"The strength of the United States is not the gold at Fort Knox or the weapons of mass destruction that we have, but the sum total of the education and the character of our people".
Claiborne Pell, US Senator from 1961 to 1997
The notion of Human Capital has been around for a very long time. In fact Adam Smith, in the “Wealth of Nations” has defined four types of fixed capital, or items which afford revenue or profit. The four types were: 1) Machines 2) Buildings 3) land and 4) human capital.
This has been commented on by a number of notables since. Karl Marx in his Das Kapital has stated:
"By labor-power or capacity for labor is to be understood the aggregate of those mental and physical capabilities existing in a human being”.
Human Capital has become an important economic concept since the 1950’s and 60’s. The basic reasoning is that people invest in education and training to build up skills and abilities which can bring about a long term return.
Claiborne Pell, US Senator from 1961 to 1997
The notion of Human Capital has been around for a very long time. In fact Adam Smith, in the “Wealth of Nations” has defined four types of fixed capital, or items which afford revenue or profit. The four types were: 1) Machines 2) Buildings 3) land and 4) human capital.
This has been commented on by a number of notables since. Karl Marx in his Das Kapital has stated:
"By labor-power or capacity for labor is to be understood the aggregate of those mental and physical capabilities existing in a human being”.
Human Capital has become an important economic concept since the 1950’s and 60’s. The basic reasoning is that people invest in education and training to build up skills and abilities which can bring about a long term return.
Theodore William Schultz was the 1979 winner of the Nobel Prize for economics. Amongst his varied research included a study into why post World War II Germany and Japan recovered much faster then the UK. He concluded that this was due to a healthy and highly educated population.
The first level of “labor capital” boosted the “Industrial Revolution”. Education and greater human skills was an enabler in the increase in the “services sector”.
Peter Drucker in his book, “The Age of Discontinuity” has talked of the “Knowledge Economy”. Today it is understood that in the “knowledge economy” or information economy, expertise and skills are an important asset.
With the current market conditions the conservation and enhancement of this important “Capital” is all the more important. The competition between companies, and economies would be won by those investing in and reaping the advantages of “Human Capital”.
The effects of the current economic crises would have wide scale implications in the nature of economic activity. Employees would need to have multiple skills and do multitasking as with time and improvement in technology, specialized roles would tend to be fewer.
In today’s scenario therefore Human Resources and specifically the training departments would need to refocus their attentions for the survival and growth of their companies
"So the question is Do Organizations realize the importance of Human Capital?
Linkedin Debate:
http://www.linkedin.com/answers/management/organizational-development/MGM_ODV/331106-564729
9 comments:
Dear Sunil,
As with everything, some do and some don't, and then there is a third category...
I believe that transitioning from one type to the other requires a deep change in values and basic assumptions so there are many companies who see the writing on the wall but don't know how to transition from the culture they have now to the culture needed to support the recruitment and retention of human capital as you call it.
Reut
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In normal economic times as well as declining economic times, the great companies do. IBM tells the story that during the great US depression, they continued to aggressively develop products and hired many new people. Those people hired were high quality people released by other companies suffering economically. The IBM story concludes with the great news of the US Census Bureau purchase of all the products built during the depression and it really propelled IBM in front of her competitors.
That story may be unique. In normal times, few top executives seriously quantify, measure, and manage the value of Human Capital. Less do it in economical stressful times. Sure, they can talk about attrition rates but that doesn’t command their frequent attention. Training and experience over the years suggest C level executives primarily focus and measure only the following things (not in a particular order)
1. Revenue
2. Expense / Cost
3. Profitability
4. Customer Satisfaction / Retention
5. Productivity of Assets
6. Market Share
7. Time to Market
8. Stock price
So the relative importance of human capital and all other subjects is proportional to its impact on the 8 factors listed above.
Once in a training meeting I mentioned these 8 factors. A person in the meeting suggested Employee Satisfaction / Morale should be the 9th factor. I asked her to apply the “why” factor to her suggestion – as why that subject is important at least 3 times. So, “why is Morale important?” She concluded it was because of productivity. She asked, “Why is productivity important?” She concluded it impacted manufacturing costs. She asked, “Why is manufacturing cost so important?” She concluded it impacted factors 2 & 3 above. She worked very hard to add a 9th factor. She gave up after about an hour of work.
