The second phase would include using these metrics in order to gather the appropriate results. Finally, the third phase implies interpreting those results and using them to gain a competitive strategic advantage on the market.
The phase dealing with the development of qualitative and quantitative metrics brings about some of the usual challenges in terms of measuring things: what metrics best reflect the performance of a certain activity? In the case of human capital, quantitative metrics can sometimes be a simple as sales growth per employee or changes in financial performance and productivity.
There are several problems, however, with this type of approach. The direct link between the changes in financial performance and human capital results is difficult to prove and, quite often, a negative change in financial performance is not necessarily caused by negative performances of human capital. For example, external factors, such as the current economic crisis, could determine a negative financial performance, despite the fact that human capital has perhaps performed well. At the same time, qualitative metrics are also useful for a better evaluation of human capital and human capital performance, because this type of metrics will also explain why a certain event has occurred, given an overall better understanding of the evolution of events, both in the past and in the future.
An excellent example of qualitative instruments used to evaluate human capital, more specifically the alignment and coordination of human capital with the general vision and strategic objectives of the organization, is given by Microsoft
. In 2003, the company put together a questionnaire for its employees in which they were asked to answer a number of 10 questions, generally of the type "I clearly understand Microsoft's vision" and "Microsoft attracts and retains smart people."
The responses, presented as percentages of the total number of answers, were relevant in determining whether or not the employees at Microsoft were working in coordination with the Microsoft vision, but also in understanding some of the issues that may affect the performance of human capital at Microsoft.
A question such as "my manager demonstrates respect for diversity" had a 90% favorable response. If it had had a percentage of 80% and it would have shown that 20% of employees believe their manager to be intolerant towards diversity, then the management at Microsoft could understand this as a problem affecting the performance of human capital. As this example show, qualitative measures are often an additional tool (sometimes they are combined with quantitative measures: in this case, the favorable responses were presented as a percentage of total responses) in understanding some of the things that quantitative measures do not cover.
The fact that human capital involves so many complex and subjective notions that are difficult to evaluate quantitatively, such as creativity or knowledge, makes evaluation different from the evaluation of performance for other assets in an organization. In other words, a machine can be strictly evaluated based on the way it reaches the objectives for which it was created, such as, for example, the number of spare parts it produces. With human capital, this is impossible. This is why it has been pointed out that there are two parts to human capital that need to be evaluated: the economic part and the spiritual part
. This dichotomy comes from the perception of an individual in an organization both as an economic unit and a spiritual being.
At the same time, as previously mentioned, measuring the performance of the human capital in an organization needs to be done in relationship with the objectives of that organization and the way that human capital has managed to contribute to accomplishing them. This goes hand in hand with the top-down approach that has been described in the beginning, related to the necessities of the 21st century.
Sometimes, evaluating based on the correlation between the performance and the objectives can be done by matching human capital performance to the company vision. Most companies are an expression of a certain vision, which is usually the common denominator of all its products and creations, as well as marketing and sales strategies.
For example, in the case of Apple, this vision is based on creativity. From that perspective, evaluating performance at Apple could tie the human capital performance to its contribution to increasing the level of creativity at the company. An example of a quantitative metrics could be the number of new product proposals per employee. Note, however, again how complex human capital evaluations are: such a quantitative metric will only present part of the evaluation and will not show whether the new product proposals were realistic (maybe they were financially or economically feasible) or whether they have actually been put into production, thus actually contributing to the development of the organization.
The phase dealing with the interpretation of the results will need to incorporate everything that has been discussed here in terms of measuring the performance. As seen, some of these results may need to be correlated with other factors that could explain why the company is moving into a certain direction. The example with the external factors, namely the economic crisis affecting the organization, points to that.
Human capital management is becoming more and more the essential function of management that needs to ensure that the necessary talent and human capital is attained and retained by an organization. With the increasingly competitive market of the present, as well as the other challenging external factors, such as the financial and economic crisis, being able to properly manage human capital can often prove the most resourceful and comparatively cheap way of producing results. This paper has aimed to cover several of the challenges that human capital management offers, including in terms of evaluating the performance of the individuals and transforming the simple notion of human resources management into a more generous strategic one that aligns it with the objectives of the organization.
The first conclusion is that human capital management has become a strategic process, one which involves strategic planning and strategic alignment with the overall goals and vision of the organization. It is no longer an isolated process, but one that ties into all the other functional departments in an organization and one where a proactive approach has become, more than ever, a necessity.
A proactive approach implies that the company has a long-term strategy to the development of its human capital, which means both improving the existing human resources in terms of performance and productivity and deciding how new personnel additions can benefit organizational human capital. It also means thinking ahead and deciding how human capital will need to develop in order to support strategic objectives.
One of the important conclusions on the performance evaluation is that the qualitative and quantitative measures need to be combined in order to achieve the best results. With such a complex object of the measurement process, namely the human capital, which comprises many subjective characteristics, including creativity or knowledge, the instruments also need to be adapted in that sense. Quantitative measures have the additional problem that they may not necessarily give a full picture, as sometimes other factors are involved in the final result. A decrease in the company profit may be a direct cause of the underperformance of human capital in the organization, but may also be more affected by economic and financial external factors, such as the economic crisis.
The qualitative measurements have the additional benefit that they explain more about the situation at hand, but also that they may provide indicators as to how the human capital will develop in the future. This allows the proactive approach that has been discussed and a strategic perspective to human capital planning.
The science of human capital management is likely to further develop in the future, as the market environment becomes more challenging. With this, one is likely to see the appearance of new human capital management models and strategies, all aimed at ensuring that the correlation between human capital and the other assets of the organization bring the best results.
1. Armstrong, Michael (2006). A Handbook of Human Resource Management Practice (10th ed.). London: Kogan Page
2. Fitz-enz, Jac. February 2009. The ROI of Human Capital: Measuring the Economic Value of Employee Performance. AMACOM; Second Edition.
3. GAO 2004. A Guide For Assessing Strategic Training and Development Efforts in the Federal Government. On the Internet at http://books.google.com/books?id=MvBOBDmbOrYC&pg=PA1&dq=human+capital+management#v=onepage&q=human%20capital%20management&f=false. Last retrieved on August 1, 2009
4. Ingham, Jon. 2006. Strategic Human Capital Management: Creating Value Through People. Butterworth-Heinemann; 1 edition
5. Ulrich, Dave (1996). Human Resource Champions. The next agenda for adding value and delivering results. Boston, Mass.: Harvard Business School Press
6. Legge, Karen (2004). Human Resource Management: Rhetorics and Realities (Anniversary ed.). Basingstoke: Palgrave Macmillan
7. Sherwin Rosen (1987). "Human capital," The New Palgrave: A Dictionary of Economics, v. 2,…