HUMAN CAPITAL ADVANTAGE: DEVELOPING METRICS FOR THE KNOWLEDGE ERA
Index Good managers know that measurement is a prerequisite for good management: You've surely heard the axiom that, “What gets measured gets managed.” This suggests then that the fundamental source of wealth creation—human capital—is seriously under managed in most organizations. That is because most organizations' systems of measurement, shaped in part by accounting and reporting requirements, are still unduly influenced by measurement concepts dating back to the industrial era when physical capital was the primary source of wealth creation
There have been only three eras in all of economic history: the agrarian era, the industrial era, and the knowledge era. Each era has been defined by the factor of production that has served as the foundation for wealth creation. Not surprisingly, in the agrarian era, land was the primary source of wealth. In the industrial era, the primary sources of wealth were machinery and, to a lesser extent, natural resources. In the knowledge era, human capital is the source of wealth. Human capital is the embodiment of productive capacity within people. It is the sum of people's skills, knowledge, attributes, motivations, and fortitude. It can be given or rented to others, but only on a temporary basis; its ownership is non-transferable.
In most of the developed nations, the currently accepted accounting principles and their related reporting requirements rest on the foundational assumption that physical assets (land, machinery, buildings, natural resources and inventory) generate wealth. Human capital does not even appear on the balance sheet. Unlike all other factors, human capital is the only factor that cannot be owned. Although that is as it should be, the omission of human capital from the balance sheet can play mischief in the wise allocation and management of resources.
Expenditures associated with the development of people—education and training are treated as costs even though, in actuality, these expenditures possess the attributes of an investment.
The Foundation of Human Capital Advantage
Economists' concept of human capital advantage is embedded in what is known as “efficiency wage theory.” This theory posits that the way to get people to avoid shirking on the job and produce the maximum possible value on their employer's behalf is to pay them an efficiency wage.
Money is, of course, one of the things—but by no means the only thing—that people want through their work. Sociologist's concept of “mutual gift giving” probably comes closer to getting at the essence of human capital advantage. Because human capital cannot be owned (or even transferred), extracting the maximum advantage from it requires that an organization first understand what people want and then give it to them. The trick to creating human capital advantage is to figure out inexpensive but difficult-to-replicate ways to give people what they want.
Human capital represents a huge operating cost that must be managed efficiently because of its sheer magnitude. At the same time—because human capital is also the only asset that cannot be owned—it must be managed wisely, but also with humanity. Consequently, a strategy that focuses exclusively on efficiency and cost containment can, at best, only is successful in the short-run. This creates a fundamental paradox.
Exceptional management in the knowledge era is defined by the ability to resolve this paradox through a “both/and,” rather than an “either/or” strategy. The both/and strategy requires a relentless focus on finding ways to cut costs and improve productivity, while simultaneously evoking the passion, creativity, loyalty and best efforts of the people on whom an organization relies.
Implications for Measuring Human Capital Advantage
Given the high cost of human capital, one major category of metrics must capture a variety of measures of efficiency, such as sales per employee and unit labor costs. This second category of metrics is the one that organizations must now master if they are to effectively manage human capital. These metrics predict the future performance of the company—the metrics that enable organizations to be driven with the steering wheel rather than the rear view mirror—the metrics that provide sound, analytically responsible guidance for improving, rather than merely justifying, human capital investments.
The findings essentially laying out the “human capital value chain” are these:
1. In addition to being fairly compensated, people place high value on:
- Being in an environment where they can grow and learn and advance
- The managerial skills/abilities of their immediate supervisor
- Being treated fairly, appreciated and acknowledged
- Doing work that makes a contribution
2. These determinants of employee satisfaction drive employee retention
3. The retention rate among key employees drives customer satisfaction
4. Customer satisfaction drives customer retention
5. Customer retention drives profitability and other measures of financial performance including total stockholder return.
In addition to the traditional efficiency metrics, the existing research base suggests that key metrics to track include:
A. Employee's satisfaction with the quality of their learning/development opportunities
B. Employee's satisfaction with the management skills/abilities of their immediate supervisor
C. Employee's satisfaction with the extent to which they are treated fairly, feel appreciated and acknowledged for their work
D. Employee's sense that the work they do makes a difference
E. Retention rate of key employees
In essence, metrics A-E above provide a research-based foundation for the human capital measures that matter—those that have consistently been demonstrated to be determinants of organizational performance. They provide a strong analytic foundation for the human capital inputs into a balanced scorecard type of measurement system.
This next level of measurement captures the effectiveness of the”interventions” that an organization uses to improve its human capital advantage. Three categories of learning intervention measures should be captured:
1. Inputs—measures of the intensity of learning resources available to employees, including formal and informal learning opportunities.
2. Outcomes—intermediate measures of the effectiveness of learning (such as Kirkpatrick levels 2 or 3 for formal learning interventions or other comparable forms of employee assessment of effectiveness for informal learning opportunities).
3. Organizational Learning Capacity—an overall assessment of an organization's commitment to and capacity for learning
By studying the inter-relationship among these three categories of learning intervention measures, and between them and items A-E an organization would develop a good understanding of how to better manage its learning interventions to drive performance through improvements in human capital advantage.
Those organizations that do launch sophisticated learning management infrastructures can begin to use the data capture capabilities they contain. These organizations then can analyze the determinants of human capital advantage and their link to performance in a much more rigorous manner than has been possible before now.
Author: Laurie Bassi |
