Scottish economist Adam Smith defined four types of fixed capital in his 1776 magnum opus, “An Inquiry into the Nature and Causes of the Wealth
of Nations”: useful machines and instruments of the trade, buildings as a means of
procuring revenue, improvements of land, and human capital.
It is widely considered the first published economic work, and in it, Smith defines human capital as “the acquired and useful abilities of all the inhabitants or members of the society. The acquisition of such talents, by the maintenance of the acquirer during his education, study, or apprenticeship, always costs a real expense, which is a capital fixed and realized, as it were, in his person.”
According to Haig Nalbantian, worldwide partner and director of research and commercialization for Mercer Human Resource Consulting, Los Angeles, human capital is the single biggest investment an organization can make.
“Human capital is the accumulated stock of skills, experience and knowledge that resides in the organization’s work force, and that drives productive labor,” he said.
It is the human equivalent of a company’s physical and financial assets, and the return is the flow of productivity. Furthermore, people cannot be separated from their skills, experience and knowledge.
“The concept of human capital is derived from the fact that people are an asset and not just a cost center. People are what separates a company from its competition, beyond the services offered,” said Jim Griffin, senior vice president of global alliances and sales for Insala, a career-development software provider based in Euless, Texas.
While most companies, however, focus on the state of their operating and financial capital regularly, they do not always devote the necessary attention to acquiring, developing and retaining the human capital that makes a company successful, according to Steve Hayes, senior partner of the Human Capital Group Inc., Brentwood, Tenn.
“It is incumbent on company leaders to create an environment that attracts and retains the right people to achieve the company’s goals,” he said.
While human capital is a way of looking at the work force as an investment made to achieve business goals, companies struggle to make the connection between this investment in people and the ultimate business outcome, according to Christa Degnan Manning, research director at AMR Research in Boston.
“This stems from a lack of tools to create a metric that financial staff can work with to capture data on training, productivity and performance to analyze outcomes,” she said.
Developing human capital
Developing an organization’s human capital requires attention to the factors that affect people’s willingness to produce.
“The channels of productivity have to be open and well-constructed to allow employees’ potential to materialize into productive labor and results,” Nalbantian said.
The organization must have processes, structures and supervision in place to motivate employees and to open opportunities for people to apply their knowledge and skills. Such a blueprint for developing and maximizing human capital includes defining the productive potential of employees; determining what workers need to do to translate their potential into results; determining what the work force believes, values and thinks; and figuring out what engagement and commitment the work force brings to the organization.
“The sheer size of the human capital asset, its enduring character and its competitive advantages are driving people both inside and outside organizations to try to measure the value and drivers of work force performance better,” Nalbantian cowrites in his book, “Play to Your Strengths.”
An organization’s management of its human capital is, therefore, essentially the ability to make decisions that will achieve strategic objectives.
“Developing human capital requires ensuring that the company has the right people filling the right positions at the right time in both the short and long term,” Griffin said.
When a gap exists between the company’s goals and the available human capital, management must decide to either develop internal talent or recruit someone outside the organization that can provide the knowledge, expertise and capabilities to achieve objectives.
“The company must understand its needs, analyze its goals and objectively assess its existing knowledge capital to learn what the gaps are. Then the decision can be made between upgrading existing human capital or bringing in new talent from the outside, or both,” said Judy Corner, Insala’s director of consulting services.
Corner described the five steps that can help a company develop its human capital: define the organization’s strategic goals; assess and identify the skills, knowledge, and competencies required to attain those goals; assess the company’s current human capital in relation to its ability to fulfill its goals; determine the gaps between the current human capital and the skill sets necessary to achieve the goals; and determine whether to develop talent internally or to hire externally and the costs associated with both.
“Then, if the company decides the best course is to hire from the outside, it must decide whether it will be on a full-time or contract basis,” she said.
According to Dan Ryan, senior consultant at the Human Capital Group, developing the company’s internal human capital requires open, honest and constructive communication; on-the-job training; opportunities for employees
to broaden their experiences within the company; and investing in opportunities for people to expand their skills and knowledge.
“The most effective way to maximize existing human capital is to provide day-to-day coaching, constructive feedback and latitude for employees to make decisions while also providing the support that encourages growth,” Ryan said.
Human capital has traditionally been developed through informal and formal training programs and by partnering with academic programs to ensure the contractor is getting skilled workers that it needs for the future.
“Industries, such as electrical contracting, that face worker shortages cannot assume, however, that academia can support their recruiting needs. Instead, contractors must develop a disciplined approach to investing in their work forces and do more to promote the profession and increase awareness of the attractiveness of the industry,” Manning said.
To develop new workers, she said, contractors need to focus today on mentoring, job sharing, job shadowing and taking a more aggressive approach to developing new workers and their skills.
Benefits of investment
Even small improvements can have a large impact on the bottom line.
“Human capital is one of the last remaining, enduring competitive advantages because it’s a prime asset that drives productivity. With the right mix of human capital and effective management, a contractor can have a productivity strategy that’s hard to copy and compete against,” Nalbantian said.
Unfortunately, there is no generic formula to determine the required investment in human capital, but there are several variations in productivity not influenced by external factors that a contractor can examine, such as turnover levels, pay and compensation levels, and managerial spans of control.
“Examining variations in productivity can help the contractor determine what investment in its human capital management will be required to optimize performance,” Nalbantian said.
Effective human capital management, according to Griffin, allows the contractor to identify its high potential talent at all levels of the organization; identify gaps in employees’ knowledge sets; identify the risks of turnover; develop employees’ skill sets and improve performance; and better plan the company’s long-term development, succession and the acquisition of people to grow the business.
“Having the wrong person in a job can be very costly. On average, the opportunity costs can be one and a half times the position’s salary and benefits,” he said.
Human capital requires a long-term, on-going investment in leadership time, according to Hayes, including providing feedback, coaching and mentoring, and supporting employee development.
“To avoid conflict, too many managers don’t provide the necessary feedback or coaching, but most people will receive timely feedback positively and will try to improve” Hayes said.
When continually renewed and refined, good human capital management creates loyalty, improves retention and recruitment, creates an environment that focuses on cooperation in which employees recognize management’s long-term support, and demonstrates the positive corporate culture to customers. Of course, this generates repeat business.
“A company doesn’t have to pull out its checkbook to invest in people,” Hayes said.
By investing in human capital, the contractor can achieve his or her ultimate goals of increased profitability or expansion into new markets. Manning suggested gauging the company’s work force challenges and then prioritizing the investment in human capital based on the desired business outcome.
“A high performance organization is one that is executing its goals successfully, and no business can achieve its goals without investing in its people,” Manning said.
Human capital is a new and evolving discipline and form of asset management and has been under-appreciated for a long time across industries. According to Nalbantian, a whole new set of quantitative metrics and measurement tools allow companies to make better decisions concerning their human capital investment based on real data about what is working or not working for organizations.
“Companies can use these metrics and tools to focus on human capital the same ways as they do their financial planning and technology and capital investments,” he said.
In addition to assessment tools, consultants and human resource professionals can help contractors further their human capital and talent management. Different associations, such as the Human Capital Institute and the Society of Human Resources Managers, exist to help organizations excel in managing and improving their human capital.
“But,” Corner said, “it is not necessary to choose a consultant that only has experience in the electrical contracting industry. The more successful choice would be a consultant with a wide breath of experience to help the contractor adapt to wider changes in industry conditions.”
BREMER, a freelance writer based in Solomons, Md., contributes frequently to ELECTRICAL CONTRACTOR. She can be reached at 410.394.6966 or firstname.lastname@example.org.