Human Capital

Management

INSTRUCTOR:
HUDDA RIAZ
 Introduction

Human capital management (HCM) is an

approach to employee staffing that perceives people
as assets (human capital) whose current value can
be measured and whose future value can be
enhanced through investment.
HCM is concerned with obtaining, analyzing and
reporting on data that inform the direction of value-
adding people management, strategic, investment
and operational decisions at corporate level and at
the level of front line management.
HCM is concerned with purposeful measurement,
not just measurement.
The defining characteristic of HCM is the use of
metrics to guide an approach to managing people
that regards them as assets and emphasizes that
competitive advantage is achieved by strategic
investments in those assets through employee
engagement and retention, talent management and
learning and development programmes.
HCM provides a bridge between HR and business
strategy
 The concept of human capital

Individuals generate, retain and use knowledge and

skill (human capital) and create intellectual capital.
Their knowledge is enhanced by the interactions
between them (social capital) and generates the
institutionalized knowledge possessed by an
organization (organizational capital).
These concepts of human, intellectual, social and
organizational capital are explained below.
 Human capital

Human capital consists of the knowledge, skills and

abilities of the people employed in an organization.
Human capital defined, Bontis et al (1999)
“Human capital represents the human factor in the
organization; the combined intelligence, skills and
expertise that gives the organization its distinctive
character. The human elements of the organization are
those that are capable of learning, changing,
innovating and providing the creative thrust which if
properly motivated can ensure the long-term survival
of the organization”
 Human Capital

Scarborough and Elias (2002) believe that: ‘The concept of

human capital is most usefully viewed as a bridging concept –
that is, it defines the link between HR practices and business
performance in terms of assets rather than business
processes.’
They point out that human capital is to a large extent ‘non-
standardized, tacit, dynamic, context dependent and
embodied in people’. These characteristics make it difficult to
evaluate human capital bearing in mind that the ‘features of
human capital that are so crucial to firm performance are the
flexibility and creativity of individuals, their ability to develop
skills over time and to respond in a motivated way to different
contexts’.
It is indeed the knowledge, skills and abilities of
individuals that create value, which is why the focus has to
be on means of attracting, retaining, developing and
maintaining the human capital they represent. Davenport
(1999) comments that:
People possess innate abilities, behaviors and personal
energy and these elements make up the human capital
they bring to their work. And it is they, not their
employers, who own this capital and decide when, how
and where they will contribute it. In other words, they
can make choices. Work is a two-way exchange of value,
not a one-way exploitation of an asset by its owner.
 The constituents of human capital

 Human capital consists of intellectual, social and organizational

capital.
 Intellectual capital
 The concept of human capital is associated with the overarching
concept of intellectual capital, which is defined as the stocks and
flows of knowledge available to an organization.
 These can be regarded as the intangible resources associated
with people which, together with tangible resources (money and
physical assets), comprise the market or total value of a business.
 Bontis (1998) defines intangible resources as the factors other
than financial and physical assets that contribute to the value-
generating processes of a firm and are under its control
 Social capital

 Social capital is another element of intellectual capital.

 It consists of the knowledge derived from networks of relationships
within and outside the organization.
 The concept of social capital has been defined by Putnam (1996) as
‘the features of social life – networks, norms and trust – that enable
participants to act together more effectively to pursue shared
objectives’.
 It is important to take into account social capital considerations, that
is the ways in which knowledge is developed through interaction
between people.
 Bontis et al (1999) point out that it is flows as well as stocks that
matter. Intellectual capital develops and changes over time and a
significant part is played in these processes by people acting together.
 Organizational capital

Organizational capital is the institutionalized

knowledge possessed by an organization that is
stored in databases, manuals, etc (Youndt, 2000).
It is often called ‘structural capital’ (Edvinson and
Malone, 1997), but the term ‘organizational capital’
is preferred by Youndt because, he argues, it conveys
more clearly that this is the knowledge that the
organization actually owns.
 The significance of human capital theory

