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7/30/2019 Evaluating Human Capital
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HUMAN RESOURCE MANAGEMENT JOURNAL, VOL 14 NO 4, 2004 21
Evaluating human capital: an exploratory
study of management practice
Juanita Elias, Manchester UniversityHarry Scarbrough, Warwick Business School
Human Resource Management Journal, Vol 14, no 4, 2004, pages 21-40
The article explores the development of systems of human capital evaluation in a
number of large UK firms. Human capital is a much used term in business literature,
and it is widely recognised that firms need to develop mechanisms to determine the
value of their employee base. An extensive human capital literature has developed in
which the authors propose elaborate systems for measuring a firms human assets. Thisarticle does not seek to offer yet another human capital model. Rather, the aim is to
examine the management practices through which human capital evaluation is
undertaken. The article is based on an exploratory study of such practices in 11 major
firms in the UK. The findings are highlighted as follows. First, we note the preference
for internal over external (static accountancy-based) reporting. Secondly, we highlight
the diverse nature of human capital evaluation systems that exist across UK business.
Thirdly, we explore the relationship between practices of evaluation and the role and
position of the HR function within the firm. Finally, in conclusion, we address the
implications of the human capital perspective for practitioners, arguing that there is no
single formula that can be applied to its evaluation. We go on to suggest that the
importance of the human capital concept and its measurement may lie in its ability to
re-frame perceptions of the relationship between the contribution of employees and the
competitive performance of the business.
Contact:Juanita Elias, School of Social Sciences, The University of Manchester,
Oxford Road, Manchester, UK M13 9PL. Email: [email protected]
The recognition that much of the added value created by firms is becoming more
dependent on assets other than physical capital has stimulated a vast literature
in the area of intellectual capital and intangible assets (Berkowitz, 2001; Drake,
1998; Leadbeater, 2000; Mayo, 2001; Miller and Wurzburg, 1995; Roos et al, 1997; Sveiby,
1997). In particular, emphasis has been placed on the importance of a companys
human capital the value-creating skills, competencies, talents and abilities of its
workforce as an essential component in gaining competitive advantage (Bontis and
Dragonetti, 1999; Leadbeater, 2000). As a result, there have been calls for human assets
to be incorporated into company accounts, thereby giving investors a much clearer
picture of where company value lies (Drake, 1998). In the UK specifically, such calls
notably from the professional body for personnel/HR managers, the CharteredInstitute of Personnel and Development (CIPD) have begun to exert an influence on
government policy. In response, a UK government taskforce was established, and this
has recently published its report, Accounting for people.1
Approaches to human capital have been widely debated over the 40-year period
since the concept was first popularised by studies of the role of education in economic
development (Schultz, 1961) and within accountancy circles (Hermanson, 1964;
Sackman et al, 1989). Views of human capital tend to revolve around a core
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Evaluating human capital: an exploratory study of management practice
specification which is to do with employee competencies sometimes equated with
knowledge together with the application of such competencies, often in the form of
employee commitment (Ulrich, 1998). All of these writings agree that human capital issomething that employees bring to the organisation (and take with them when they
leave), yet is also something that is developed within the workplace through training
and work experience (Miller and Wurzburg, 1995: 17). From this wide and burgeoning
literature, however, it is possible to identify several distinct schools of thought, which
range in their interest from theory building to the development of tools. One important
school of thought, for instance, is human resource accounting (HRA), which has
existed at the margins of academic studies of accountancy for many years (Flamholtz,
1999). Given the growing emphasis on people as key company assets in a knowledge-
driven economy, HRA has become the subject of renewed interest (Roslender andDyson, 1992).
A second school focuses on the non-standardised, tacit, dynamic and context-
dependent features of human capital. Viewed from the perspective of competitive
advantage, these features are seen as significant because they reinforce the causal
ambiguity of human capital and hence its inimitability by competitors (Carpenter et al,
2001). A third school, which has developed recently, focuses more narrowly on the
competitive value of scarce and inimitable skills. Inspired by the notion of a war for
talent (Haker, 2001; Michels et al, 2001), a number of writers have addressed questions
of recruiting and retaining the most valued employees often technical specialists oryoung managers of high potential (Annunzio, 2001; Sadler and Milmer, 1993). This
focus, however, has been rebutted by other writers (O'Reilly and Pfeffer, 2000; Pfeffer,
2001), arguing that the value of human capital is context-dependent. In this view,
concentrating managerial efforts on the recruitment and retention of talented
individuals risks neglecting the development of the workforce as a whole.
