While all of the chapters in this section underscore the importance and value of human capital, this one examines the importance and value of human capital from a logical, intuitive basis, and introduces several arguments for why human capital is king or queen. It begins by looking at the role of people in organizations, and then explores issues such as how human capital is (or is not) accounted for. The role of human capital in highly successful organizations is examined in popular lists such as the Best Places to Work and the Most Admired Companies. In almost all cases, logical arguments point toward the importance of people to an organization, as people contribute most, if not all, of the organization’s successes. The discussion emphasizes the value organizations place on their people and their reasons for doing so. The chapter ends with a concern for additional research—some managers and executives need more data to be convinced that human capital makes a difference.
Some managers view the human aspect of organizations as an irritant, a burden, or perhaps a necessary evil. People cause most of the problems. It is the people who are dissatisfied, file grievances, lodge complaints, allege sexual harassment, get injured on the job, file workers compensation claims, go on strike, and create a host of other problems that not only take them out of service, but take precious time and resources to resolve. Some executives have estimated that employee problems account for as much as 20 percent of the total cost of human capital investment. If the people could be removed, the problems would go away; there would be no complaints, charges, gripes, grievances, accidents, or work stoppages. For some organizations, this would be Utopia and they strive to achieve this scenario.
The advancement of equipment, machines, and technology has enabled many organizations to automate parts of the job and, in some cases, all of the job. As technology evolves, is it possible to have a completely automated workplace? Is it possible to remove the human factor, at least for the most part? Consider something that would almost be unheard of years ago: automated air travel. With the available technology, airplanes could basically take off, fly to their destination, and land completely automated. Much of the check-in, boarding, and logistics could be automated, as it is now to a certain extent. It may be possible for the entire process (from checking in to arriving at the desired destination) to be accomplished without any human interaction. To some, this seems like science fiction, but it could be a reality. Is this desired? Perhaps not. What happens if technology fails or there is a glitch in the automation? The dream becomes a nightmare. It may be impossible to remove the factor in the short term, but this is a goal for many.
Regardless of one’s position on job automation, there are some jobs that should be eliminated; automation should be an essential and significant part of the strategy of deciding how much to invest in employees. Four types of jobs are ideal candidates for automation. First, the jobs that are considered very monotonous and boring should be eliminated. These jobs are routine and require little thought and concentration. Many assembly line jobs fit into this category. If possible, these jobs should be automated; otherwise, the monotony leads to dissatisfaction, which leads to absenteeism, turnover, injuries, withdrawal, sometimes even sickness. Employees have become sick solely because of the rote work they do.
Second, jobs that are highly dangerous should be automated. This is a critical issue in heavy industry, manufacturing, and mining—using technology to remove the employee factor so that injuries and deaths can be prevented. This is not only the cost-effective thing to do, but the humane thing as well.
Third, transaction-based jobs should be automated. These jobs involve simple-step transactions that can be handled much more efficiently with technology. Consider the issue of booking an airline reservation—a very transaction-based process. A few years ago it was all done on the phone or face-to-face; now the majority of reservations are made on the Internet, thus eliminating many people who have to be involved in the process. Some airlines charge an additional fee when reservations are made via the phone, thus providing an incentive to reserve a seat via the Internet. The newer technology produces fewer errors, is quicker, and less costly for the organization.
Fourth, jobs that are difficult to recruit capable employees for should be automated, if possible. Many organizations are automating processes, steps, and even entire functions. Consider the local service station and the job of fueling your automobile. Gone are the days when three attendants ran out to your car, filled the tank, checked the oil, washed the windshield, put air in the tires, and took your money. Today, the individual consumer is familiar with the gas pump. By following a few simple directions, the consumer fills the tank, pays with a credit card, and goes through an automatic car wash. These “modern” conveniences have enabled companies to provide more efficient delivery of their gasoline. If an attendant had to pump the gas and take the money, the associated cost would have to be passed onto the consumer—some estimate as much as 5 to 10 cents per gallon. This automation has eliminated jobs that are hard to fill and those that have high turnover. At the same time, there is increased efficiency and convenience. The hours of store operation are no longer a consideration; you can fuel your car at any time, any day of the week.
It would be remiss to discuss the importance of human capital—from a logical and intuitive perspective—without mentioning the impact and influence of management gurus. They are the first to say that the organization cannot be successful without human beings. Dozens of gurus have been advocating that employers should invest more—not less—in their people. Two of the most notable have been Stephen Covey and Ken Blanchard. Covey is the best-selling author of 7 Habits of Highly Effective People (1989), selected by Chief Executive Magazine as the most influential book of the twentieth century. He has devoted his career to teaching leaders and individuals the value of people in the organization. Blanchard is the author of over thirty books, including The One Minute Manager, Gung Ho, Raving Fans, and Empowerment Takes More than a Minute. His concept of return on people (ROP) is intended to flag the importance of the people side of the business.
Other gurus, such as Tom Peters, who wrote the best-selling book, In Search of Excellence, continues to stalk the speakers’ circuit, telling businesses what they need to do and what they need to stop doing. Among his themes is the importance of people, unleashing their power, and getting out of their way in the organization. For half a century, Peter Drucker (considered the father of management) has advocated investing more in employees. At age ninety-four, he is still stressing the importance of people in an organization’s success, particularly the importance of the knowledge worker. Much of the current interest in the value of human capital is based, in part, on Drucker’s assumptions, which he developed well ahead of his peers.
