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