Human Capital Management the New

Human Capital Management

The new human capital management paradigm

Strategic human capital management

Measuring performance

Human capital management is the new paradigm of organizations in the current environment and it has transformed from a general notion to one on which the future of the organization depends. The paper below aims to present the most important characteristics of human capital management, evaluate its importance for an organization and discuss some of the instruments and means that human capital management uses in order to reach the objectives of the organization. It also refers to concepts such as strategic human capital planning and argues on different performance evaluation methodologies, a key element in human capital management.

Conclusions show that human capital management is a strategic process, one that needs to be strategically aligned with the vision of the organization and its overall strategic objectives. The conclusions also point out that, in terms of performance evaluation, the combination of quantitative and qualitative methodologies is often the best way to make ensure that the evaluation reflects all issues involved, but also that it gives a perspective on how things are likely to develop in the future.

Introduction

Human Capital Management (HCM), sometimes referred to as human resources management is "the strategic and coherent approach to the management of an organization's most valued assets - the people working there who individually and collectively contribute to the achievement of the objectives of the business."

In the last decades, this type of management has become a segment that business leaders tend to award more and more attention to. One of the main reasons for this is the fact that the human capital of any organization has become the best instrument to obtain a competitive advantage over other organizations on the market. Training people, employing good personnel, being able to motivate them -- all these are the necessary requirements to ensure that the organization will perform well.

Often, it is with smaller investments in the company's human capital management rather than bigger investments in its infrastructure or total assets that the company gains a greater profile on the market, as compared to other firms. At the same time, human capital includes everything from individual creativity to knowledge and know-how, all of these assets in their own right, with the capacity of creating an advantage for an organization on the market.

The new human capital management paradigm

The second half of the 20th century and the 21st century brought about a global economy that was much more interconnected, dynamic and volatile than ever before in history. This meant that the entire organizational framework that supported the business activities of a company needed to change in order to match these new dynamics. One of the first changes was the introduction of a new human capital management model, one that would incorporate these new realities.

The first and most important change was the perspective on human resource

. In the past, there tended to be a bottom-up approach, one where the perspective on human resource was considered before determining the objectives of the organization. At the same time, there was also a sole perspective on human resources, often regarded as a separate module from the other departments in the organization.

Today this can no longer be the case, because the increased competition and communication, along with the other reasons previously listed no longer allow it. There are two significant changes. First of all, the human resources and human capital in an organization are subordinated to the strategic, tactical and operational objectives of the organization. The bottom-up approach has transformed itself to a top-down vision. The objectives are established at the leadership level and the human capital needs to be engaged in achieving these.

The second important change is the great interconnectivity between human resources and the other departments in an organization. Human capital can longer function alone, but rather it is closely interconnected with all other activities of the organization. The increased necessity of interdependence between the different branches of the organizational structure has thus produced a further integration of the human resources department with other departments.

Strategic human capital management

The complexity of the challenges in the current business environment and of human capital management itself has led to the constant development of new human capital management models. One of these is the model developed by the U.S. General Accounting Office (GAO) and it is useful presenting it not only because it is one of the most complete ones, but also because it comes to show that human capital management is a necessity in any organization, not necessarily only in one which has as its main objective profit maximization.

The model presents four different cornerstones in the strategic human capital management: leadership, strategic human capital planning, acquiring, developing and retaining talent and results-oriented organizational cultures

. The second and third cornerstones are best reflecting what strategic capital management refers to.

First of all, strategic human capital planning refers to a proactive rather than a reactive approach when it comes to human capital. Rather than filling in positions because this becomes a necessity at some point, strategic human capital planning means that the organizations will look at the strategic objectives and actions the management has set and plan human capital development according to these benchmarks.

Such a proactive approach will have several important advantages. First, it will lower costs, because it is cheaper to plan ahead and commit to recruitment and selection in due time rather than start filling in positions under temporal pressure. Second, the development of the human capital will be strictly correlated to the objectives of the organization, which, as pointed out, is an essential element of human capital management.

The third phase is probably the most important cornerstone of the human capital management process. In fact, human capital and talent can be considered synonyms, so the goal of managing human capital is in fact reflected in the capacity of an organization to gather and manage talent. Acquiring talent is the result of a long process of recruitment and selection. Both of these are correlated, in that the organization will need to both sort through the initial candidates for a certain position (and deciding what position needs to be filled is, as shown, the result of the strategic human capital planning) and, subsequently, decide which of the recruited individuals will best fit for the organization.

The management of talent starts once the recruited individual has been incorporated into the organization. There are so many aspects worth referring to here. First of all, as any asset, the performances of the respective employee will need to be constantly monitored (through a consistent feedback and control mechanism, which will require a good measuring framework, described in another subchapter) and his performance improved where necessary. This means that the leadership will need to consider certain benchmarks that will show between which ranges the individual is performing satisfactorily, how much his performance and productivity can be improved etc.

Improving the performances of human capital will incur motivation or training or, in many cases, both. The training of human capital is essential in improving the technical capabilities and skills of the employees. There are different challenges here. First of all, one needs to properly identify those segments that the employee needs to be trained in. These can be segments where he has underperformed or segments that would be necessary for the future development of his career.

At the same time, there are several segments where training will not necessarily help. One of these is, for example, the social skills of an employee. Despite the importance of these skills in human capital management, sometimes these cannot be taught. A final challenge with training is that the employee can relocate to a different organization, which would make the training process useless for the organization that has initially implemented it for that particular employee.

Motivation is another important part of the performance improvement process. In many situations, the training process is in fact part of the motivation process, but there are numerous other examples of motivation practices, such as financial motivation. In many situations, knowing how to properly motivate the human capital will result in better performances. For example, in some companies, the financial motivation is not sufficient and employees tend to emphasize more the need of a good social environment at work. In such situations, motivational instruments will need to target this aspect and measures will be taken in that sense.

Measuring performance

The importance of measuring the performance of the human capital in an organization is obvious: according to some sources, as much as 70% of the expenses in an organization are related to human capital

. With such a figure, it becomes essential to be able to evaluate whether this type of investment is actually produce the expected results.

One of the 21st century human capital management theoreticians, R. Donkin, has shown that human capital management should ideally include three different phases

. The first phase would involve the development of relevant qualitative and quantitative metrics that can be used in order to evaluate the performance of human capital in an organization. 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.