Human Capital Management

Achieving Added Value Through People

Angela Baron, Michael Armstrong

• Publisher: Kogan Page
• Year: 2007
• ISBN:
  9780749451370
• Edition: 1
• Topic: Business
• Subtopic: Human Resource Management
• Index: Business

Human Capital Management (HCM) has recently been described as a high-level strategic issue that seeks to analyze, measure and evaluate how people policies and practices create value. Put simply, HCM is about creating and demonstrating the value that great people and great people management add to an organization.This unique book describes how HCM provides a bridge between human resource management and business strategy. It also demonstrates how organizations can use the concepts of human resource management and the processes involved to enhance the value they obtain from people while continuing to meet their aspirations and needs.Baron and Armstrong explain how to achieve these objectives using various approaches including describing the concept of HCM and how the process works, discussing its application in numerous areas within an organization and examining the role of HR in HCM and the future of the concept.It also contains a toolkit which organizations can use to develop their own HCM policies and practices.

Part 1

The essence of HCM

1

The concept of human capital

The concept of human capital is concerned with the added value people provide for organizations. It has been well said by Chatzkel (2004) that ‘it is human capital that is the differentiator for organizations and the actual basis for competitive advantage’. Human capital theory, as stated by Ehrenberg and Smith (1997), ‘conceptualizes workers as embodying a set of skills which can be “rented out” to employers. The knowledge and skills a worker has – which come from education and training, including the training that experience brings – generate a certain stock of productive capital.

Human capital is an important element of the intangible assets of an organization. The other intangible assets include copyright, customer relations, brands and company image. All these, but especially the know-how, imagination and creativity of employees, are as critical to business success as ‘hard’ assets. The significance of human assets explains why it is important to measure their value as a means of assessing how well they are used and of indicating what needs to be done to manage them even more effectively.

As described by Scarborough and Elias (2002): ‘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-standardised, 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’. They also mention that: ‘In human capital theory, reference is made to people and skills, whilst in theories of physical capital, reference is made to plant and equipment.’

There are many definitions of human capital but in this book it is treated as one of the three elements that make up intellectual capital, the others being social capital and organizational capital. This chapter examines the meaning and significance of each of these elements.

INTELLECTUAL CAPITAL

Intellectual capital defined

Intellectual capital consists of the stocks and flows of knowledge available to an organization. These can be regarded as intangible resources which, together with tangible resources (money and physical assets), comprise the market or total value of a business. Bontis (1996; 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. As described by Edvinson and Malone (1997), these comprise the value of all relationships inside and outside the organization, including those with customers and suppliers. They also cover the values attached to such intangibles as goodwill, corporate image and brands.

The elements of intellectual capital

The three elements of intellectual capital are:

• Human capital – the knowledge, skills, abilities and capacity to develop and innovate possessed by people in an organization.
• Social capital – the structures, networks and procedures that enable those people to acquire and develop intellectual capital represented by the stocks and flows of knowledge derived from relationships within and outside the organization.
• Organizational capital – 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 intellectual capital

This tripartite concept of intellectual capital indicates that, while it is individuals who generate, retain and use knowledge (human capital), this knowledge is enhanced by the interactions between them (social capital) to generate the institutionalized knowledge possessed by an organization (organizational capital).

As Chatzkel (2004) points out: ‘The reality is that organizations are nothing more than an extension of human thought and action.’ It is the knowledge, skills and abilities of individuals that create value, and the focus has to be on means of attracting, retaining, developing and maintaining the human capital they represent. This individual knowledge is retained and put to use through knowledge management processes as described in Chapter 9, but it is equally important to take into account social capital considerations, that is, the ways in which knowledge is developed through interactions between people. It is pointed out by Bontis et al (1999) 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 effectiveness also depends upon making good use of this knowledge, which needs to be developed, captured and exchanged (knowledge management) in order to create organizational capital. In doing so, it should be remembered that, as stated by Daft and Weick (1984), ‘individuals come and go, but organizations preserve knowledge over time’. Or, as expressed more colourfully by Fitz-enj (2000), ‘organizational capital (knowledge) stays behind when the employee leaves; human capital is the intellectual asset that goes home every night with the employee’.

HUMAN CAPITAL

Origin of the concept

The term human capital was originated by Schultz (1961), an economist who proved that the yield on human capital investment through education and training in the United States was larger than that based on investment in physical capital. Schultz elaborated his concept in 1981 as follows: ‘Consider all human abilities to be either innate or acquired. Attributes…which are valuable and can be augmented by appropriate investment will be human capital…By investing in themselves, people can enlarge the choices available to them.’

However, the idea of investing in human capital was first developed by Adam Smith (1776), who argued in the Wealth of Nations that differences between the ways of working of individuals with different levels of education and training reflected differences in the returns necessary to defray the costs of acquiring those skills. The return on investment in skills can therefore be compared to the returns from investing in physical capital. But this comparison has its limitations. Firms own physical capital but not their workers, except in a slave society.

Economists such as Elliott (1991) developed the theory of human capital. He is concerned with human capital in terms of the quality, not quantity, of the labour supply. He describes the decision to acquire or develop skills as an investment decision that requires the outlay of resources now for returns in the future and emphasizes that a major part of the human stock of economies takes the form of human capital. He comments that:

When investing in individuals, firms have fewer guarantees, than they do with machines, that they can secure the continuing use of their services. Individuals, unlike machines, can always decide to leave the firm, or they can decide to withdraw their labour, strike, go absent or work badly. Human ...