Valuable Human Capital

Much of accounting is concerned with valuing and tracking tangible assets. Equipment, fixtures, accounts receivable, and real estate are physical assets that businesses measure when determining the value of a company to its stockholders. But there is an asset that is many times more precious when considering the worth of a business and in turn what the future earnings potential can be. This would be the category of intellectual capital, an intangible asset with actual and potentially enormous value. Intellectual capital has three parts: human capital- the people that work with you every day, structural capital –everything non-people- the data bases, systems, customer lists, manuals, files and checks lists and finally social capital which would include your customers, suppliers, referrals and reputation.

For now I will discuss some of the features and opportunities associated with human capital. This intangible asset can be leveraged in two ways. How can you harness this asset and multiply the value?

First, when your company uses more of what each person already knows. Consider the combined wealth of knowledge based on years of experience of people in your company. We’re not just talking about information but the applied use of information that is true wisdom. Do you have any systems allowing or promoting mentoring so young associates can benefit from the hard earned and expensive lessons that your seasoned professionals have learned over the years? They hold the keys to how to swiftly and satisfactorily resolve customer issues, purchase more efficiently and develop new products.

The second area of leverage is when your people know more things that are useful to the company, your customers will benefit because you will be able to offer better products or more efficient (lower cost) service to your customers. One sure method to improve your profits is to consistently increase the wealth of your customers.

While the individual may be the creator of knowledge, the firm enhances the ability to deliver the value of that knowledge to the customer base. A great sales idea can be shared from one person to the entire sales force. Cost saving ideas in one factory can be implanted company wide. Recognition and rewards for good ideas that are shared and multiplied stimulate additional contributions leading to geometric expansion.

But be careful not to be short-sighted in your quest for profits and efficiencies. Recently the electronics retail chain, Circuit City, announced they were laying-off a few thousand long-term employees who were earning $16 per hour and higher. The company postulated (and correctly so in the very short term) that they could save money by replacing the experienced workers with those earning $8 per hour. Sounds like a no-brainer albeit a bit hard-hearted. But how smart was this calculated move? Did the company study the productivity and contribution to profits made by these experienced workers? How about the level of customer satisfaction in dealing with knowledgeable store representatives? What about the negative effect on morale of the remaining employees? What message is the company sending to the remaining workers? Get better at what you do, earn more money and you too will be laid off. Jim Cramer of CNBC’s Mad Money panned the stock.

If the labor costs were really an issue in profitability, consider the effect of a decrease in compensation to some of the top executives making millions of dollars each year. The quality level will be diminished right where it’s most important- at the point of contact with customers on the retail floor! There was a short circuit somewhere.

Consider now a positive case of a company that recognizes and supports the idea of leveraging human capital, Southwest Airlines. Founder Herb Kelleher’s hiring practice was to look for people with positive attitudes who lend themselves to good causes, have a sense of humor and want to perform as a team. He said, “We hire attitude, we teach functionality.” Do you think people are attracted to working for Southwest? You bet. It’s actually statistically easier to be accepted to Harvard or Princeton than to get a job with Southwest. They hire only 4% of the 90,000 applicants per year. If you have flown Southwest you know they limit the frills but the employees have a fun time and the customers are glad for low cost, reliable and friendly service.

The issue of attracting the proper human capital to your firm is actually a marketing issue. Instead of the traditional question “what do we want and need in our company?” change your mind set to ask of new people, “what do you want and need?” The paradigm changes from one of accumulating resources to one of attracting contributing human assets.

I believe there is a parallel to the famous question President Kennedy asked the nation at his inauguration. “Ask not what your country can do for you. Ask what you can do for your country.” That reframing of priorities motivated this nation to great achievements such as the landing a man on the moon and starting the Peace Corps. Did he energize human capital by spurring investment and development by urging us to determine what contribution we could make? What questions do you ask of your people and what characteristics of your organizational culture are designed to attract and develop human capital?

The change starts with a difference in the mindset of the leadership. To have better results of building wealth in your company and to accelerate that growth rate, be sure that you are paying attention to human capital. Because the greatest value is in the head of the knowledge worker. In the Industrial Revolution, where the worker depended on the organization to provide the means of production (factory and equipment) today’s knowledge workers themselves own the firm’s means of production, the intellectual capital, in their heads. If you want a physical manifestation of this factor consider the wide spread practice of telecommuting. Millions of workers now contribute to the company’s progress and wealth without leaving home! And their efforts are shown to be more efficient than working in the office environment!

Rather than asking, “how much is this person worth to the firm”, the real question is how much is this firm worth to this knowledge worker?” If you can satisfy the answer to this question your will attract valuable people who will build your company’s wealth as you help the workers build their wealth. How can your firm add to the individual’s intellectual capital and develop it further? Many of us invest in product development in the uniforms and career apparel industry. The key is how to make those products more valuable to your clients so they can make more money. How much do we invest in developing people who can contribute to many areas that will add value to your clients and increase your wealth?

Joseph Greco is president of Greco Apparel. Visit them on the web at www.grecoapparel.com