The Importance of Human Capital in Business

Managers may ask the question what is the most important asset in their company? The greatest asset of a company is not its financial capital, the number of building or it’s properties, nor it is the equipment or products that the company own. The greatest asset that a company own is it employees. Then again, what exactly is human capital? The term human capital is recognition that people in organisations and businesses are important and essential assets who contribute to development and growth, in a similar way as physical assets such as machines and money. The collective attitudes, skills and abilities of people contribute to organisational performance and productivity. Any expenditure in training, development, health and support is an investment, not just an expense. The importance of human capital is rising tremendously since the last few decades. Human capital is now regarded as the most important factor in an organization on the way to success. In fact, nowadays talent is no longer dependent upon the employer but the employer is getting more dependent upon talent. Human capital is considered an organization most important asset because without human, there will not be anyone to sell the company products/ services, manage the company daily operations or handle customer effectively. Any organizations will only able to go as far as the people who are driving it.

Importance of Human Capital in Business

Employees are considered a company most important asset as they own something that is irreplaceable, the superiority of a human mind. Many people may think that machines are better than human as they can work consistently and capable of working for long hours. However, we need to be aware that the way machines work are ‘dead’. They work things out by following the orders or the way we human program them to. They are not capable to make changes according to the situation or environment by themselves alone. A company’s employees are its intellectual capital. Employees own skills and talents which are hard to be embed into machines. Besides that, human also owns idea and innovation which machines are incapable of owning. As we know, a company need to be innovative and creative in order to compete with their competitors. However, machines are programmed to carry a certain task by following the procedure that was programmed in them. In other word, machines are capable of doing things consistently but the ways it operates are fixed. Therefore if every company are using machines, their product and services would be very similar with one another. Human on the other hand are capable of thinking. They are also capable of finding a way to improve. A motivated employee can make a significant difference to the company’s bottom line in terms of bringing in new orders, meeting customer needs, developing new products and performing heroic efforts to achieve company goals.

High intellectual human capital will generate greater income and profits compare to other assets. Human capital and income are linked closely. A person with high educational level will allow him or her to perform high value-added task more efficient and more quickly. The person will also be capable of applying more new ideas and innovations into his or her work. In short, higher human capital leads to more output per hour worked and thus productivity is higher. These tempt to be similar with additional physical capital (machines) as additional human capital also raises the productivity of labor. Besides that, putting priority on machines instead of human capital may not be beneficial to organizations in terms of output. More organizations or company choose to equip unskilled workers with complicated and expensive machines and yet does not necessary boost output. Instead, output might boost more drastically if the additional money spend on more physical capital is spend on human capital instead. In addition, an unbalanced focus on physical capital can be inefficient from a macroeconomic perspective, especially if globalization opens up more options in other countries for the owners of physical capital. Furthermore, there is an important interaction between trade openness and human capital in an economy. Countries and organizations with higher human capital can learn more easily from aboard and therefore take greater advantage of the beneficial effects on open trade.

Human capital is also defined as recognition that people in organizations and businesses are important and essential assets who contribute to development and growth, in a similar way to physical assets such as machines and money. The collective attitudes, skills and abilities of people contribute to organizational performance and productivity. Any expenditure in training and development, health and support is an investment, not just an expense. Thus, it is important that organizations did not ignore the credibility of human capital over physical assets such as machines and money. Competition is so fierce and change so fast, that any competitive edge gained by the introduction of new processes or technology can be short-lived if competitors adopt the same technology. But to implement change, their people must have the same or better skills and abilities. The reliability of his statement was shown when changes were seen in organizations where they shift their strategic values from tangible to the intangibles. In other words, most organizations have shifted their hiring focus from technology to people and process. This development also caused the increasing desire to hire non-traditional employee by many forward-thinking organizations.