With the previous discussion as a backdrop, several conclusions can be reached about the role of people in the workplace. First, minimizing the numbers is not necessarily a bad strategy. In the name of efficiency, employee welfare, and the desire to have motivating and challenging jobs, certain jobs need to be eliminated or minimized, as outlined above.
Second, human capital investment at some level is necessary. Even in a completely automated transaction, people are involved in making key decisions, solving problems, and ensuring that the processes work correctly. The investment still exists; it is just that it may be a smaller percentage of the operating expenses.
Third, in a highly automated workplace, people are still critical. Sometimes their skills are upgraded because of problems that arise when transactions fail, or when technology or equipment fails. They are also needed to coordinate and implement the new technology in the first place. In an ideal situation, as jobs are eliminated, skills are upgraded so that the workforce is maintained or, in some cases, even grows. A firm that has both job creation and significant automation is adding tremendous value to the economy, which is the challenge of many organizations.
When considering the value and importance of human capital, executives need to look no further than the stock market. Investors place a tremendous value on human capital in organizations. For example, consider QUALCOMM—a San Diego, California-based organization—a leader in developing and delivering innovative digital wireless communication products and services, based on the company’s CDMA digital technology. QUALCOMM is included in the S&P 500 Index and is a Fortune 500 company traded on the NASDAQ stock market. QUALCOMM is a very profitable company with revenues in 2003 of $4 billion, a gross margin of 64 percent, and a net income of $827 million.[1]
QUALCOMM reported total assets (tangible) on its balance sheet of $8,822,436,000; however, the market value is much higher. The stock price in mid-2004 was $70 per share, and the company had a market value of $57,242,850,000. In essence, tangible assets represented only 15.4 percent of the market value and included not only the current assets of cash, marketable securities, accounts receivable and inventories, but also property, plants, equipment, and even goodwill.
Thus, investors see something in QUALCOMM that has a value much greater than the assets listed on the balance sheet. This “hidden value,” as it is sometimes called, is the intangible assets, which now represent major portions of the value of organizations, particularly those in knowledge industries, such as QUALCOMM. It is helpful to understand what comprises intangible assets; human capital is certainly a big part of it.
The concern for intangible assets and their values can be traced back many years, but this concern gained popularity in the late 1960s and early 1970s in the form of human resources accounting.[2] Although interest diminished in the early 1980s, human resources accounting (HRA) enjoyed renewed emphasis in the late 1980s and continued strong throughout the 1990s. Human resources accounting was originally defined as a process designed to identify, measure, and communicate information about human resources in order to facilitate effective management within an organization. It was an extension of accounting principles—matching costs, revenues, and organizational data to communicate relevant information in financial terms. With HRA, employees are viewed as assets or investments for the organization. Methods of measuring these assets are similar to those of other assets; however, the process includes the concept of accounting for the condition of human capabilities and their value.
In the 1980s, organizations began developing case studies describing their application of HRA principles. For example, UpJohn used HRA to measure and forecast the return on investment in people. Even professional baseball teams began to use the concept to place a value on their talent. Three important questions placed HRA under scrutiny: Are human beings assets? What costs should be capitalized? What methods are most appropriate for establishing a value for employees with the eventual allocation of such values to expense?[3]
In 1986, Karl Erik Sveiby, manager and owner of a Swedish-based publishing company, published The Knowledge Company, a book that explained how to manage these intangible assets.[4] It was one of the first books to focus on “intellectual capital” and inspired other critical research in Europe. In Asia, the idea developed as firms attempted to show the value of their intangible assets. Japan’s Hiroyuki Itami published an analysis of the performance of Japanese companies.[5] The study concluded that much of the performance differences of the firms is the result of intangible assets. In 1991, Skandia AFS, an insurance firm in Sweden, organized the first known corporate Intellectual Capital Office, naming Leif Edvinsson its first vice president for Intellectual Capital.[6] Edvinsson’s mission was to learn how others were managing intellectual capital and using it to generate profits.
In 1991, Thomas Stewart, a member of the editorial board at Fortune magazine, wrote an article on brainpower, which began to discuss the idea that intangible assets had much to do with profitability and success.[7] This was followed by a cover story on the subject.[8] Since then, dozens of books have been written and hundreds of articles in professional journals have dominated print space on this critical issue. The topic of intangible assets often dominates conference agendas with some conferences devoted exclusively to the subject. The need to understand, measure, and use it in a productive way has led to a proliferation of information sources, benchmarking possibilities, and consulting groups.
Major changes in the economy and organizations have created a tremendous interest in intangible assets. In the last century the economy’s base has moved from agricultural to industrial to intellectual, as shown in figure 6-1.[9] The knowledge era is perhaps the most far-reaching and explosive of the economic eras.
During the agricultural era, the focus was on land and how to make it more productive. During the industrial age, which dominated much of the first half of the twentieth century, the focus was on how efficiency and profits could be generated through the use of machinery. In the knowledge economy, the focus is on the human mind and how knowledge is used to build a more productive and efficient economy.
When it comes to classifying intangible assets, there is no agreement on the specific categories; the assets are important and varied. A large technology company, such as QUALCOMM, has a market value far exceeding its actual book value, which reflects its tangible assets. Important intangible categories make up this huge difference in value.
