effectiveness in an organization is determined by many more factors: what objectives the organization has set, how the jobs are designed, how the organization is structured, how people are picked to go into what jobs, whether the climate is conducive to productivity, whether employees are motivated, and whether there are systems and processes in place to permit and encourage people to use the knowledge and skills they have. So it's a combination of things that are used to manage people effectively to improve the return--not just training and development.
If you don't understand what management is measuring, how can you ever hope to affect it?
Jeff Oberlin is manager of planning and evaluation at the Motorola Training and Education Center, Schaumburg, Illinois.
I think you have to look at human resources as an investment just like capital investment in a business. And you have to get the most out of it. Of course, you have to do it in a humanitarian way, but it gets right down to black and white. Managers don't care how many personal skills programs people have gone through or even how much it costs them. What they do care about is that the business is being effected by the training--that the right things are happening. That's the bottom-line measure of any good training or human resource program.
1. The first thing in an accounting system is to get the big picture. Know what you're dealing with. Know how many people within a certain business or functional group are there. Learn what their critical business issues are.
You need management involvement from the top down in order to get the big picture. Managers are really the ones who will be making the investment decisions for you. You can lead them to the investment, but they are the ones who are going to make the final decision. The training organization has to figure out where the investments can and should be made and then help the organization manage that investment. The human resource professional is similar to a stockbroker in that sense.
Understanding the measurement systems of the business is by far the most important part of a human resource accounting system. If you don't understand what management is measuring, how can you ever hope to affect it?
2. The second level of the accounting system is determining the measures that you want for the training or the human resource intervention itself. What's the cost of doing what you want to do? What's it going to cost you to develop the program? What's it going to cost to implement it? Where are the dollars going to come from? Where are they going to flow to in an intervention?
3. The third level is measuring the effectiveness of the training intervention against the business measures.
Let's take a small manufacturing organization that wants to reduce its cycle time for producing a certain product from 15 days to 10 days. That goal is where you're going to have to try to drive the organization. All training activity associated with cycle time has to work toward cutting five days off the cycle.
Now, I'm not going to worry about salaries or any other human resource expenses. Somebody somewhere has decided that they need to invest x amount of money to get the cycle time down, and that's what you have to do. Whether you take those employees into a classroom or train them on the line, it doesn't matter as long as you get the cycle time down. And any human resource manager worth his or her salt can make that number move. And you should, because that will be the measure of your effectiveness.
You should measure your human resource investment against the productivity of the business, not of the individual. Is it really worth it to have a system that tells you how productive a certain individual is within an organization? I don't think so. Certainly you need to track the progress of individuals so you can understand how you can make them perform better back in the workplace. That's important for you to know, but that's not what the head of the business unit is interested in. That person wants to know how productivity affects the bottom line.
4. The final thing you need to do is report back to managers. Your accounting system has to report back to top management so that they can see that you are meeting the goals they helped you set. It goes back to what I said about productivity: Whatever they say is productivity, you have to show them that you've attained it.
The real problem is not so much in defining costs, but in trying to find out how effective training is and what it means for the organization.
Robert Fenn is national director of training at The Travelers, Hartford, Connecticut.
What I see an HRD accounting system covering is the dollar cost for developing people in a corporation. Accounting for dollars is not really that difficult to do, and as HRD professionals we have a responsibility to account for what training costs. The only way we can evaluate whether we're being effective is to have some sort of a system that accounts for expenditures and relates them to the effects of the training.
On the other hand, don't get carried away. Figures have to be good enough to give a general idea of training costs, but they don't have to catch every last little thing. It's just not worth it--the old saying that the first 20 percent of the effort gets you 80 percent of the results has a lot of truth to it. Training often takes place in little pockets across a corporation. Gathering cost data on each small training incident can be far more costly than the effort is worth.
1. The first thing to do is ask what the objectives of your accounting system are going to be. If you're trying to prove a point, you'd better set up the system to account for things in a way that will prove your point. That may mean categorizing expenses in ways that fit your particular needs.
2. Once you have identified the objectives of your accounting system and the expense categories, examine the details of your costs and classify them according to the categories you have defined. Development, delivery, travel and maintenance of people, and student salaries are usually the largest categories. Relative costs in these areas may vary widely depending on delivery methods, vocations, type of facility, and so on.
