Measuring return on intangibles

THE FUTURE value of the HR profession hangs on understanding and supporting activities that create sustainable capability and external shareholder value, according to Dave Ulrich, professor of business at the University of Michigan.

HR can play a critical role in business if it is able to assist executives in helping investors make choices about how much they will pay a firm’s assets – both tangible and intangible, he said.

“If I, as an HR person, was asked to go before the board of directors, to go before the investment community to be a part of a conference call, then I would have to talk about intangibles. What would I talk about?” Ulrich asked.

Speaking during a recent Workforce Management webcast, Ulrich said there are four levels of intangibles that can be addressed when talking with the investment community.

The first level is keeping promises: “One of the things in managing intangibles is managing expectations. Managing expectations is promising less and delivering more – making sure that once we make a promise we deliver on it,” he said.

The second level is having a clear strategy. Whether it is mission, vision, goals or objectives, Ulrich said, a sense of direction is needed in order to create a story about the future.

“A good intangible is an executive team that has a sense of their future and what they are trying to do and how they are trying to get there. This would apply to a public agency as well as a not-for-profit association as well as an investor shareholder firm,”he said.

The third level is based on technical competencies – not just capabilities, but the core competencies of an organisation, according to Ulrich. These are the functional components necessary to deliver strategy, the competencies that give investors confidence and create more intangible value.

The fourth level involves organisational capabilities. “What we really need to be doing is building the capabilities consistent with what the company needs to succeed. So as we try to look at those four levels, the human resource professionals can become coaches, architects, facilitators and designers in order to accomplish some of those goals,” Ulrich said.

Organisational capability consists of a number of elements, with talent being the first and most obvious human capital capability.

Other elements include leadership, a shared mindset (what you are known for by your best customers), speed (making important changes happen fast), learning (the ability to generate knowledge and to share it), accountability (the ability to do what has been promised) and collaboration (the ability to make the whole more than the parts).

“Each of those items begins to give us a framework of what the capabilities might be in the organisation,”he said, noting that other elements might include innovation, efficiency or customer service.

According to Ulrich, analysts acknowledge that such intangibles matter, but don’t pay attention to them because the ability to measure them in a rigorous way is limited.

“We need to get some standard ways to track the extent to which we’re counting things in numbers so that we can monitor firm performance,” he said.

“In this world of transparency and Sarbanes-Oxley, these intangible issues are so critical and we need to begin to get a strategic report that will allow us to go forward and make that happen.”

Ulrich encouraged companies to include investors in discussions about intangibles. He envisaged analysts or investors who follow firms will start looking at their performance appraisal system and acknowledging that executives lead correctly and with confidence.

He recommended going to analysts or investors and asking them about the capabilities they would want a firm to be known for. “When they identify it, then weave those into the performance review,” he said.

“If you can’t get to the analyst go to the chief financial officer or the chief investor relations officer who becomes a surrogate for the analyst. When we are building performance appraisals for this level of position, are these the things that we would be comfortable sharing with the analysts?”

Ulrich said that in board meetings, there is generally a three-step dance, in which the financial goals of the company are reviewed, followed by the strategy, and then decisions are made based on the previous two steps. Organisational capabilities need to be built in before the decisions step, he said.

Change would occur gradually, he said, but this would assist in the institutionalising of intangible measures.

“We believe that without any question or doubt, the future of HR and the value of HR is not simply in doing a lot more activities and doing them better, but it is in figuring out the activities that will create sustainable capability and shareholder value for those outside the firm,” he said.