Human Resources as Critical Investments

Human Resources as Critical Investments

IN AN ORGANIZATION'S FUTURE

The purpose of this paper is to explore whether or not the human resources (HR) within an organization should be used as critical investments. To support this exploration, the terms "human capital," "human assets" and "intellectual capital" will be discussed, on the merits of each specific term as well as in relation to one another. Finally a conclusion will be drawn that determines if human resources should be viewed as any or all of the above terms, and if HR managers should utilize them as critical investments in an organization's future.

To begin, the overarching term "human resources management (HRM)" must be understood. HRM essentially is an all-encompassing term that refers to how an organization's human resources are used to achieve the organization's overall objectives or strategic directions. HRM includes a continuum of activities that can be compartmentalized into seven categories:

Human Resource Planning - anticipates organizational needs, then prepares to have the right employees in the right place at the right time

Human Resource Staffing - involves establishing job needs, then recruiting and hiring the best candidate for the position

Human Resource Development - ensures that the workforce is prepared for change, and is achieved primarily through training

Compensation and Benefits - includes both financial and non-financial rewards that are given to employees, in exchange for the time and effort put forth by the workforce

Safety and Health - identifies and mitigates potential workplace hazards

Employee and Labor Relations/Industrial Relations - in unionized environments, organized labor relationships; in non-unionized environments, workforce relationships

Human Resource Information Management - the means by which information that supports the above steps is obtained, handled and archived

All of the above aspects of HRM are interrelated, with decisions in one area affecting all other areas. The means by which a firm approaches any of these six areas will therefore have an impact on the organization's overall human resources practices. Generally an organization's Human Resource Manager coordinates the key components of HRM. However others, such as line managers, employees, unions and even shareholders can have important contributions to make to the overall HRM practices of the organization. Irrespective of who is involved in the HRM practices of an organization, "HRM must be engaged in creating institutional change capacity, identifying social trends impacting future business opportunities, and building organizational cultures that can accomplish radical innovation."

All organizations must determine how they will view, and consequently treat, their human resources. Will the human resources be seen as "human capital," "human assets," "intellectual capital" or some other human-resource-related construct? Before determining which point of reference will be used within an organization, these various terms must be understood.

Human capital has the longest grounding in intellectual theory. The origins of human capital theory can be traced to the seventeenth century, when William Petty, an economist, "emphasized labor quality differences and who identified what much later was labeled human capital when he argued for an inclusion of the 'value of works' in accounting for wealth for actuarial purposes." Adam Smith (1776) wrote, "that education and learning were to be considered as 'investments' in human beings" in Wealth of Nations. Modern human capital theory emerged with Irving Fisher's capital theory in 1906. "He emphasized that all types of stocks would be capital when yielding services, and even explicitly included human beings."

Human capital theory developed quickly through the 1950s and 1960s, from both macro-economic and micro-economic perspectives. "Human capital theory affirms that people invest in themselves, through accumulation of different types of human capital goods like formal education and productive knowledge and information in order to constitute stocks of generally intangible human capital with the potential for increasing their owner's market and non-market productivity." Human capital can be expressed as an equation, using marginal product (MP), assumed to be equal to wages, which is taken as a function (F) of three sorts of input. These inputs include the number of supplied person-hours (L), various types and qualities of human capital goods in aggregation (H), and a construct of other positive and negative capacities - such as personal endowments shaped by nature and nurture (mental and physical capacity, motivation, behavior and learning). Elements of - affect both the productivity and effectiveness of (L) and (H), while allowing that aspects of - can be modified and improved by investing in (H). Both the quantity and quality of human capital components (H) and capacity characteristics work in a relationship that is circular and mutual, and therefore strongly influences (L). This relationship is presented as:

MP = F[L;(H, C)]

Human capital can be summarized as a quantification of the intangible aspects of human beings - their attitudes and attributes that are inherent to each person, as well as any investments that are made to increase these capacities and capabilities (e.g. training, other personal improvements and the ability to retain learning) along with any intangibles that detract from these capacities and capabilities (e.g. loss of motivation, effects of aging).

In the context of the knowledge economy, or new economy, human capital "embraces both the broader human resource considerations of the business workforce...and the more specific requirements of individual competence in the form of knowledge, skills and attributes of managers and the people they manage."

New competencies are required by employees to survive and thrive in the new economy. To add to the previous equation on human capital, the new economy requires that the "personal attributes required involve self-confidence, resilience and the ability to be flexible and adaptable.... If job security is no longer tenure-based new economy workers will need to be psychologically able as well as technologically proficient to scan the environment and recognize opportunities." Although the understanding of human capital is well established, this field of HRM continues to evolve as the world economy changes.

