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A Capital Idea

A Capital Idea

Say you're the most successful coach in the NBA, and there's one spot left on your team's roster for a power forward. Millions of dollars and the ability of your franchise to repeat last season's NBA championship rest on whether you sign Karl Malone or Dennis Rodman. This may seem like a no-brainer, but since you're looking for a player with particular skill sets (and you don't want this daydream to end with you getting canned), you carefully study the numbers-field-goal percentages, blocked shots, rebounds and the like.

In some ways, the two players' stats are remarkably similar, but you know the statistics don't tell the whole story. Malone, after all, is nicknamed "The Mailman" because he consistently delivers. And Rodman has a history of distractions in his personal life and has been known to show up late for practice, minus socks and sneakers. You want a player who is not only technically skilled but also committed, loyal, hard-working and dependable. You pick Malone. You go on to win the championship. You retire in glory.

It doesn't take years of experience as an NBA coach to grasp the importance of factoring the two players' intangible qualities into your decision; teams and companies have always taken attitude into account when evaluating their players and employees. Today, though, organisations are beginning to give squishy qualities-like loyalty, ability to relate to customers and willingness to take risks-more credence and are looking for ways to formally measure them. And by recognising the hard-dollar potential of such soft attributes, companies are turning them into something more concrete: human capital.

As the term human capital makes its way into the corporate lexicon, many companies are bandying it about freely while making no attempt to measure or manage the asset to which it refers. It's hard, after all, to make the connection between what's rattling around in employees' brains and the company's financial results. Many misunderstand the whole concept of human capital and see it as an effort by companies to create artificial worth by attaching a dollar value to employees' knowledge and skills. But a few progressive organisations, most notably Skandia Insurance of Stockholm, Sweden, have embraced the idea of human capital wholeheartedly and have made concerted efforts to track its value and manage it, achieving impressive bottom-line results in the process.

The concepts of human capital and intellectual capital are closely related-and easily confused. Intellectual capital is the broader of the two, encompassing the accumulated knowledge that an organisation possesses in its people, methodologies, patents, designs and relationships. Human capital is a subset of that concept. "Human capital is all about people, their intellect, knowledge and experience," says James Hatch, global director for people strategy and HR management for Arthur Andersen's human capital services practice in New York City. Hatch says that human capital also goes well beyond just knowledge and skills to encompass other qualities such as loyalty, motivation and teamwork.

Paying attention to human capital is becoming increasingly important because in the current job market, employees have a lot of discretion in choosing an employer. "The top reason for employees to leave is that they didn't feel they were challenged or fully developed," says Nick Bontis, director of the Institute for Intellectual Capital Research in Hamilton, Ontario. Human-capital management helps to tap into the experience and knowledge of employees to help them realise their full potential.

How does it work? Proponents of human-capital management believe that by measuring the broad impact that employees have on the financial value of an organisation, companies can hire, manage, assess and develop employees in a way that converts human attributes into hard financial figures. Although this involves finding ways to value qualities that heretofore have been considered intangible, champions of the process point out that the business market already does that. The high-flying stock price of Yahoo, for example, reflects not only the book value of the company but also the potential that lies in employees' knowledge, skills and ability to innovate.

Nonetheless, many executives have been discouraged from investing in human-capital enhancement programs (such as, for example, an organisational learning initiative) because of the perceived difficulty of determining the return on investment. Hatch lays the blame for this squarely at the feet of human resources executives, arguing that they need to add more rigor to what they do. "HR professionals say you can't measure [human capital]," scoffs Hatch. "But you can measure anything you want to measure. If something can't be measured, you shouldn't be trying to manage it."

Naturally, sceptics of human-capital management abound. Frederick Reichheld, a fellow with Boston-based consultancy Bain, maintains that instead of focusing on trendy lingo like human capital, companies should follow some of the many established common-sense approaches to employee development. Looking at the retention rate of top performers and striking real partnership arrangements with them will enable a company to hold onto its best employees and develop their skills just as effectively, argues Reichheld. The problem he sees is that many companies are, as he puts it, "just dancing around the ether but not doing the obvious." Additionally, many executives and analysts contend that human capital defies measurement, and that companies are actually devaluing the worth of employees when they try to measure them as they would a financial asset.