The first step to understanding the issue is to clearly define the difference between tangible and intangible assets. As presented in table 6-1, tangible assets are required for business operations and are readily visible, rigorously quantified, and represented as a line item on a balance sheet.[10] Intangible assets are key to enjoying a competitive advantage in the knowledge era and are invisible, difficult to quantify, and not tracked through traditional accounting practices. With this distinction, it is easier to understand the different categorizations.
Table 6-1. Comparison of tangible and intangible assets.
Tangible Assets | Intangible Assets |
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Required for business operations | Key to competitive advantage in the knowledge era |
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Intellectual capital was early defined as the intangible assets that could be converted to profit. This concept has created a tremendous interest in understanding the impact of the knowledge contribution of successful organizations. Although there are more than a dozen ways to classify intangible assets, some categories are common between the groupings; three variations are presented here. A widely accepted grouping is contained in figure 6-2, where the enterprise is divided into tangible assets, intellectual capital, and financial capital.
In this arrangement, intellectual capital is divided into customer capital, human capital, and structural capital. Stewart, Edvinsson, Saint-Onge, and many others support this division. These categories will be discussed in this chapter with the phrase intellectual capital reflecting customer capital, human capital, and structural capital. Figure 6-3 shows the elements comprising intellectual capital offered by another researcher/practitioner in the field.[11] This categorization includes research and development, intellectual assets, and knowledge, with knowledge being divided into tacit knowledge and codified knowledge.
Figure 6-4 offers a second grouping.[12] In this categorization, renewal capital reflects intellectual properties and marketable innovations. Relationship capital reflects networks and customers.
Still, another definition comes from Thomas Stewart[13] who suggests that human capital has three elements:
Collective Skills. These represent the talent of individuals, colleagues, and teams to build on the skills of each other.
Communities of Practice. Organizations are made up of communities and these communities of professional practice have become a recognized part of business life. The nature of knowledge will require companies to foster communities where there is a high level of candor and where corporate speak has no place.
Social Capital. What transforms workers into colleagues is social capital. It is the stock of active connections among people, the trust, mutual understanding, and shared values and behaviors that make cooperative action possible.
Whatever the definitions, human capital is a significant part of intellectual capital; intellectual capital is an important part of intangible assets. For organizations—including knowledge-based organizations—intangible assets are often far greater than the tangible assets. The bottom line: We’re in the knowledge era. Knowledge comes from people—not machines, financial resources, or natural resources.
One of the problems of attempting to place a value on intangible assets stems from accounting standards. Both financial accounting (which appears in annual reports) and management accounting (which enables managers to take action) are inadequate for current organizations. Although there has been much discussion, the Generally Accepted Accounting Principles (GAAP) offered by the Financial Accounting Standards Board (FASB) are inadequate for placing a value on intangible assets and, in particular, the human capital issue. Even Alan Greenspan, chairman of the Federal Reserve Board, complained that accounting was not tracking investments of intellectual assets and that changes in technology have muddied the crucial distinction between capital assets and ordinary expenses. FASB indicates that accounting’s fundamental purpose is to provide information that is useful in making rational investment, credit, and similar decisions. This is not happening. If the books were communicating stories that investors found useful, then a company’s market value should correlate with the value accountants place on it. The QUALCOMM example illustrates the tremendous difference between market value and book value.
Professor Baruch Lev, who specializes in valuing trademarks and patents, conducted a series of in-depth comparisons of corporate asset values (book values) and share prices.[14] He concluded that the financial reporting methods used by nearly all corporations—the methods codified by the FASB and required of public companies by the Securities and Exchange Commission (SEC)—were giving “exactly the wrong impression” of the real comparative worth of corporations. In growth industries, in particular, the accounting numbers consistently overstated the value of physical assets (like buildings and machinery) and consistently underestimated other assets, especially the intangibles that were, in the early 1990s, just coming to be seen as critical sources of corporate competitiveness.
The debate will continue as the accounting profession tries to adjust to the new economy organizations. The issue of measuring the value of human capital is explored further in chapters 9 and 10.
As there are superstars in almost every area in life, so there are superstar organizations—those perceived as being extraordinarily successful, based on major accomplishments. One common denominator for the superstar organization is recognizing the people factor. Executives at superstar organizations give recognition to the people who have created the outstanding performance. Six examples highlight the importance of human capital in achieving superstar status.
Consider the success of QUALCOMM, described earlier. QUALCOMM has earned a distinguished reputation in technology innovation. It has more than 3,000 patents, most of which have been filed with key foreign jurisdictions around the world. In exchange for good ideas and hard work, the company provides an environment that fosters creativity and recognizes achievements. A continuous learning organization, the company is dedicated to promoting the growth of their employees and development of the surrounding community. As a global organization, QUALCOMM works with people around the world, helping create and transform technology to meet the needs of people at home and on the job. QUALCOMM has been recognized for this outstanding success. The American Association of Retired People (AARP) has labeled QUALCOMM as one of the best employers for workers over fifty years old. It is listed in the Black Collegians Top 100 Employers as well as Business Week’s IT 100 and Global 1,000. In financial terms, QUALCOMM is on the list of Most Valuable Global Companies and is in Fortune magazine’s list of the most admired companies. Also, it is consistently listed in Fortune magazine’s 100 Best Companies to Work For. The success of the organization and the importance of people who make it happen go hand-in-hand in public statements, demonstrated activities, and supporting recognition.
