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What is Human Capital Management?

Concepts & Definitions Human Capital Management

Human Capital Management

What is Human Capital Management? The term Human Capital represents an asset with a flow of benefits that are greater than the cost of the asset. To most the term capital means assets that yield income; when using the term Human Capital, it means the value added by the workforce.

The approach to workforce management in most organisations focuses on cost i.e. cost per hire, or in other words Financial Capital, which is expressed in hard dollars.

However, recent research strongly suggests that non-financial- management and intangibles can have immediate and dramatic effects on executing organisation strategy with much higher outcomes. Balanced Scorecard approaches offer an alternative to the traditional indicators by describing what has to be measured in order to assess the effectiveness of workforce performance to meet company strategies.

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Financial Capital Management mostly cuts costs

The concentration on financial metrics mainly focuses on cost cutting and short-term gains at the expense of longer-term goals and objectives. We have seen an evolution in Human Capital Metrics through the use of the Balanced Scorecard, human capital metrics and return on investment.

Developing strategic performance measures can be difficult, slow and might not provide the same sense of clarity as cost per hire, however in the case of performance metrics it is always better to be approximately right than precisely wrong.

Human Capital Research

Evidence adds weight to strategic HR

Lake’s (1999) research illustrates that 60% of HR departments have no official measurement system, and those that do merely focus on “performance against budget”. Sanchez (2006, p.16) further broadens the issue conveying that there is too much attention to the financial dimensions of performance, and not enough attention to the performance drivers that determine those results achieved. He also claims that “intangibles such as human capital are the primary source of profits”.

Dr. Mark Huselid, co-author of “The HR Scorecard” and “The Workforce Scorecard“, performs research and consulting activities which focus on the linkages between human capital management systems, corporate strategy and firm performance. Dr. Huselid conducted a study of over 3,000 organisations over a 10 year period. His research focused on comparing the best and worst HR systems, his findings may surprise some.

Figure 1.1 “Five bi-annual national surveys with over 3,000 firms (Huselid & Becker, 1991-2003)”

Watson Wyatt has been globally acknowledged for having created the Human Capital Index or HCI. The HCI was developed by rating 750 leading European and United States organisations on their Human Capital Management practices. In 1999 and 2001 Watson Wyatt surveyed 51 organisations and rated them according to how they scored in the HCI against the five year total return to shareholders.

They found that:

  1. Low HCI organisations averaged a 21% total Return to Shareholders
  2. Medium HCI organisations averaged 39% total Return to Shareholders
  3. High HCI organisations averaged 64% total Return to Shareholders

The reverse correlation was not true. That is, strong financial performance did not lead to better Human Capital Management practice or necessarily to sustained strong financial performance.

SEEK Limited is Australia’s leading employment website advertising positions in Australia, New Zealand and the UK. SEEK have also conducted some interesting research. The SEEK Survey of Employee Satisfaction and Motivation in Australia asked the question, “Is there anything you hate about your current job”? The research discovered, as per the results in Figure 1.2 that over 55% of employees surveyed were unhappy with the quality of management and 50% where dissatisfied with the lack of feedback and appreciation they received.

‍‍Figure 1.2 – “A manager can be a great person but a lousy manager.” – Source

Figure 1.3 “Management – What jobseekers want vs. what they get” – Source

Figure 1.3 describes how employees rate their immediate manager versus management qualities they respect. It is astonishing that the results indicate that the 2005 actually qualities are 55-60% less than the respected qualities

Finance invested in human capital is recognised as having a much greater influence on organisational performance than capital invested in other types of resources.


How does Human Capital Performance Management Work?

Research conducted by the University of Chicago reviewed the business results of 437 publicly listed companies to determine if there was a link between the use of Performance Management systems and business performance. The sample group was divided into organisations with Performance Management systems and those without.

On every financial or productivity measure used in the study, the organisations with Performance Management systems outperformed those without Performance Management systems (Allan Preiss and Maria Galati. “Do you measure up?”, HR Monthly, May 2001: 46-47).

In a survey conducted by Dave Ulrich of 240 organisation’s in 1999 it was found that organisation’s with higher strategic capabilities perform significantly better than lower capability organisations. When a manager and employee set clear and concise expectations about the results that need to be achieved and the methods needed to achieve them, a clear path for success is established. The statistics and research covered clearly relay the same message.

A plethora of recent research strengthens these results as well as the conclusions.

“If you can’t measure it, you can’t manage it — therefore you can’t improve it.”

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