As with many debates, the truth about human capital lies somewhere in between. "The measurements tend to be fluffy, but it's the process of measurement that is important," observes Tom Davenport, a principal with New York City-based Towers Perrin and author of Human Capital: What It Is and Why People Invest It (Jossey-Bass, 1999). Indeed, even Bontis says that precise quantification is not possible-or even desirable. "Any individual who tries to attach a dollar value to any intellectual asset is pulling your chain," he says. But organisations are becoming aware of the strong link between human capital and corporate financial results-a link that traditional accounting practices fail to recognise.

Companies studying that link may or may not arrive at a specific number or figure to express the value of their human capital. But by attempting to quantify it, they can get a sense of how much individual employees can contribute to the organisation, how committed they are to their jobs, how they feel about the company and how likely they are to leave. What companies learn about their organisations in the process of evaluating their human capital often provides useful insights and actionable information. Here's what four organisations have achieved by attempting to measure their human capital.

Human Capital Pioneer

Blazing the trail in the field of intellectual-capital and human-capital assessment is Leif Edvinsson, former corporate director of intellectual capital for Skandia, the 144-year-old Swedish insurance and financial services behemoth. (Edvinsson left Skandia in September 1999 to become CEO and global knowledge nomad for UNIC, or Universal Networking Intellectual Capital, a new prototyping organisation for intellectual capital based in Stockholm.) Edvinsson began his work on human capital at Skandia in 1991. The leaders of the company recognised that they had a lot of invisible assets that simply were not recognised by the stock exchange, and they wanted to find a way to assess and communicate that value to the marketplace. Edvinsson developed a matrix known as the Skandia Navigator, a tool to identify and improve the intellectual capital in the company's Assurance Financial Services (AFS) division. The Navigator looks at how human capital-in combination with customer capital, internal processes and the company's capacity for innovation-creates financial value for the company. Used as a business-planning model, the Navigator provides big-picture perspective on the company's past (financial focus), its present (customer focus, process focus and human focus) and its future (renewal and development focus). (See "The Skandia Navigator".) Software known as Dolphin, which is based on the Navigator concept, lets users view an operation through a given focus and enables simulation of various scenarios, such as a jump in the company's stock price or an increase in sales.

With the help of the Navigator, Skandia breaks down the vision and objectives of the company into more concrete factors and then measures these factors at the individual level, group level, business level and corporate level. Edvinsson explains that by studying the extent to which critical success factors are being met at each level, Skandia can more easily identify what he calls "the roots for the organisation's financial fruits."

At the individual level, American Skandia, the company's US division, uses the Navigator to drill down on the performance and growth of each employee. Employees are measured on critical success factors that tie into the company's strategic direction and values. For example, if the company decided that it needed to improve its investment on employee training, the Navigator could look at the number of hours of training that an individual receives and the dollars spent on training that employee. The employee could also access the Dolphin program on Skandia's intranet to see what courses she would be expected to complete in the next six to 12 months. In addition, the Navigator can provide performance feedback, record achievements, and identify future renewal and development objectives.

At the corporate level, Skandia tracks the value of its human capital through use of an empowerment index that reflects employee motivation, loyalty and competence. The company also looks at employee turnover, training costs per employee, average years of service and average education level to paint a clearer picture on the state of its human capital. Since 1994, Skandia has been compiling an intellectual-capital report to go alongside the company's annual report. The reaction from the analyst community to Skandia's reports has been overwhelmingly positive. After all, the market had always accounted for a company's invisible assets in the form of "goodwill," but no company had ever provided measurements on which analysts could base goodwill value estimates.

Though most companies focus on financial capital as the vanguard of business success, Skandia views human capital as the driver of innovation; financial capital is merely the end result. This approach to asset evaluation has yielded very tangible results: Since Skandia's AFS division began using the Navigator in 1991, its gross revenue has grown from $300 million to $16 billion in 1998. Edvinsson attributes that growth to Skandia's innovative approach to "building an organisational system in which human talents can flourish." He points to the Navigator tool and Skandia's continuing exploration of human capital as a large part of that success.

Tracking the High Performers

Although Skandia is the uncontested leader in the field of measuring human capital, other organisations have implemented smaller programs that focus on one or two specific areas of measurement. One such organisation delving into the realm of human capital is the Georgia Merit System, the personnel department for the state of Georgia. There, Senior Human Resources Consultant Charlie Brooks uses a competency research process called Strategic Assessment Research to identify the value of the state's collective human capital. The process involves measuring the performance of each employee to identify the high performers, then conducting a series of behavioural interviews with each employee to determine how the most productive employees work.