A fourth set of studies is explicitly tools and systems-orientated, and seeks to
develop robust systems for measuring human capital (Becker et al, 2001; Davenport,
1999; Fitz-Enz, 2000; LeBlanc et al, 2000; Mayo, 2001, 2002; Ulrich, 1998; Zwell and
Ressler, 2000). Similarly, several major consultancy firms have developedmethodologies relating to human capital management as part of their product
offerings. What these approaches have in common is that they all share a commitment
to building robust metrics for measuring one of the most intangible of intangibles, and
recognise that the development of such metrics will help firms and investors to
understand the drivers of corporate performance, enabling firms to identify future
sources of value in a competitive business environment.
Despite their diversity in approach, a common strand of many of the existing
schools is their concern with abstract and prescriptive models of human capital which
are based on unitary and economistic views of business organisation. The rulingassumption in such studies is that improved information on managing human capital
leads directly to improved performance (Becker et al, 2001: 13). Issues of the
problematic relationship between information and decision-making (March and
Simon, 1958), and the mediating role of management practice and systems (Guilln,
2003), are somewhat neglected. In contrast, the principal contribution of this article is
to provide an exploratory account of the actual development of systems of human
capital evaluation at firm level. Our empirical study of such systems across a range of
firms allows us to shed some light on the relationships between human capital
evaluation and management practices within particular contexts. This study not onlyhighlights innovations in the methods employed by firms to evaluate human capital
22 HUMAN RESOURCE MANAGEMENT JOURNAL, VOL 14 NO 4, 2004
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but also links these developments to management practices and the influence of
particular sectoral contexts.
EVALUATION OF HUMAN CAPITAL IN PRACTICE
The gap between existing theories of human capital and its evaluation within
particular contexts is a significant one. The features that are seen as critical to
organisational performance include the flexibility and creativity of individuals, their
ability to develop skills over time and to respond in a motivated way to different
contexts (Davenport, 1999). Yet, many of these features depend on the acquisition and
application of tacit knowledge (Lave and Wenger, 1991), and are thus not readily
amenable to measurement and representation. This paradox poses a major challenge to
systems designed to evaluate human capital in practice. Given evidence that there is
unlikely to be a universal formula for measuring human capital (Mayo, 2002), it
suggests that systems of evaluation and the way they are implemented in practice mayvary according to a number of different features of the organisational context.
Based on a review of the existing literature on HR systems, our study identified a
number of contextual features that were seen as likely to influence evaluation in
practice. These features served to inform the development of our research questions as
outlined below. First, existing work suggests that HR systems may be implemented
with different types of objective, ranging from strategic objectives linked to the
overall goals of the organisation, to operational objectives that are concerned with
the efficiency of the HR function (Hendry, 1995; Storey, 1992; Tyson, 1995). The
strategic label is a problematic one, of course, and needs to be understood as asocially constructed distinction within management practice (Scarbrough, 1997).
However, within the parameters of our study, this distinction offered a useful
shorthand means of identifying the kind of business objectives that were served by
human capital evaluation.
Secondly, HR systems are seen as varying significantly in their scope, depending on
the status and numbers of employees they encompass (Keegan, 1998; Scarbrough,
2000). This suggested that the scope of the evaluation system was an important
question. Thirdly, a number of studies have highlighted the relationship between the
implementation and effectiveness of HR systems and the role played by the HR
function within the organisation (Guest et al; 2000; Legge, 1978). Fourthly, an
important issue in the arena of accounting systems, though less well advanced in the
human resource area, is the question of the audience for the reporting of information.
Accounting systems are subject to a binary division between those that address an
external audience (conventionally termed financial accounting) and those that
generate information for internal use (labelled management accounting). In applying
this distinction to human capital, we were keen to establish whether evaluation
systems had been developed with an internal or an external audience in mind.
In the remainder of this article, we will describe the findings of our study in relation
to these initial questions, and will go on to explore their implications for the furtherdevelopment of management practice in future.
