Human capital has assumed a new importance in the knowledge economy. For organizations, understanding the challenges of managing that capital has never been more important or difficult. For example, the knowledge economy and unfamiliar business conditions may require today’s leaders to make major decisions about employee layoffs in the midst of unprecedented situations. Not surprisingly, many CEOs and managers have difficulty knowing which employees to cut and why, and how it will change the future of the enterprise.
This article discusses how the knowledge economy and technology have created new principles of human capital, and why every organization has to understand and internalize them in order to be a leader, whether in a downturn or in a growing economy.
THE NEW PRINCIPLES OF HUMAN CAPITAL
In this article, I discuss the five new principles of human capital.
1. A skilled workforce is a cash multiplier
2. The ubiquity of skills demand
3. Matching of supply and demand
4. The recruiting supply chain
5. Human capital management as a systematic process
1. A SKILLED WORKFORCE IS A CASH MULTIPLIER
That most of a company’s value resides in its intellectual capital was made very clear by a 1999 BusinessWeek article which showed that the value of Microsoft was superior to GM + Ford + Boeing + Lockheed-Martin + Deere + Caterpillar + USX + Weyerhauser + Union Pacific + Kodak + Sears + Marriott + Safeway + Kellogg. Yet, the real and only value at Microsoft is the knowledge of its employees.
Another way to show the intrinsic value of intangible, human capital is to look at the historical evolution of the ratio of book value to market value. In the early 1980s, the ratio of book value to market value among the companies listed on the S&P 500 was approximately 1, but by 2000 it had risen to about 6. The higher ratio indicates that a corporation’s ability to attract and retain talent is now perceived to increase its core value. This trend has encouraged academics to develop new models that better reflect a corporation’s worth.
Studies by both Hewitt and Associates, and Watson Wyatt, have shown that recruiting excellence improves a company’s financial results. The Human Capital Index Survey demonstrated that organizations with excellent recruiting practices increase shareholder value by more than ten percent.
This explains why many corporations include in their annual reports a line that reads something like, “Our employees are our greatest asset and the key driver of our future success.” That a skilled workforce is a cash multiplier is well understood by venture capital companies who proclaim that they prefer, “B ideas with an A team, rather than A ideas with a B team.”
Unfortunately, large corporations conducting mass layoffs often forget this basic principle. They terminate A teams whose projects are not yet profitable, and in the process eliminate valuable employees who in the process could be re-deployed on A projects elsewhere in the organization. With a better understanding of the next principle, the ubiquity of skills demand, managers can begin to resolve this issue. The solution is to increase the emphasis on workforce quality, which, in the context of this article, is the ability of an individual to increase the corporation’s value.
2. UBIQUITY OF SKILLS DEMAND
The best way to understand the principle and implications of the ubiquity of skills demand is to examine the dynamic between supply and demand in the workforce arena. On the demand side are organizations that demand the skills and talents to perform tasks that deliver value to the marketplace. Economic theory states that in any market, there is an equilibrium point between supply and demand that gives rise to a specific price point.
However, every economist knows the limitations of this theory. For instance, a corporation that is looking for a specific skill to perform a task may use traditional recruiting methods such as advertising and a referral system. The limited reach of these methods creates another limitation, i.e., limited supply. The reason for the corporation’s limited access to supply in this example is called “friction,” which is typified by a less-than perfect communication between buyer and supplier. Today’s on-line marketing techniques enable job seekers and corporations to bridge the gap between supply and demand, and reduce friction and enable equilibrium.
In the second quarter of 2001, job seekers could access opportunities on-line with 88 per cent of iLogos’ Global 500 companies. This compared with 29 per cent in 1998. On-line recruiting is a powerful alternative to the traditional source of employment opportunities, newspapers, which dominated the market until just a few years ago. My firm, iLogos, calls this first shift in the availability or ubiquity of data the ubiquity of demand, i.e., every job opportunity is available anywhere at any time.
Other techniques are available for corporations to market their opportunities to candidates in a timely way. One option is the use of “job agents” who build ongoing relationships with job seekers. This technique is an extension of the permission-marketing concept, whereby candidates provide their personal e-mail address to corporations so that they can be automatically notified about positions that match their interest profile. Job agents enable corporations to stretch their marketing budgets they off-load work from in-house recruiting staff. In 2000, only six per cent of Fortune 500 companies made use of job agents in their recruiting practices, perhaps because their hiring management systems did not provide the necessary profiling and automation.
