Human Capital Financial Statements

Presents: Human Capital Financial Statements April 19, 2011

About Human Capital Management Institute The Human Capital Management Institute (HCMI) was founded on the belief that organizations can and must, find better ways of measuring their investments in human capital. Our vision of the future is one in which human capital measurement and information is as integral to business decision making as financial information is today. We Bring Financial Discipline, Standards and Rigor to the HR Function HCMI Background: Specialized in HR analysis & measurement Deep expertise in Workforce Analytics & Planning Board made up of CFOs and HR heads Over 40 years of experience What We Do: Measure the immeasurable in human capital Transform workforce data into business intelligence Provide Tools and Training so HR can Partner with Finance Workforce Assessment Strategic Consulting Training Best Practices Workforce Analytics and Planning Benchmarking 2

The Average FORTUNE 500 Company makes a $3 billion annual investment in Human Capital it cannot measure. - Hewitt Associates In most organizations, including large companies such as the Fortune 500, total human capital costs, also known as Total Cost of Workforce, average nearly 70% of operating expenses. - A 2006 SHRM survey of over 700 companies including a significant number of Fortune 500 companies 3

History of Accounting and Financial Statements Statements of cash and balance sheets were relatively common mid 1800 s American Institute of Certified Public Accountants (AICPA) gave the Committee on Accounting Procedure (CAP) responsibility to issue accounting standards 1938 1934 Modern financial reporting and the development of Generally Accepted Accounting Principles (GAAP) started with the Securities and Exchange Commission (SEC) Act of 1934 1973 Financial Accounting Standards Board (FASB) established to improve standards of financial accounting and reporting for the guidance and education of the public 4

Purpose of the Traditional Financial Statement Financial statements are used by many different stakeholders Stakeholder Company Leadership Prospective Investors Financial Institutions (banks and other lending companies) Government Entities (tax authorities) Vendors who extend credit Media and the General Public Use Tool for business decision making that may affect an organization s continued operations and annual report to stockholders Assess the success and viability of investing in a business Decision to lend to a company or extend debt securities Ascertain the propriety and accuracy of information for legal, tax and audit purposes Assess the creditworthiness of the business Variety of reasons But they leave out the company's most valuable asset: the workforce. 5

Human Capital Measures Linked to Financial Performance How do we go from Human Capital to Financials with actionable data? Data Integration Model + Quantifying the Talent Management Life Cycle Human Capital Financials Recruiting & Hiring Recruiting Training Mobility Engagement Lead/Manage Retention Operations & Business Days Worked Cycle Time Quantity Customer Satisfaction Net Promoters Price/Margin Revenue Expenses Profits Assets Liabilities Turnover & Retention Leadership & Management Training (L & D) Quality Retention Return rate Mobility Career Path Performance & Engagement 6

Human Capital Financial Statements (HCF$ ) Delivering Value with Human Capital Financial Statements: Greater Transparency into an organization s greatest asset: The Workforce Method to Value Knowledge Capital by measuring the 81% of Market Capitalization not on traditional financial statements, Intangible/Knowledge Capital Improved Investment Decisions providing key information, investors can make informed investment decisions Standards in Human Capital Measurement and Reporting Leads to industry and geographic based Benchmarking capabilities True Linkage of Human Capital to Financial Results A Supplement to Traditional Financial Statements, not a substitute 7

Human Capital Financial Statements (HCF$ ) Human Capital Financial Statements answer the following questions: 1. How do you quantify the impact human capital has on financial performance? 2. How do human capital metrics integrate with commonly accepted financial metrics? 3. How do you measure total workforce costs to drive workforce effectiveness and efficiency? 4. How do you quantify value creation across the talent management life cycle? 5. What is the impact of training on profit, productivity and total human capital value? 6. What is the differential human capital value creation of different job roles? 7. How do you measure workforce flow, changes, and growth like a cash flow statement? 8

