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The Art of Measuring Human Capital Published: Sunday, May 5, 2002 By: Sr. Rafael Ríos

Organizations have come to accept that people, intellectual capital, not cash equipment or technology, are the critical differentiates of a business. Most assets other than people are inert. They are passive resources that require human application to generate value. Yet little as been develop to measure the impact of human capital on the organization.

Most of the international research that has been done in this area has assumed it is possible to devise information systems that can generate invisible equivalents in dollars and cents of balance sheets. Various methods have been proposed, for treating human capital as balance sheet items. In other words, measuring them in dollars. Some introduce probabilities or discount of a person’s output during a life. While theoretically interesting, unfortunately up to now little of the attempts to convert people or competencies into dollars have proved useful for managers. Before, the research that was brought forward emphasized personnel accounting calculations. They for instance, assessed the costs of sick leaves and of personnel turnover and designed indicators that can be used as rules-of-thumb by managers.

Depending on one’s perspective any indicator is subject to a large number of possible interpretations, so the coherent conceptual framework is necessary for a good design. For example, consider the issue of what constitutes an investment. When a company invests in material assets like machines, or computers, the money is paid out of liquid funds, and a corresponding amount is booked as an asset on the balance sheet under a heading like “machinery”. In accounting terms, there has been a negative cash flow, but not an expenditure. The cost is incurred gradually, as the asset is depreciated.

When a company invests in an intangible asset like a competency development program it is not generally permitted to record the value of the intangible asset in the balance sheet. The investment thus appears both as a negative cash flow and as a cost item. Both types of investment are inspired by the same motive; to achieve higher profitability in the long term, by sacrificing cash flow in the short term. The difference in accounting treatment, however, is very confusing and is made more so by the fact that the “cost” of intangible investments can take forms other than direct payments from cash reserves.

Two schools emerged in the late eighties and early nineties. Most of us have worked with Balanced Scorecard which focus in four areas. First it emphasizes the development of strategies for growth, profitability a risked viewed from the perspective of the shareholder; value creation and differentiation strategies from the perspective of the customer; incorporates the perspective of the system and process re-engineering establishes priorities that create a climate that support organizational change, creativity and innovation.

The Europeans in parallel works have developed a three pronged approaches: 1. Individual competence is people’s capacity to act in various situations. It includes skill, education, experience, values and social skills. People are the only true agents in business; all assets and structures, whether tangible physical products or intangible relations, are the result of human action and depend ultimately on people for their continued existence. Competencies cannot be owned by anyone or anything, but the person who possesses them, can contribute to the organization. A case can, however, be made for including competence in the balance sheet, because it is impossible to conceive of an organization without people. 2. Internal structures consists of a wide range of patents, concepts, models, computer and administrative systems. These are created by the employees and are generally owned by the organization. Sometimes they can be acquired from elsewhere. Decisions to develop or invest in such assets can be made with some degree of confidence, because the work is done in-house, or bought from outside. Also the informal organization, the internal networks, the “culture” or the “spirit” belongs to the internal structures. 3. External structure consists of relationships with customers and suppliers, brand names, trademark and reputation, or “image”. Some of these can be considered legal property, but the bond is not as strong as in the case of internal assets because investments in them cannot be made with the same degree of confidence. The value of such assets is primarily influenced by how well the company solves its customer’s problems, and there is always en element of uncertainty here. The external structure is not particularly liquid, and unlike the material assets, they may or may not be legally owned by the company.

Our point is that in order to develop an effective Human Capital Measurement System an organization should identify those key deliverables which will add value to the implementation of the organizational strategy. Translate those deliverables into specific desired behaviors that are needed to achieve those deliverables, and determine which factors of the HR architecture should be aligned to those deliverables. Then, develop the measurement system based on specific desired results.


Copyright 2002 QBS, Inc.
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