Jack Welch, former chairman and CEO of General Electric, achieved extraordinary results with uncanny consistency. He achieved growth year after year, helping to build his reputation as an outstanding business leader who could do no wrong. He was a role model for others to emulate; double-digit annual growth became the benchmark for all CEOs and corporations in America. Welch debunked many of the most common myths of management, for example, that the command-and-control model is the best way to run a large company. But his ultimate legacy is that he created a learning culture within a mammoth corporation that had an amazingly diverse business portfolio.
Welch defined a learning organization as an organization in which employees and managers soak up good ideas from everywhere. He felt that the organizations that would ultimately achieve a sustainable competitive advantage were those that continuously learned, and then translated that learning into action. “You need to believe that you are a learning institution,” he once commented, “and to constantly challenge everything you have.” In a learning organization, employees are given access to critical information and are expected to search out creative solutions to problems.[15]
Welch did not start as GE’s chairman with the notion of creating the world’s largest learning organization, nor did that accomplishment come easily or quickly. It took many years, lots of sweat and blood, and a series of courageous decisions in the intervening years. He did, however, send the right message almost from the very start: learning would be a top priority at General Electric.
The following steps represent what Welch did in his “business laboratory” (a favorite Welch term) at GE from 1981 to 2001. They are less a comprehensive blueprint than a general framework:
Make sure the company is financially sound before embarking on something as sweeping as developing a learning culture.
Set a definitive strategic direction and make sure that the vision is articulated throughout the organization.
Make sure that there is a stated set of values to guide the company.
Establish an environment of trust and openness.
Create a “boundary-less organization.”
Make speed, flexibility, and innovation a reflex.
Make sure that everyone in your organization is encouraged to seek out the best ideas from anywhere.
Implement a best-practices program. Importing the best ideas should be a process, not simply a mindset.
Reward behaviors and actions that promote a learning culture.
Establish processes and an infrastructure for converting learning into results.
Use companywide initiatives to spread the gospel.[16]
By any measure, GE under Welch placed high value on human capital and its importance to success. Welch believed that behavior is driven by a fundamental core belief: the desire and the ability of an organization to continuously learn from any source, anywhere, and to rapidly convert this learning into action is its ultimate competitive advantage.
When he took over, GE’s total market capitalization was $13 billion. In the spring of 2000, GE became the most valuable company in the world, worth an astounding $596 billion (before sliding substantially in the market downturn of 2001 and 2002). There is little doubt that Welch’s learning culture played a prominent role in GE’s transformation from an aging manufacturing bureaucracy to one of the world’s largest, most valuable global multinationals.
For more than forty years, Honda has continued to grow and expand in America. Today, with a presence in all fifty states, their investment in sales, manufacturing, and research operations in the United States exceeds $5.9 billion. By 2004, Honda’s direct employment in the United States rose to 24,000 associates with an annual payroll of $1.2 billion. Their plants, facilities, and authorized dealerships currently employ more than 120,000 Americans. The importance of employees to generate success is underscored when examining the role of employees at Honda’s newest U.S. automotive plant located near Birmingham, Alabama. Employees—known as “associates”—are encouraged to solve problems in groups rather than fretting over them alone. The practice comes to life both on the assembly line and in big, open offices that lack the isolating cubicles common in so many U.S. companies.
Working for Honda, which put its first manufacturing facility in the United States twenty-five years ago, is not anything like toiling in one of the old steel mills or foundries that used to dominate Alabama’s manufacturing base, employees say. Paint booths have replaced blast furnaces, and employment for life does not seem like a particularly bad idea, with assembly line wages starting at more than $15 an hour, not including benefits. Shifts rotate regularly so no one gets stuck on the graveyard shift forever.
The Alabama factory began making Odyssey minivans and engines in November 2001. In 2004, it added a second assembly line that makes the Pilot sport utility vehicle. In all, the $1 billion factory can manufacture 300,000 vehicles annually.
American and Japanese engineers write on big white boards to hash out problems, relying on hand-drawn sketches where needed. Their commitment to quality is amazing. The engineering tolerances are set, and they stick to them.
Commenting on the twenty-fifth anniversary, Masaaki Kato, the president and chief executive, said the company has succeeded by emphasizing respect for individual employees. “We look to associates not just for their physical skill, but for the ability and willingness to challenge with their ideas,” Kato said in a speech to an automotive conference.[17]
Creating a culture of accountability ensures that a superstar is developed. When employees at all levels understand their role and their connection to the success of the company, they will help it become a superstar. Take, for example, Southwest Airlines. With 35,000 employees, this airline is, no doubt, the most profitable airline in the world—it has never failed to make a profit. Even in tough years when other companies were losing billions, Southwest was making a profit. Among other factors, the most important consideration for success was the employees. Southwest employees understand their roles and what they must do to make the airline profitable—and they share in the profits. They understand that great customer service, efficient and profitable turnarounds, and controlling costs at every angle make the airlines more profitable. Because of this, some of the early Southwest employees have become millionaires with the wealth created through their stock plans. This success stems from the culture created—a culture that is focused on getting things done and meeting the challenges that many said could not be accomplished.[18]
The president and chief operating officer of Southwest Airlines, Colleen Barrett, helped Herb Kelleher found the company more than thirty years ago in Dallas, Texas, and has been the inspiration behind Southwest’s amazing culture. In 1990, she formed Southwest’s Culture Committee to preserve and promote the organization’s core values, known collectively as “SPIRIT.” From day one, Barrett perceived the essential role that culture would play in differentiating Southwest Airlines from its industry rivals.[19]
From 1997 to 2001, Southwest was in the top five of Fortune’s list of the 100 best companies to work for in America. In 2002, it did not make the list because Barrett had the guts to remove the company from the competition, saving more than $100,000 of employee time that goes into applying for the honor.
