Vienna Index™ Policy Questions
How is the Vienna Index different from conventional human capital metrics products?
The Vienna Index was designed to meet 7 principals for credible people metrics:
- Measure the organization’s entire investment in human capital.
- Use standardized, auditable data sourced from the organization’s financial system.
- Define and measure data consistently over time.
- Yield measures that are few in number, supported by diagnostic layers of detail.
- Answer important strategic questions about what drives business results.
- Provide a credible and clear line of sight between human capital performance and business performance.
- Apply straightforward methods that are resistant to being “gamed.”
For the most part, conventional human capital metrics products measure the efficiency and effectiveness of the human resource function. The Vienna Index measures the ROI on the entire amount of money a company spends on human capital, in financial terms. Because the Vienna Index only uses the most credible data source—that being the organization’s financials (Income Statement, Balance Sheet and underlying account structure) — the results resonate with the organization’s executive leadership.
Why doesn’t the Vienna Index use HR data?
The Vienna Index was not designed to replace the content rich data currently available in those areas, but to work in concert with HR-centric data products to measure the business outcome of the overall company investment in human capital.
Why does the Vienna Index use data only from the financial system?
Data from a company’s financials is the most credible data source with the organization’s C-suite and executive leaders. Because the Vienna Index is a financial approach to measuring the Human Capital investment, it is appropriate to use data only from the financial system.
Why are the Vienna Index formulas configured as they are?
The Vienna Index consists of three formulas:
- Human Capital ROI (HCROI)
- Profit Sensitivity
The formulas are adaptations of universally accepted formulas commonly used in the finance and accounting world to measure ROI, Productivity and Liquidity.
The Vienna™ formulas and Index are protected by U. S. Patent No. 7,983,945. Use of the formulas, metrics, and Index without express written consent form Vienna Human Capital Advisors, LLC is strictly prohibited.
Human Capital ROI is a so-called values-based formula. The formula is EBITDA less Financial Capital Costs (FCC) divided by Human Capital Costs (HCC). EBITDA is a measure of profit exclusive of any financial capital costs. Our view is that EBITDA is the amount of operating profit generated from the human capital investment. The premise of this formula is that the investment in human capital has not added one dollar of value to the business enterprise unless and until all financial capital costs have been recovered. Thus, EBITDA must first be reduced by all financial capital costs. Beyond the recovery of financial capital costs all remaining profits are the value added to the business enterprise from the human capital investment.
The Productivity formula is Revenue less Raw Material Costs divided by the sum of HCC and FCC. The premise is that human and financial capital are the drivers of incremental revenue, not raw material costs. Therefore, the incremental revenue driven by the human and financial capital investments is the balance of revenue after subtracting raw material costs, if any.
Profit Sensitivity looks at the relationship of profit-driven incentive compensation (PdIC) to EBITDA. The premise is that PdIC is the most agile tool available to management to protect the profitability of the business enterprise. For the reasons explained in the HCROI formula, the level of profit that needs to be protected is EBITDA. Because of the importance to the overall value of the business enterprise to maintain and grow profits, we have elevated the Profit Sensitivity measure to a key performance indicator (KPI).
How does the Vienna Index work with and add value to the traditional HR metrics that we currently use?
Unlike traditional HR metrics, the Vienna Index provides a direct line of sight to company performance. The Vienna Index gives HR executives a business context in which to further analyze results from traditional HR metrics. Through its financial approach, the Vienna Index provides indicators that reveal issues within a business unit. The Vienna Index and traditional HR metrics will help pinpoint the specific issues within the business unit.
The added value of the Vienna Index is that it will highlight those issues that traditional HR metrics missed, or highlight issues that can be overlooked in using only traditional HR metrics.
What does the Vienna Index give us or tell us that we don’t get from traditional business performance measures, such as margin (profit/revenue) and year-over-year performance for revenue, profit, free cash flow, etc.?
While traditional financial measures effectively gauge overall business performance, they do not reveal how specific investments in the business are performing. To continuously improve the ROI of the human capital investment, HR needs to know how well the investment in human capital is performing. The Vienna Index accomplishes this through a financial approach that extracts standardized, auditable data from an organization’s general ledger to measure ROI, Productivity and Profit Sensitivity of an organization’s entire human capital investment over time. This kind of high-level insight enables HR executives to think and act strategically, rather than tactically.