Corporate Responsibility in a Global World: Marrying

Investment in Human Capital with Focus on Costs

by Angela Baron

Executive Summary
• A human capital approach to the management of people shifts the emphasis of people management
from minimization of cost to maximization of return on investment.
• Human capital is an important element of intellectual capital, and hence the market value of an
organization.
• The importance of human capital has increased as the shift to knowledge-based work and a
knowledge-based economy has accelerated.
• Human capital management combines information on the value and contribution of people with
management processes, to direct their efforts and behavior.
• Human capital information can be collected on a number of levels, all of which have value to the
organization.
• At its highest level, human capital information can produce meaningful insights to enhance business
decision-making, or assist the achievement of strategic objectives.

Introduction
Love it or loathe it, the term human capital has entered the HR vocabulary for keeps. The term is much
criticized for implying that people can be subjected to the same rules as more traditional forms of capital,
regardless of personal aspirations and objectives. Yet the same grounds for criticism are also the impetus
for a fundamental shift in organizational thinking in terms of the people employed. Organizations that adopt a
human capital approach to the management of their workforce immediately shift that workforce from the cost
to the asset side of the balance sheet. People become assets to be invested in, and from which a return that
can be maximized is expected, as opposed to a set of costs to be kept to a minimum.
Immediately the focus of people is asset-based, the organization needs to rethink a whole set of
assumptions and people-management actions. When organizations treat people as costs, they assume:
• that people need to be incentivized to work harder;
• that people should be bought in with the highest possible value for the lowest possible cost;
• that it is only worth investing in training if there is an immediate need;
• that the removal of people from the organization is primarily a cost decision.
When people are assets, organizations assume:
• people will work better when they have interesting and challenging work to do;
• people work harder when they are motivated and committed to their work, experiencing high levels of
satisfaction;
• people should be brought into the organization on the basis of their potential to develop and grow;
• investment in training and skills is worthwhile, if there is likely to be a return on that investment in the
medium to long term;
• when people leave the organization, there are knowledge retention and capacity issues to be
considered and managed.
This, therefore, has given rise to a whole new set of rules about how we recruit, develop, and finally exit
people from the organization.

A Definition of Human Capital

There have been many definitions of human capital over the years. However, there now seems to be
general agreement that human capital is the knowledge, skills, abilities, and capacity to develop and

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innovate possessed by people in an organization. It is an aspect of intellectual capital—the stocks and
flows of knowledge available to an organization—and is associated with the concepts of social capital—
the knowledge derived from relationships within and outside the organization—and organizational capital,
the institutionalized knowledge possessed by an organization which is stored in databases, manuals, etc. It
hence contributes to the market value of an organization through its contribution to intellectual value, which
also accounts for the value of brand and reputation. Our research at the Chartered Institute & Personnel
(and Development) (CIPD) has resulted in the following definition of human capital (Figure 1), viewed as an
element of intangible value, and it is this definition that has shaped our work to date.

Figure 1. Human capital as an intangible asset

Human capital management is important because it enables organizations to make more productive use of
people through measurements, analysis, and evaluation rather than guesswork. It provides guidance on the
development of HR and business strategies which enable improvements in levels of business performance,
and higher levels of engagement to be achieved by such means as better selection, training, and leadership.
It encourages the initiation of processes for the assessment and satisfaction of future people requirements.
It provides the basis for developing policies and practices which enhance the inherent capacities of people
—their contributions, potential, and employability—by providing learning, and continuous development
opportunities. It also shapes the way in which people share and apply their knowledge. Therefore, if human
capital management processes are aligned with business processes, it can ensure that the effort and
behavior of people are focused on the things that are important for the business, and the achievement of
strategic objectives.
The impact human capital can have on markets is huge. In advanced economies, the only distinctive asset
which cannot be imitated easily is the skills, talent, and know-how of people. The 1999 Competitiveness
White Paper, “Building the Knowledge-Driven Economy,” published by Peter Mandelson while UK Secretary
of State for Trade and Industry, argued that “…we will only compete successfully in the future if we create an
economy that is genuinely knowledge-driven.” It is no accident, therefore, that interest in human capital, how
to measure it, and how to manage it has increased as the knowledge-intensive sector of the economy has
expanded.

What Information Should be Collected to Inform Human Capital

Management?
Effective human capital management relies on credible and appropriate data, which informs managers of the
drivers of individual performance, and enables informed business decision-making on the people capacity
available to implement strategy, and achieve strategic objectives. There are several levels at which data can
be collected, which are described in Table 1 below.
The collection, development, and analysis of human capital data is still a relatively new process for the
majority of organizations. Most of those making systematic efforts to collect information to describe the
contribution of people are using existing data, often collected for another purpose. So, for example, most
organizations collect data on absence, retention, training provision, pay, health, and safety (i.e. the number
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of accidents). This is the basic level of data, and can be very useful in terms of identifying patterns, or trends,
and informing management action. It can also be important for informing external stakeholders about their
commitment and understanding of factors which might impact on future performance, such as retention of
key staff, and management of risk.
However, higher levels of data are more likely to be of use to the investment community, particularly data
likely to provide insight into the drivers of business performance. It is these factors which can enable
informed decision-making, both assessing the impact of cost, and the return on investment in people.
Although many organizations are making huge progress in this area, it represents a significant investment in
terms of time and effort.
Table 1. Levels of human capital data collection and analysis

