Features Of The Human Capital Management - Term Paper Example

Features Of The Human Capital Management Table of Contents Table of Contents 1 Introduction 1 Research Context and Research Framework 2 Return on Investment of human capital 3 Human capital as powerful intangible asset 4 Education as an investment 6 Training and Development as means of human capital investment 8 Knowledge management as a means of Human Capital Investment 10 High performance working 11 Measuring the human capital investment returns 12 Conclusion 14 References 15 Introduction Human capital is indisputably the most powerful and valuable asset of an organisation and therefore effective recruiting, selective hiring, progressive training, and successful knowledge development programme have become some of the strategic initiatives of human resource management. Economists generally view capital as asset that serves as resource for an organisation. All other resources including technology and process may not yield desired positive outcome unless the management focuses on effective managing of human capital by enhancing the knowledge, skills, competency, and efficiency of its people. In economic perspective, human capital represents skills, knowledge, and competencies that people acquire through education, training, and experience (Mankiw, 2011, p. 538). Human capital represents commercially valuable skills (Marcus, Ippolito, & Zhang, 1998, p. 490) and economically productive attributes of an individual or group of people. This paper reviews various literature on return on investment of human capital and examines how and why investments in to human capital demonstrate a very high return on investments. This paper illustrates the significance of investments to human capital in terms of its long-term productivity and profitability factors. Research Context and Research Framework In today’s highly competitive and complex business environment, most businesses are looking for effective strategies that can help them achieve sustainable competitive advantage. With a view to achieve the ultimate business goal to create and deliver value for customers, management experts brought significant and strategic changes in business investment. Many went to investing in technologies whereas many others to investing in large-scale fixed capitals. Investing in technology is more visible and easily measurable than investing in human capital. However, investing in human capital ensures greater benefits and higher potential. Economic advantages of investment in human capital can be compared to the advantages of labor intensive industries. Literature, including Ajami and Goddard (2006) and Ul-Haque and Bell (1995) emphasized that emerging countries like China reported rapid economic growth in labor-intensive industries whereas relatively less economic growth in both capital and technology intensive industries. This research work demonstrates what, why, and how the investments in human capital yield high positive returns on investment. Investments to human capital are in forms of training, development, skill enhancement, selective hiring, retaining skilled workforce, knowledge management, etc. Investments in human capital directly result in bringing high performance working, improving workforce productivity, and ensuring long-term profitability. Return on Investment is perhaps one of the most critical concepts in financial accounting. It is the ultimate measure of accountability showing the financial return for investing in a programme, process, initiative or performance, etc (Phillips & Phillips, 2006, p. 1). It is a concept for quantifying the value of an investment. This is typically a ratio analysis between the spending on a particular asset and the net returns from the same. Human capital is intangible asset and business organisations invest in to it with a view to bring greater returns of profitability and productivity. This paper aims to describe the concept of return on investment of human capital and explain the returns from human capital investment. Return on Investment of human capital There are HR departments and effective management systems in almost all the business organisations. However, most business organisation lack an effective system of metric and systematic analysis to describe and predict the costs and productivity levels of its people. Human Resource Management requires both quantitative system to measure and analyze costs, capacity, and time and qualitative system to focus on value and human reactions that reflect the ultimate productivity of the firm (Fitz-Enz, 2009, p. 11). For instance, training and employee development are significant part of many organisation’s budgets. It is therefore highly important to use certain economic measures to assess the success of the training and development programmes. Human capital investment through methods of education, training, and employee development programme was larger in the United States than the investment and total spending on physical capital (Baron & Armstrong, 2007, p. 8). The idea of investing in human capital and its significance in terms of economic value has been first developed by the economist Adam Smith in early 1770s. He argued in the Wealth of Nations that there is greater difference between the ways of working of individuals with different levels of education, skills, training, and developments (Baron and & Armstrong, 2007, p. 8). To assess and evaluate the returns of human capital investment, it is critically important to understand how human capital interacts with other forms of capital and to recognize different methods of investments in human capital such as education, training, development, and knowledge management. Human capital as powerful intangible asset People in an organisation represent knowledge basis with which the company produces products and services and generate new intangible assets. Jennewein (2004, p. 115) noted that people provide a company with their knowledge, experience, and skill that human resource management