 The added value that people can contribute to an organization is

emphasized by human capital theory.
 It regards people as assets and stresses that investment by
organizations in people will generate worthwhile returns.
 Human capital theory is associated with the resource-based view
of the firm as developed by Barney (1991).
 This proposes that sustainable competitive advantage is attained
when the firm has a human resource pool that cannot be imitated
or substituted by its rivals.
 Boxall (1996) refers to this situation as one that confers ‘human
capital advantage’. But he also notes (1996, 1999) that a
distinction should be made between ‘human capital advantage’
and ‘human process advantage’.
 …

 An approach to people management based on human capital theory

involves obtaining answers to the questions set out below.
 What are the key performance drivers that create value?
 What skills do we have?
 What skills do we need now and in the future to meet our strategic
aims?
 How are we going to attract, develop and retain these skills?
 How can we develop a culture and environment in which
organizational and individual learning takes place that meets both
our needs and the needs of our employees?
 How can we provide for both the explicit and tacit knowledge
created in our organization to be captured, recorded and used
effectively?
 Human capital measurement

Human capital measurement has been defined by IDS

(2004) as being ‘about finding links, correlations and,
ideally, causation, between different sets of (HR) data,
using statistical techniques’.
Becker et al (2001) emphasize: The most potent
action HR managers can take to ensure their
strategic contribution is to develop a measurement
system that convincingly showcases HR’s impact on
business performance. [They must] understand how
the firm creates value and how to measure the value
creation process
The primary aim of HCM is to assess the impact of
human resource management practices and the
contribution made by people to organizational
performance.
 The need for human capital measurement

There is an overwhelming case for evolving methods of

valuing human capital as an aid to people management
decision making. This may mean identifying the key
people management drivers and modeling the effect of
varying them.
The need is to develop a framework within which reliable
information can be collected and analyzed such as added
value per employee, productivity and measures of
employee behavior (attrition and absenteeism rates, the
frequency/ severity rate of accidents, and cost savings
resulting from suggestion schemes).
 …

Becker et al (2001) refer to the need to develop a

‘high-performance perspective’ in which HR and
other executives view HR as a system embedded
within the larger system of the firm’s strategy
implementation. They state that: ‘The firm manages
and measures the relationship between these two
systems and firm performance.’
 Reasons for the interest in measurement

The recognized importance of achieving human capital

advantage has led to an interest in the development of
methods of measuring the value and impact of that
capital, as indicated below.
Reasons for the interest in measuring the value and
impact of human capital:
Human capital constitutes a key element of the market
worth of a company. A research study conducted in
2003 (CFO Research Studies) estimated that the value
of human capital represented over 36 per cent of total
revenue in a typical organization.
 …

People in organizations add value and there is a case for

assessing this value to provide a basis for HR planning and for
monitoring the effectiveness and impact of HR policies and
practices
The process of identifying measures and collecting and
analyzing information relating to them will focus the attention
of the organization on what needs to be done to find, keep,
develop and make the best use of its human capital
Measurements can be used to monitor progress in achieving
strategic HR goals and generally to evaluate the effectiveness
of HR practices
You cannot manage unless you measure
 Caution about measurement

Three voices have advised caution about measurement:

Leadbeater (2000) observed that measuring can ‘result in
cumbersome inventories which allow managers to
manipulate perceptions of intangible values to the
detriment of investors. The fact is that too few of these
measures are focused on the way companies create value
and make money
The Institute of Employment Studies (Hartley, 2005)
emphasized that reporting on human capital is not simply
about measurement. Measures on their own such as those
resulting from benchmarking are not enough; they must
be clearly linked to business performance.
Research carried out by Professor Harry Scarborough
and Juanita Elias of Warwick University (Scarborough
and Elias, 2002) found that it is not what
organizations decide to measure that is important but
the process of measurement itself. As they noted:
In short, measures are less important that the
activity of measuring – of continuously developing
and refining our understanding of the productive
role of human capital within particular settings, by
embedding such activities in management practices,
and linking them to the business strategy of the fi rm.
 Approaches to measurement

Three approaches to measurement are described below.

