Inarticulate ramblings of a management consultant

the day to day experiences of a consultant operating in weird and wonderful client situations

Human capital – what does it actually mean?

With thanks to Paul Freeman for giving me the initial inspiration behind this latest blog / rant, I want to explore this concept today in a little detail.

A long long time ago (in a far away land), someone thought of this phrase as a way of creating a linguistic connection between other forms of capital (financial, intellectual) and that troublesome group of costly, irrational and emotional and most importantly unpredictable assets, the employee base.

I have no proof of this but I suspect that the intention was a positive one…if we can attribute the word ‘capital’ to our employees, our leaders will stop thinking of them as necessary costs to running a business and will start to recognise an inherent value in them.

As with many things to do with people, the experiment was not completed or implemented in its totality. Unlike other forms of capital, no-one seems to have got to the concept of measuring a return effectively. Whether that’s:

  • Informing the market of their superior return on human capital employed compared with their competitors
  • Coming up with clever multiple calculations which valued a business based on the productivity and performance of its human capital.

The only sector where this is done regularly or at least taken seriously by market analysts / observers is in Financial Services where the cost / income ratio is watched closely. The cost component is largely a human capital cost.

So, in general, we are left in no-man’s land…the graveyard of good intentions…to thoroughly mix my metaphors! On the one hand, the term is being bandied around as though it’s an accepted and valuable method of measuring performance but when you look for any substance, you find at best some remedial measures:

  • Retention / attrition rates
  • Average length of service
  • Comparative costs of employment across industry

…and then some even more questionable ones:

  • Employment engagement levels based on surveys

Let me say with regard to the latter that I’m fully in favour of the concept of engagement surveys. What I find utterly extraordinary is the apathy with which the results are treated by leadership in many corporates. This leads directly to the vicious circle of less honest reporting and poorer quality data.

Now, it cannot be beyond the wit of man to be able to measure the contribution of human capital in some kind of meaningful, positive, return based way. For a start, there seems to be increasing energy around measuring innovation in organisations, which is surely a measure of human capital return…and clearly a very important contributor to the health of any business.

Then if we look at time to market for a new product or service offering, it will also give a perspective on internal decision making / autonomy levels.

We could also look at customer experience measures as another sample to demonstrate service quality and market differentiation / ability to charge a premium over the competition.

Finally, the simplest thing of all…looking at revenues as a ratio of the number of employees and looking at the split of direct (customer facing) vs indirect employees (support) may also give some insight into the efficiency of the business.

To summarise, three things need to happen to make Human Capital a meaningful term:

  1. Companies need to start measuring it properly and regularly
  2. Shareholders, analysts and employees need to start asking intelligent, detailed and probing questions about it
  3. Leaders need to respond to the management information which they find

Categories: C suite leadership, Complex transformation, Economics, Human Capital, Innovation, Management Information

Tags: , , , ,

4 replies

  1. Thanks Ben, I enjoy these – well written and thought provoking … One thought – a parallel that is rarely understood or interrogated is the military, where no matter how advanced the equipment, the utilities (ammunition/explosives) the communications or the processes — the entire focus of the collective organisation is on the human factor. Remember that, like many others before and after me, I stood in front of collective bodies of men and women (in my case up to 250 of them) asking them to follow me into war, conflict, peace keeping (in many cases eg N Ireland for the 5th or up to 10th time) or at very least uncertainty without ever having the freedom or authority to offer overtime, holiday or promotion. The team and spirit building that took was the result of years of work (identity, a common bond, pride etc etc) which has never/rarely been matched in the commercial world …. despite the fact that, ironically and expressed carefully, we were dealing with perhaps a lesser educated and perhaps less advanced banding of our society. I spent some time in THALES boiling down the factors that made that possible (with a view to introducing them into the corporate ethics) and we found that, again almost ironically, the 6 ‘codes of conduct’ which were the foundation of that military spirit were actually very simple, behavioural and entirely human — but also rigid, disciplined and enforced from basic training. Could be a useful discussion one day (after sheep, wood/trees, chickens and what you call our new ‘Archers’ life style !!!) ? Love to all

    Jan

    UK Private Mobile: (0044) 7748 692691 UK Home: (0044) 1451 844452

    Skype: jan.de.haldevang

    Date: Tue, 10 Feb 2015 06:41:40 +0000 To: jdeh_bahrain@hotmail.com

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  2. Very interesting insight, Jan…lots of the research around behavioural economics talks to the concept of a common bond / connection as the primary method of removing implicit prejudice and creating teams. In some experiments, physical activities were mentioned as being particularly relevant. As another aside, one of the challenging side affects of Ebola in West Africa has been that physical contact (which was a critical part of the human connection between people in that part of the world) has had to be reduced substantially as it poses a very real threat to ones’ health. Quite what impact that’s going to have on the cohesiveness of society there will be interesting to observe

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  3. Ben. It’s always stagered me that the one area of due dilgence that is so conspicously ommitted, especially in a financial services M&A transaction, is Human Capital. Yet the human capital element has the potential to completely destroy all the financial forecasts. I believe this is for a number of reasons. Firstly the M&A advisors cannot transpose such a subjective item, as Human Capital, onto a spread-sheet. Nor do they have the skills to identify human capital They only commission a Kroll Associates fit and proper report on the key execs. Nevertheless, they are often the deal instigator but simply not enthusiastic at embracing such a fuzzy issue. Ask any young M&A banker why he works such long anti-social hours and he will tell you he is running spread-sheets covering every permutation of financial forecasts upon which both a valuation is achieved and acquisition funding is structured. But not Human Capital! Also bankers talk in deliverables to justify all and everything. How can you put a guaranteed deliverable about Human Capital! Well for a start, a pre-acquisition human capital due diligence audit will identify the strengths and weaknessess contained within a target. Its INTEL and worth what it’s worth. Sometimes crucial, sometimes less so, but should you even go into the ring without it? I can think of one significant publicly quoted insurance deal where the acquirer should never have contemplated the deal as the target management were simply uncontrolable and there are certain people from whom you should never ever buy anything! But no banker wishes to know such a grubby thing. Secondly, there is the assumption that if the senior management are tied in to the deal then all else will follow: “We don’t need to concern ourselves as those guys will bring their teams with them and that’s what they have told us!”. This smacks of a total lack of due dilgence. Beyond line management, acquirers rarely care to determine the comparitive value of the engine room that produces the goods and where the day to day client and counterparty relationshps exist. It is this locker of ambition which commonly gets overlooked and the most susceptible to walking. It’s all well and good firing up a post merger integration programme, to maximise value, but if that Human Capital element has already succombed to the “open season transfer market “, facilitated by the agents (head hunters), then the liklelihood of the financial forecasts matching expectation is greatly reduced. But it happens time and time again. Personally, I think you would have to be insane not to commission a pre-acquisition human capital due diligence audit if embarking on a significant merger,or acquisition, within the financial services sector. And brief your advisor that he has the scope to tell you all possible concerns including a toxic warning. It’s money worth paying and a fraction of the deal costs levied by the conventional financial, legal,& operational due diligence advisors! It might even save millions in wasted shareholder value and the inveitable severance terms that follow.

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  4. Alastair, thank you for what is clearly a heartfelt issue…you are absolutely right of course, it’s completely crackers to buy a business where often half the cost, most of the customer relationships and all the IP rests in the one asset that doesn’t undergo a proper diligence process. Smacks of a lack of adherence to one’s fiduciary responsibility to me. Plus ca change…and all that!

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