Human capital—the elusive asset; measuring and managing human capital: a strategic imperative for HR - 2003 Research Quarterly

HR Magazine, March, 2003 by Leslie A. Weatherly

So what is the basis for this paradigm shift, i.e., the routine use of the phrase "intangible assets" in a company's vocabulary? In brief, we have moved from an industrial society, where the primary source of wealth was machinery, to a knowledge society, where the primary source of wealth is human capital. In essence, we have undergone a metamorphosis. "In the closing years of the 20th century, management has come to accept that people, not cash, buildings, or equipment, are the critical differentiators of a business enterprise." (6)

The reality of the situation today is that 60 percent to 70 percent of a company's expenditures on average are labor related. Data from the Brookings Institute will help to put the importance of the measurement and management of human capital/knowledge assets into perspective. In 1982, hard assets represented 62 percent of a company's market value on average. By 1992, this figure had dropped to 38 percent. (7) More recent studies place the average market value of hard assets in many companies as low as 30 percent. (8) In other words, up to 70 percent of a company's expenses may be related to human capital. It would seem nothing less than a business imperative, therefore, that the challenge of a taxonomy and a valuation of human capital be pursued.

The Dynamics of an Organization's Total Capital Environment

It is important to note that a business is not just a storehouse for knowledge, but a viable, dynamic environment. Vital relationships exist throughout an organization and interactions occur with varying degrees of intensity to ensure that knowledge (the tacit knowledge of the group found in the form of organizational culture, the explicit knowledge of an individual, or the structural knowledge of a data warehouse) gets converted from one form to another through, perhaps, multiple transformations, all for the purpose of adding value. These interactions result in the creation of new knowledge, organizational learning, and, on occasion, innovation.

Whereas human capital represents the knowledge, experience, and attributes of employees, additional types of capital have emerged in the literature. Structural capital represents the codified knowledge that resides within an organization (policy and procedure manuals, databases, corporate files, departmental and organizational processes). Social capital represents the value that can be found among the relationships within the organization to facilitate the transfer of knowledge. Examples of social capital could include mentor/mentee relationships, informal networks of long-term interdepartmental work associates, and peer relationships. Finally, customer capital (also referred to as organizational and/or relational capita)) is the corporate memory possessed by those who have relationships with suppliers, customers, and any other outside entity that interacts with the firm for the purpose of accomplishing the work of the organization. It is the successful amelioration of each of these forms of capital and their effective blending that forms the basis for improving organizational value. (see Figure 1.) The predominant objective of any investment is to minimize risk and maximize return. So, how should this statement be interpreted in relation to human capital, the elusive asset?