Human Capital Management

Managing human capital strategically is critically important to business success.


What Is Human Capital?

Human capital is creeping up the corporate agenda and has emerged as a powerful management philosophy. This is partly driven by the importance now being placed on the value of intangibles within organizations. Human capital can be defined as the knowledge, skills, experience and initiative possessed by employees.

Human Capital = Knowledge + Skills + Experience + Initiative

Human capital has economic value to firms. It directly impacts upon organizational productivity and profitability. More recently, the term human capital has been applied to selection, training, compensation, and human resource (HR) management practices in general.

Why Is Human Capital Important?

Human capital costs account for between 30 to 80% of the total costs of a business (depending upon the industry sector). As such, it is typically the largest cost borne by any business or organization. There is now a great deal of evidence that the contribution of people is the largest driver of organizational performance.

However, surveys of CEOs indicate that it is one of the least effectively managed corporate functions. Human capital is one of the least understood, measured and analyzed investments. Companies have revamped practically every business process in their search for competitive advantage, apart from the area of human capital. Many organizations are lacking the concepts, strategies, models and measures that matter most to manage effectively their most vital intangible asset. Human Resource functions are often disparate and "out of synch" with the business strategy, even when we know well that integration multiplies business value.

Furthermore, the Global Financial Crisis (GFC) has left, and continues to leave, an indelible footprint on many organizations. These impacts include, amongst other things:

  • a higher level of conservatism, with an increased focus on assessing and mitigating risk
  • more stringent corporate governance
  • consolidation, with a greater emphasis on long-term value creation and sustainability, given lower growth rates
  • a more strategic and authentic focus on people, who are a real source of sustainable profits

Five Ways of Increasing Human Capital

The ultimate objective in building human capital is to enhance organizational, productivity, profitability and sustainability.

Five ways to build human capital

There are five ways in which an organization can build its human capital. These are:

  1. Acquisition (recruitment and selection)
  2. Engagement and retention (HR and people management practices)
  3. Development (learning and development)
  4. Borrowing (using consultants, contractors)
  5. Merger and/or acquisition

How are you building human capital in your organization? Do you have the right models and measurement systems to monitor and enhance the value of your human capital?

Expert View Author: BA(Hons), BEng(Hons), MBA

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