Was it a good decision? If success is a measure, it was. In the wake of the 9/11 terrorist attacks, many U.S. airlines were forced to borrow cash, cancel aircraft orders, cut flights, lay off employees, and slash fares. Southwest’s story was dramatically different. The airline’s employees remained strong, dedicated, empathic, united, and highly spirited. The post-9/11 results speak for themselves. Southwest operated at 100 percent of capacity without a single layoff and fully met its obligations to its employees profit-sharing and savings plans, which totaled $197.5 million. It inaugurated new routes and its revenue-per-passenger-mile (RPM) share of the U.S. domestic market increased by approximately 25 percent. It reported 2002 revenues of more than $5.5 billion, with net income of $241 million and a growth margin of 30.5 percent, compared to 26.02 percent for the industry.
General Wilson Cooney, former president of the property and casualty insurance group, USAA, was monitoring the phones at its San Antonio, Texas, headquarters one day when he happened to catch a conversation between a service representative and an eighty-one-year-old customer. “I need some help, but I’m not sure what with,” the customer began, and that seemed true enough as she rambled on. Eventually, she explained her confusion: “I lost my husband three weeks ago and I don’t know what to do.” She had seen some insurance papers around the house, but had no idea what to do about them.
After offering condolences, the service representative suggested that the customer gather the papers together. The customer warned it might take a while—and it did. In fact, the call lasted sixty-five minutes. By the time it ended, the service representative had resolved all the woman’s problems with her auto, life, and estate policies.
“I just want to tell you this is the nicest thing that’s happened to me in three weeks,” the customer said. She sent the representative flowers. “Those are the kinds of things that go on every day,” Bill Cooney said.[20]
For more than eighty years, USAA has focused on achieving the best customer service in its industry, and it has succeeded: 98 percent of its customer base is in the top 40 percent for customer satisfaction; 98 percent of its members renew their policies each year. The secret, according to Cooney, is in the interface between USAA’s people and its customers. The company’s skill at maximizing its employee assets is legendary.
The member-owned Fortune 500 company manages more than $71 billion in assets and is recognized as a leader in the financial services industry. In 1998, it earned $980 million on revenues of $7.7 billion. Phoenix Marketing International reported USAA received the highest client-satisfaction score from affluent investors with 83 percent. This compared to others such as TIAA-CREF (77 percent), A.G. Edwards (75 percent), and Vanguard (75 percent).
The company uses technology to furnish employees with up-to-the-minute information, makes the most of its employee assets, and consequently provides greater value to customers. At the same time, the company insists that employees be, as Cooney puts it, “passionate about serving people.” Many of its 22,400 employees have special qualifications for empathizing with the dire circumstances that many of its customers find themselves in.
The leaders of USAA want to know what their employees are thinking and feeling. That kind of knowledge is useful when you want to instill in employees the attitudes that make for a service-first company. The company’s investment in employees thus takes many forms. USAA knows that it is not enough to employ good people. To create value, employees must be properly trained, equipped, directed, and motivated. USAA provides a best-practice standard in this area. Working Mother Magazine has named USAA to its list of “100 Best Companies for Working Mothers” for six years in a row. Along with this, USAA has been recognized as a best place to work for commuters as well as being named best employer for the fourth time by LATINA Style magazine.
Failure to focus on people can be detrimental. Les Hayman, Chief Officer of Global Human Resources at software giant SAP, puts it more bluntly, “I remember a lot of great companies from the 1970s that have since disappeared because their focus was on products, not people.”[21] Hayman assumed his new post after serving as Chief of SAP’s Asia Pacific operations. In eight years, he built SAP’s Asia Pacific business from a paltry $6 million in sales to an astonishing $800 million. Hayman credits his success to getting the most out of his staff’s talent. “If you talk to technology companies, you always hear them say that what they really need is a killer application,” Hayman says. “That’s rubbish. That’s really the by-product of what you do. You need a good strategy—not a brilliant one, but one you can execute. And you need a performance-driven culture and people who are emotionally engaged. If you have all those things, you’ll create the right product.”
As of March 31, 2004, SAP had over 30,000 full-time-equivalent employees. Software revenues in the United States increased 63 percent to 140 million (2003: 86 million). Employees are critical to an organization’s success and the superstars are the showplace examples. Most executives not only declare that their people are the most important assets, but make statements like, “We could not have done it without the people.”
Some will argue that the success of an organization can only be defined in terms of employees. Success cannot be generated in any way without successful people, not only at the top, but at all levels. People are the most important asset and no organization has been successful without them. A superstar company has to rest on the success of its people.
