The value of a business is made up from a combination of traditionally measurable and tangible assets like equipment, buildings etc and intangibles such as brand, reputation, knowledge and of course people i.e. human capital. In this introductory article, Delia Goldring FSN contributing writer, visiting Professor in HRM at Middlesex University and Director Performance Options, looks at the practical challenges of human capital measurement.
It has become common place for business leaders to express the phrase ‘our people are our greatest asset’ but often they do not actually measure the impact of that asset. In an increasingly knowledge-based economy, human capital is growing in importance but despite a number of academic models and theories many organisations find the evaluation of human capital a difficult concept to quantify.
A definition of human capital in an article ‘Beyond productivity: How leading companies achieve superior performance by leveraging their human capital’ in 1999 by Dess & Picken goes some way to explaining why this measurement is complex. Their view is that human capital is ‘generally understood to consist of the individual’s capabilities, knowledge, skills and experience of the company’s employees and managers, as they are relevant to the task at hand, as well as the capacity to add to this reservoir of knowledge, skills and experience through individual learning’.
In addition as pointed out in 2000, by Rastogi in an article entitled ‘Sustaining enterprise competitiveness – is human capital the answer?’, the efforts of that human capital ‘need to be relentlessly pursued and focused on the firm’s environmental context and competitive logic’. This means that the accumulation of talented individuals is not enough for excellent performance of an organisation, there must also be a desire on the part of the individuals to invest their skills and expertise in the organisation and in their specific jobs and they must commit or engage with the organisation if there is to be effective utilisation of these human assets.
Therefore, all of an organisation’s intellectual capital must be taken into consideration when attempting to put a measure on the impact of the human capital in an organisation. Intellectual capacity is made up of three elements, namely, human capital, social capital i.e. the structures, networks and procedures that enable those people to acquire and develop intellectual capital represented by the stocks and flows of knowledge derived from relationships within and outside the organisation and organisational capital i.e. the institutionalised knowledge possessed by an organisation which is stored in databases, manuals etc including HR policies and processes used to manage people.
In order to be effective, organisations must be able to understand the relationships between these different forms of capital. Human capital alone will not create value. People have to be motivated and managed by the use of good HR practice and given the opportunity to develop and use their skills to create goods and services which can be sold. If the knowledge they are creating cannot be embedded in goods and services that are in demand, then this human capital will have no value to the business.
The measurement of human capital is vital for informed decision making about how to manage, maximise the return on investment in an organisation’s people and ascertain the contribution of people to bottom-line performance.
Measurement is notoriously difficult because the things that human capital is likely to influence such as customer satisfaction, innovation and service delivery are at the mercy of numerous other contextual factors. Whereas it can be relatively easy to collect data to describe the workforce and the prevalence of certain practices, particularly where sophisticated human resource information systems exist, it is more difficult to develop credible and reliable measures and decide what the measures will tell us.
Many of the things which could give us an indication of the contribution of people are out of the control of the business. Employees can decide how much effort above the absolute minimum required to retain their job they put into their work. To secure the extra effort from their employees which will really make a difference to their business, organisations must identify the triggers which will encourage this discretionary effort. This is discussed in depth in the report ‘Understanding the people and performance link: unlocking the black box’ by John Purcell in 2003.
The types of data which can be useful in measuring human capital are:
- demographic data: data on the composition of the workforce, age, gender, ethnicity
- recruitment and retention data: data on number of applications for vacancies, number of people leaving, length of service, numbers of vacancies, length of time to fill vacancies
- training and development data: number of days training given, money spent on training, types of training given, length of time to reach competence levels, data on training needs
- performance data: performance management data, productivity and profitability data, targets set and met, levels of customer satisfaction, customer loyalty
- opinion data: data from employee attitude surveys.
Almost more important than the measurement is the communication of human capital information. Different types of information will be of value to different audiences within the business. Shareholders want to know what is likely to influence long-term financial performance i.e. investors are interested in the long term viability and potency of an organisation’s performance. Customers want to know if they will get good service and after sales support. Employees want to know their jobs are secure and how they can develop themselves and their skills. Managers need to know what actions they can take to improve the performance of their business units.
So it is the systematic collection, analysis and communication of information on the value of an organisation’s human capital that is vital as it will help to determine the design and implementation of the HR policies and practices needed in order to maximise the impact on business performance. However, every organisation needs to decide which specific measures are relevant to them in the effective communication of the value and contribution of human capital both internally and externally.