RESEARCH METHODS
Our study began with an initial review of the literature summarily outlined in the
introduction which was designed to inform and contextualise our research
questions. Subsequently, fieldwork based on comparative case study methods of
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data-gathering was conducted over a six-month period. Although lacking the
advantages of single-shot longitudinal studies (Pettigrew, 1985), such an approach
does enable a comparative analysis based on within-group similarities and differences(Eisenhardt, 1989). Our selection criteria for the sample were threefold. First, we
acknowledged the context-dependent nature of human capital by drawing cases from
a range of different sectoral contexts. Secondly, given our concern with management
practice, we sought to include firms that were understood from external reports or
from personal contacts to be developing systems for the collection of data on human
capital (although we acknowledge the potential bias towards more visible, larger
corporations implicit in this approach). Thirdly, we sought to ensure that our cases
reflected a range of workforce skill-sets, ranging from production line and front-line
service skills to the different skills found in high-tech, knowledge-intensive andprofessional services firms.
Within each firm in our sample, we sought to interview one or two respondents
who were identified by senior managers as playing a key role in the development
and implementation of their approach to human capital evaluation. A significant
observation here was that in all instances the key respondents identified to us were
either located within the mainstream HR function or within specialist units attached to
that function a point to which we return later. Our final sample of 20 HR managers
from 11 organisations included 11 director-level managers (see appendix for further
details). The identities of the organisations involved have been protected bypseudonyms to respect their confidentiality.
Given variations in the scope of initiatives, size of organisation and the access made
available by the firm, the actual number of interviews varied from one firm to another.
In each case, however, interviews lasted around one-and-a-half hours (often longer)
and, with the exception of one telephone interview, were all conducted face to face. As
befits an exploratory study, interviews were conducted on a semi-structured basis,
revolving around a set of core themes based on our overall research questions.
Interviews were taped and transcribed, and notes were returned to respondents to
ensure the accuracy of our findings. Wherever possible, interview materials weresupplemented by extensive documentary evidence on existing management policies
and practices in this area.
As we noted above, there are many different interpretations of human capital
available within the existing literature. To avoid a pre-emptively restrictive approach in
this exploratory study, we adopted a broadly based definition of human capital which
saw it as encompassing the whole range of value-creating skills, competencies, talents
and attributes that employees bring to the firm. Moreover, since the term human
capital was not itself in wide circulation among practitioners (although it has been
more recently popularised by the government taskforce described earlier), thisdefinition helped us to operationalise the concept in relation to specific practices and
systems for evaluating workforce competencies and attitudes. Interviews with
managers often revealed some managerial resistance to the term human capital itself,
which cloaked both normatively positive and negative views of its evaluation in
practice. Thus, one manager commented:
The term human capital is interesting. I wouldnt say that Im pursuing a
human capital agenda But if we talk about competency and the value of
competence in fulfilling our value proposition to our customer that I can
talk about. Then one starts to talk about capital. But how one values thatcapital becomes a bit of a problem. Director of HR, CopyCo
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Conversely, another was more sceptical:
In this company most assets are tangible. But people as an asset is not
something that is easily measured. Its measured very easily as a cost
because this is very simple to do. HR director, CarCo
Despite these concerns about the terminology of human capital evaluation, what
we did find was that many of the companies in our study possessed extensive systems
for measuring and reporting on the knowledge and skills of their employees. These
systems typically focused on competency-based definitions of such knowledge and
skills based on normative assessments within specific organisational contexts
(Sandberg, 1994).
INTERNAL AND EXTERNAL REPORTING
The call for more widespread reporting by organisations on the value of their humancapital has its origins in HRA. This radical accountancy approach put forward the
idea that there was a need for constructing meaningful systems for the reporting of a
firms human assets (and other intangible assets) alongside its physical and financial
assets (Berkowitz, 2001; Roslender and Dyson, 1992). It should be acknowledged,
however, that, unlike other intangibles, human capital has certain unique qualities
that make valuation very difficult. The most important of these is that human capital
is not really an asset at all, in the sense that it is something owned by the company
people being free to move and withdraw their skills. Furthermore, as we have already
highlighted, human capital is also difficult to measure because of its context-dependent nature.