Human capital is an important concept which recognizes people and believe that people should be treat as asset instead of expense. Company who merely value their employee as an expense will attempt to reduce their man power during crisis. However in contrast, for organizations who value their employee as an important asset; will try to make sure their employee stay with them during the hard time. Examples of such situation would be when highly-solvent organizations will hire new people who will help the organizations to grow even faster as the economy comes out of the downturn. For them, the economy downturn is an opportunity which allows them to hire intellectual human capital that is discarded by less-liquid companies, those emerging from the downturn with increased market share. These organizations believe that as long as their human capital stays with the organizations, they will be able to overcome the hard times. Nobel Prize winner economist Gary S. Becker, who coined the term “human capital,” stated that “the basic resource in any company is the people. The most successful companies and the most successful countries will be those that manage human capital in the most effective and efficient manner.” To manage human capital in the most effective and efficient manner, it is important for the human resources department to assign the right person to the right task. Most of the time, wrong people were assigned to wrong task and thus unable to produce the result expected. As an example, due to the lack of candidates with finance qualifications in the market, candidates with others qualifications such as management or marketing may be taken to fill finance required job. This will cause those newly employed to show bad results in their work as they have no experience in the required field. Unfortunately, they will be blamed for their unproductive work. However, the situation will be in contrast if a candidate with experience or qualification in the finance field takes the job. As he has the required knowledge and experiences for the job, he will be able to show good results in his work and improve the productivity of the organizations he works with. Everyone can be a talent when placed on the right spot. Since every employer looks for the right person on the right spot and there are many different spots (jobs), every talent can have his or her spot. Therefore, it is reasonable to say that most organizations think that human assets are not reliable because they do not manage the human capital carefully. Organizations need to know the strong point and weak point of their employees to deploy them accurately to the right workplace.

Any organizations will only be able to go as far as the people who are driving it. Although an organisation is a separate legal entity, it will cease to exist if it has no people such as leaders, directors, members or employees. All these people are required to maintain an organisation’s existence. Without them, here will be no one to manage the organisations, no one to sell its product or services, manage the organizations daily operations or handling the customers effectively. Without being able to perform any one of these activities well will causes the organizations to have a bad reputation and the organizations will lose its customer. For instances, customers do wish to wait for too long. Customers usually expect an operator to pick up their call to an organization within a minute. Organizations which unable to do so or didn’t pick up the call will leave a bad impression to the customer and being label as unproductive and not customer friendly. Machine or electronic operator may not be the best alternatives to solve this problem as well as it reasonable to assume that most people prefer speaking and interacting with another person instead of a machine. Thus, the only way to solve this problem is for organizations to increase their human capital or provide appropriate training to them.

An organization without human capital is noncompetitive. Unlike to machines, human have feeling and willpower. Human love to compete with one another to win and be recognized. In a saturate business sector, only organizations which are competitive will able to survive and stand out upon the rest. For instance, although there were many sports and fitness company around the world, Nike Inc. continue to be the leading and most well known sports and fitness due to their innovative and competitive way. This was also proven by the statement by Phil Knight, Chairman of the Board and Co-Founder of Nike. He stated that, “it’s not a single product model, or a single manager, nor one ad, nor a single celebrity, not a single innovation that is the key to Nike. It is the people of Nike, and their unique and creative way of working together.” From the statement, it is noticed that Knight respect and acknowledge every single of his employees in Nike organizations as the main factor behind the success of Nike Inc. today. Thus, to be competitive organization should help employee to learn new technical skills, learn soft skills to enhance their personality, and investing to the employee personal goal.

Human capital can provide a large diversity and inclusion to an organisation. The large diversity and inclusion will allow organisations to be different from their competitors. This will further allow an organization to be creative and innovative with a universal, global reach. Diversity also helps an organization to recruit intellectuals from various places. The more these intellectuals work together under an organization, the more they can offer to the consumer. As an example, Nike Inc. has always regard diversity as a priority. They establish the U.S. Leadership Team Diversity Steering Committee to monitor and their progress in driving and encouraging diversity. Diversity means different things in different regions and organizations should continually strives to ensure that their diversity initiatives are truly global. As an example, in Nike Inc. European headquarters, they currently employ over 70 different nationalities, with recruits from 10 of the top MBA schools across Europe. In Nike Asia, they have a wealth of employee programs and diversity recruiting efforts from premier MBA schools.

