HR technology focus has significant impact on company shareholder value

February 19 2002 - Businesses focusing HR technology initiatives on achieving specific, quantifiable improvements can see as much as a 6.5% increase in company shareholder value. But companies with "softer" goals may find themselves with negative returns. These conclusions come from Watson Wyatt's recently released 2001 Human Capital Index(R) (HCI) study.

"When it comes to implementing HR technologies, the focus of the initiative is the key driver in achieving financial results," says Ed McMahon, National Practice Leader, eHR Canada, Watson Wyatt. "The same technology initiative implemented in two similar organizations, but with a different focus, can actually result in a dramatically different impact on company shareholder value."

The HCI study shows that returns on that investment can be significant when technology is used primarily to:

- help reduce costs,
- improve employee service,
- increase transaction accuracy.

But where HR service technology is focused on less quantifiable goals - for example enhancing communication and promoting culture change - it is associated with a significant decrease (-14.3 percent) in shareholder value.

Primary focus for HR technology   Reduce costs Improve service to employees/managers Increase transaction accuracy/integrity Promote common corporate culture Enhance employee communication

Expected change in shareholder value +2.3% +2.3% +1.9% -6.6% -7.7%

"The important point here is not that HR technology shouldn't be used to enhance employee communication and build organizational culture. Both are important components of organization success, and both are valuable results of successful HR technology implementations," notes McMahon. "But making them the primary focus of those technology implementations negatively impacts the results."

The data can also be used to measure factors such as impact of HR technology choices on total returns to shareholders over 5 years. Most HR organizations are now dependent on a combination of Enterprise Resource Planning (ERP) systems, outsourcing and individual "best- of-breed" HR applications. The HCI study shows that those decisions may also have an impact on market value, depending on company size.

Five-Year Total Return to Shareholders, by Company Size

Primary HR Technology Choice ERP Total outsourcing Integration of multiple HR applications

Fewer than 1,000 Employees -19% -12%     5%

1,000- 10,000 Employees 33% -3%   78%

More than 10,000 Employees 92% 71%   82%

"Clearly, larger organizations are achieving significant returns for their shareholders from properly focused HR technology initiatives, regardless of the primary HR technology chosen for service delivery. For small and mid- size firms, however, the technology choice itself can severely restrict any positive impact on financial results," observes McMahon.

The HCI study was based on a comprehensive survey of HR practices at at total of 750 North American and European companies, each with a track record of at least three years of total returns to shareholders (TRS), 1,000 or more employees and/or a minimum of US$100 million in revenues or market value. According to Watson Wyatt: " The survey data is matched to objective financial measures of a company's worth, including its market value, three- and five-year TRS, and its Tobin's Q, which measures a company's ability to create economic value beyond its physical assets."

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