The Human Capital Financial Statements (HCF$ ) HCMI has developed three unique statements collectively known as Human Capital Financial Statements for organizations to disclose human capital information: Human Capital Impact Statement Workforce Productivity Impact Summary Total Cost of Workforce Sub-Schedule Talent Management Impact Schedule Human Capital Asset Statement Human Capital Headcount Summary Human Capital Asset Cost Schedule Human Capital Training Value-add Schedule Return on Human Capital Investment Schedule Total Human Capital Value Schedule Prior Year New Current Year Human Capital Flow Statement Talent and Headcount Flow Summary Human Capital Job Value Schedule Workforce Primary Category Headcount Hires % Chg Turnover % Chg Retirement % Chg Subtotal % Chg Promotions % Chg Transfers % Chg Headcount % Chg Employees 13,300 1,745 13.1% -510-3.8% -140-1.1% 14,395 8.2% 50 0.4% 5 0.0% 14,450 8.6% - Management 1,250 50 4.0% -10-0.8% -15-1.2% 1,275 2.0% 20 1.6% 5 0.4% 1,300 4.0% & Senior Leadership - Professional Staff 2,300 292 12.7% -70-3.0% -50-2.2% 2,472 7.5% 30 1.3% -2-0.1% 2,500 8.7% - Sales Staff 3,000 560 18.7% -150-5.0% 0 0.0% 3,410 13.7% -25-0.8% 15 0.5% 3,400 13.3% - Specialists and Technicians 900 100 11.1% -25-2.8% -30-3.3% 945 5.0% 68 7.6% -13-1.4% 1,000 11.1% - Skilled Trade Staff 250 25 10.0% -10-4.0% 0 0.0% 265 6.0% -25-10.0% 10 4.0% 250 0.0% - Operations Staff 1,450 225 15.5% -80-5.5% -20-1.4% 1,575 8.6% 20 1.4% 5 0.3% 1,600 10.3% - Service Staff 2,750 308 11.2% -120-4.4% -25-0.9% 2,913 5.9% -8-0.3% -5-0.2% 2,900 5.5% - Administrative Support Staff 950 110 11.6% -20-2.1% 0 0.0% 1,040 9.5% -40-4.2% 0 0.0% 1,000 5.3% - Laborers and Helpers 450 75 16.7% -25-5.6% 0 0.0% 500 11.1% 10 2.2% -10-2.2% 500 11.1% Contingent Staff 1,700 455 26.8% -150-8.8% 0 0.0% 2,005 17.9% -50-2.9% -5-0.3% 1,950 #### - Temporary 1,100 235 21.4% -100-9.1% 0 0.0% 1,235 12.3% -30-2.7% -5-0.5% 1,200 9.1% - Contractors 600 220 36.7% -50-8.3% 0 0.0% 770 28.3% -20-3.3% 0 0.0% 750 25.0% Total or Average Workforce 15,000 2,200 14.7% -660-4.4% -140-0.9% 16,400 9.3% 0 0.0% 0 0.0% 16,400 9.3% 9

The Human Capital Impact Statement Quantifying Workforce Productivity Human Capital Impact Statement Summary Revenue Prior Year Current Year Variance % Chg Net Operating Revenue $1,400,000,000 $1,540,000,000 $140,000,000 10.0% Total Workforce Headcount (FTE) 15,000 16,400 1,400 9.3% Revenue per FTE $93,333 $93,902 $569 0.6% Costs Total Expenses $1,170,000,000 $1,285,000,000 $115,000,000 9.8% Total Operating Expense $725,000,000 $795,000,000 $70,000,000 9.7% Total Cost of Workforce (TCOW) $779,950,000 $861,000,000 $81,050,000 10.4% TCOW Percent of Revenue 55.7% 55.9% 0.2% 0.4% TCOW Percent of Total Expenses 66.7% 67.0% 0.3% 0.5% TCOW Percent of Operating Expenses 107.6% 108.3% 0.7% 0.7% Key Metrics: Revenue per FTE Profit per FTE Avg. Market Cap. per FTE Total Cost of Workforce Human Capital ROI Ratio Return on Human Capital Investment Profit EBITDA (1) $310,000,000 $340,000,000 $30,000,000 9.7% Net Operating Profit $143,750,000 $159,375,000 $15,625,000 10.9% Profit per FTE $9,583 $9,718 $135 1.4% Productivity and ROI of Human Capital Total Market Capitalization (2) $2,156,250,000 $2,390,625,000 $234,375,000 10.9% Average Market Capitalization Value per FTE $143,750 $145,770 $2,020 1.4% Human Capital ROI Ratio 1.29 1.30 0.00 0.1% Return on Human Capital Investment 18.4% 18.5% 0.1% 0.4% TOTAL WORKFORCE PRODUCTIVITY IMPACT: $34,570,000 $41,294,200 $6,724,200 19.5% 10

