2002 - Human capital measures
Many have tried but no one has
yet succeeded in measuring the true value that
people can bring to a business. We know people
do add value, otherwise information technology
businesses such as Microsoft would not have such
high market-to-book ratios.
But the most sophisticated attempts
to measure the intellectual, emotional and creative
input that defines the competitive strength of
companies in a marketplace relying increasingly
on intangible assets have so far failed to stir
much interest among general managers, even in
some of the world's largest companies.
There is a simple reason for
this. People are complicated. They act in different,
often unpredictable ways. Their contribution in
the workplace differs too.
Some are good organisers, some
are inspirational, some have tidy desks and tidy
minds, others may produce the occasional creative
gem and little else. Some are understanding, some
are critical, some work long hours and some spend
much of their time gossiping.
The difficulty is in deciding
what kind of work practice matters most. One worker,
for example, may be something of a dull functionary
who will never have a useful idea in a lifetime
of service yet who, nevertheless, can be relied
upon to get a job finished.
Another may be inventive and
visionary and yet lack the skills to convert ideas
into some kind of profitable enterprise. Together,
with colleagues who possess other contributory
skills, they could comprise a dynamic team. Left
to their own devices, these diverse talents might
go to waste.
With so many variables in the
human character it is understandable, perhaps,
that managers have shied away from quantifying
the know-how and capabilities of the workforce.
As a new report points out: "The features
which make human capital so critical are the very
same features which inhibit evaluation."
But this is no excuse for neglecting
the need to undertake such work, says the report
Evaluating Human Capital *, prepared for the UK's
Chartered Institute of Personnel and Development
by Harry Scarbrough, of Warwick Business School,
and Juanita Elias, of the University of Leicester
"If firms were as backward
in identifying and reporting on any of the other
main resources at their command, it would be viewed
as nothing short of scandalous," say the
The report, which looks at various
attempts at measuring the value of employees in
10 UK-based case studies, makes a timely contribution
to the debate on management effectiveness and
the meaning of human capital .
Not only does it chart the evolution
of the term " human capital " from its
economic basis in the work of the late Theodore
Schultz but it also recalls various attempts at
definitions, including one from the Organisation
for Economic Co-operation and Development that
describes it as "the knowledge that individuals
acquire during their life and use to produce goods,
services or ideas in market or non-market circumstances".
The corporate version, of course,
relates solely to the market and the latest business
definitions tend to reflect an increasing interest
from human resources managers, hence the CIPD
interest. The Scarbrough/Elias study defines human
capital as "the competencies which employees
apply to the production of goods and services
for an employer". This is no great surprise,
given HR's obsession with competencies. But it
is a pity, since general managers appear to detest
the word in equal measure. In the context of the
report, "competencies" translates as
skills, abilities and behaviour that define superior
Not one of the 10 companies in
the study was using the term " human capital
" and some said they disliked the phrase
because they thought it reduced individuals to
the status of economic units. All the companies,
however, were happy with the idea of competencies.
One of them, Marks and Spencer, the retailer,
was trying to map various skills and behaviour,
using skills surveys, and had developed an "employee
insight unit" to find out what employees
thought of the company.
The jargon must be getting around
because Tesco, the supermarket chain, has a "people
insight unit" that attempts to measure, among
other things, whether employees are "living
the values of the organisation". This all
sounds a bit happy-clappy but it has become serious
stuff in many multinationals.
Shell UK, for example, believes
it has identified the skills and values it needs
to ensure corporate success and employees are
assessed to make sure they possess these skills.
Royal Dutch/ Shell, the parent company, spent
a period of intense navel-gazing some time ago,
after the outcry against its attempts to dispose
of its Brent Spar oil rig at sea. A social audit
led to its Shell values report and its admission
that: "We had looked in the mirror and we
neither recognised nor liked what we saw. We have
set about putting it right."
This last remark is quoted by
David Boyle in his immensely entertaining critique
of measurement: The Tyranny of Numbers: Why Counting
Can't Make Us Happy. He credits the Swedish company
Skandia with the first attempt to evaluate intellectual
capital in its annual report. Another Swedish
company, Celemi, pioneered the auditing of intangible
assets that soon began to catch on in the US.
Today the race is on, mainly
among accounting firms, to develop a meaningful
audit of human capital . Patricia Hewitt, the
trade and industry secretary, has signalled her
desire to see this kind of reporting in company
accounts. But where does it all stop? As Mr Boyle
points out in his book: "If you thought intellectual
capital was difficult to measure, try empathy."
Empathy, with common sense, foresight,
creativity, good judgment and trust, are becoming
sought-after human qualities among companies that
are serious about differentiating themselves in
the way they approach their customers. But how
do you measure such qualities?
The report admits that there
is "no single measure that can adequately
reflect the richness of the employee contribution
to corporate performance" but it advocates
measuring nonetheless, since it concludes that
"measures are less important than the activity
of measuring". The danger here is that too
many companies will adopt crude, simplistic measures.
As Thomas Stewart, the knowledge management writer,
says in his book Intellectual Capital, "It's
easier to count the bottles than describe the
*The Tyranny of Numbers,
Why Counting Can't Make Us Happy, by David Boyle
(Harper Collins paperback, Pounds 8.99). ** Evaluating
Human Capital , by Prof Harry Scarbrough and Juanita
Elias, Chartered Institute of Personnel and Development,
as a pdf file