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The concept of human capital has nowadays emerged and its importance is increasing daily. As Chatzkel(2004) rightly stated ,”it is effectively the human capital that is the differentiator and the actual basis for competitive advantage”.
Human Capital refers to the right combination of intelligence, skills and expertise owned by an organization’s employees. Essentially, this encapsulates:
Intellectual capital – the knowledge individuals possess
Social capital – derived from both internal and external relationships between employees; and
Organizational capital – the knowledge stored in organizational manuals and databases.
Employees own abilities, behaviours and talents and only they have the power to decide how and in what ways to apply them. This capital will only be made available for as long as the life and blood of our organization gain value in return for the investment.
It is up to organizations and human resource executives to create the right mix of performance incentives to motivate and empower employees whilst building a constructive labour-management relationship.
Collins and Porras (1994) proved that a strong and emerging company culture is significant for both survival and corporate organisational success. However, this is ineffective unless an alignment between people and company-value characteristics exists. The long term survival of the organization can only exist if there is the correct link between HR practices and the organization’s strategic vision. This is what human capital management strives to achieve.
Human capital management is in itself a journey; it tries to implement the purposeful measurement and use of metrics to establish the importance of each individual as a value-added intangible asset in the organisation. Organisations may start by collecting basic information regarding their employees such as employee turnover and absence, which is then analysed to draw up conclusions on trends. Decisions are then taken based upon this analysis.
Methodologically collected and analyzed human capital data can effectively help managers in defining the factors direct impacting their subordinates.
The 3 Stages of Development in People Management
Through decades, theorists tried to find the best ways for “people management”. In Classic Personnel Management, the main focus was on how to manage, recruit and acquire people on the basis of job description, with an authoritarian and top-down approach. Employees were simply a cost to be minimized and training them was provided to suit organizational needs. The change to human resource management brought a paradigm shift in the organization’s perception of its employees. Employees were now seen as resources to be expended in pursuit of organizational goals, whilst training was aimed at multi-availability.
In human capital management, employees take a central role in corporate life. It is no longer a question of exploiting employees but rather investing in these intangible assets. As with any investment, the goal is to maximise value through talent management, retention and personal training and development plans.
Human Capital Management introduces the strategic and people-centred approach, linking it with the organization’s strategic vision for itself and for its people. It aims to determine the impact of the human factor on business performance and their effect upon shareholders’ value.
It is not enough to have the right talent – at the right time – in an organisation. It is now vital to nurture employees by educating and enriching their jobs to contribute towards organisational needs. The biggest challenge organizations are now facing is choosing the best people who will drive up the organisation’s enterprise value and create sustained commercial advantage.
Challenges in HCM – The Need for Metrics
Neil Roden, the Group Director of the Royal Bank of Scotland, rightly stated:
“Human capital is often represented as both an opportunity and a challenge. A challenge to identify relevant measures and meaningful information to be acted on, and an opportunity to both evaluate and maximise the value of people”.
Researchers have demonstrated that motivated human capital results in improved accounting profits; however, HR professional and line managers have sincere difficulty in translating this into practice.
Trying to justify investments in people, in training and innovation, knowledge management and leadership development is difficult with the absence of proper metrics.
The starting point in properly valuing human capital is to understand how to measure the contribution of human capital to organizational success. Human resource lacks the science and tools to describe and measure human capital and without measurement, organizations cannot manage human capital.
The process of identifying suitable measures together with collecting and analysing related information will focus organization’s attention on what needs to be done to use human capital to its maximum potential.
Approaches to Human Capital Measurement
The most popular approaches in measuring human capital are those developed by Mercer HR Consulting, ‘the organizational performance model’, and Andrew Mayo, ‘the human capital monitor’.
The organizational performance model focuses upon key elements, explicitly:
people and work processes;
organizational management structures;
Conversely, the human capital monitor portrays “human asset worth” as a product of employment cost and individual asset multiplier where the IAM is the weighted average of:
employee growth potential;
alignment to organizational values.