Brian Casto
CEO Group 19, Sales Consulting & Outsourcing
I don't believe in the main that corporations value Human Capital. People are an expendable resource. Many pay lip service but through their actions let them be judged.
In the 'current market' corporations will downsize, laying off the most expensive (and therefore most experienced) employees.
Only smaller companies truly value (need) the cross-skilled, multi-tasking personnel.
Fortunately (for the organisations concerned) they all work according to the same basic rules so the potential cost/efficiency/competitiveness advantages of an enlightened HC policy are not forced upon them.
Business Process Re-engineering, outsourcing - all trends towards a lower cost, expendable, easily replaced workforce.
The problem with focusing on Human Capital is that it is difficult and the benefits are accrued over the long term.
Gerard Byrne
CEO, Experience IT
I don't believe that the problems with the financial instruments could have been avoided through a Human Capital perspective. Most of the organisations were (are) intrinsically morally bankrupt and value only short term gains and deals. How do you place real value on human capital where a junior currency trader or broker can make 7-figure income. There is only the moment, the deal, the profit, the kill.
And in such an environment a Human Capital perspective which would demand mutual respect (not just for colleagues but the counter-parties to trades) would actually be regarded as an impediment.
Best wishes
GB
Hi Sunil,
Unfortunately, most of the current organizations underestimate the value of human Capital as a driver to ensure company´s competitiveness on a highly volatile and uncertain business context.
These companies have failed miserably in making the managing of talent a strategic priority in function of different causes that could be acting concurrently. Let see us:
- Poor understanding of the talent management value that is considered as a commodity instead of being considered as an asset of strategic value for the company.
- Prevalent focus of an organisation driven by processes instead of privileging an organizational model dominantly based in talent and properly oriented to the business strategy.
- Reluctance of hiring consulting effort and managerial coaching to make the required transformations to migrate from a hierarchical organisational structure to a new one based in roles, competences and people.
- Lack of influence of the Human Resource department in the corporate landscape, for being a transactional, operational and administrative function with no seat at the corporate table.
- Difficulty of HR managers to identify valid paths to favor a Human Talent model of management that provides better alignment with corporate strategy.
- A corporate culture and a managerial style that being very conservative and averse to risk consider that the HR function must be entirely administrative and with focus in operational issues.
- Difficulty in estimating properly the financial, operational and organizational benefits from applying an organizational model based in talent management.
The most critical problem that today’s HR managers face is hiring, retaining, training and motivating professional talent in a troublesome scenario where the already critical shortage of human talent in some professional areas and in diverse managerial disciplines due to the beginning of the retirement with no enough replacements of the baby boomers’ workforce; economical growth in China and India and resurgence of energy market firms due to record crude oil prices has motivated a fierce competence to hire, train and retain the already scarce talent available in the job market. Being so, human talent is being more critical to ensure the competitiveness of a company for the long term.
Such perspective is the expression of a growing trend of cannibalization in hiring and recruiting scarce professional resource that finally is engaged to work with the bigger companies. This trend is particularly critical in the Oil & Energy and Engineering industries where I have worked for years and where is possible observe a continuous turnover of engineers from one company to other one looking for better salary perspectives and superior career development plans.
Being so, some companies belonging to these industries are beginning to develop systematically their respective Strategic Workforce Planning to analyze, evaluate and forecast the talent that they need to develop their strategic planning. In parallel, these companies are developing a more proactive HR management and are making the necessary adjustments to excel in the role of hiring, retaining, training and motivating professional talent.
When an employee as usually happens in most of today's companies is considered as a mere commodity that may be easily replaced, relocated, hired and finally fired out, is easy to expect that in such workplaces an anguish feeling of demoralization, progressive disengagement and lost of motivation finally will have a profound and detrimental impact over employee’s productivity, increasing the rate of employee’s attrition and affecting the whole company’s productivity for the long term. This is the reason that justifies the progressive adoption of Employer Branding practices.
Relevant to your question, I am including links to 3 question, I have posted some time ago in Linkedin Answers:
I hope this helps you.
Octavio
On 9/28/08 2:28 PM, Octavio Ballesta added the following clarification:
1. How important is having a powerful Mission and a inspiring Vision as essential elements of an employer branding strategy?