uses them in generating the company’s output. It is very evident from literature that employee’s know-how, experiences, and wisdom usually represent a company’s most valuable intangible assets. Fitz-Enz (2009, p. 20) stressed that human capital is the combination of skills, knowledge, motivation, engagement, and commitment of people in an organisation. People activate the intangible forms of intellectual capital and the equally passive forms of tangible capital to improve operational efficiencies. HR functions do not confine in managing and controlling the people in an organisation in terms of physical availability, recruitment, selection, training, and so on, but rather concentrates on enhancing their intellectual abilities and innate qualities. In the economic and financial perspectives, human capital are truly intangible, but are different in terms of how they and other intangible assets are marketed, valued, and traded. Intangible assets, such as trade mark and good will can be marketed, rated, and traded. Intangible assets are shown in financial reporting such as balance sheet. An organisation’s human capital represents its internally generated goodwill figure but is not figured on its balance sheet (Scarbrough and & Elias, 2002, p. 6). Accounting methods are based on historical records of transactions providing relatively little understanding of the impact on such intangible assets on the performance. In short, human capital is intangible asset but is not marketed or traded. As Bontis (1999, p. 433) stressed, human capital is the collection of intangible resources of three kinds: 1) competencies, including skills and knowledge, 2) attitude, including motivation and leadership and 3) intellectual ability with which they are quick to adapt to changes. Human capital consists of skilled, creative, motivated, and knowledgeable people within an organisation and they understand different business contexts and competitive requirements to respond them effectively and react logically (Murale & Ashrafali, 2010, p. 49). Human capital is very different from all other types of capital because, they understand their individual and collaborative role and responsibilities in relation to the vision, mission, objectives, and competitive feasibility of the firm. Similarly, they can create, share, and make use of their knowledge for continual learning and to form organisational learning environment. It thus helps the firm cultivate organisational competencies (Murale & Ashrafali, 2010, p. 49). Other form of capital cannot be said to have responsibility and discretion about the success keys of the organisation, but human capital shows organisational commitment and are concerned about the success of their organisation. Concerning the aspect of return on investment, the typical measures such as organisational performance, quality of output, employee as well as customer satisfaction, and success factors of the firm are direct returns of the intangible benefits of human capital investment (Phillips, 2005, p. 82). When Human Resource Management develops and motivates the intangible qualities of human capital, the organisation will most likely to enjoy favourable returns such as organisational learning, teamwork, collaboration, employee satisfaction, organisational commitment, and so on. Phillips (2005, p. 82) noted that the ROI is measurable in both tangible and intangible ways. Tangible benefits can be measured in monetary ways whereas intangible benefits are business benefits. Education as an investment Cahuc and Zylberberg (2004, p. 69) found that the theory of human capital introduced by Becker in 1964 started with a hypothesis that education of people in business firms is investment that can produce income in the future. This is very evident from the fact that wage differences influenced by investment in education in turn cause differences in individual productivity. Investment in educating human capital will pay off greater returns when people can produce an accumulation of competencies that the firm as a result will be able to achieve competitive advantages and greater business potential. An organisation should pay for the education of its people up to an extent where the present value of the costs are less than the present value of income generated by the educational achievements (Octavian and Nicoleta, p. 270). Constant and lifelong learning have become major concerns of human resource management because knowledge economy demands constant learning. The investment in educating the workforce in an organisation is thus an important determinant of future human capital capability (Fitz-Enz, 2009, p. 206). Educating the existing workforce and helping them develop their career and professional abilities are undoubtedly better than recruiting new educated human capital because the existing human capital have already become experienced and adjusted with the specific environments of the organisation. Lifelong learning is certainly an important aspect of investing in education for furthering the future returns of human capital. Lifelong learning is an ongoing learning throughout an individual’s life directed by the individual needs and with an interest in enhancing personal and professional competencies (Billett, 2010, P. 402). There is greater need for lifelong learning that Human Resource Management requires to invest for future benefits. Lifelong learning may mean different to different levels of people in an organisation. For instance, managers may attend seminars as part of lifelong learning whereas semiskilled employees may participate in rudimentary skills training programmes. Sims (2007, p. 29) instructed HRM professional to provide a full range of learning opportunities for all different levels of employees. By encouraging people to go for lifelong learning, HRM professionals help their organisation to learn, adapt, and change. Lifelong learning aims at favorably influencing the inexperienced people in changing their career targets and making them highly demanded employees. It thus