Talent management is fundamentally about ensuring that the right people are positioned in the right places and keeping them over the long haul. Business leaders clearly understand their talent pool. They work hard to identify the key players who have critical relationships with customers and suppliers, and then work even harder to nurture and keep those players.[22]
A number of business leaders have asserted that coming up with the best talent for their companies is the most important task they have to perform. Some, like Jack Welch and Honeywell International’s Larry Bossidy, spend an inordinate amount of time searching for the best talent within their own employee pools, hoping to build leadership that way. Both Welch and Bossidy have frequently said that all the great strategies in the world will have little effect on a company unless the right people are chosen to execute those strategies.
Leaders understand this and put a premium on keeping the talent they need for growth. They do what is necessary to ensure that key people are secure and do not leave because of low morale, thus preventing a defection domino effect.
In recent years, there has been much interest in the subject of executing strategies. Leaders are beginning to make the connection between executing strategies and results. Execution does not happen without top-quality people in key jobs.[23] To understand the execution of strategies, three points should be kept in mind:
Execution is a discipline that is integral to strategy.
Execution is a major job with business leaders.
Execution must be a core element of an organization’s culture.
At the heart of executing strategies lies three core processes: the people process, the strategy process, and the operations process. Every business and organization uses these processes in one form or another. The people process is most critical; people must be engaged and committed to action plans to ensure that execution occurs. Top quality employees are necessary to ensure that the execution drives the organization where it needs to be.
Today’s organizations have access to many of the key success factors. Financial resources are available to most organizations with a viable business model. Although financial capital can freeze during economic downtimes, one company no longer has an advantage over another to access the financial capital needed to run a business. In addition, a company can readily adapt technology to a given situation or business model. It is difficult to have a technology advantage in an information-technology society.
Businesses also have access to customers—even if there is a dominant player in the market. Newspapers are laced with stories of small organizations taking on larger ones and succeeding. Having entry and access to a customer database is not necessarily a competitive advantage. What makes the difference, clearly, is the human capital of the organization. With relatively equal access to all the other resources, it is logical to conclude that human resources are where a strategic advantage can be developed. However, having capable human resources is no guarantee of success. What is important is the way those assets are managed.
Human capital value does not develop quickly—it develops over time. Consider, for example, an organization like Southwest Airlines, which is the most profitable airline in the business. If Delta Airlines—struggling near bankruptcy—decided to change its business model to mirror that of Southwest’s, could it be as profitable? Unfortunately, while the business model may be adjusted quickly, the human capital may not adapt appropriately. Delta would struggle for years trying to imitate Southwest. It would have to change its habits, culture, practices, and adopt a new set of value systems—a system that has made Southwest Airlines so successful. In its frustration, employee turnover may be rampant and inefficiencies may develop as values and practices are changed. It may take years for the transition, if it occurs at all. Thus, the way in which the human assets have been acquired, maintained, and managed provides a unique opportunity to provide a competitive advantage. A company that gets its system of people management right has an extraordinary competitive edge over its rivals. It will obtain better performance from what is often the largest asset and will not have to worry about its rivals copying its keys to success. In doing this, a company is playing to its strengths.[24]
Perhaps there is no work that shows the importance of human capital more than the research done by Jim Collins. Along with co-author Jerry Porras in the book Built to Last (1994), Collins explored the deep reasons behind long-term corporate success stories in the United States. (Industry Week magazine declared Built to Last the number one business book for 1995.) Drawing on a six-year project at the Stanford University Graduate School, Collins and Porras studied each exceptional and long-lasting company in direct comparison with one of its competitors. The authors asked fundamental questions, “What makes the truly exceptional companies different from other companies?”
Throughout their research, the importance of people was evident in every aspect. These companies practice what they preach when it comes to the role of employees in the organization. Table 6-2 represents most of the core ideologies of these visionary companies. The researchers did not merely paraphrase the company’s most recent missions, visions, and values, but tried to find out from a variety of sources the historical consistency of their ideologies through multiple generations of key executives. These values, missions, and philosophies highlight the importance of people and their contributions as the basis for companies that are built to last.
Table 6-2. A part of the core ideologies in the visionary companies.
| |
American Express |
|
Boeing |
|
Citicorp |
|
Ford |
|
General Motors |
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Hewlett-Packard |
|
IBM |
|
Johnson & Johnson |
|
Marriott |
|
Merck |
|
Motorola |
|
Nordstrom |
|
Philip Morris |
|
Procter & Gamble |
|
Sony |
|
Wal-Mart |
|
Walt Disney |
|
Source: Adapted from James C. Collins and Jerry I. Porras Built to Last (New York, NY: Harper Business, 1994). | |
Jim Collins’ next book, Good to Great (2002), was an attempt to understand what makes companies move from being defined as “good” to being defined as “great.” In this work, Collins explored how good companies, mediocre companies, and even bad companies achieve greatness. Using a benchmark, Collins and his research team identified a set of elite companies that made the leap to “great” and sustained those results for at least fifteen years. The good-to-great companies generated cumulative stock returns that beat the general stock market by an average of seven times in fifteen years—better than twice the results delivered by a composite index of the world’s greatest companies, including Coca Cola, Intel, General Electric, and Merck. The synthesis of the research published in Good to Great underscores the attributes of the truly great companies. The important ingredients are the quality of, and focus on, employees throughout the organizations.