The Human Capital Impact Statement Total Cost of Workforce Quantifying the Talent Management Life Cycle Talent Management Lifecycle: Recruiting & Hiring Workforce Productivity Impact Across the Talent Management Life Cycle: Talent Management Segment Recruiting and Hiring Prior Year Productivity Impact Current Year Productivity Impact Advanced metrics at each talent management life cycle stage: Example Quality of Hire Index Turnover & Retention Leadership & Management Training (L & D) Mobility Leadership and Management Training New Hire Turnover 90 Day New Hire Turnover Rate Percent of Job Requirements Met New Hire Satisfaction Survey Supervisor Survey Score Employee Survey Score New Hire High Performer Rate 25% 20% 25% 20% Applicant Percent of Job Recommendations Met Applicant Percent of Job Requirements Met Percent of High Performers # of Qualified Applicants 10% Total Qualified Applicants Performance and Engagement Quality of Hire Index Mobility Career Path Performance & Engagement Turnover and Retention Overall Productivity Impact Internal + External Best Hire Source 11

The Human Capital Asset Statement + Human Capital Flow Statement Key Assumptions: 1. Workforce Value Increases Over Time Exceptions exist which is why differentiating workforce job roles #3 below is critical 2. The Workforce Create Value Far Greater than its Cost (See Human Capital ROI Ratio and Return on Human Capital Investment) 3. Certain Job Roles Create More Organizational Value than Others (See #1 above, differentiated workforce value is foundational to the Human Capital Asset Statement) 4. Training is More of an Investment than an Expense Therefore it is treated as a capital asset and depreciated in the Human Capital Asset Statement 5. Captures Workforce Total Value Add both annual and accumulated 6. Quantifies the Total Value of the Workforce 12

The Human Capital Asset Statement Measuring Human Capital: an Organizations Most Valuable Asset Human Capital Headcount Deployed Prior Period % of Total Current Period % of Total Variance Employees 13,300 88.7% 14,450 88.1% 8.6% - Management & Senior Leadership 1,250 8.3% 1,300 7.9% 4.0% - Professional Staff 2,300 15.3% 2,500 15.2% 8.7% - Sales Staff 3,000 20.0% 3,400 20.7% 13.3% - Specialists and Technicians 900 6.0% 1,000 6.1% 11.1% - Skilled Trade Staff 250 1.7% 250 1.5% 0.0% - Operations Staff 1,450 9.7% 1,600 9.8% 10.3% - Service Staff 2,750 18.3% 2,900 17.7% 5.5% - Administrative Support Staff 950 6.3% 1,000 6.1% 5.3% - Laborers and Helpers 450 3.0% 500 3.0% 11.1% Contingent Staff 1,700 11.3% 1,950 11.9% 14.7% - Temporary 1,100 7.3% 1,200 7.3% 9.1% - Contractors 600 4.0% 750 4.6% 25.0% Total Workforce 15,000 100.0% 16,400 100.0% 9.3% Prior Period Percent Percent of Total Current Period of Total - Management & Senior Leadership $114,085,191 33.5% $122,597,851 31.6% 7.5% - Professional Staff $47,570,395.54 14.0% $51,871,882 13.4% 9.0% - Sales Staff $95,688,967 28.1% $114,895,893 29.6% 20.1% - Specialists and Technicians $3,200,000 0.9% $3,750,000 1.0% 17.2% - Skilled Trade Staff -$820,000-0.2% -$1,750,000-0.5% 113.4% - Operations Staff $18,141,980 5.3% $20,585,366 5.3% 13.5% - Service Staff $41,025,572 12.0% $45,733,106 11.8% 11.5% - Administrative Staff -$9,325,500-2.7% -$10,046,500-2.6% 7.7% - Laborers and Helpers -$3,550,000-1.0% -$4,000,000-1.0% 12.7% - Contingent Staff $0 0.0% $0 0.0% 0.0% Total Retained Human Capital Value Variance Retained Human Capital Value Add (3) $306,016,607 89.8% $343,637,598 88.5% 12.3% Annual Workforce Productivity Impact (4) $34,570,000 10.2% $44,666,667 11.5% 29.2% TOTAL HUMAN CAPITAL VALUE ADDED (5) $340,586,607 100.0% $388,304,264 100.0% 14.0% 13