Rather than the actual measurement process, what is important is the result. This implies identifying whether human capital is sufficiently meeting our needs.
Metrics chosen for human capital measurement rely upon the type of organisation and the business organisational goals and what actually drives these organizational goals.
Human Capital Measures and their Uses
Organisations may opt to use different data, categorized as:
Measures and Possible Uses
Demographic data e.g. job category, sex, age
Work Force Composition – Analyze the extent of diversity and extent to which the organization relies on part-timers
Absenteeism/Sickness rates- Recognize the need of a sound attendance management policy
Average vacancies per % of total workforce- Identify probable shortfall problematic areas
Total payroll costs
Outcome of Equal Pay Review
Human Development and Performance Data – learning and development programmes, employee skills and qualifications
Skills Analyses/Assessment:Match skills to job requirements and identify areas of shortfall
Training Hours per Employee- gives an indication of the amount of training activity
Perceptual data relating to attitudes and believes
Cost Savingas a result of employee suggestion schemes – highlights the value generated by employees
Emerging Measurement Techniques of Human Capital
An organization’s employees are by far the best source of information about practices and management processes. New systems can easily be developed by applying the HR tool creatively – designing an effective employee survey and applying the six sigma techniques to analyse and draw up conclusions.
The six sigma technique is used to link variations from one end – the quality of processes and practices used in managing employees to business outcomes across different units (sales productivity, profit margins,etc)The survey should be designed in a way so as to strike the right balance between employee commitment and satisfaction and organizational capabilities. Questions should be focused on identifying the extent to which best practices in managing human capital are effective within the organization. The six sigma-type analysis is a simple provider of a leadership assessment serving as a catalyst for improvement whilst providing significant input for an organization’s balanced scorecards.
The Balanced Scorecard has emerged as an important tool in identifying the missing link between human resource and enterprise. By using balanced score cards, Human Resource Professionals can define the impact of human capital on the organizational strategy. This specifies how Human Resource can be transformed from a sideline player to a business partner.
As managing human capital by instinct is no longer effective, the faster an organization adapts to their methodologies and metrics, the more it gains significant competitive advantage.
Human Capital Internal Reporting
The analysis and reporting of human capital data to both top and line management leads to better decision making and to the taking of rapid actions. It allows a better ability to recognize problems in demonstrating the effectiveness of HR solutions and thus, supporting the business case for greater investment. Management report should be simple, credible and accurate and provide guidance as to what actions should be taken.
Human Capital External Reporting
External reporting should unveil the necessary information for understanding the development in the performance and position of the organization. Information should be narrative and quantitative as well as available and relevant. Human capital external reporting should offer information on possible barriers and be future-oriented to draw attention upon the contribution of human capital to the organization’s future performance.
Human Capital Management Techniques in Practice
Human capital Management should have the optimization of the flow, deployment and development of human talent within an organization as one of its primary objectives. Future human capital needs should be projected to ensure a good balance of quality and skills, including an appropriate number of future employees and key competencies required for mission accomplishment. These human capital decisions allow managers to spot areas of particular attention before crisis develop.
Talent Management and Employee Motivation
In managing talents, organizations may choose either to align people with the roles they should fill in the organization or else retain people as the fixed element and adjusting their roles upon their character and personal skills.
In choosing to align people with roles, organizations try to recruit good learners who will respond best to development opportunities and organizational succession development. Conversely, when roles are built around people – customizing rewards and compensations according to the employees’ individual preferences and needs – employees will feel more involved in the organization, hence maximising their job satisfaction and motivation. The use of extrinsic and intrinsic motivators can also help in retaining good quality staff and encouraging them to give their maximum potential while at work.
Training, Development and Succession Planning
Training and development of employees should be high up on the organization’s agenda. This helps in meeting the changing needs of individuals and organizations. After training employees, an effective organization should try to build up an inventory including knowledge, skills and employees’ competencies and updating it according to changing needs and organizational training patterns.
Organizations may choose from a wide variety of development techniques: courses, seminars, on-the-job-training and a diversity of training resources – interactive, internet based etc. An even better approach to development would be the introduction of a mentor-apprentice relationship that can assist in meeting specific performance needs.