Given these problems, it is unsurprising that a preference for in-house reporting
systems was noted in the fieldwork. The lack of external reporting by firms is partly to
do with the problem associated with measurement, as well as there being no legal
obligations for firms to report this information externally. It is also an indication of the
relative lack of interest that the UK investor community (in common parlance, the
City ie the City of London) has in all forms of intangible assets (Vance, 2001). An HR
director of an insurance firm commented:
The City is not really that interested. The City isnt even that interested inour brand, and brand is one of the more tangible intangibles It is only
really interested in the impact on the bottom line and thats OK we as
an organisation have to believe that service and morale are key to
achieving profit long term. For me its not just about short-term or long-
term focus they all enable you to deliver profit but youll only deliver
sustainable profit if these other things are right.
Director of HR projects, InsuranceCo
A senior training manager at a telecommunications company, interviewed shortly
after a meeting with City analysts, commented:
Judging from some of the market analysts questions that Ive heard this
morning, this says to me that they are a long way off from showing any
kind of interest in that kind of information [on human capital] There
were six or seven priorities that the CEO listed in terms of focus for our
three-year strategy. One of them was motivating people. But there wasnt
a single question on motivating people. All the questions were about
what are the financial returns on this and that and the other, what is your
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Evaluating human capital: an exploratory study of management practice
26 HUMAN RESOURCE MANAGEMENT JOURNAL, VOL 14 NO 4, 2004
Comments
Company has outlined its approach to measuring and evaluating human capital for largelyoperational purposes, and this has been rolled out across the business following a major merger.There is growing appreciation of the strategic role of this information, and human capitalfeatures in strategic planning via the inclusion of measures of morale and customer services asa key company goal, alongside the more traditional financial focus of company planning. Themeasurement of employee competencies is broad in scope, although the company also hasconcerns about retaining certain key talented populations such as underwriters.
Comprehensive approach to evaluating human capital across the whole of the business.Data has strategic value, especially in terms of building the companys commitment tocorporate social responsibility.
Human capital evaluation does have a strategic focus, but this is more targeted around thegoal of delivering a learning organisation through training, development and knowledgemanagement programmes. However, there is no emphasis on metrics that would supportand measure progress towards this goal. Use of metrics for mainly operational purposes (egaudit skills of employees to ensure that they have sufficient staff to perform a specific task,or appraisal systems that use data on a very individualistic basis). Many initiatives are broadin scope, while others such as talent retention initiatives aimed at retaining highly technicalstaff are much more narrow in focus.
Strong emphasis on accurately measuring business leader performance through a widerange of measurement tools (egpeer review, 360o appraisal, employee feedback, customersurveys). Measurement based on an identified range of leadership competencies andbehaviour. Leads to definite training and development outcomes aimed at building and
retaining strategic and visionary leadership for the company.
Little development in human capital evaluation aside from some limited changes to theappraisal system. The company is highly dependent on key talented individuals, and isincreasingly concerned about talent retention. However, the lack of any strategic approach todeveloping, recruiting and retaining talent, let alone systems in place to monitor andmeasure this process, means that talent retention practices are largely confined to increasedlevels of remuneration to high-flyers.
An emphasis on measuring employee competencies in strategic planning (for example, canthe company develop a new product with the current level of competency in its workforce ata particular location?), and use of balanced scorecard further underlines this commitment tothe strategic importance of HRM.
Approach is targeted on the top management group. Information generated on this group viaappraisal and employee feedback systems is key to targeting potential business leaders in aglobally organised company. Approach to evaluating human capital among this top leadershipgroup was specifically born out of concerns regarding the war for talent.
Clear approach based on metrics. Use of a strategic unit within HR to undertake the processof human capital evaluation. Focus is broad; all employees are engaged in the process ofhuman capital evaluation.
A new HR-directed unit is taking the lead in the development of metrics for evaluatinghuman capital. The process is very much in its early stages, but has clear strategic focus. HRhas huge input into company strategy as its cube (a form of balanced scorecard) was
designed by a leading HR practitioner within the firm. The focus is on measuring talentacross the organisation, with particular concerns being raised about the role of solidperformers people who work consistently and effectively across the business.
No strategic approach to measuring people within the organisation. Information generatedthrough an appraisal system is used for operational purposes only. Within a department storeenvironment in which there is low mobility between stores, it is claimed that managers havea good knowledge of the workforce and therefore more rigorous metrics are unnecessary.
Company has been working on various aspects of human capital evaluation as part of thefirms commitment to total quality management. A major commercial crisis in the 1980s ledto a renewed and more strategic approach to HRM. The firm utilises different kinds ofcompetence-based systems for different groups of employees. Many of these consist ofperformance profiles that are linked to career progression.
