One of the largest assets of any company is its human capital combined with the system that manages it, but so many managers insist on treating employees as costs to be minimized rather than as investments that add value to the organization. The reason is that people and their skills – unlike more tangible assets – are hard to measure and predict. But increasingly human capital is becoming a company’s unique competitive advantage, and it will need more active management and guidance.
American companies typically invest an aveage of 36% of their revenue in their work force each year, yet they know nothing of the return on that investment. Executives accept this lack of knowledge because of their inability to measure, assess or predict the outcomes of work force tactics as they can for other areas of the business. Since no company has been able to use it as an advantage. But that is changing.
Past sources of tangible competitive, such as access to capital, technology, and economies of scope and scale, are becoming less critical. The last unexploited sources of advantage are a company’s intangible assets of human capital and its human capital strategy.
CEOs, investors and managers tolerate more variance in human capital investments that they would in other assets. There are 4 barriers to resolving this problem:
- People are typically treated as an operating cost, not a source of value creation
- No one really owns the human capital issue, or is focused on making strategic decisions about it.
- Practices and policies are made one at a time and not connected as though they are part of a system.
- Because of long-standing lack of good internal measures, companies rely on benchmarking of another – usually irrelevant – company’s systems.
The first principle of effective human capital management is system thinking, or having an awareness of the connections that link organizational units, people, processes and behavior. Any major change in one area ripples through the larger system.
Key work force characteristics have 3 dimensions:
- Capabilities – are the mix of knowledge, skills and competencies determining what the work force can do.
- Behaviors – are specific actions determining what the work force does.
- Attitudes – are the psychological propensities determining what the work force believes and values.
At any moment in time, a work force is the outcome of 3 interrelated labor flows:
- Attraction – who comes to the organization and whether they achieve the goals of the organization.
- Development – How people move through the organization and how successful the organization is at nurturing human capital to execute its business strategy.
- Retention – Who stays, who leaves, and whether those who stay produce the highest value.