Beginning Headcount Promo In Transfer In Demotions In External Hire Rehire Promo Out Transfer Out Demotion Out Terminations Other Involuntary Term Voluntary Term Ending headcount Human Capital Flow Statement Provides an exact report by category and critical role of workforce size, gains, losses, tenure and talent level Breaks down workforce flows across the talent management lifecycle. Human Capital Flow Statement Human Capital Flow Chart 4000 3500 3000 2500 2000 1500 1000 500 0 200 547 311 517 350 29 35 302 2,000 260 169 426 1,626 14

Case Study: BroadTek Communications 15

The Human Capital Impact Statement Case Study: BroadTek Communications Revenue Prior Year Current Year Variance % Chg Net Operating Revenue $4,114,540,000 $4,444,560,000 $330,020,000 8.0% Total Workforce Headcount (FTE) 4,645 4,750 105 2.3% Revenue per FTE $885,800 $935,697 $49,897 5.6% Costs Total Expenses $2,788,752,921 $2,809,406,376 $20,653,455 0.7% Total Operating Expense $2,262,997,000 $2,377,839,600 $114,842,600 5.1% Total Cost of Workforce (TCOW) $447,661,952 $467,567,712 $19,905,760 4.4% TCOW Percent of Revenue 10.9% 10.5% -0.4% -3.3% TCOW Percent of Expenses 16.1% 16.6% 0.6% 3.7% TCOW Percent of Operating Expenses 19.8% 19.7% -0.1% -0.6% Profit EBITDA (1) $1,316,652,800 $1,511,150,400 $194,497,600 14.8% Net Operating Profit $573,155,422 $680,017,680 $106,862,258 18.6% Profit per FTE $123,392 $143,162 $19,770 16.0% Productivity and ROI of Human Capital Total Market Capitalization (2) $6,304,709,642 $6,800,176,800 $495,467,158 7.9% Average Market Capitalization Value per FTE $1,357,311 $1,431,616 $74,305 5.5% Human Capital ROI Ratio 3.96 4.50 0.54 13.5% Return on Human Capital Investment 128.0% 145.4% 17.4% 13.6% 1 1 2 2 2 3 3 TOTAL WORKFORCE PRODUCTIVITY IMPACT: $355,630,545 $700,578,523 $344,947,978 97.0% 16

The Human Capital Impact Statement Case Study: BroadTek Communications $1,400 $1,200 $1,000 $800 $600 $400 $200 $0 1 25.0% 2010 Financial KPIs 2009-2010 KPI Variance ClearTel RayFi BroadTek Revenue per FTE Profit per FTE Total Cost of Workforce per FTE Productivity Gain(Loss) per FTE 15.0% 20.0% 15.0% 10.0% 5.0% 0.0% 2 2009 2010 Productivity Variance ClearTel RayFi BroadTek Revenue per FTE Profit per FTE Total Cost of Workforce per FTE 10.0% 5.0% 0.0% -5.0% -10.0% 3 Human Capital ROI Ratio Return on Human Capital Investment ClearTel RayFi BroadTek Note: All Dollars in Thousands Data for 2009 and 2010 Fiscal Years KPI = Key Performance Indicator FTE = Full Time Equivalents 17

The Human Capital Asset Statement Case Study: BroadTek Communications Step #1: Measure Changes in Workforce Headcount Total Employees Sales Staff and Service Staff = Core Workforce Administrative + Laborers and Helpers = Non-Core Workforce Step #2: Quantify Differential Value of High vs. Low Value Add Roles Core Job Roles add Greater Value Critical Job Roles add Greater Value Human Capital Headcount Deployed Prior Period Percent of Total Current Period Percent of Total Variance Employees 4,395 94.6% 4,535 95.5% 3.2% - Management & Senior Leadership 610 13.1% 615 12.9% 0.8% - Professional Staff 1,310 28.2% 1,405 29.6% 7.3% - Sales Staff 730 15.7% 805 16.9% 10.3% - Specialists and Technicians 515 11.1% 530 11.2% 2.9% - Skilled Trade Staff 115 2.5% 105 2.2% -8.7% - Operations Staff 210 4.5% 210 4.4% 0.0% - Service Staff 550 11.8% 560 11.8% 1.8% - Administrative Support Staff 250 5.4% 220 4.6% -12.0% - Laborers and Helpers 105 2.3% 85 1.8% -19.0% Contingent Staff 250 5.4% 215 4.5% -14.0% Total Workforce 4,645 100.0% 4,750 100.0% 2.3% 18