TABLE 1 Summary of case study findings
Company
InsuranceCo
OilCo
TelecommsCo
EngineeringCo
CityCo
CarCo
HitechCo
ShopCo
RetailCo
StoreCo
CopyCo
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market performance in this area of the business, when will you get this
product to the market. Not a single question on motivating people as a
priority. So my judgement from that would suggest that market analysts
are still some way off the concept of human capital being measured.
Head of learning, TelecommsCoReflecting this indifference, our practitioner interviews revealed a strong preference
for internal systems of reporting that is to say, information generated about members
of staff is used for internal, management accounting purposes only. Internal reporting
is non-standardised and enables the firm to develop a system of human capital
evaluation that best serves its business needs.
A summary of the main features of each cases approach to human capital
evaluation is provided in Table 1. It is notable that there is considerable divergence in
the different approaches. In part this reflects the flexibility of design granted by internal
systems of reporting. But, as we shall see in the following section, these divergences inmanagement practice also reflect the factors influencing the adoption of human capital
evaluation, as well as the real difficulties that firms face in dealing with such an
intangible concept. Although some of the academic literature associated with
accounting and human capital has been influential within certain case study firms we
noted, for example, the widespread use of the balanced scorecard (Kaplan and
Norton, 1996) managers also pointed out that there were limitations concerning the
extent to which the ideas have been adopted wholesale by firms:
there are a number of practices but none of them are terribly well
developed in the way that Im familiar with in the human capital theories
of people like Andrew Mayo. We are some way off developing that kind of
approach to quantifying the value of the capability within our business as
opposed to simply quantifying the number of people.
Head of learning, TelecommsCo
ACCOUNTING FOR DIFFERENCES IN HUMAN CAPITAL EVALUATION
In the rest of this article we explore the factors explaining how and why these different
approaches to human capital evaluation have emerged in practice. Such divergence in
practice can be understood in a variety of ways. It can obviously be related to sectoraland contextual differences, given the range of firms involved (Child and Smith, 1987).
It can also be seen as the result of UK managers tendency to pick and mix new ideas
and techniques, rather than apply them in a uniform and consistent way (Storey,
1989). Equally, this divergence in practice may be related to more structural factors to
do with the distribution of power within the organisation and, particularly, the role
the HR function plays within that distribution of power. Hoque and Noon (2001), for
instance, identify a relationship between management practices and the labelling of
the HR or personnel function within firms. Some of these questions are outside the
scope of the present article. However, we did find some suggestive evidence ofsystematic variation in the forms of human capital evaluation employed by the firms
in our sample. This variation is described in more detail below, while the subsequent
section explores the linkages with the role and aspirations of the HR function in our
sample firms.
Differences in human capital evaluation in our study can usefully be analysed in
terms of the two dimensions of practice described earlier. First, there are variations in
the focus of a firms human capital evaluation practice. We observed in certain firms
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systems that were specifically focused on, for instance, the top 250 members of the
management population (ie those whose managerial skills and competencies create
most value) or on a specific talented population (eg insurance underwriters and ITspecialists). This talent focus seemed to contrast with firms that adopted a much wider
focus on the value-creating skills and abilities of their workforce as a whole.
The second major variation concerns the extent to which the firms sought to
establish systems based on the collection of aggregate data as a counter-weight to
financial indicators. This balancing act was often characteristic of firms that had
adopted some form of the balanced scorecard (Kaplan and Norton, 1996), and
respondents at these firms were keen to stress the strategically focused nature of the
human capital evaluation system. For these firms, adoption of systems of human
capital evaluation was linked to the attempted reformulation of the HR function as astrategic partner within the organisation. In contrast to these leading firms, for most
firms in our sample the focus of human capital evaluation was on its individual aspects
rather than on the development of aggregate measures designed to contribute to
company strategic thinking and decision-making.