3. If your objective is to prove to line management that your training is effective, I suggest you get them involved. You're going to want them to be comfortable with the figures you bring them. If they have a say about how you set up the system, you'll have a much easier time getting them to buy into the training than if you try setting up the system by yourself.
4. The real problem is not so much in defining costs, but in trying to find out how effective training is and what it means for the organization. When it comes to skill training, there's less of a problem. For instance you can take the keyboard skills of a computer operator, measure an improvement, and link that fairly easily to an improvement in the workplace.
It's when you get into the more esoteric areas of training and education that you run into problems identifying training effectiveness and linking it to costs. In these cases you need to spend more time on needs analysis to be sure you're addressing critical skills and knowledge. The evaluation process also becomes more important, so you should establish rigid standards and processes to be sure that trainees are learning as they progress. This makes measurement back on the job easier, as you will know what trainees bring back with them.
Involve somebody else--don't just go jumping off the end of the pier into the accounting area.
David Schwandt is director of the Office of Organizational Development at the General Accounting Office, Washington, D.C.
Cost figures are important but can be a double-edged sword: they can help you or they can cloud the issue. You want people to look at the benefits side of training first. If you run in with the costs first, you could close down the discussion before you even get to the benefits.
I'm not sure that doing a detailed breakout of everything down to the per-course level gets you much of anything. In many cases these are sunk costs, which are very ambiguous and hard to calculate.
You have to balance the amount of effort you put into determining your costs versus getting a good product out to the organization. If you spend a lot of time trying to account for everything, you might get so wrapped up in figures that you lose sight of your end objective.
1. If you're going to talk about training or any developmental activity, you have to have a concept of what the benefit of that training is supposed to be and how you are going to measure the effectiveness of the training. Don't let the benefit slip away from you. The accounting system is a control mechanism that gives you an idea of the relative cost of things. Just like it's not essential to base all your decisions on statistics, it's not essential to base all your decisions on costs.
Associating costs with benefits can be difficult in training, particularly with courses in areas such as management development. Management courses can be very expensive, and you have to make some leaps of faith that managers are going to behave differently enough after the course to benefit the organization's cost. It's much easier to tie the costs of computer or typing courses to their benefits.
2. Go to your operations people or your boss and ask what they would like to see as far as accountability. Involve somebody else--don't just go jumping off the end of the pier into the accounting area. What matters to the chief operating officer? What's the bottom line for that person?
3. Once you know what you're accounting for and how to measure the benefits, you have to look at two broad cost areas: developmental costs and implementation costs. Developmental costs range from those things from the original conceptualization right on through developing materials and methodology. These costs include salaries, consulting fees, travel expenses, computer time, and pilot program expenses.
Implementation breaks down into three main areas: participant costs, cost of the actual implementation and operations, and evaluation costs. I'm not really sure, though, whether participant cost really means very much. Remember, people are going to get their salaries whether they are on the job or in a training program, so in a sense salaries are sunk costs. Of course you could argue that a particular person is associated with a product or an output. This is true in industries where there is a clear connection between output and one person's task--such as manufacturing industries. But if you're talking about a service organization in which people work in teams and there's a lot of uptime and downtime, it's hard to say that losing a day of work means losing a piece of your product.
The second part of the implementation costs are all the operations of putting the course on. This tends to be a better figure because you can calculate it by factoring in quantity and monitoring the cost per seat of a training course. You also figure in the cost of instructors and training materials.
Then there's the cost for evaluation, which we treat somewhat on a separate basis here. We have a unit within the training branch that does training evaluation, so we can see that as being another-cost center that contributes to the training activity but isn't directly controlled as part of the operations.
4. Check your organization's accounting systems to find out what costs they are tracking and what form they are using to track them. You may find that the overall accounting system isn't built to track the cost data that you might need. If this is so, see if you can adapt your system to the larger one.
So many times I've seen people jump to set up their own accounting systems. But this can become incredibly labor-intensive if you don't have a source database to pull your figures from. You'll continually have to redo your database. Attempt to tie in to the larger system so accounting doesn't become a cost to you that you can't bear.…