Measuring Critical Job Roles Case Study: BroadTek Communications Low Value Add High Value Add Core Roles that are revenue generating Roles that are key to bringing in future revenue Roles that are customer facing Roles that directly support revenue generation / or manage cost Non Core Roles that indirectly supports revenue generation Roles that are not customer facing Roles that are administrative in nature Roles that do not make decisions Typically easier to outsource 2009 2010 54.5% 2009 2010 22.5% Roles that establish strategy Roles that make critical decisions that impact the business Roles that manage a team or key business processes 48.5% 18.5% 23.5% 21.5% 4.5% 2009 2010 2009 2010 6.5% 19

Linking Productivity to Financials Example: Workforce Category and Job Group Workforce Category Job Group Workforce Metric Key Business Outcome Sales Sales Manager Sales Engineer Revenue per FTE Customer Satisfaction Revenue Revenue, Customer Retention Professional Consultant Developer Engagement, Billable Days, Training Investment per FTE Engagement, Performance Rating Productivity, Profit, Cost New Product ROI, Cost Operations Call Center Rep % of 1 st Calls Resolved, Customer Satisfaction Unit Volume Output 20

Linking Performance and Productivity by Job Role Performance Productivity Not Sure Typically Always Accountant Customer Service Sales Positions 1X 2X 3X+ 21

Job Importance Human Capital ROI Ratio Impact Matrix X = Human Capital ROI Ratio Multiplier. Example 1.2 Human Capital Ratio * 1.0X = (1.0 * 1.2 or 1.2) Employee Performance Level 1.0 1.0X 3.0 X 4.0X 5.0-10.0X Critical 1.0 1.0X 2.0X 3.0X 4.0X High.7X 1.0 1.0X 2.0X 3.0X Important.5X.7X 1.0 1.0X 2.0X Average.25X.5X.7X 1.0X 2.0X Low Low Okay Good Typical Job Category Impact* High Stars Primary Workforce Category Typical Job Importance Level Top Management Important to Critical Sales Staff Average to Critical Service Staff Average to Critical Professional or Executive Staff Average to Critical Operations Staff Average to Critical Specialist & Technicians Average to Critical Administrative Support Staff Low to Average Laborers & Helpers Low to Average *Relative Impact and Importance of a job role or job category varies considerably by industry, region and business model 22

Workforce Image Map (WIM ) A Story of 2 Technology Companies (Software) Primary Workforce Category Total Workforce Tech Co. A Total Workforce Tech Co. B Tech Company A Headcount Tech Company B Headcount Top Management 50 50 Management 550 550 Sales & Marketing Staff 1,250 3,000 Product Research and Development Staff Consulting, Training & Service Staff 850 100 1,200 300 Other Professional Staff 300 300 Call Center Staff 350 0 Administrative Support Staff 200 200 Contingent Workforce 250 500 Software Tech Co Comparison Total 5,000 5,000 Which Company has the most High Value Add Job Roles? Co. A vs. Co. B 3,700 vs. 3,450 74% vs. 69% Too much of any one Category Creates an Unsustainable Imbalance 23

Introducing Workforce Intelligence Consortium www.workforceic.com A partner-driven organization dedicated to translating insights into actionable workforce management technology with industry-specific content Quantify Integrate Predict Identify and solve workforce challenges that impact bottom line results Comprehensive integration of workforce, customer, and financial data Optimize workforce costs and conduct advanced workforce analytics and planning Evaluate the financial impact of workforce decisions Identify ROI for Engagement, High Performance, Internal Mobility, Time to Productivity/ Profitability and more Utilize the advanced Cost of Turnover calculator Employ a comprehensive data blueprint Leverage defined standards and metrics that create meaningful output Implement data disciplines to ensure reliable metrics and measures Optimize the Total Cost of Workforce by industry Model Industry Specific Issues for Productivity, Skills, capabilities, performance, tenure, and training Evaluate your Organization s Most Critical Job Roles: Measure and Predict the Impact of Changes and ROI Human Capital Management Institute 24

Next Steps: For more information about HCMI and the Human Capital Metrics Handbook TM, visit http://www.hcminst.com/hcmi.html For inquiries about the Workforce Intelligence Consortium, contact Cheryl Farley, Program Director at cheryl.farley@hcminst.com Presenter information: Jeff Higgins, CEO HCMI at jeff.higgins@hcminst.com Workforce Intelligence Consortium Group @HCMI 25

Question and Answer 26

Thank you 27