Level
Basic
Action Collect basic input data
e.g. absence, employee
turnover Identify useful
data already available,
such as data from pay
reviews, performance
management, job
evaluation, training, the
recruitment process Use
this data to communicate
essential information
to managers about
absence, turnover,
or accident levels,
compared by department
look for trends or
patterns in the data, and
investigate their causes
Outcome Measures of efficiency
and effectiveness Basic
information for managers
on headcount, make-
up of the workforce, and
so on Identification of
any action that might
be needed as a result
of these measures,
for example to reduce
accident rates, to improve
the diversity profile of the
Intermediate
Design data collection
for specific human
capital needs. For
example, conduct an
employee attitude
survey to measure
satisfaction, or follow
up on training activity to
monitor implementation
and use Use this data
to inform the design
and implementation of
people-management
policies and processes
Look for correlations
between data, for
example, whether high
levels of job satisfaction
occur when certain HR
practices are in place,
such as performance
management, career
management, or flexible
working Communicate
the value of processes
to line managers, and
identify specific actions
to improve people
management
Measures of process
Information to help
design the HR model
that is most likely to
contribute to performance
Communication to
managers, not just how
to implement processes
but with accompanying
information on why they
are important, and what
they can achieve
Higher
Identify key performance
indicators relating to
the business strategy,
and design and
implement data collection
processes to measure
against them Feed
both quantitative and
qualitative information
into an analysis model,
such as a balanced
scorecard Provide
managers with indicators
on a range of measures
designed to inform
them on performance
and progress in their
department Accompany
this with specific actions
to be taken, informed
by the resulting human
capital data Interpret
and communicate data
in ways that will be
meaningful to a range of
audiences
Identification of the
drivers of business
performance Information
that will enable better-
informed decision-
making, both internally
on the management of
people, and externally on
the progress with regard
to strategy

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 workforce, or to reduce
absence

Case Study

Nationwide Building Society

Nationwide has been investigating the links between employee commitment, customer commitment, and
business performance for some years. Its objectives were to:
• establish the key drivers of customer commitment;
• measure the impact of improved employee commitment on customer commitment, and business
performance;
• identify activities that can be undertaken, at corporate and local levels, to leverage this knowledge, and
bring about business improvements.
It collected data from four main sources:
• HR data: from PeopleSoft;
• employee opinion data: from the “Viewpoint” survey;
• customer satisfaction and commitment data: from the “Member Perception” questionnaire;
• business performance data: from the Operational Sales database.
Analysis revealed that employee commitment and length of service were the most critical factors
driving customer commitment and sales. Further modeling demonstrated that areas generating the best
performance were also those with the highest average length of service.
It was then possible to investigate further the drivers of employee commitment, and means of increasing
employee tenure. Five key drivers were found to have the most effect on employee retention, which in turn
affect positively customer satisfaction and business performance, as follows:
• employees’ perceptions of pay levels;
• average age of employees;
• levels of resource during peak times;
• understanding and promoting the values of Nationwide;
• management behaviors emphasized in Nationwide’s organizational development program, PRIDE.
(Note: The full version of this case study is available in the CIPD guide, “Human capital reporting: An internal
perspective,” which can be downloaded from www.cipd.co.uk/humancapital.)

Conclusion
Good managers have always known instinctively that better managed people perform better and contribute
to high performance outcomes. However, human capital literature now contains both theory and evidence
to prove this, as well as a number of frameworks which can assist managers in developing information
and insight to inform their business decision-making. This does not mean ignoring the cost implications of
employing people. It does, however, mean that these cost implications can be considered and assessed in
the context of the investment opportunities that people present and the role they play in achieving strategic
business objectives.

More Info
Books:
• Baron, Angela, and Michael Armstrong. Human Capital Management: Achieving Added Value through
People. London: Kogan Page, 2007.
• Kinnie, Nicholas, Juani Swart, Mark Lund, Shad Morris, Scott A. Snell, and Sung-Choon Kang.
Managing People and Knowledge in Professional Service Firms. London: CIPD, 2006.

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Article:
• Kinnie, Nicholas, and Juani Swart. “The alchemists.” People Management 12:7 (April 6, 2006): 42–45.

Websites:
• Chartered Institute of Personnel and Development, section on human capital: www.cipd.co.uk/
humancapital
• Human Capital Management magazine: www.humancapitalmanagement.org
• Institute for Employment Studies: www.employment-studies.co.uk
• PricewaterhouseCoopers: www.pwc.com
• Society for Human Resource Management: www.shrm.org

See Also
Thinkers
• Gary Becker

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