Human

capital
management
Lecture 2
 Defini0on
•  HCM is concerned with obtaining, analysing and
reporting on data that inform the direction of value-
adding people management, strategic, investment and
operational decisions at corporate level and at the level
of front line management.
•  The defining characteristic of HCM is the use of
metrics to guide an approach to managing people that
regards them as assets and emphasizes that
competitive advantage is achieved by strategic
investments in those assets through employee
engagement and retention, talent management and
learning and development programmes.
HUMAN CAPITAL MANAGEMENT

The provision of guidance on

effective people management
by the systematic analysis,
measurement and evaluation
of how people policies and
practices create value.
 Defining human capital
A recent research study, estimated that the value of human capital
represented over 36 per cent of total revenue in a typical
organization - It's not surprising, then, that there's a growing
demand to define and measure its contribution and the return
on investment in it.
—  Defining human capital as an Intangible Asset:
—  A plan for securing, managing and motivating the workforce
capable of achieving business goals

—  With the growing realization of the importance of intangibles,

financial analysts and investors are calling for more
transparency in methods to measure their value.

4
 Defining Human Capital

—  There are many definitions of human capital, some of which unfortunately refer
just to the efficiency of the HR function - such as the average number of training
days per employee.
—  ‘A strategic approach to people management that focuses on the
issues that are critical to an organization's success - The DTI's AfP task
force
—  A form of asset management: a plan for securing, managing and
motivating the workforce capable of achieving business goals -
MERCER

—  Human capital extends well beyond the HR function to encompass the total
people strategy of the organization and the management practices needed to
optimize performance and drive value creation.

—  Human capital owned by all of the business leaders and resides in everyone
within the organization.

5
 Human Capital Management (HCM) Definition

—  Human Capital Management can be defined as

“an approach to people management that treats it as a high-level strategic issue
and seeks systematically to analyze, measure and evaluate how people policies
and practices create value”

—  Defining the link between HR and business strategy is an important

issue to understand the HCM
—  A human capital approach implies that a realistic business strategy
must be informed by human capital data.
—  how can a business pursue a strategy that doesn’t take account of the
capacity of all the resources available, including the human ones?

Human capital can be seen as a bridging concept between HR and

business strategy.

6
HUMAN CAPITAL MANAGEMENT AIMS

Obtain, analyse and report

on data that inform the
direction of HR strategies
and processes

Use measurements to prove

that superior HRM strategies
and processes deliver superior
results

Reinforce the belief that

HRM strategies and
processes create value
through people
 Aims of HCM
•  To determine the impact of people on the business
and their contribution to value;

•  To demonstrate that HR practices produce value for

money in terms (e.g. ROI).

•  To provide guidance on future HR and business

strategies.

•  To provide data that will inform strategies and

practices designed to improve the effectiveness of
HRM in the organization.
 Linking to the business strategy
l  From compensation to talent management, learning and
development to organization design, have sometimes been built
up in isolation and from 'best' professional practice rather than
being developed as an integrated support for business needs.
l  Human Capital strategy seeks to address this by placing the
investment and development of the workforce as a key component
of business strategy.

l  This implies that People Management should be clearly set out

in a framework that allows for a strategic 'fit' and for flexibility in
matching changing business requirements.
l  It's well worth producing a human capital business plan with a
summary of the organisation's human capital strategy.

9
Business strategy and HCM
THE SIGNIFICANCE OF HUMAN CAPITAL

It is the knowledge, skills and abilities of individuals that create value,

which is why the focus has to be on means of attracting, retaining, developing
and maintaining the human capital they represent, thus producing:

A human capital pool that cannot be imitated or substituted by rivals

Human capital advantage that results from employing people

with competitively valuable knowledge and skills

Competitive advantage
Business drivers and HCM
Intellectual and Human
Capital
THE ELEMENTS OF HUMAN CAPITAL

Human capital

Intellectual capital Social capital

Organizational capital
 Intellectual capital
•  the stocks and flows of knowledge available to an
organization. These can be regarded as the
intangible resources associated with people which,
together with tangible resources (money and
physical assets), comprise the market or total value
of a business.

•  Bontis (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.
 Social capital
—  It consists of the knowledge derived from networks of
rela0onships within and outside the organiza0on. The
concept of social capital has been defined by Putnam (1996)
as ‘the features of social life – networks, norms and trust –
that enable par0cipants to act together more effec0vely to
pursue shared objec0ves’
 Human capital advantage
—  sustainable compe00ve advantage is aPained when the firm
has a human resource pool that cannot be imitated or
subs0tuted by its rivals.
 Questions on people management raised by human
capital theory
•  What are the key performance drivers that create value?
•  What skills do we have?
•  What skills do we need now and in the future to meet our
strategic aims?
•  How are we going to attract, develop and retain these skills?
•  How can we develop a culture and environment in which
organizational and individual learning takes place that meets
both our needs and the needs of our employees?
•  How can we provide for both the explicit and tacit knowledge
created in our organization to be captured, recorded and used
effectively?
 Why measuring the value and impact
of human capital
•  Human capital constitutes a key element of the market worth of
a company. A research study conducted in 2003 (CFO Research
Studies) estimated that the value of human capital represented
over 36 per cent of total revenue in a typical organization.
•  People in organizations add value and there is a case for
assessing this value to provide a basis for HR planning and for
monitoring the effectiveness and impact of HR policies and
practices.
•  The process of identifying measures and collecting and
analysing information relating to them will focus the attention of
the organization on what needs to be done to find, keep,
develop and make the best use of its human capital.
•  Measurements can be used to monitor progress in achieving
strategic HR goals and generally to evaluate the effectiveness
of HR practices.
•  You cannot manage unless you measure.
 Main HCM data used for measurement
—  Basic workforce data – demographic data
(numbers by job category, sex, race, age,
disability, working arrangements, absence and
sickness, turnover and pay).
—  People development and performance data –
learning and development programmes,
performance management/poten0al
assessments, skills and qualifica0ons.
—  Perceptual data – aTtude/opinion surveys, focus
groups, exit interviews.
—  Performance data – financial, opera0onal and
customer.
 Approaches to measurement