Overall, then, our analysis of existing practice suggested that there were systematic
variations in the forms of evaluation adopted according to the scope and objectives
applied to the design of systems. By analysing the practice of human capital evaluation
against these two dimensions we were thus able to identify, on a propositional basis,
four possible styles of human capital evaluation.First, we identified firms that focused evaluation on an elite group that was
perceived to have a strategic value to the business. Thus, at EngineeringCo and
HitechCo, it was felt that systems of evaluating the worth of their senior management
population would help to deliver senior managers capable of thinking strategically in a
competitive global environment. As one manager commented:
In the new era of companies that are knowledge based, if you dont
manage your human capital and your competitors do, then they will beat
you because they will get the best. Director of learning, HitechCo
Thus, both of these firms cited the idea of the war for talent in justifying theadoption of human capital evaluation systems. These firms saw a strategic value in
focusing their evaluation systems on the most talented and therefore most valuable
senior managerial population. Developments here may thus reflect the link identified
by Sisson and Scullion (1985: 36) between the scope of HR activities and the emergence
of a core set of workforce skills as a strategic contingency. Certainly, the practice of
human capital evaluation at EngineeringCo seems to reflect such a link. Here, we found
that traditional HR practices such as collective bargaining were located at the level of
the subsidiary, with few policies in place to ensure consistency in practice across the
subsidiaries. At the same time, in a newly emerging strategic HR function, a smallteam of senior HR specialists had sought to concentrate human capital evaluation on a
core senior managerial group. In contrast to these cases, we also need to note
Armstrongs (1995) contrary argument that HRMs strategic presence may actually be
downgraded when (as is more typical) firms diversify away from such core skills. This
question of the link between human capital evaluation and the role of the HR function
is a theme that is developed later.
The second grouping that we identified was that which demonstrated a broad focus
on evaluating its employee base and which displayed a recognition of the potentially
strategic value of this process. This type of firm predominated in customer-drivenbusinesses such as those found in the retail sector or in service-sector firms operating
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large call centres. Managers in this latter group felt that long-term company value
derived largely from improved customer service. Critically, this was seen as dependent
on building loyalty and commitment across the workforce as a whole.
These two groupings of firms (which, for the sake of convenience, will be labelled
talent focused and customer focused) have adopted fairly sophisticated forms ofhuman capital evaluation. Although diverging in their focus, both sets were pursuing
rigorous and metrics-driven approaches to evaluation. For example, in both groups we
discovered that firms were attempting to draw on a range of more traditional HR
metrics (eg appraisal data, customer feedback, data on employee training and
development) and were attempting to utilise this data in order to produce more
aggregate measures of employee performance. Managers in both groups of firms
expressed the view that such measurement systems were a vital part of building and
developing a strategic approach to HR (an issue that we develop later).
In certain firms (EngineeringCo, HitechCo and ShopCo) this process was very
advanced, and these firms sought constantly to re-appraise and monitor the kinds of
metrics that they were using, feeding this data into strategic decision-making (often
through some form of balanced scorecard mechanism) as well as into day-to-day
operational HR decisions on training provision, promotions and remuneration. Other
firms (RetailCo and InsuranceCo) were in the early stages of some kind of human
capital evaluation system, although interviews revealed that they aimed to emulate
those systems that were at work in leading companies such as EngineeringCo or
ShopCo. For example, managers at RetailCo commented that they had been visiting
other firms (including ShopCo) in order to learn about best practice in this area.
A clear contrast to these leading firms was a third type that focused its evaluationof key individuals exclusively on financial performance outcomes, and which sought to
retain this talented population through systems of high (and escalating) remuneration.
Firms such as CityCo were clear examples of companies fighting a war for talent with
a pure focus on systems of financial reward for top performers. We were keen to
interview HR practitioners in City firms because such companies identify a core
population of employees (investment brokers) as a key corporate asset, and we felt
that, with their aggressive headhunting policies, they represented a clear-cut example
of firms fighting the war for talent. Human capital was evaluated strictly in terms of
the financial performance of the individual brokers. This is in contrast to most of the
other firms in our sample, where human capital was seen as intangible, context-
dependent and stemming from a complex web of difficult-to-measure soft skills. This
applied even at firms such as InsuranceCo, where the professional skills of a group of
insurance underwriters were evaluated against the same competency criteria applied
to other employees.
A final group identified were those where data on workforce competencies was
gathered and utilised at the level of individuals only and was not aggregated to
provide a more composite view of human capital at firm level. In these companies the
evaluation of human capital did not extend beyond narrow functional concerns to do
with the validity and effectiveness of employee appraisal systems.
