Valuing Human Capital

During my early articleship days, I and my peer group were often enthralled during the process of finalization of Balance Sheet of big corporates.  We saw with amazing disbelief as to how figures and values were assigned and fine-tuned to various heads of accounts giving those a shape and size which was true state of affairs of business on a given date and at the same time was acceptable to Shareholders, Promoters, Bankers, Revenue Authorities and Employees alike. The process to us, at that point of time was an art, an act of magic, the pinnacle of applied knowledge in our profession and our principle trainer was our Hero. We spoke to ourselves at length if anything more wonderful and artistic was possible in our profession.

Just when we started to soak ourselves into this amazing world of numbers, figures and estimates and started getting hang of it, Infosys zapped us by putting a value to its Human Resources in its Balance Sheet (BHEL and not Infosys was the first company to do so but the latter glamorized this process the way nobody could). Infosys was the first private sector company to do so and by doing so it broke many myths. The most common emotion it generated in profession is that here is an employer, which “really values” its employees.

What Infosys did was revolutionary. It was not about dressing up Balance sheet with big multipliers. It published a ratio termed as “Return on Human Resources Employed” akin to “Return on Capital Employed”. More aggressive disclosure was the indice of “Wealth Created per Employee”. The whole exercise was all about recognizing true assets in the business. It was an act of recognition. It was an effort to bind a set of performers into an integrated team and turning them into business owners. When I look back, I conclude that it was a well thought out strategy by Infosys knowing that theirs was a “Knowledge based Business” and success or failure will only depend upon the level and quality of this knowledge pool.

Whilst Infosys runs a “Knowledge Based Business”, applicability of Infosys belief will not be flawed in any other business. Whatever may be form of the business, people remain the key. The most successful of businesses across the globe chant one mantra day-in and day-out. “Our Employees are our most valuable resources”. So much so that it has now become a cliché.

As we discussed in the previous post, when business is viewed as a stream, people become components in the stream. Once people become components in this stream, the key is to tap full potential of this component and work towards enabling them to be successful will ensure smooth flow in the stream.

However managers view business as a tool to maximize shareholder returns. Most of the times, focus of the business owner/manager is to create a right balance between Customer Satisfaction and quantum of Shareholders Return. This process of finding this right equilibrium is much so engrossing that the process of enabling people to achieve success becomes insipid to business managers/owners.

Quite often, businesses which are under pressure of deliverance/survival emphasize on competitive strategies, quality enhancement and investment in technology. As compared to this, the most important component in business stream, Human Capital, takes a back seat.

However it is at the time of such stress, this component deserves most focus. Because it is at such times attitudes of people becomes the weight which can tilt the scales.

Following are two basic measures of employee attitude in an organization

  1. Job Satisfaction
  2. Organizational Commitment

There is actually a cylindrical cause and effects between above two and employee attitude. However it can be safely said that quantum of job satisfaction predicts subsequent profitability and productivity. This in turn will influence organizational commitment and will create an environment which will greatly affect employee attitude.

During times when “more” has to be performed with “less” it is critical that Human Capital perform at its peak. It is during such times that managers need to go more close to people down the line and communicate more often to align them more closely to organizational goals. During such times Human effort deployed in a wrong direction will be the most critical waste. It is during such times that hiring and retention strategies are to be put to maximum use. It would be a blunder at such times to assume such acts as routine administrative chores.

Another big mistake is to look upon human capital as deployed waste during tough times. I am not a big fan of cost cutting. As any individual spreads his spending to align with his income, business also reaches certain cost level in the process of aligning itself towards an expected revenue stream. All focus now has to be towards protecting this revenue stream rather than cutting cost down. I rather look upon cost optimization and cost rationalization as correct tools during tougher times (more on it in subsequent posts)

During such times, one needs to leverage human capital to squeeze through tough times. It is during such times that investment done earlier in Human Capital starts to give returns. When times are tough, reacting without leveraging human capital will only result in hitting more roadblocks.

To conclude, it is a gospel truth that “Our Employees are our most valuable resources”. During all times business owners/managers should engage themselves aggressively on acquisition and development of employee skills and constantly should recast job designs to create leaders/winners/performers. Job design should be constantly revamped to tap full potential of individual skills of Human workforce. These practices will ensure a very “progressive” and “high performance” work practices in business. Such progressive practices will ensure enhanced business performance. In times when businesses face fierce competition and are committed to excellence and quality standards, it is well understood that performance can only will be enhanced through creativity and innovation. During such times employee commitment and a positive ‘psychological contract’ between employer and employee are fundamental to success.

About bsbasan

Professional with over 20 yrs of experience managing business. A strategist, A thinker and an innovator. Experience in cross sectional functions in various industries like Chemicals, Apparels, Retails,Hospitality, Construction, Manufacturing, Services. Proven experience in Business Development, P&L,Finance, Risk Management, Strategic planning and organizational transformation. 20+ years record of success managing corporate finance & business operations for growing manufacturing companies with multistate and international operations. Made break-through improvements in business processes utilizing lean methodologies and Six Sigma principles. Currently designated as Chief Executive Officer of Texport Syndicate India Limited
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One Response to Valuing Human Capital

  1. Joaquin says:

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