Organisational leaders routinely tell us that talent is a firm’s most important resource. This may very well be true, but there is no universally agreed-upon method to place a valuation on talent. Over many decades there have been numerous approaches designed to value human capital – each approach may be reasonable, depending on what assumptions one is willing to accept, but none have been universally accepted.
Can talent be valued?
The importance of quantifying the value of talent is clear, as resources that are not formally valued or monitored are at greater risk of being ignored. My study with Dr. Ingrid Fulmer, published in the Journal of Management, suggests that talent resources may not be seen as comparable to other assets that are officially recognised and reported. This can lead to talent resources being undervalued or underappreciated in the minds of organisational decision makers.
Talent as assets 'prohibited'
The challenge is that talent cannot be owned or controlled by a firm. Most accepted accounting standards actually prohibit recording talent as assets – meaning that it’s often only recognised as a cost. This is rather unfortunate because it fails to demonstrate the value of talent or acknowledge its existence as an asset.
In fact, when framed in this way, talent investments are often presented in terms of cost savings rather than what they actually are—a valuable means to develop a critical asset for firm performance and competitive advantage.
Integrity of HR 'questionable'
Consequently, firms often take the value of talent more on faith and anecdote than actual evidence.This in turn can make the credibility of the entire Human Resource (HR) function questionable to managers in other functions.
Making the link with the business
One way to move past this hurdle is to quantify talent and link it to important business outcomes, enabling a way to estimate its value. For example, by identifying the business outcomes that are used to gauge a firm’s strategic or operational execution, we can link quantitative measures of talent to those business outcomes. This makes it possible to demonstrate how changes in talent contribute to changes in business outcomes. While this approach may have limitations, it has the benefit of showing whether there is an empirical link between talent and business outcomes.
In a series of studies, we have used this approach to try to demonstrate how talent can be an asset capable of generating positive returns on business outcomes. When we look at the quantitative impact of talent on businesses, we recognise that talent affects internal (operational) performance which, in turn, impacts a company’s external performance such as revenue, earnings and customer satisfaction.
For example, research in the retail sector shows that enhancing human capital on shop floors grows store sales over time. Higher levels of service mean these firms outperform their competitors who have lesser qualities of talent.
If better staff are hired initially, there will also be a greater return on training. In one research study we found that talent acquired through staffing and developed through training lead to a growth in unit sales per employee. In fact, a 1% improvement in staffing produced a 2% improvement in sales per employee.
The same study showed that ensuring all hires met minimum standards reduced costs by 18%.
Talking a common language
One benefit of this approach is that it puts talent in a conversation that is understandable to non-HR managers. A manager can see the value of talent by seeing changes in talent producing changes in revenue. Thus, we move the discussion away from metrics that are helpful for evaluating the HR function, such as the cost of new hires or time to fill positions, to metrics other business leaders care about.
Another benefit is that this approach helps managers understand which levers they can pull to produce the largest changes on firm outcomes. Most elements in the talent pipeline are important, but which are the critical ones that strongly influence business growth? The quantitative approach initiated in these studies helps answer those questions. Of course, changes often incur costs that need to be recognized, but at least these costs can be balanced against gains.
Overall, talent adds value to businesses in a number of ways – in generating market opportunities and achieving these opportunities, reducing threats, lowering costs, increasing revenue and profits, enhancing benefits to customers, and reinforcing or changing company culture.
After all, convincingly demonstrating the financial benefits of talent means showing it differentiates firms, increases their productivity, and grows sales, thereby allowing some companies and investors to ascribe subjective value to talent. This subjective value is quite likely to be specific to the firm.
Empirically linking talent to business outcomes provides firms with the opportunity to show that talent is key to competitive advantage—and finally offers empirical substance behind claims we’ve been hearing for a long time.