ROLE OF THE HR FUNCTION
This section seeks to link the differences in practice observed in our study to the
differing roles played by HR departments within our sample. Our interviews suggest
that the nature of that link operated both at a general level and through more specific
aspects of the way in which HR functions operated.
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The more general and pervasive aspects of the interplay between human capital and
HR seemed to derive from two principal sources. First, there was evidence that the
development of a more proactive approach to human capital derived from a significantchange in the firms market position. In several firms, this was seen as impelling a
radical reorientation of the HR function with consequent implications for the treatment
of human capital. Hence, at CopyCo managers discussed how the loss of its majortechnical patent in the 1980s led to a significant restructuring of management. This was
seen as a process that paved the way for its current systems of human capital
evaluation. Interviewees elsewhere also mentioned crisis points, such as a suddendownturn in profitability (RetailCo), calls for greater corporate social responsibility
(OilCo) and a corporate merger that led to a new, strategic emphasis on human capital.
A respondent at InsuranceCo described the latter process as follows:One of the benefits of the merger is that you actually do have a chance
to start again in terms of policies, and you actually have to put new stuff
in place. Director of HR projects, InsuranceCo
A second, more general, influence on human capital evaluation came from theincreasing professionalisation of HR practices. Our findings here echo the work of Bellet al (2001) on Investors in People (IiP), who suggest that the IiP process acts as a
mechanism for the codification and legitimisation of HR management practice, therebyenhancing the relative power of the function within the dynamics of the organisation.
As they note:For the personnel function to be able to coalesce as an effective group of
professional individuals that is distinct and recognisable to other
managers, the personnel manager must engage in standardisation or
codification of specialist knowledge. (Bell et al, 2001: 210)
It could be suggested that such standardisation enhances professionalism byincreasing the ability of HR managers to define their professional identity through
access to specialist knowledge (Friedson, 1994). We noticed similar processes at work inmany of our case study firms (particularly those that we identified as leading firms
earlier). Although human capital is a term that many HR practitioners were reluctant to
employ, more sophisticated metrics-driven approaches to measuring employeecompetencies were frequently seen as part and parcel of a reshaping of the HR function
in line with a process of greater professionalisation. HR managers at OilCo, for
example, talked about HR getting smarter in this context.The drive towards professionalisation, however, also highlights the implications of
inter-professional competition in the development of human capital evaluation (Abbott,
1988). In this context, Armstrongs (1995) work is highly relevant, warning of thedanger that confirmist innovations involving the standardisation and quantification of
HR activities merely entrench the dominance of a management accountancyperspective. He claims that the provision of hard data for the accountingframework, and the evaluation of the outcomes of personnel activity in accounting
terms (Armstrong, 1995: 158) simply encourages the contracting out of personnel work
and undermines the case for a distinctive personnel approach.It is not possible within the scope of this study fully to evaluate this argument,
which is broad based and historical in nature. We can observe, however, that in all our
case studies the process of human capital evaluation was an HR-led initiative. Inparticular, our interviews revealed that the views of HR managers were closer to the
normative literature in this field which sees human capital evaluation as actuallyenhancing the strategic role of the HR function within the firm (Becker et al, 2001;
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Berkowitz, 2001; Bontis and Dragonetti, 1999; Fitz-Enz, 2000; Hitt et al, 2001; Lee and
Miller, 1999; Mayo, 2001). This leads to the tentative conclusion that, at this stage in its
development at least, human capital evaluation is not subordinate to accountancy
criteria, but potentially provides a space within which HR tools and practices (eg
training and development) may be legitimised in terms of their ability to build long-term value for the firm. In this sense, human capital evaluation may represent a
deviant form of innovation (Legge, 1978), challenging rather than reinforcing the
management accountancy perspective.
The prospect that HR functions may actually be able to enhance their role within the
organisation although the appropriation of these measurement tools and techniques
reinforces, rather than detracts from, a concern with questions of power and control as
key to understanding the practice of human capital evaluation. With this in mind, the
following (albeit somewhat indicative) observations can be made.