The beginning point for these good-to-great organizations is the quality of leadership. When compared to high-profile leaders with big personalities who make headlines and become celebrities, the good-to-great leaders (called “Level 5 Leaders”) seem to have come from a different planet. They are self-effacing, quiet, reserved, even shy; these leaders are a blend of humility and professional goodwill.
The various levels of leaders focus on the importance of people in the company and importance of individual contributors. Contributing team members provide individual capabilities to the achievement of group objectives and work effectively with others in a group setting. Highly capable individuals make productive contributions through talent, knowledge, skills, and good work habits.
The next issue focuses on ensuring that the right people are in place before actions and executions are taken—making sure the right people are on the bus. A third issue is to confront the facts and is a philosophy of all the leaders and employees in the organization. They realize that all companies face challenges. It is only by facing the facts and checking with the reality of the situation that progress can be made. A fourth issue focuses on the competencies in core business with the conclusion that a company cannot be great unless they are the best in the world at their core business. The fifth issue emphasizes the importance of having a committed, disciplined group of employees. Disciplined people lead to disciplined thought, which leads to disciplined action to achieve the breakthrough necessary to become a great company. Finally, the great companies think differently about the role of technology. They never use technology as a primary means of igniting a transformation, yet paradoxically, they are the pioneers in the application of carefully selected technologies.
This research underscores the people aspect of these companies. When the entire body of research is examined, what comes through is not the innovative products, unique markets, the nature of the business, or some other technological or resource advantage. The real advantage of these great companies is the people that make them great and then sustain the greatness over a long period of time.
Probably no activity about the importance of human capital is more visible than the list of organizations selected as the 100 Best Companies to Work For. This list is published each year in Fortune magazine and has become the bellwether for focusing on the importance of employees.[25] Although other publications have spin-offs, this is the premier list that organizations strive to make. The most important factor in selecting companies for this list is what the employees themselves have to say about their workplace. For the 2004 list, some 46,526 randomly selected employees from 304 candidate companies filled out an employee-produced survey (The Great Place to Work Trust Index, an instrument created by The Great Place to Work Institute, San Francisco). Nearly half of them also provided written comments about the workplaces. These candidate companies also filled out a questionnaire detailing people policies, practices, and philosophies. Each company is evaluated on both employee surveys and company questionnaires with employee opinions accounting for two-thirds of the total score. The annual list presents each company in rank, along with:
Total employment, detailed by the percent of minorities and women
Annual job growth (percent)
Number of jobs created in the past year
Number of applicants
Voluntary turnover rate
Number of hours of training per year
Average annual pay, detailed by professional and hourly
Revenues
These lists are alive with tales of how the employers focus on building a great place to work and building employee respect, dignity, and capability. These firms are successful in the market. The 2004 list includes such well-known and successful companies as American Express, Cisco Systems, FedEx, Genentech, IBM, Eli Lilly, Marriott International, MBNA, Merck, Microsoft, and Procter & Gamble. Inclusion in the list has become so sought after by organizations that they change many of their practices and philosophies in an attempt to make it.
This trend all began with the pioneering work of Robert Levering and his partner Milton Moskowitz. Those two, along with Michael Katz, co-authored the best selling book, One Hundred Best Companies to Work for in America (1985). In the late 1980s, Levering began to provide prescriptions for employees in his publication A Great Place to Work: What Makes Some Employers so Good and Most so Bad (1988). Later, they partnered with Fortune magazine to create the annual list. As employers make this list, their accomplishment becomes part of the recruitment advertising and is even included in other advertising channels. Plaques are displayed on-location to acknowledge their inclusion on this list.
This is truly a list that employers want to be on. More important, it shows the importance of human capital and what value companies place on it. It shows how diversity, job growth, turnover, and training make a significant difference in the organization. For the most part, these organizations invest heavily—far exceeding those on any other list. Investment, in their mind, translates into payoff.
Another important list is Fortune’s America’s Most Admired Companies, a list that is unique because the ranking is determined by peer groups. To develop the list, the Hay Group started with the ten largest companies (by revenue) in sixty-four industries, including foreign firms with U.S. operations. Then, they asked 10,000 executives, directors, and security analysts to rate the companies in their own industries with eight criteria, using a scale of one to ten. The respondents selected the ten companies they admired most in any industry. From a human capital perspective, it is interesting that four of the eight key attributes focused directly on human capital: employee talent, quality of management, innovation, and social responsibility. The other four were indirectly related. The key point is that investors and business people admire companies who place important emphasis on the human capital aspects of their business.[26]
While this chapter provides some convincing, anecdotal, and intuitive evidence of the success of human capital, it does not necessarily present proof. Logic holds that no organization would be successful without competent human capital. Yet, some executives need proof about the correlation between investing in human capital and subsequent performance. Additional research is needed on that elusive connection, and chapter 7 presents more detail at the macrolevel (across firms).
From an organizational perspective, there are important challenges that emerge from this chapter. There is a persistent need to clearly understand the value of human capital—not only from the logic perspective, but a research perspective, as well. It is important to work more closely with Wall Street analysts so that they understand, at least partially, the worth of human capital when placing a value on a business. Also, there is a need to work more closely with the finance and accounting standards board and the accounting profession to continue to make adjustments in how organizations value human capital.
