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Human capital from an economist's perspective consists of a company's market value (that is, the firm's value in the marketplace, calculated by multiplying stock price by shares outstanding) divided by the replacement value of its fixed assets. Some firms with relatively few hard marketable assets (for example, plant, equipment, inventory, and so on) may have much more market value than book value. Microsoft, for example, currently has a market value about nine times its book value. This represents the market's valuation of Microsofts human capital. Other firms with extensive facilities, capital equipment, and other hard assets may have replacement values closer to their market values. In these cases, the market places less value on the firm's human capital.
This definition makes calculations and comparisons of value across firms relatively easy. It does not, however, adequately measure human capital in a way that leaders can use on a daily basis. High market value may be due to brand success, dominant market share, innovation, an exclusive technology, or some other factor, any or all of which can create extraordinary market value.
Human capital can also be defined in terms of what is inside the heads and hearts of the people who work in an organization. In economic terms, this approach puts a value on the knowledge, education, experience, and creativity of the work forced. Although desirable, accurate measurement of such employee qualities and contributions remains elusive.
If leaders are to make the most of their organization's human capital, a clearer, more applicable definition is required. Auseful distinction here is the one between what employees can and what they will do. Some analysts apply the term human capital only to what employees can do for an organization. Far more useful, realistic, and promising, from the leader's point of view, is an inclusive assessment of human capital, one that includes willingness, or commitment, along with capability.
The lack of a clear and accepted definition leaves the concept of human capital relevant, timely, and important, but vague and soft. This chapter proposes a simple, yet useful and measurable definition: Human capital = employee capability x employee commitment. As this equation suggests, within a given unit, overall employee capability should increase with experience, but capability alone will not guarantee a high level of human capital. Units with high capability but low commitment possess talented employees who stand around the water cooler; firms with high commitment but low capability have intellectually challenged employees who work hard and quickly. Both extremes are dangerous; building human capital requires both employee capability and employee commitment.
Thus measured, human capital can be assessed at the firm, unit, or individual level. A restaurant chain, for example, may measure the human capital at each of its restaurants, using an index based on employees' average skill level (capability) multiplied by employees' average length of service (commitment). The resulting human capital index would likely be a useful predictor of other positive outcomes for the given unit, including customer loyalty, employee productivity, and profitability.
Knowing how to increase human capital will become ever more valuable to firms as human capital continues to increase in importance as an element of organizational success. Leaders who want to increase employee results can do so by increasing both the capability and the commitment of their employees.
Human capital can be seen as a problem or as an opportunity. To make it work for you, keep in mind the following principles and cautions.
Human capital is underutilized.
In countless private discussions with executives, we have heard them readily acknowledge that they could do more with the knowledge, creativity, and experience of the people in their organization. One executive lamented, "We just don't know what we know." What has been true historically will only be more so in the future: knowledge work is increasing, not decreasing. In his excellent work on the intelligent enterprise, James Brian Quinn observes that the service economy grows both directly, in service industries such as retail, investments, information, and food, and indirectly, with service becoming more critical in traditional manufacturing industries such as automotive, durable goods, and equipment. As the service economy grows, the importance of human capital increases. Service excellence derives from solid customer relationships, which are made possible through the capability and commitment of individual employees forging the relationships.
Human capital is one of the few assets that can appreciate.
Most firm assets (building, plant, equipment, or machinery, for example) begin to depreciate the day they are acquired. Human capital, on the other hand, an asset embedded in the minds and hearts of employees, can and must grow if a firm is to prosper. The leader's job is to make employee knowledge productive and to turn human capital into customer value.
Human capital is portable. Employees with the most human capital have essentially become volunteers.' Because they can find work opportunities in many firms and thus have a choice about where they work, they can be said to volunteer to work in any particular firm. Volunteers give commitment when they feel an emotional bond with a firm. Economic return matters less to them than creating meaning. The human capital of employees as "volunteers" matters more because increasingly employees may leave for other firms. Leaders can no longer invoke "role power" to get things done; they must find new ways to elicit commitment.
Human capital has been both mismanaged and undermanaged.
Especially in the past decade, many management initiatives have overlooked the role of human capital in organizations. In the name of downsizing, delayering, and restructuring, many valuable employees, repositories of substantial amounts of organizational experience and knowledge, have been jettisoned. These actions have most often been taken with little or no thought given to the long-term consequences of the loss in human capital. In addition, downsizing has coincided with increasing global competition, customer requirements, fewer layers of management, increased employee obligations, pressures on productivity, and every other modem management practice. Small wonder, then.....
|1||Connecting Leadership Attributes to Results||1|
|2||Defining Desired Results||27|
|3||Employee Results: Investing in Human Capital||53|
|4||Organization Results: Creating Capabilities||81|
|5||Customer Results: Building Firm Equity||107|
|6||Investor Results: Building Shareholder Value||139|
|7||Becoming a Results-Based Leader||169|
|8||Leaders Building Leaders||191|
|About the Authors||233|
Posted April 13, 2007
Dave Ulrich, Jack Zenger and Norm Smallwood's book is really a broadside against the 'cult of personality' that rules so much of the current thinking about what makes leaders great. Amazingly, even in the pragmatic world of business, personality attributes ¿ such as the 'vision thing' ¿ often dominate conversations about what you need to become a great leader. But great leaders are great because they achieve great results. The authors seek a balanced approach that recognizes the importance of both strong executive skills and bottom-line success. They provide questionnaires, charts and exercises. We strongly recommend this book to managers and aspiring leaders who are looking for a practical approach.Was this review helpful? Yes NoThank you for your feedback. Report this reviewThank you, this review has been flagged.