The human capital index – Watson Wyatt
On the basis of a survey of companies that have linked
together HR management practices and market value,
Watson Wyatt (2002) identified four major categories of
HR practice that could be linked to increases in
shareholder value creation. These are:
total rewards and accountability 16.5 per cent
collegial, flexible workforce 9.0 per cent
recruiting and retention excellence 7.9 per cent
communication integrity 7.1 per cent
The organizational performance model – Mercer HR Consulting

The organizational performance model developed by

Mercer HR Consulting is based on the following
elements: people, work processes, management
structure, information and knowledge, decision
making and rewards, each of which plays out
differently within the context of the organization,
creating a unique DNA.
The human capital monitor – Andrew Mayo

Andrew Mayo (2001) has developed the ‘human

capital monitor’ to identify the human value of the
enterprise or ‘human asset worth’, which is equal to
‘employment cost × individual asset multiplier’
The latter is a weighted average assessment of
capability, potential to grow, personal performance
(contribution) and alignment to the organization’s
values set in the context of the workforce
environment (i.e. how leadership, culture,
motivation and learning are driving success).
 Measurement data

Main HCM data used for measurement

Basic workforce data – demographic data (numbers by
job category, sex, race, age, disability, working
arrangements, absence and sickness, turnover and pay).
People development and performance data – learning
and development programmes performance
management/potential assessments, skills and
qualifications.
Perceptual data – attitude/opinion surveys, focus
groups, exit interviews.
Performance data – financial, operational and customer.
 Human capital internal reporting

Analysing and reporting human capital data to top

management and line managers will lead to better
informed decision making about what kind of actions or
practices will improve business results, increased ability to
recognize problems and take rapid action to deal with
them, and the scope to demonstrate the effectiveness of HR
solutions and thus support the business case for greater
investment in HR practices.
The process of reporting the data internally and the
inferences obtained from them is therefore a vital part of
HCM. It is necessary to be clear about what data is required
and how it will be communicated and used.
 Human capital internal reporting

 The factors affecting the choice of what should be reported in the form of
metrics are:
 the type of organization – measures are context dependent;
 the business goals of the organization;
 the business drivers of the organization, ie the factors that contribute to
the achievement of business goals, such as increases in revenue, control
of costs, customer service, quality, innovation, expansion through
mergers and acquisitions, product development and market
development;
 the existing key performance indicators (KPIs) used in the organization;
 the use of a balanced scorecard which enables a comprehensive view of
performance to be taken by reference to four perspectives: financial,
customer, innovation and learning and internal processes;
 the availability of data;
 the use of data – measures should only be selected that can be put to
good use in guiding strategy and reporting on performance;
 Human capital internal reporting

It is not enough simply to give managers and other

stakeholders information on human capital.
It must be accompanied by effective analysis and
explanation if they are going to understand and act
upon it in the interests of maximizing organizational
performance.
 Human capital external reporting

The EC Accounts Modernization Directive requires

companies to prepare a business review. This has to
disclose information that is necessary for the
understanding of the development, performance or
position of the business of the company including
the analysis of key financial and other performance
indicators, and information relating to
environmental and employee matters, social and
community issues, and any policies of the company
in relation to these matters and their effectiveness.
 Introducing HCM

It is important to emphasize the notion of HCM as a

journey. It is not an all or nothing affair. It does not
have to depend on a state-of-the-art HR database or
the possession of advanced expertise in statistical
analysis. It is not all that difficult to record and
report on basic data and, although some degree of
analytical ability is required, it is to be hoped, nay
expected, that any self-respecting HR professional
will have that skill.
 HCM

At the beginning of the journey an organization may do no

more than collect basic HR data on, for instance,
employee turnover and absence. But anyone who goes a
little bit further, and analyses that data to draw
conclusions on trends and causation leading to proposals
on the action required that are supported by that analysis,
is into HCM. Not in a big way perhaps, but it is a
beginning. At the other end of the scale there are the
highly sophisticated approaches to HCM operated by such
organizations as Nationwide and the Royal Bank of
Scotland. This might be the ultimate destination of HCM
but it can be approached on a step-by-step basis.