Within companies, there is the need to show the value of particular projects. One of the most important and challenging issues, initially introduced in chapter 5, is to show the value of the return of the investment in human capital. Measuring the return on investment is being done; it is one of the most persuasive ways to show the value of investing in this important resource. Chapter 8 presents a summary of the overwhelming research at the microlevel for measuring the return on investment in individual human capital projects.
This chapter explored the intuitive, anecdotal, and logical evidence of the importance of human capital. Based on all the evidence available, the chapter concludes, at least for the most part, that investing in human capital is a good thing. This should be convincing enough for most executives. The chapter outlined the importance of human capital from several perspectives: examining the necessity of human capital in the first place, building on success stories of the superstars, and discussing the various lists that highlight human capital. There is much evidence that presents a convincing case.
It might be helpful to conclude this chapter with this significant observation: In 2001, JPMorgan Chase, in its annual report, proclaimed the importance of human capital. “At 23 Wall Street stands a building that was once JPMorgan’s headquarters. In it is a vault (it is a bank building, after all). No money is stored there—it is a breakout room for the bank’s training center. There, in the knowledge and skills of its people as manifested in intellectual capital, is where the real wealth for JPMorgan Chase or any company can be found.”[27] The next two chapters examine the research that supports the importance of investing in human capital.
| 1. | QUALCOMM Annual Report. Available from http://www.qualcomm.com; Internet. Accessed 2 September 2004. |
| 2. | Eric G. Flamholtz, Human Resource Accounting, 2nd ed. (San Francisco: Jossey-Bass Publishers, 1985). |
| 3. | Wayne Cascio, Managing Human Resources: Productivity, Quality of Work Life, Profits, 4th ed. (New York McGraw-Hill, Inc., 1995). |
| 4. | Karl Erik Sveiby, The New Organizational Wealth (San Francisco: Berrett-Koehler Publishers, Inc., 1997). |
| 5. | Patrick H. Sullivan, Value Driven Intellectual Capital: How to Convert Intangible Corporate Assets into Market Value (New York: John Wiley & Sons, 2000). |
| 6. | Thomas A. Stewart, Intellectual Capital: The New Wealth of Organizations (New York: Doubleday Publishing, 1997). |
| 7. | Thomas A. Stewart, “Intellectual Capital: Brainpower,” Fortune, June 3, 1991, p. 44. |
| 8. | Thomas A. Stewart, “Your Company’s Most Valuable Asset: Intellectual Capital,” Fortune, October 3, 1994. |
| 9. | Hubert Saint-Onge, “Shaping Human Resource Management Within the Knowledge-Driven Enterprise,” Leading Knowledge Management and Learning, ed. Dede Bonner (Alexandria, Va.: The American Society for Training and Development, 2000). |
| 10. | Ibid. |
| 11. | Patrick H. Sullivan, Value Driven Intellectual Capital: How to Convert Intangible Corporate Assets into Market Value (New York: John Wiley & Sons, 2000). |
| 12. | W. Miller, “Building the Ultimate Resource: Today’s Competitive Edge Comes from Intellectual Capital,” Management Review, January 1999, pp. 42–45. |
| 13. | Thomas A. Stewart, “Intellectual Capital: Brainpower,” Fortune, June 3, 1991, p. 44. |
| 14. | A. Kleiner, “The World’s Most Exciting Accountant,” Strategy + Business, Issue 35, 2004, p.35. |
| 15. | Jeffrey A. Krames, What the Best CEOs Know: 7 Exceptional Leaders and Their Lessons for Transforming Any Business (New York: McGraw-Hill, 2003). |
| 16. | Ibid. |
| 17. | John Hines, “Honda’s Culture in the South,” Birmingham News, 2004, p. C-1. |
| 18. | Andy Serwer, “Southwest Airlines—The Hottest Thing in the Sky,” Fortune, March 8, 2004, p. 86. |
| 19. | Kevin Freiberg and Jackie Freiberg, Guts! Companies that Blow the Doors off Business-as-Usual (New York: Currency Books, 2004). |
| 20. | Richard E.S. Boulton, Barry D. Libert, and Steve M. Samek, Cracking the Value Code (New York: Harper Collins Publishers, Inc., 2000). |
| 21. | P.J. Kiger, “Les Hayman’s Excellent Adventure,” Workforce Management, August 2004, pp. 41–44. |
| 22. | Amir Hartman, Ruthless Execution: What Business Leaders Do When Their Companies Hit the Wall (Upper Saddle River: FT Prentice Hall, 2004). |
| 23. | Larry Bossidy, Ran Charan, and Charles Burck, Execution: The Discipline of Getting Things Done (New York: Crown Business, 2002). |
| 24. | Haig R. Nalbantian, Richard A. Guzzo, Dave Kieffer, and Jay Doherty, Play to Your Strengths: Managing Your Internal Labor Markets for Lasting Competitive Advantage (New York: McGraw-Hill, 2004). |
| 25. | Levering, Robert, and Milton Moskowitz. “2004 Special Report: The 100 Best Companies to Work For.” Fortune, Jan 12, 2004, p. 56. |
| 26. | Ann Harrington, “America’s Most Admired Companies,” Fortune, March 8, 2004, p. 80. |
| 27. | Thomas A. Stewart, The Wealth of Knowledge: Intellectual Capital in the 21st Century Organization (New York: Currency Books, 2001). |