Most of the current organizations underestimate the value of human capital as a driver to ensure their competitiveness on a highly volatile and uncertain business context. These organizations have failed miserably in making managing talent a strategic priority in function of different causes that could be acting in sync. These organizations have poor understanding of the talent management value that is considered as a commodity instead of being considered as an asset of strategic value for the company. Most organizations have their prevalent focus driven by processed instead of privileging an organization model dominantly based in talent and property oriented to the business strategy. Their misunderstanding also causes them to be unwilling to hire professional consulting effort and managerial coaching to make the required transformations to migrate from a hierarchical organizational structure to a new one based in roles, competences and people. Lack of influence by the Human Resource Department is also another factor causing this misunderstanding as in an organization corporate landscape, they have no seats in the corporate table for being a transactional, operational and administrative function. Human resources managers also face difficulties to identify valid paths to favor a human talent model of management that provides a better alignment with corporate strategy. They may face problems like having too little talents to occupy certain positions or too much talent to occupy a few positions. Corporate culture and managerial style that are too conservative and undesirable to risk will cause the lost of human capital consider that the Human Resource function must be entirely administrative and with focus in operational issues. Employee hope that their work place will allow them to be creative and allowing them to perform in their own way. From time to time, organizations face difficulty in estimating properly the financial, operational and organizational benefits from applying an organizational model based in talent management. This is due to the lack of a proper method or system to calculate it use by organizations. Some organizations think that the human resource department as not important or unnecessary as they did not contribute to the sales or profits in the company. They fail to understand that the Human Resource Department do contribute to it indirectly as they are the one who is responsible to hire the suitable workforce in the organizations. If the Human Resource department did their job well and hire good quality workforce, the profits and performance of the company are sure to be positive.

The most critical problem that today’s Human Resource managers face is hiring, retaining, training and motivating professional talents in a difficult situation where the already significant shortage of human talent in some professional areas. For instance, in China four hundred thousand engineer graduate every year but only forty thousand are found to be suitable for employment at organizations with global standards because of their low quality education. They also face problem in diverse managerial disciplines due to the beginning of the retirement with no enough replacements of the baby boomers’ workforce.

Such perspective is the expression of a growing trend of cannibalization in hiring and recruiting scarce professional resource that finally is engaged to work with the bigger companies. This trend is particularly critical in the organizations where it is possible to observe a continuous turnover of employees from one company to other one looking for better salary perspectives and superior career development plans.

Being so, some organizations are beginning to develop systematically their respective Strategic Workforce Planning to analyze, evaluate and forecast the talent that they need to develop their strategic planning. In parallel, these companies are developing a more proactive Human Resource management and are making the necessary adjustments to excel in the role of hiring, retaining, training and motivating professional talent. When an employee as usually happens in most of today’s companies is considered as a mere commodity that may be easily replaced, relocated, hired and finally fired out, is easy to expect that it will create a distress feeling of demoralization, progressive disconnection and loss of motivation in employees at their workplace. All these distress feeling and bad working environment will finally have a profound and harmful impact over employee’s productivity. Thus, increasing the rate of employee’s attrition and affecting the whole company’s productivity for the long term.

In modern organizations, job-hopping has become a trend among employee. The aim of job-hopping was for them to gather more information of different kind of organizations by physical attendance. When there is a healthy environment in terms of demand against offer it can be desirable for both parties. However in the case whereby there is shortage of talent while the demand from business organizations for talent is rising, this ‘attitude’ of job-hopping is no longer desirable. The desired attitude will swift for organizations towards attract and maintain talent. For talents, it is important to have as basic assumption of no longer the physical presence in an organization to gather information, but by collecting information through other ways. The result lays therefore in the focus of the basic assumption which changes towards an organization whereby the talent feels ‘home’ and desired. The ‘feeling-home’ situation is therefore desirable from both parties. The chance of remaining talent is higher for the employers, when the ‘feeling-home’ situation is created.

A longer stay of an employee can be translated in many ways into lower costs such as introduction cost and absence cost beside increase efficiency. Furthermore study on job satisfaction has shown that employees also find it important to be able to use their qualities. To come back on the “home-feeling” for talents, this cannot be defined in one way. It is different for every person. For one person this feeling is created through a well-defined task description, dominant leadership and well-structured organization and for another person ‘home’ can be defined as an open culture whereby creativity and cooperation are pillars within this organization. Thus, it is the responsibility of employer or organizations to create the most suitable workplace environment for their employee.

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