Evaluating human capital

Company accounts currently record the costs associated with people, but not the benefits they bring. This is despite the fact that most organisations now accept that people represent the key driver of value in organisations.

A new report Evaluating Human Capital from the Chartered Institute of Personnel and Development (CIPD) examines one of the most important intangible assets in today's economy – the knowledge, skills and initiative possessed by employees.

Written by Professor Harry Scarbrough of Warwick Business School and Dr Juanita Elias, University of Leicester Management Centre, the report suggests that human capital, while fundamental to organisational success, cannot be the subject of a one size fits all measurement tool.

Overall, there is no 'holy grail' in the evaluation of human capital - no single measure which is independent of context and which could accurately represent the impact of employee competencies and commitment on business performance. This is because human capital is, "non-standardised, tacit, dynamic, context-dependent and embodied in people."

However, it is entirely possible for organisations to measure and manage human capital using methodology designed to suit their own needs and goals.

Duncan Brown, the CIPD's Assistant Director General says: "We know that city analysts place a premium on good management – and good people management must be fundamental to this.

"Organisations need to get to grips with measuring and reporting on the value their people bring. This would enable stakeholders to make better-informed decisions about the long-term viability of an organisation and its ability to generate value in a fast changing world."

The CIPD says that organisations need to better understand and put in place key measures of the value which people add to the organisation, such as skills and qualifications, labour turnover rates, rates of innovation, the extent of team-working and key employee statistics in areas such as employee attitudes and demographic composition.

According to Duncan Brown, "today's organisations are using a range of sophisticated management techniques, including progressive people management practices. But our research shows that they still do not fully understand how to adequately value what so many experts agree is the major source of competitive advantage.

"If organisations were as poor at identifying and reporting on any of the other major resources at their command, their stakeholders would express immediate concern."

The importance of intangible assets.

The area where human capital evaluation is currently practised most rigorously is the assessment of small concentrations of individuals who were seen as highly talented and critical to the firm's future.

By embedding these evaluations in management practices, and linking them to the business strategy of the firms, organisations may be capable of developing a more coherent and ultimately strategic approach to one of the most powerful, if elusive, drivers of competitiveness.

The increasing importance of such assets poses a major challenge to existing methods of accounting and valuation. The scale of that challenge is reflected in the size of the gap between the value of a company's tangible assets in its balance sheet and its stock market-value.

This growing disparity between market and book values not only reflects the growing importance of intangible assets. It also dramatically exposes the limitations of traditional accounting practices in identifying and measuring the value-adding elements of the firm.

A new role for HR?

The human capital perspective provides a new rationale for the role of the HR function, where HR is no longer viewed as a cost centre, but rather an asset provider. HR practitioners are conscious that methods which are too closely associated with their function may not be able to secure commitment from other groups in the organisation. This means that initiatives centred on human capital are often given an internal "brand".

The tension between HR and wider business concerns in the evaluation of human capital seems to have been reflected also in the development of small, specialised units to manage certain aspects of this activity. Organisations establishing these units include Tesco, Marks and Spencer and Motorola.

These developments highlight the development of new forms of expertise within and between HR and other functions. Such groups are seen as being linked more explicitly to change and innovation and the data that they generate is being developed for wider business reasons which are strategic rather than bureaucratic in nature.