develops their own skills (Uzunboylu & Ursen, 2011, p. 450). Many organisations encourage its people to go for distance or online education. People who successfully complete education from distance or online facilities are found to be capable with certain qualities, such as self-planning of their learning, self-assessment, becoming active learners, peer learning, and leaning from any environment, etc. . (Uzunboylu & Ursen, 2011, p. 450). Many organisations in recent years are supporting employee development through various forms of educational programmes, either at workplace or off-site. Some organisations encourage educational programmes including short-term courses offered by consultants or universities, university programmes, executive MBA programmes, etc (Noe, Hollenbeck & Gerhert, 2003, p. 227). As human capital gains more education related to their profession, they become more knowledgeable people and improve their personal as well as professional qualities. This in turn help them become highly productive and as a result the organisation will enjoy higher returns of investment, such as improved performance, greater employee commitment, effective teamwork, collaboration and employee satisfaction. Training and Development as means of human capital investment Business firms that invest heavily on innovative training and development programmes are found to become successful because it has achieved high performance working, improved overall productivity of employees and ultimately helped the firm achieve sustainable competitive advantage (Noe, 2002, p. 7). Investment in training and development targets enhancing future performance. Training is a planned and systematic effort by Human Resource Management to enable people in a firm to learn profession-related skills, knowledge, behavior, and attitudes toward works. Development is the acquisition of knowledge, behavior, and skills that help the people advance their competence to meet changes in job requirements (Hollenbeck & Gerhert, 2003, p. 8). Organisations adopt different systems of training and development programmes. Major forms of training and development programmes include on-the- training and off-the-job training that comprises of lecturing, classes, demonstration, games, and simulations. All these types of training and development programmes are truly better forms of investment because firms can expect greater returns from people’s improved competencies in future. As Scarbrough and Elias (2002, p. 28) opinioned, training is an ever larger investment and less firm specific and therefore the risk for business owners is that they are investing in a public good. More specifically, no company can guarantee that they always can own their human capital unless the company uses certain retention strategies and that works well too. Cascio (2002, p. 318) presented an investigation about the return on investment for various types of employee training and development programmes. His investigation proved that behavior modification resulted 5:1, customer service resulted 8:1, team training resulted 7:1, manager’s role training reflected 15:1 and sales training showed 21:1. Training and development programmes cannot alone bring the maximum positive results, however; the business also needs to have considerable planning and follow up programmes to evaluate and assess the returns. Garavan, Costine & Heraty (1995, p. 45) explained the correlation between productivity and investment in training and development. According to them, training and development are investments directly to influence the skill creation on productivity. Investments in training and development improve skills and knowledge base of human capital and this in turn bring better returns by helping the firm achieve high performance working. Knowledge management as a means of Human Capital Investment Knowledge management has recently become an important interdisciplinary approach to Human Resource Management. Knowledge Management is a strategic process of creating, sharing, and employing the knowledge in an organisation for the organisational purposes. Many firms in recent years considered knowledge management as an HR strategy because it enhances the human capital. Any effort or spending made to implement knowledge management is an important investment to human capital. Knowledge management strategies are found to have improved employees’ knowledge to make them well performing within the workplace. The positive outcomes and favourable results that Knowledge management generated in the Human Resource Management are the evidences for how effectively it can guarantee greater returns on investment. Knowledge management is an HR strategy that focuses on knowledge creation, knowledge sharing, and knowledge use among the employees within an organisation (Awad & Ghaziri, 2007, p. 26). Knowledge management encompasses certain processes by which knowledge, skill, experience, ability, and expertise are gathered, shared or transferred from people to people and utilized for the general organisational purposes (Forster, 2005, p. 397). Knowledge is either tacit (knowledge that people possess in their minds) or explicit (knowledge that database and documents store) and transfer between these two may take four forms. Knowledge transfer and knowledge creation are the interactive processes between tacit and explicit knowledge. Nonaka and Takeuchi (2005) explained the four types of knowledge transfer, they are tacit to tacit known as socialization, tacit to explicit known as externalization, explicit to tacit that is internalization and explicit to explicit that is combination. They proved that knowledge share especially between tacit and explicit knowledge through various strategic programmes such as retaining older workforce, recruiting highly knowledgeable and talented workforce, maintaining organisational learning environment, encouraging group work and teamwork have been the main forces behind the success of many Japan companies. Investing in knowledge management seems to be less