Most business leaders agree that the human resource component remains one of the last remaining avenues to leverage as a means to enhance organisational competitiveness. Unfortunately, the value of people (in other words, employees or human capital) is too often measured as nothing more than a big expense. Very seldom is human resources properly linked to important organisational outcomes such as output or profit. Consequently, the inability to quantify human capital effectiveness creates an impression or opportunity that employees do not add value. Why is this so important in a South African perspective?
South Africa hits all-time low in
global competitiveness ranking
Faced with sluggish economic growth and in the midst of the global Covid-19 pandemic, South Africa has hit its lowest global competitiveness ranking according to the latest World Competitiveness Yearbook (WCY) compiled by the Switzerland-based Institute of Management Development (IMD).
According to the 2020 WCY, South Africa fell by three places to be ranked 59 out of 63 countries as rated by the IMD. This is driven by a number of factors, including the deteriorating public transport system, youth unemployment, rising public debt levels, the lack of decisive plans to revive the struggling economy, ongoing electricity supply problems and a sluggish legal process to address corruption.
South Africa’s consumer inflation accelerated to a 13 year high and food, fuel and transport are the main drivers. In September 2022, the Reserve Bank raised the repo rate by 75 basis points to 6.25%, meaning the prime lending rate increases to 9.75%. This upwards inflation within a fragile economy is unlikely to end soon. Topping it up with unemployment at 33.9% and skills migrations leaves SA in a precarious position and potentially in an economic condition that is defined as a period of ‘’stagflation’’. Basically, a period of rising inflation, generating lower output with rising unemployment. The causes of stagflation are often initiated by:
- Rising oil prices that increase business operating costs (transport costs)
- Higher wages in a period of low economic growth (high wages remains a significant cause of inflation)
- The devaluation of the currency (ZAR)
- Lower productivity – employee inefficiency increases labour costs while output declines
- Lower output with lower consumer demand plus an increase in labour cost leads to business restructuring and increased unemployment.
Unfortunately, all of the above boxes are ticked. Any period of stagflation will put South African organisations under severe growth pressure. Annabel Bishop, the Chief Economist at Investec, forecast a 1.9% year on year growth. However, due to the high levels of uncertainty of the Ukraine and Russia war, supply chain pressures can slow down this projected growth.
The graph below shows the year-on-year real retail sales trend that serves as an economic metric that tracks consumer demand for finished goods. This figure is an important data set, reported each month and indicates the direction of the economy. Noticeably, a 12% downward trend has been reported in six months.
Real Retail Sales – South Africa – Moody’s Analytics (2022)
How organisations can survive stagflationary times
The first priority is for organisational leaders to accept and acknowledge that we’ve entered a period that requires new thinking and planning. The human capital strategy should be adapted to align to rising costs and possible declining customer demands. The following methods can assist organisations during these times:
- Improving productivity. This is easier said than done, especially during a period where the economic pressures affect workers personally and tougher conditions affect employee morale and engagement. As a result, absenteeism and overtime costs are likely to spike if not well managed and productivity can further slump. Measuring productivity has never been more important.
- Reducing idle time. When employees are not engaged in productive activities it can have serious implications for employers. According to a 2018 study from the Harvard Business School, 78.1% of workers find themselves on a weekly basis with involuntary idle time, which costs employers billions per year.
- Reducing costs. Cutting costs is essential to offset inflationary pressures. Unfortunately, people cost is a big contributor to an organisation’s total cost and often one of the only places to reduce. When required, it should be done responsibility and only as a last resort.
- An engaged workforce. The real complexity is to keep employees engaged during the time when retrenchments are likely to occur. A disengaged workforce affects everything from company productivity to customer satisfaction.
- Contingent model. This refers to non-permanent workers that are hired on a need basis. This fits well with the current market environment that constantly changes and where organisations need to be more agile and fluid to stay adept. It is also an ideal model to limit idle time, reduce overtime costs, improve daily fill rates, efficiencies and increase productivity. Workers also relate to this model better than before. A recent survey reported that Gen X and Boomers are aligned with one another, stating that contingent work is a good way to re-enter the workforce (51% and 49%, respectively). Millennials feel learning new skills (61%) is the top benefit, while Gen Z believes that more flexibility (53%) is the most important benefit.