The emergence of the ubiquity of skills demand has important consequences. One is that it gives the job seeker the ability to shop for more opportunities and to play a more active role in furthering his or her career. Today, many salary surveys are available on-line.
The second consequence of this principle is that it increases the flow of supply for the corporation. Simply translated, corporations now have more information from which to choose. But it also raises the issue of quality, which is why it is important to understand the third principle of human capital management.
3. MATCHING SUPPLY AND DEMAND
The ubiquity of skills demand is a great step forward, but it does have an important limitation: Not all of the many candidates who may apply for the position are qualified.
In order to explain the third principle, matching supply and demand, it is necessary to consider the content of the communication delivered in on-line recruiting. Traditionally, the “content holder” for recruiting was the resumé, which was the best tool available for matching an individual to a task.
The process of finding the best individual to fill a position has always been highly manual and paper-intensive. The final recruitment decision should be, and will continue to be, a collaborative human decision, because it is not reducible to a computer algorithm. However, computers can be used in the first phase of the recruitment process to assess whether an application has the minimum criteria for the position.
When a department of a large company needs additional resources, it fills out a requisition that must pass through an approval process. The resulting job description matches the resumes of the candidates with the tasks that the company wants to achieve.
The matching of these two unstructured documents, the job description and the resume, is called pre-screening and is done by individuals who primarily apply highly unsystematic and subjective criteria to make the first selection.
This activity is not only highly inefficient and time-consuming, but also very ineffective. The criteria used to select candidates do not ensure that the selection will lead to the ideal group of candidates. Yet, it was the best of the worst systems, and better than hiring a candidate based on his or her contacts.
Today, the internet represents a new, much more effective opportunity for managing this step. It provides a common platform for both the job description and the resume, enabling instant connectivity and the refined processing of information. This platform includes corporate-wide, standard skills that can now be systematically ranked according to new standards. This new possibility has been created only because of the widespread acceptance of the computer as a new communication device for external job applications and as a portal for internal redeployment.
The ubiquity of skills demand and the matching of supply with demand have an important impact at the macroeconomic level. They will reduce the base level of unemployment, called “friction unemployment,” which results from the inefficiency of communication between the corporation and the individual. Moreover, real-time access to a pool of candidates also creates a positive productivity boost in corporations, which can now identify needs, translate them into a common language, and fill them in a timely and quality fashion, as well as redeploy resources in a downturn.
4. THE RECRUITING SUPPLY CHAIN
Recruiting can be seen as a succession of steps in a process with several providers. For the most part, hiring managers, recruiters and candidates, as well as activities such as background checks and job-board postings, operated independently. Today, these individuals and activities can be brought together in a supply chain that is much like inventory. In the context of recruitment, the importance of the supply-chain model lies in being able to apply one of its key principles, the “just in time” philosophy. When we start to see the individuals who perform the tasks in the chain as inventory, we can see the opportunity cost of undone tasks. As a result, we are better able to recognize the importance of having a workforce that is readily available or that can be redeployed quickly.
The opportunity cost is typically calculated by dividing the revenue by the number of employees, which equals the annual revenue per employee. To calculate the opportunity cost per day, we divide this number by the number of working days. Thus, an on-time inventory illustrates that every day saved has a financial impact.
The importance of thinking in terms of inventory and supply chain has two other consequences. One is to encourage human resources to think in financial terms more often, and to encourage them to consider the total impact their practices have on the corporation. This shift is already evident in the language used to describe the practice itself, human resources, that is, human capital. The second consequence is to be able to upgrade from a tracking system to a workflow. This distinction is more than just a semantic one; it is the difference between a simple date-stamp system and a push process that drives the next steps and speeds up the process of meeting goals.
5. HUMAN CAPITAL MANAGEMENT AS A SYSTEMATIC PROCESS
Today, human capital management is regarded as a true differentiator for any successful business. The principles described in this article enable corporations to begin to think about human resources as a true process. Human capital may be more of an art than a science, but successful businesses need to find new ways of bridging the divide, of combining art with science.
The developments described above have the potential to make recruiting highly systematic and more efficient. The power to make human capital management and its principles a reality, however, rests with the leaders of organizations. Increasing evidence of the first principle – that a skilled workforce is a cash multiplier – is encouraging them to act now.