Human assets is a term that tends to frame employees as assets of an organization and generally does not recognize the role that individuals play in investing in and controlling their own personal and professional development. "Since the late 1970s, many organizations have professed to view human resources as valued assets rather than liabilities, and the investment in human resources as strategically imperative to corporate competitiveness." Human assets are generally seen as receiving investment from organizations instead of making investments in themselves. The term "human assets" tends to treat an organization's workforce as one of many assets that add value to an organization. This general assessment is supported through a methodology that proposes to measure the return on human assets within companies:

All organizations have assets. Assets are used to produce output.... Standard accounting techniques allow monetary values to be put to many of these assets - buildings, machinery, transportation, stock and so on. Management uses this and other information in order to make the most efficient and productive use of their assets. The employees of an organization represent an additional asset - they too are there to produce output and they too have an inherent value.... (A) human asset value does not appear on the balance sheet - it is intangible and it cannot be sold to raise cash. But for managers to run human assets as efficiently as they can other assets, they need equivalent information.

Human assets are a business construct that aligns human resources with all other assets held by the organization. The term "human assets" captures the intangible value of human resources in a tangible form, to allow a more thorough valuation of the organization's worth to be determined.

Intellectual capital has been defined by the Organization for Economic Cooperation and Development (OECD) as "the economic value of two categories of intangible assets of a company," including both organizational and human capital. Intellectual capital has also been defined as intangible assets or intangibles, knowledge that can be converted into value, and intellectual material - knowledge, information, intellectual property and experience that can be used to create wealth. The value of intellectual capital is seen in its ability to generate wealth. "Intellectual capital is becoming the preeminent resource for creating economic wealth. Tangible assets such as property, plant and equipment continue to be important factors in the production of both goods and services. However their relative importance has decreased through time as the importance of intangible, knowledge-based assets has increased."

Intellectual capital is seen as the ability of an organization's human capital to generate added value for the firm, beyond what would be generated through assets alone. For example, a manufacturing plant can produce widgets through the use of its assets, including its workforce. Intellectual capital is an intangible aspect of this production process, in which employees can generate savings, increase sales or streamline processes by applying their intellectual capital, thus adding value beyond what would have been accomplished by physical assets alone.

In the above example, intellectual capital is shown to add value to an organization. In the new knowledge-based economy, intellectual capital becomes increasingly important to organizations. For knowledge-based organizations, their intellectual capital becomes the essence of the company, since the absence or loss of intellectual capital can lead to the rapid, if not immediate, demise of the organization. An example can be found in the computer software industry, where intellectual capital forms the basis for the company's value. If the intellectual capital is lost, through employee turnover, as an example, then the company can lose its competitive advantage and cease to exist. Intellectual capital is not limited to employees, and refers to other knowledge held by an organization. Patents, copyrights, processes, systems and other intangible constructs are part of an organization's intellectual capital.

A relationship clearly exists between the terms "human capital" "human asset" and "intellectual capital," with unclear boundaries between the terms and significant overlap. Despite these challenges in differentiating terms, the relationships can be summarized as follows:

Human Capital - looks at individuals vs. The collective, and recognizes the value of the intangibles held by the individuals within the workforce of an organization. Human capital recognizes that some of the intangibles held by individuals are inherent while others are developed or learned. Human capital is encompassed by human assets, and flows to intellectual capital.

Human Assets - encompasses the collective intangible holdings of an organization's workforce. Human assets hold value for an organization, but this value cannot easily be defined due to the intangible nature of knowledge as an asset. The human assets of an organization are seen as assets vs. individuals, and are therefore treated as an accounting construct. Intellectual capital is found within human assets, and the value of this intangible is assigned to the assets.

Intellectual Capital - flows from both human capital and human assets, and refers to the knowledge held within these human resources. Human capital and human assets can exist within an organization without intellectual capital. Intellectual capital can be found within both human capital and human assets, but is also found in other aspects of the organization such as its intellectual property.

A visual representation of these relationships follows:

With an explanation of terminology now established, an assessment can be made of the statement, "Human resources should be viewed as 'human capital', 'human assets' or 'intellectual capital', and HR managers should strive to utilize them as 'critical investments' in an organization's future." In the explanations that have been provided, the case has been made that all three terms arise from human resources, although intellectual capital is not limited exclusively to human resources. An organization's human resources can clearly be seen as human capital, because every employee represents an investment by the organization in the individual. Organizations recruit, pay, train and are affected by (both positively and negatively) the workforce. In light of this relationship, human resources are human capital.