Brooks began his efforts by conducting competency research to help the child-support enforcement unit of HR, a state agency that collects child-support money owed to single parents. When deadbeat parents fail to pay, the unpaid parent often ends up on welfare, which represents a drain on the state coffers. Because some agents are more effective at their jobs than others, the amount collected annually per agent ranges from $172,000 to $1.6 million. With the state paying for a large part of the shortfall, finding ways to improve the performance among the 300 agents can make a difference to the tune of $150 million.

Brooks conducts behavioural interviews to find out what the high performers have in common. He asks employees to tell him the precise details of how they do their jobs, and he documents the high performers' attitudes, rules of thumb and methods. When interviewing for new hires, Brooks looks for the qualities that have been shown to be an asset on the job. And perhaps more important, he trains existing agents to adopt some of the high performers' work practices. In previous research with a trucking company, Brooks found that even details as seemingly minor as the time of day employees make collection calls can matter; high performers at that company tended to make all of their calls before noon. At the Georgia Merit System, Brooks discovered that agents hired on the basis of video tests of their customer service and interpersonal skills collected an average of $200,000 more annually than those hired based on the results of basic cognitive tests and an interviewer's impressions. In the year-and-a-half since he began conducting competency research at the Merit System, Brooks says the state has spent roughly $160,000 on the program. But he estimates that the agency's improved collections have helped the state save $60 million to $122 million.

Brooks says that although human capital is a salient term to executives, he avoids using the phrase with employees because he thinks it evokes a negative emotional response. Some employees also grumble that the program is elitist, he admits. "They think we're all going to be like a bunch of robots," Brooks says. "[They assume] that we're only going to be looking for one kind of person." He insists, however, that he is only trying to discover the key behaviours that have the greatest effect on job performance and pass them on as best practices. "People want to be good at their jobs," says Brooks. "I want to help them like it and be good at it."

Enhancing the Employee Experience

Alabama Gas, or Alagasco, as the division of Energen is called, has twice been named by Fortune as one of the best companies to work for. Much of that honour is due to the work the company has put into measuring the attitudes employees have toward their jobs and creating programs that measure and build on those impressions. The company tracks employee satisfaction diligently because it sees customer satisfaction as a direct outgrowth of employee happiness.

In the early 1990s, Michael Warren, chairman and CEO of Alagasco, was looking for ways to improve the employee experience at the company. Research revealed that the organisations widely regarded as the best places to work also tended to be top performers in their industries. The company launched a series of programs designed to enhance the employee experience at Alagas For example, the company implemented the Temporary Reassignment Program, which lets employees try out job roles that are completely different from their own. The goal is to give employees a chance to develop new skills as well as enlarge their overall scope of experience. When employees are seen in roles that they might never assume in their regular duties, it builds not only their confidence in their own capabilities but also the trust and respect of managers and coworkers.

Although the company has received favourable press for its efforts, Warren admits that "the value of one employee and his or her full participation is hard for us to measure." The impact of employee satisfaction may not be easily translated into a dollar value, but he insists that it is nonetheless integral to the success of the company. He compares the value of considering the employee experience to the message in a baseball-themed MasterCard commercial: "You can get a camcorder for $400, a battery for $25, but sitting next to Willie Mays at the World Series...that's priceless."

Keeping Score

Traditional goods and services companies aren't the only organisations interested in finding out how to maximise the value of their human capital. One NBA organisation has been using software from Purchase, N.Y.-based HR Technologies for the past year to assess how it can build the best team based on the players' competencies. In fact, the team considers such tracking so proprietary that it won't talk publicly about its use of the software. The software allows team management to assess not only technical skills, such as shooting percentages and the ability to pass, but also less tangible qualities like attitude and team loyalty. Looking at both sets of attributes helps determine if a given player has all the characteristics the organisation requires to take full advantage of his talent. When you stack Larry Bird up against other players physically, he wouldn't appear all that exceptional, maintains Paul Storfer, cofounder and managing partner with HR Technologies. "But [Bird] worked very hard," he explains. "It was his intellectual and behavioural competencies that made him a better player."

In a trade situation, managers of the NBA team will be able to use the software to determine which of several available free agents they should sign based on how each player complements the skill sets and competencies of players already on the team. Although coaches expect that fresh-out-of-school recruits will need a few years to mature into NBA-level athletes, they hire them hoping that working alongside top players will help them develop faster. The team working with HR Technologies believes that this kind of measurement will help it identify the future Karl Malones more readily-and make all hiring decisions less of a gamble.

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