Calculating utilisation rates
Organisations use a number of metrics to determine human capital efficiency, but perhaps the most universal metric for any business is utilisation rate. If the utilisation rate is not measured, organisations won’t understand their efficiency and productivity – which means one can’t begin to evaluate the profitability of the business.
It is important to get the balance of utilisation rate right. If it’s too high, corners may be cut on essential internal work and there’s probably a need for more resources. If it’s too low, there is not enough work for the current headcount. If we compare this to occupancy cost, business leaders want to optimise each square meter of space and decrease any unused space paid for monthly. The utilisation rate assesses whether there is the capacity to take on more work, whether to hire more people or flex down.
The formula is:
Utilisation rate = (Total hours worked / Total available hours) x 100
So, if an employee works 32 hours from a 40-hour week, they would have an utilisation rate of 80%. There are actually several different ways you can calculate utilisation rates depending on whether you want to understand pricing, hiring, organisation health, etc. To work out your utilisation rate on an organisational level, divide the total of all employee utilisation rates by the total number of employees. A good time and attendance system can make this easier to calculate.
Human capital return on investment (HCROI)
HCROI is a financially-based metric and comes from ROI and EVA (Economic Value Added). The purpose of HCROI is to look at return on investment with regard to monies spent on employee pay and benefits. When expenses are subtracted (but not pay and benefits), it produces an adjusted profit figure. When the adjusted profit figure is divided by human capital costs (pay and benefits), it produces the amount of profit derived for every Rand invested in human capital compensation (training, etc. excluded). In effect, it is the leverage on pay and benefits, which is expressed as a ratio. This helps organisations to make more informed decisions and to know how well the company performs on its own and compared to others, and to know how to adapt the path of the company for the future with the strategic goals in mind.
Calculations of HCROI
HCROI = (Revenue – (Expenses – Salaries + Benefits) / (Salaries + Benefits)
HCROI = (R100 000 [Revenue] – (R80 000 [Expenses] – R24 000 [Salaries & Benefits) / R24 000
HCROI = R44 000 / R24 000
HCROI = R1.83
The above calculation means that the organisation/business unit receives R1.83 profit for every R1 that has been invested towards employee compensation. Effectively, it shows a profit of 0.83 cents. This can be done over a three to five-year period to track human capital effectiveness.
Why hiring contingent workers is an attractive workforce strategy
Organisational leaders can determine the percentage of contingent workforce they require, which largely depends on their historical trends, demand forecast, downtime flexibility requirements and cost projections. Contingent workers themselves benefit from this model in the following ways:
- Easier entrance into the job market as opposed to permanent employment
- Offers opportunities to gain experience in various sectors and industries
- This model is very well regulated by the Labour Relations Act
- Finding a new job when an existing one becomes redundant is much easier
- Long-term or permanent employment opportunities always exist
Selecting the right service provider
The success in a contingent workforce model is to match the right employee with the right client in the right job at the right time. This is complex and it requires a diligent process to identify reliable candidates. Therefore, when selecting a service provider, the following is important:
- Having a database of readily available skills
- Advanced technology to source per skill set, per geo-location
- Using pre-employment tests (testing for cognitive, personality and risk profile)
- Competency based interview techniques
- Doing throughout background checks
- Employee well-being programs
- Training and development initiatives
- Prioritising employee experience coupled with employee relation expertise
- Regular performance evaluations and off-boarding techniques.
As South African businesses and employees are preparing for tougher conditions, there are various methods to navigate through them successfully. It remains important to keep as many people employed and to curb higher unemployment. Each stakeholder plays a role and has the responsibility to steer South Africa towards a better place to live and work in. BLU will continue to partner and play an active role in connecting human potential and creating agile, focused and skilled workforces of the future.