Investing in human capital, people assets
Published February 9, 2007
Today's competitive global market environment brings steadily increasing pressure to improve return on investment (ROI). In the push for improvement, an organization’s biggest investment and its primary assets are its human capital.
Many companies are focused on management of capital assets – maximizing utilization and minimizing downtime with a minimum of upkeep and maintenance.
Return on capital assets is constantly being measured with break-even calculations and strictly financial returns – all typical “bean-counting” myopia. Indeed there are several technology solutions that are being offered to address these kinds of plant and equipment problems – on-line monitoring, machine-to-machine (M2M) communications and the like. Operating ROI is constantly monitored and can be made available at any time.
But there are no real measurements to monitor and maximize company’s biggest assets – people. In most companies this is the realm of “human resources”, often reporting at a non-executive level to a financial manager and mostly related to payroll, vacations, insurance, legal regulations and discipline. Even in large corporations, the Human Resource (HR) Manager is often ranked lower than other executives.
Peter Drucker’s advice
More than 50 years ago, the famed management guru Peter Drucker was the first to assert that workers should be treated as assets, not as liabilities to be minimized or eliminated. He originated the view of the corporation as a human community built on trust and respect for workers, and not just a profit-making machine.
Peter Drucker wrote continuously on a variety of issues. His books launched the "practice of management" as we know it today. In his later years his comprehensive articles covered an amazingly wide spectrum of human affairs.
The great management guru died in November 2005, at the age of 95, eight days short of his 96th birthday. His immense impact will continue for much of this next century. It may be worthwhile to recall some of his key ideas.
- The first (1950s) to assert that workers should be treated as assets, not as liabilities to be eliminated.
- Originated (1950s) the view of the corporation as a human community built on trust and respect for workers, and not just a profit-making machine.
- First (1950s) made it clear that there is "no business without a customer", a new marketing mind-set.
- Wrote (1970s) about the contribution of knowledge workers, long before anyone knew or understood how knowledge would be the essential capital of the New Economy.
In an article for the Harvard Business Review, Peter Drucker observed that while all organizations say routinely that people are their greatest asset, “few practice what they preach, let alone truly believe it.” He insists that when companies claim they are “people-orientated” it’s often “corporate hypocrisy.” After all, how can companies declare that they put their employees first when they are willing to lay off thousands while the leaders get bonuses?
People-assets are too often frittered away as casualties of short-term financial thinking. Companies driven by the need for short-term results will do well to heed Peter Drucker’s advice. People are a company’s primary assets; they represent the knowledge base, the proprietary edge.
Globally we live in times of turbulence and change. Because of accelerating technology, business is moving at ever greater speeds. Today, people under the age of about 35 (classified as Generation X) have abandoned organizational loyalty and consider the continued development of their own skills as their personal passports to survival in changing times. Some of these attitudes have come about as a result of corporate short-sightedness in ignoring individual tenure during difficult times.
The problem is not that companies don’t value their people — it is that they don’t know how to value them in the new business environment. It’s not simply a matter of buying more tools and additional software and paying more attention – it’s much more widespread and diffuse than that. Loyalty is a two-way process, a culture that is carefully developed and nurtured over a long time.
Successful organizations recognize that intellectual capital and knowledge management are the core ingredients of success. Good businesses know that while most other assets are replaceable and become obsolete, developing and nurturing people, and exploiting their knowledge and experience is paramount.
In order to value people, companies must move beyond the concept of human resources and toward the notion of human capital. The term “resource” implies an available supply that can be drawn upon when needed. The term “capital,” however, refers to something that gains or loses value depending on how much is invested in it, and how that investment is made.
Here are some ideas that flow from the concept of “human capital”:
- People are assets that must be valued, measured, and developed.
- People are not hard assets that depreciate in value and can be written off; they are dynamic assets can increase in value with time.
- People are primary assets. “Human capital” represents the remaining assets of a business after everything else has been eliminated.
- The systems created to recruit, reward and develop people form the major part of any company’s value — more than other assets such as cash, land, plants and equipment, and intellectual property.
- Company value and, therefore, shareholder value suffers when human capital is mismanaged.
Assets or liabilities?
There are two distinct camps when it comes to how people are viewed within an organization. Successful companies treat people as assets. But many financially orientated corporations treat people as costs and overhead expenses, much like any other expense that can be reduced or eliminated for short term gain. That attitude becomes embedded as part of the corporate culture.
Most organizations would protest! After all, they go to great lengths to communicate how they value their people and make every effort to do the right thing by all their employees. However, the ultimate test is in how people are accounted for in the financials – salary expense, headcount, benefit expense, training expense, etc. all of which are the costs which are typically most affected by “belt tightening” when last quarter’s (or last year’s) earnings turn out to be less than expected.
For successful companies today, management goes beyond capital assets. It involves consistent, long-term investments in leadership and committed talented people.
Treating people as if they truly were assets would not only impact how they get accounted for, but how they were treated and nurtured. If a talent search was undertaken with the same care and methodical due diligence as a piece of capital equipment (for example, expensive machinery or computer systems), reviewing the specific ways company performance will improve, and what “maintenance and support” would be needed to maximize performance, then that company is more likely to consider its people as assets.
If intellectual capital was nurtured and maintained in the same way that mechanical equipment was maintained and upgraded, then companies would not consider cutting the training budget, or withholding merit increases when there is a profit shortfall. The asset that thrives is the one that is fed.
Investment in people will pay off like investments in other assets. It’s a long-term strategy. The last thing a company should do for short-term gain is asset-dumping. Indeed, that’s the time to get the assets working extra hard. Everyone knows that without good people, good products cannot be developed, or good services delivered, or good customer relationships maintained. But when times get tough, people are often viewed as expendable. And sadly, the lower down the chain a person is the more expendable they become.
Treating people as if they are costs demoralizes and disenfranchises them. A company’s competitive advantage erodes whenever investment in people is cut back – when layoffs occur. This takes a predictable toll on the company’s health and inevitably the bottom line.
Suppliers & customer relationships are assets
In the new business environment, it may be worthwhile to point out that people-assets are not just limited to personnel employed directly within the company. There’s another valuable leap that the best companies are making with their people assets: motivating and encouraging not only their own employees, but also collaborating effectively with suppliers and customers alike. The best companies develop people and company relationships that yield good results – beyond just short-term price and delivery.
In the new global environment, people should work in extended virtual teams comprising company employees, as well as customers and supplier partners. Just as collaboration between separate departments within companies proves to be very effective, collaboration should be extended beyond conventional corporate boundaries.
Working in multi-company environments, transcends international boundaries. Successful companies assign people to establish collaborative relationships with customers and suppliers. Strong mutual inter-company benefits will result, to build these relationships and yield results.
Look around your own company to review whether people are being treated as expendable costs, or as valuable human capital.
Jim Pinto is an industry analyst and commentator, writer, technology futurist, angel investor. You can email him at: email@example.com. Or review his prognostications and predictions on his website: http://www.jimpinto.com/. Review the contents of his new book “Pinto’s Points – How to Win in the Automation Business” at: http://jimpinto.com/writings/points.html