In light of this, truly effective deployment – transferring staff to different units to help them gain further knowledge and skills – requires an extensive strategic process to ensuring this transfer is to the best benefit for both the organization and the individuals.
Moreover, the policy of the enterprise should incorporate planning for the entire organization as well as career planning for individual employees.
By developing a culture in which investment and learning is encouraged, organizations would indirectly be working towards reducing resignations and turnover. This minimizes hiring replacement costs and creates an “internal” brand facilitating the recruitment of new talents. Organizations can evaluate organizational culture in light of reasons given for employee departure by analyzing exit interview response.
Organizations should cultivate a steadfast leadership team to steer the ship of the company and provide reasonable continuity through succession planning. HCM in this area encourages effective teamwork and ensuring continuity through executive succession and development planning. In today’s labour market, it is essentially important to focus on developing excellent leadership skills, especially trust building.
An effective strategic human management approach would not be possible without the sustained attention of a competent senior leadership team in valuing and investing in their employees. This leadership is crucial for an organization to overcome its resistance to change, organize the necessary resources and create an organization-wide commitment to improving business operations. Effective leaders have the authority to offer recruiting bonuses, retention allowances and skill-based pay in addition to investment in training and professional development.
Performance Culture/Management and Reward Management
Accountability and fairness at the workplace is essentially important in empowering and motivating employees through recruitment bonuses, retention allowances and improved working conditions. An organization needs to assess its workforce’s performance and incorporate strategies to reward professional and ethical behaviour, integrity and employees’ loyalty whilst promoting teamwork and customer focused-performance.
Information Technology and the introduction of a Diversity Policy in favour of Inclusiveness makes the organization a better place to work for.
Knowledge workers and the best talents in the industry rest within an organization for as long as it is capable of providing a challenging and stimulating environment; hence, organisations should strive to meet this objective.
Effective Industrial Relations also contributes effective capital management. An organization loaded with industrial conflicts gives an indication of an ineffective management style. Sound industrial relations schemes should be built upon tripartism: namely the participation of the government, employers and employees.
Provision of Employees Services
Organization should cater for their employees’ welfare in terms of their mental and physical well-being. The forms this welfare can take are many and can vary from financial needs such as loans to counselling in respect of personal employees’ problematic circumstances.
Best Approach to Human Capital Management
Human Capital Management will not reach its full potential unless all processes within the employee life cycle are fully integrated and automated. For example: the same job profile used by recruiters to aid them in hiring employees should be utilized to develop the performance of the individual.
The first generation of HCM catered for business needs through the assimilation of recruitment, learning and succession planning. Organizations have realised that software such as Enterprise Resource Planning and Human Resource Information Systems are only part of the puzzle – the remaining parts – content and services – will be the major focal points of the next generation of HCM solutions.
The main components of a good human capital management solution include:
Learning Management Systems – courseware, testing instruments and evaluations;
Applicant Tracking System – interview guides, screening aids and job profiles;
Performance Management System – goal templates and mentor guides;
Succession Planning – proficiency profiles and career paths.
Contents and services should no longer be a late addition – clients and solution providers should collaborate to provide a fully fletched system to complete the necessary HCM functionalities.
The Future of Human Capital Management
The Future of Human Capital management is thought to revolve around:
task-based automation for jobs which are repetitive in nature; Vendors should deliver solutions which allow the systematic measurement and improvement of employee performance in a variety of tasks;
project based HCM for task which are dependent upon teamwork and individual creativity. This will allow organizations to spot potential flaws relating to incongruity or inconsistency beforehand.
The use of online metrics for gaining continuous employee feedback
Essentially, organizations should try and think ahead of the curve in the utilization of the latest technological developments to maximize their human intangible assets.
In retrospect, human capital management requires a transformational manager to develop a group of employees with high capability and commitment. This approach can achieve returns-on-investments discernibly higher than other assets, enabling manager’s expectations to meet employees’ realities.
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