Human capital is one type – category of intangible asset…that can, when effectively exploited – leveraged produce value, competitiveness, sustainability, and sources of revenue for a business.
An over-arching reason for the current (broader, expanded) interest in developing a business’s human capital lies with – is because…
- the economic fact that today, and for the foreseeable future, growing percentages (80+%) of most company’s value, sources of revenue, competitiveness, and sustainability lie in – emerge directly from intangible assets, i.e., human, intellectual, structural, and relationship capital!
- doing so, represents a forward looking – thinking (prudent) strategy to elevate the probability (ensure) a business’s workforce will perform as effectively and efficiently as intangible asset intensive – dependent businesses require.
The common definitions of human capital include…an array of employee (possessed) descriptors, i.e., their knowledge, skills, education, vocational qualifications, professional certifications, work-related experiences, competencies, and (personal, professional) commitment of a workforce (collectively, collaboratively) to an employer, i.e., a business or organization.
Developing the right strategy, i.e., right time, right place, and right method, etc., for…assessing and measuring human capital development outcomes is also a prudent undertaking which can contribute to business’s achieving the performance goals which they aspire. This may involve reduction in employee turnover – attrition, better competitive positioning of its products and/or services, business value, sources of revenue, sustainability, and resilience, etc.
As in most business endeavors (in addition to the above) it’s prudent for a business’ leadership to clearly convey at the outset…
- how human capital development activities are relevant to a business, e.g., current, future standing, value, human capital costs, etc.
- the projected – desired benefits and outcomes, both tangible and intangible, i.e., return on investment, and
- how and why any – all subsequent (future) human capital development may be mandated, assessed, and measured.
Human capital are assets which businesses are obliged to make effective investments…especially in sectors which are increasingly intangible asset intensive and dependent. Businesses are also obliged to determine the ROI for their human capital development initiatives, particularly the intangible asset resource which a business should expect reasonable returns.
Once business leadership has satisfactorily calculated…their human capital investment – development ROI, they should be better positioned to…
- assess the efficiency and effectiveness of their human capital.
- identify and remedy gaps in human capital.
Too, once business leadership have effectively identified, distinguished, and measured…what (human capital) they have, they will be positioned to more accurately assess what (human capital) they don’t have and likely need. Any gaps – distinctions becomes all-the-more-clear when business leadership factorsnear and longterm operating objectives.
For example, if a business’s objective are to…be the most effective – efficient service provider in a specific sector, then, they are obliged to have exceptional investments in human capital development and assure those essential (human capital) attributes are indeed the outcomes.
Bridging business gaps in human capital…is similar to any other analyses, business leadership’s objective must be to identify what (human capital) they have, what human capital is lacking, and then set about determining how to bridge that gap to consistently achieve the organization’s goals.
Needless-to-say, it has become essential for business leadership to remain mindful of…their organization’s goals – objectives throughout the (human capital gap) analysis process. Especially when devising the means to actually-bridge any ‘human capital’ gaps. Here, business leadership are obliged to ensure how they set about to bridge those gaps can (will) actually-support their company’s goals and objectives.
For example, a business leader may assume that any (human capital) gap can be readily resolved…merely by making corrections to the existing (human capital) recruitment, on-boarding, and/or training programs. However, if a business’s strategy is to be the lowest cost provider, then, obviously, spending a large sum of money on a training program may be incorrect.
The initial step to measuring human capital…is recognizing that in most instances, human capital is collections of collaboratively valuable intellectual, structural, and relationship capital ala intangible assets. Consequently, through my rather experienced lens, I caution business leadership not to assume there is a single method for measuring human capital. In part, that’s because of the…
- human capital is comprised of numerous variables – fluctuations which can affect its measurement, i.e., valuation.
- intangible and variously fluctuating nature of human capital, and also because
One measure, however, that is relatively more straightforward is measuring a business’s human capital’s via return on investment (ROI). A prudent way to measure human capital ROI (return on investment) arising from a business’s initiatives – programs for acquiring and developing its human capital, is to apply the following formula…
Total business profits
Investment in – cost of developing a business’s human capital
Investment in – costs associated with developing a business’s human capital include…monies expended relative to personnel recruitment and selection process, personnel training and development, and personnel compensation, etc. All of which are relevant to…
- determining whether the ROI is sufficient.
- while recognizing ROI measurement can involve numerous other indicators, e.g., comparing the ROI to other companies in the same industry – sector.
It’s important to remember that ROI’s…may – are likely to differ among businesses, e.g., depending on size, strategy, and industry. Here, bench-marking is generally considered good practice.
Because human capital encompasses, among other attributes…one’s personnel knowledge, skill sets, relevant experiences, including one’s personal commitment – investment to their employer’s organization, it prudent to focus on these attributes to improve the ROI for a business’s human capital.
Admittedly, while there are few readily used – applied measurements regarding human capital…and the ROI it delivers to a business, there are other ways business leadership may approach this increasingly important contributor…
Conduct a skills inventory…which entails recording of the skills, capabilities, qualifications, trainings, and certifications relative to employees’ preferences, career goals, and other developmental information. Of course, another purpose for conducting a skills inventory is for an organization to have a database of its (human capital) resources for more effective HRM (human resource management).
While the main purpose of conducting a skills inventory may not be to measure human capital, per se…there are some benefits to developing such a database, i.e., to sort, arrange, and compare employees’ skills with what is or may be required of such positions in the future, and then identify any (human capital) gaps and determine how to effectively and proactively bridge those gaps as it becomes necessary to do so.
This post was inspired by…
‘Human Capital: Why and How To Measure It’ authored by Leen Sawalha https://atmanco.com/blog/hcm/measuring-human-capital/
‘A Human Capital Measurement Scale’ authored by by Juarez Domingos Frasson Vidotto, Helio Aisenberg Ferenhof, Paulo Mauricio Selig, Rogerio Cid Bastos – Journal of Intellectual Capital, April 2017, Emerald https://www.emeraldinsight.com/doi/abs/10.1108/JIC-08-2016-0085
Michael D. Moberly St. Louis May 7, 2019 [email protected] the ‘Business Intangible Asset Blog’ since May 2006, 650+ published posts, read in 137 countries, ‘where one’s attention span, businesses intangible assets, and solutions converge’!
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