2. What is the role of corporate culture and leadership in creating empowered organizations?
3. What could be done in your organization to transform it in a Great Place to Work?
Links:
http://www.linkedin.com/answers/management/organizational-development/MGM_ODV/217315-933031
http://www.linkedin.com/answers/management/organizational-development/MGM_ODV/254142-933031
http://www.linkedin.com/answers/hiring-human-resources/personnel-policies/HRH_PPO/193369-933031
Octavio Ballesta
Corporations are recognizing the importance of investing in their employees now more than ever before. Companies are beginning to understand that to stay on top in the global economy, they
need to place more and more emphasis on developing and retaining their people. Organizations that appreciate the financial impact of their employees often refer to them as human capital I defines human capital as “recognition that people in organizations and businesses are an important and essential asset who contribute to development and growth, in a similar way to physical assets such as machines and money.
The collective attitudes, skills and abilities of people contribute to organizational performance and productivity. Any expenditure in training, development, health and support is an investment, not just an expense.” He continues to say, “Competition is so fierce and change is so fast, that any competitive edge gained by the introduction of new processes or technology can be short-lived if competitors adopt the same technology. But to implement change, their people must have the same or better skills and abilities. In defense of this statement, we have noticed a shift in our clients' strategic values from the tangibles to the intangibles. What began as a change in requirements for senior executive searches has become a shift permeating through the ranks of all the organizations we service.
In other words, our clients have shifted their hiring focus from technology to people and process. I believe this trend is one of the factors that has increased the desire to hire non-traditional information security professionals by many of our forward-thinking clients. This re prioritization of the value of human capital has changed the profile of what a successful candidate looks like, even in the most technical roles. For example, we have seen an increase in hiring in the areas of insider threat and security monitoring. Given the severe impact of insider threat incidents, companies and technology vendors are starting to focus their resources to address these types of threats. From a hiring profile these positions require heavy technical skills, but that’s not what seals the deal in receiving a job offer. To develop an effective insider threat management strategy, a person must have the ability to understand and envision the ways that other people could pose a threat. So companies are searching for security professionals who have technical depth but who also understand human and criminal psychology. In the monitoring area the roles require technical skills, but just as importantly, employers are looking for employees who can interpret technology in a way that’s useful and in line with the organization’s business and risk management goals. Even in these traditionally operational roles it is the interpretive ability of a candidate to understand the problems they need to solve that's what hiring managers are focusing on. Relationship and consensus building skills are highly sought after at the middle management level.
The job description for a recent middle management search required the “ability to build
relationships with Business and Technology leadership, audit personnel, legal counterparts, compliance, human resources, and internal and external cross functional teams.” To read between the lines: If you are to be successful and valuable you will need to create the personal relationships necessary to address the unique requirements and risk appetites of the business. Nobel Prize-winning economist Gary S. Becker, who coined the term “human capital,” says that the basic resource in any company is the people. The most successful companies and the most successful countries will be those that manage human capital in the most effective and efficient manner. Human capital is a valuable concept because it recognizes that people should be treated as assets, rather than as an expense.
Ramesh Manghirmalani
L'Entrepreneur En Residence at Foundation
Washington D.C. Metro Area
Though companies are realizing the importance of Human capital, I still doubt it has gain prominence in Asia.
The responsibility lies with the line managers and if they don't have the right approach, organizations won't value the human capital.
Amit Agarwal
Strategic Business Consultant-Asia Pacific at DHL
Good day Sunil,
Enclosed is a link to a similar question that I posted recently.
Regards,
John S. Rajeski
International Business Development Executive
Links:
http://www.linkedin.com/answers/hiring-human-resources/staffing-recruiting/HRH_SFF/302093-890119?browseIdx=4&sik=1222698589053&goback=.amq
http://rajeski.com/
With extremely competitive market conditions, it is even more imperative for companies to invest in human capital that has abilities to operate in a dynamic environment calling for various levels of skills that span not only functional areas but also leadership and entrepreneurship as well as have a vision to bring resources together to bring about solutions that have the ability to take people to the next level of development. Such requirements have led to more and more companies giving active encouragement to foster entrepreneurial culture in companies
Vinti Agarwal
Adjunct Faculty at ICFAI Business School
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