costly whereas it is found to provide with greater returns. Pfeffer (2001, p. 3) stressed that organisations can certainly achieve high performance from major upfront investments like training, selective recruiting, and effective knowledge creation and knowledge sharing strategies. Knowledge creation empowers organisational performance and improves the individual productivity (Yalabik & Chen, 2008, p. 1) High performance working Human capital investment aims at achieving better performance in future, to say high performance working. High performance is often misunderstood as just the best performance of employees in a firm. It is more than the better performance, but it is a system in which a business organisation has best fit between the social system and technical system. Social system in an organisation comprises of people and their interaction. Technical system comprises of technology, equipments, and processes (Noe, Hollenbeck & Gerhert, 2003, p. 5). An organisation will be able to gain best fit between the social and technical systems only when it arranges extensive training and education programmes for its people to get accustomed with the technical system it has. High performance working denotes to an organisation setting in which people gain considerable knowledge in performing specific tasks assigned them and become highly skilled in performing the tasks. Being highly skillful and knowledgeable, employees are able to perform their tasks and produce more within less time and less costs. More specifically, their productivity increases, and the outcome is that the organisation gets best fit of people to work in the technical system it has. By achieving high performance working, the firm can be said to have maximum favourable returns from the investment on human capital. Measuring the human capital investment returns For Human Resource Management, it is critically important to measure and find if human capital investment and efforts made to enhance human capital yield financial as well as performance advantages of the company. It should never be limited to mere matching of human and financial variable that has been in practice for several years. It is not to confine to measuring the revenue per employee, but rather it should be broadly measured from the overall quality, business performance, effective marketing programmes and better inventory control. There is no single metric for measuring the relationship of investments in human capital to a firm’s financial performance, but the firm has to depend on many metrics (Fitz-Enz, 2009, p. 39). Metrics of return on investment should measure the return that a company achieves on its workforce investment, perhaps calculated by dividing revenues minus non-wage costs by remuneration costs (Armstrong, 2010, p. 171). He noted that higher human capital return on investment is associated with greater recruitment investments with almost higher cost per hire, increased acceptance of job offerings, lower resignation rates and lower rates of absence, and high level of performance-based pay. Traditionally, companies have been following revenue per employee metric. They used sales per employee measure for this purpose. However, this metric has become outdated in today’s value-oriented and quality seeking business environment. It is because today’s business organisations not only depend on full-time employees but also part-time employees as well as outsourcing the human capital. An effective system to measure the return on investment is Human Economic Value-added in which net operating profit after tax minus cost of capital has been measured. This system measures if the actions of Human Resource Management has added true economic value rather than simply relying on financial statements (Fitz-Enz, 2009, p. 45). As similar to that of income statement used by businesses, human capital cost factor can also express the revenue and value calculations. He identified the four basic human capital costs; that are pay and benefit costs for employees, pay expenses for contingencies, expenses incurred for absenteeism and costs that can be measured for employee turnover. Another important metric for measuring human capital return on investments is Human Capital Value added. It is the measured of human capital productivity in the form of revenue per employee (Fitz-Enz, 2009, p. 46- 48). Fitz-Enz (2009, p. 50- 51) described human capital return on Investment as an important metric for measuring return on investments for human capital. This shows the relationship of investments to human capital and profitability through ratio analysis. In short, traditionally there has been just one method for measuring the ROI of human capital; that was revenue per employee. However, in today’s business contexts, value, and quality aspects are of greater significance and therefore organisations need to depend on different metrics, such as Human capital return on investment, human capital value added and human capital cost factor. Conclusion This piece of research paper has reviewed various literatures on return on investment of human capital. Return on investment is an important measurement that explains how a specific investment yields returns. Human capital has become the most valuable asset in recent years since no other capital can bring result unless human capital works with it. Business organisations in recent years found human capital enhancing as most significant to its business strategies and have emphasized various programmes or tactics to improve the intangible values of human capital. Education, training, and employee development programmes are thus some of the techniques that businesses use to improve human skills and knowledge. As and when their skills and knowledge are developed, it undoubtedly benefits the business to achieve high performance and increase financial performance as well. References Ajami, R.A and Goddard , G.J, 2006, International Business: Theory and Practice, Second edition, M.E. 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