Effective human capital management for business sustainability

The business environment and operational climate is dynamic. It has many uncertainties and unpredictability. Ridges and troughs are the nature of the game! This is due to the so called ‘PEST’ or Political, Economic, Social and Technological factors both locally and globally.

Therefore, businesses adopt different strategies during different ‘cycles’ for survival; from extremely cautious ‘risk averse’ to the highly-bold ‘risk-taking’ approaches. Business strategy too is and has to be situational to ensure business continuity.

However, my point of concern is that the kind of strategies some companies adopt during bad times. Whether entities adopt risk taking or risk aversion, a common tendency is to reduce costs or engage in ‘cost cutting’. This is good as long as it is focused on pruning unnecessary expenditure – which is cost rationalising – but not cutting down on essential investments on resources and cutting costs to the bone, thereby strangling the organisational efficiencies. That’s a ‘penny wise-pound foolish’ practice with long-term negative ramifications.

However, the sad fact is even the organisations which adopt ‘cost rationalising’ tend to cut down human resources and related expenses such as training and development and talent recruitment. This is the very reason in this country we still hear of ‘retrenchment,’ ‘VRS plans’ and ‘golden handshakes’ and even ‘constructive terminations’ by some unprofessional and uncivilised organisations – although not a common practice.

Two years ago when the global recession hit us, we witnessed certain conglomerates sending on Voluntary Retirement hundreds of their top and middle level executives, spending a fortune on compensation payments. In the apparel sector even now some groups have resumed this practice, according to industry sources.

The retrenchment/VRS mania

However much one would try to justify cutting down people by any name or cutting down on investments in their training and development, such people and organisations have forgotten or chosen to ignore the fact that – as Chatzel (2004) said – “Organisations are nothing more than extensions of human thought and action!”

In other words, people make organisations tick and in the absence of people, there is no organisation. This does not mean ‘the more (people) the merrier’. The take on this is you need to have the right quantity of the right people!

Therefore, more often than not, the organisations which clamour to cut down its people are those that either do not have the right people, those which have more than the needed right people (due to unplanned greedy picking for egoistic and/or misguided perceptions on corporate image/employers of choice) or have more than it needs of both the right variety and the wrong species.

In short, these are organisations which have not looked at their people as knowledge and skill assets or capital investments as they would at other physical assets; and have failed to engage in effective ‘human capital deployment and management’! The bitter truth is these organisations pay lip service to preserving ‘human capital’ in their external and internal preaching, but do little or nothing to optimise on the human capital, thereby wasting valuable careers and productive output potentiality of people.

What is human capital management?

Human Capital Management (HCM) is all about aligning HR policy and strategy or linking same with business strategy. It is “a strategic approach to people management that focuses on the issues that are critical to organisational success” (Accounting for People Task Force – 2003).

Daikin (2005) further expands this definition by adding that HCM is “development and application of relevant measures – both qualitative and quantitative, gathering and analysing results and utilising that information for strategic advantage.” Simply, how much an organisation aligns its people practices with strategic intent and competitive advantage.

There are many theories in the world about HCM and diverse practices are existent. Many models have come up where people are regarded for what they are – assets – and that people-related costs have to be viewed not as costs but as investments on which they can expect and get a Return On Investment (ROI).

There have been many attempts at valuing the human asset/capital and there are many accounting methods practiced. There are cost models which addresses historical acquisition, replacement and opportunity costs, HR value models combining non monetary (qualitative) and economic value attributes and monitory models based on discounted estimates of future earnings, etc., which are all highly technical exercises.

Some companies in the world including a Sri Lankan entity a few years ago displayed thus valued human capital in the asset side of the balance sheet. However this practice of ‘human asset accounting,’ although good on paper in annual reports and other documentation to boost company image, has not been accepted by the accounting fraternity as a sound and practical method of accounting due to many inherent flaws and biases that can occur which will not be delved into here.

Suffice to say that the Accounting Standards Board of the UK summed up in a nutshell all the arguments against simply stating, “We don’t think you can solve (organisational) problems by putting them into accounts!” True, indeed.

However, it must be stressed that human capital performance measurements are essential as other key performance indicators as:

nIt forms the basis for measuring the impact of people’s output on bottom-line

nIt facilitates the deployment of checks and balances to optimise ROI on people

nIt drives the compensation and reward philosophy and practices

nIt highlights and justifies where further investment on the people asset(their engagement development and retention) has to be done

The above measurement mechanism (whatever the measurements would be as relevant and developed by each organisation) has to be a part of the total HCM model and process.

HCM theory, process and implementation

Baron & Armstrong (2007) argue that organisations have “intellectual capital” intangible such as corporate image and goodwill. According to them this intellectual capital, which is essentially the stocks and flows of knowledge available to an organisation, which is made up of three sub components i.e. human capital – the knowledge skills competencies and potential to grow held by the people in the organisation, social capital – the structures, practices and networks put in place for knowledge to flow/exchange both internal and external and organisational capital or the institutionalised or stored explicit knowledge an organisation possesses. Therefore according to them in the human capital management process implementation, these questions have to be addressed before a suitable model is developed:

nWhat skills do we have?

nWhat skills do we need – now and in the future?

nHow are we going to attract retain and develop these skills?

nHow can we develop a culture and environment in which both individual and organisational learning takes place meeting the needs of both these entities?

nHow can we provide for the capture of explicit and tacit knowledge

The key HCM drivers therefore would be:

nThe need to achieve organisational objectives

nThe realisation that organisational objectives can be achieved only through “value creation” by people

nThe acceptance that for value creation there has to be a set of specific performance norms/KPIs and measurements and that these measurements would shape HR and business strategy

nEnsuring that the HCM process delivers the required/right value for capital employed

The following questionnaire developed by Saratoga/Price Waterhouse Coppers (Saratoga 2005) would form an essential component in a practitioner’s tool kit in the implementation of a HCM model

1.What are the priority business challenges facing your company in the next two years?

2.What human capital actions are needed to maximise the opportunities required to guarantee business success?

3.How will you make those actions happen?

4.What are your KPIs and how are they related to the business challenges?

5.What data are required to measure human capital performance?

6.Are you fully informed and involved in the company’s business review and plans?

7.What human capital information would be moist valuable to your shareholders and in what format?

8.What information gaps exist and how do you plan to fill them?

9.Are information systems advanced and flexible enough to respond to all recognised demands?

10.Are you satisfied that the information you generate is robust and can stand scrutiny?

11.Are you familiar with the key human capital subjects and major global trends that may be raised by shareholders?

12.Is there a direct link between what the HR function does and what the board wants it to do?

In conclusion, the progressive organisation must always keep in mind that unlike other assets, the human asset is not and cannot be ‘owned’ by a company, but merely hired for a mutually-beneficial period of time and that work is a two-way exchange of value and not a one-way exploitation by its hirer!

(The writer is a HRD professional and corporate trainer He is an executive committee member of the Association of HR Professionals and The Management Club. He leads The Talent Gallery as Program Director/Key Facilitator. He can be reached at [email protected].)