—  The human capital index

—  The organiza0onal performance model

—  The human capital monitor

 Human capital index
—  Watson WyaP (2002) iden0fied four major categories of HR
prac0ce that could be linked to increases in shareholder
value crea0on:
—  total rewards and accountability 16.5 %
—  collegial, flexible workforce 9.0 %
—  recrui0ng and reten0on excellence 7.9 %
—  communica0on integrity 7.1 %
 The organiza,onal performance model
—  People, work processes, management structure,
informa8on and knowledge, decision making and rewards
plays out differently within the context of the
organiza8on, crea0ng a unique DNA.
—  If these elements have been developed piecemeal, as o_en
happens, the poten8al for misalignment is strong and it is
likely that human capital is not being op0mized.
—  ‘Internal Labour Market Analysis’: draws on the running
record of employee and labour market data to analyse the
actual experience of employees. Thus gaps can be
iden8fied between what is required in the workforce to
support business goals and what is actually being
delivered.
 The human capital monitor
—  is to iden0fy the human value of the enterprise or ‘human asset worth’:
employment cost × individual asset mul,plier.

—  Individual asset mul,plier: a weighted average assessment of capability,

poten0al to grow, personal performance (contribu0on) and alignment to
the organiza0on’s values set in the context of the workforce environment.

—  Absolute figure isn’t important: what does maPer is to consider whether

human capital is sufficient, increasing, or decreasing, and highlights issues
to address.

—  The most cri0cal indicator for the value of human capital is the level of
exper8se possessed under the headings of iden0fied organiza0onal core
competencies.
 The Difference Between HCM and Strategic HRM

—  Andrew Mayo, Professor of, argues that what distinguishes human capital and
HCM from HRM is the emphasis on the value of people and what they produce,
rather than a focus on the HR function itself.

—  HCM, unlike HRM, is about assessing the impact of people management practices
and the contribution of people to bottom-line performance.

—  The development of human capital might develop as follows:

—  assessing the effectiveness of HR
—  evaluating the impact and effectiveness of people management processes
—  using human capital data
—  developing measures to calculate the return on investment in people
—  HCM, which includes strategically-focused areas HCM reporting.

As organizations evolve their human capital evaluation and reporting,

they increasingly adopt a more sophisticated approach to their
measurement techniques.

25
HCM AS A BRIDGE BETWEEN HRM AND BUSINESS
STRATEGY

Business
HCM strategy
HRM
THE PROCESS OF HUMAN CAPITAL MANAGEMENT

Drawing conclusions Guide to future

Measurements Reporting
about the significance action
measurements
of the measurements
 HC Measurement and Reporting

—  4 Principles
—  Human capital should be viewed as a bridging concept linking business strategy and
HR practices.
—  It is a precarious asset – the potential mobility of individual employees could and can
undermine an organization's ability to deliver.
—  It is a paradoxical asset – the qualities that individuals bring, notably flexibility, mobility
and personal commitment, the very same factors that create competitive value, are
some of the most difficult to measure.
—  Human capital measurement is context-dependent.
—  The specific set of measures are less important than the process of measuring and the
uses for the information gathered.

—  Focus on internal rather than external reporting, as the latter is impossible without solid
internal information.

—  There are three core principles behind effective HCM:

insist on systems thinking get the 'right' facts focus on value.

28
 Guide for HC Measurement and Reporting

The purpose of this Guide is to help organizations move forward with their
internal HC measurement and reporting, by providing practical information
and setting out a clear process to follow. This process has five key stages,
and each section of the Guide will cover each of these stages in turn.

—  Step 1 – Setting human capital management in context

—  This section defines what HC is and its links to the business strategy, and
provides an overview of the frameworks and models necessary HCM and
measurement.

—  Step 2 – Getting started: gathering and collating the data

—  This section provide guidance on the nature and sources of relevant
information for HC reporting, what measures and categories might be
reported on, and how this information can be collated to build a HC
measurement platform.

29
 Guide for HC Measurement and Reporting

—  Step 3 – Measuring human capital: tools and methodologies

—  This section presents the spectrum of measurement techniques for HC,
introduces statistical methodologies which can be deployed to leverage
the measurement platform, shows how to communicate results internally
and select key metrics to guide human capital decisions.

—  Step 4 – Reporting the data: from internal to external reporting

—  We address the links to the related issues of external reporting
requirements, what kind of information investors are expecting, and
propose a framework for external reporting.

—  Step 5 – Developing a route map to human capital reporting

—  This final step covers developing your own route map, identifying who in
your organization should be involved, determining stakeholders’
expectations, and embarking on the human capital measurement journey.

30
Internal HC Measurement and Reporting

31
 APPROACHES TO MEASUREMENT
—  Analyse sources of value.
—  Analyse relationships between people management practices and
outcomes and organizational effectiveness.

—  Measure impact of people management practices on performance, not just

the efficiency of the HR function.

—  Keep measurements simple.

—  Only measure activities if it contributes to decision making.
—  Analyse trends not just actuals.
—  Focus on easily available quantified data.
—  Remember, measurement is a means to an end not an end in itself.

This resource is part of a range offered free to academics and/or students using Armstrong’s Essential Human Resource Management Practice as part of their course.
For more academic resources and other FREE material, please visit www.koganpage.com/resources and then click on Academic Resources.
Thank you for listening!