First, we found a possible relationship between the level of sophistication of systems
of human capital evaluation and the strategic role of the HR function. In certain cases,
by stimulating greater managerial attention towards issues of human capital, the new
flows of information created by measures of employee performance and competency
seemed to have at least the potential to support the strategic aspirations of the HR
function. This relationship with the role of HRM was not one way, however. Our
second observation was that the evaluation of human capital was seen in some of our
firms as enhancing the credibility of the HR function with other groups. At ShopCo, for
example, the interviewee suggested that the process of human capital evaluation had
enabled the HR function to be taken more seriously by the rest of the business. The
point was made that HRMs human capital goals (which at this firm were viewed interms of the necessity to deliver a loyal and committed workforce in order to create
corporate value) needed to be recognised as essential components of successfully
achieving company strategic goals:
Its a company goal to have the most loyal and committed staff, and the
reason we believe that is that you cant actually deliver engaging customer
service unless youve got committed people. You can see that straight
away its the old stories of going into a record shop and seeing people
totally ignoring you. But if you have got somebody who is really
motivated to deliver and committed to the business, then you are going tofeel more likely that they are going to care about you as a shopper and
youll probably come back. So its a very sensible reason, really, and the
business believes that. Its not HR smoking dope stuff!
HR measurement unit director, ShopCo
Greater credibility was also seen as linked to the adoption of more objective metrics.
Such metrics did not necessarily require new tools. For example, some firms had
identified the appraisal system as the best way to generate aggregate measures of
employee competencies across the organisation. At EngineeringCo and HitechCo,
however, a larger range of metrics was employed (including human capital datagenerated from appraisals, peer review, employee feedback and customer feedback),
leading to perhaps more accurate assessments of employee competencies.
One implication of the adoption of human capital metrics was the greater ability to
relate HR concerns to wider business issues. This echoes Johansons study of human
capital evaluation in Sweden, whereby a process of Human Resource Cost Accounting
(HRCA) had enabled managers to identify connections between human resources and
financial results (Johanson, 1999: 95). As an interviewee at ShopCo observed, the key
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issue in terms of human capital evaluation was:
taking the business with you so that they understand it and why you are
doing it and not overloading the business. The first step in getting thebusiness to understand you is to have data and information that is arguing
why you need to do it and what the impact is going to be.
HR measurement unit director, ShopCo
This is not to say that the adoption of metrics necessarily precluded attention to less
tangible aspects of the role of HR, as has been suggested in some studies (Grugulis and
Bevitt, 2002). A concern with measurement may certainly create a tension between the
quest for rigorous (scientific) objective measurement systems and the traditional roles
and functions of HR in industrial relations and everyday people management practices
(Armstrong, 1995). However, it must also be recognised that the HR-led nature of this
process in our case studies seems to have avoided the simplistic equation of employee
competencies with financial inputs and outputs. Rather, in a number of cases,
managers have developed more complex understandings of what drives company
performance. Indeed, in several cases the process of human capital evaluation was
explicitly linked to the development of company values, which were to be cascaded
throughout the organisation. At EngineeringCo, for example, the company had
developed a list of key competencies and behaviour for business leaders that were
viewed as driving business success. Individual performance was measured against
these specifications. Thus, at EngineeringCo, in sharp contrast to CityCo, for instance,there was a strong concern not to neglect softer skills in the way in which managers
set about achieving their targets:
We started by saying its [performance] about achieving business targets
and its about achieving individual objectives, but it is also about the way
in which you do it. So if you just achieve all your business targets and
achieve all your personal objectives but you do it in an inappropriate way
you destroy people in the way that you do it then you fail the
performance criteria. So these five competencies and 40 behaviours are all
about driving for an improved performance in an appropriate manner
one that is people-centric. HR director, EngineeringCo
A fourth mechanism linking human capital to the role of HR could be identified in
evidence of the organisational change and differentiation within that function. This was
specified most explicitly at ShopCo:
The business came to the conclusion that we [HR] had to really shake
things up if we wanted to become a strong global retailer which is one of
our goals and we went through a complete relaunch of the HR function
close to three years ago... that led us to really being far clearer as to whatthe people processes are that we are delivering.
HR measurement unit director, ShopCo
This reorientation of the HR function was linked in some cases to the development
of new specialised units dedicated to developing workforce capabilities for strategic
goals (RetailCo, ShopCo, HitechCo). These units were often closely focused on
measurement. Perhaps the best example of this was at ShopCo. Here, they had
developed a People Innovation Unit whose raison dtre was to improve how human
capital was measured in a way that maximised value for the business. At RetailCo,
we saw the development of an Employee Insight Unit (EIU) which was focused onmaking the organisation a great place to work through the development of
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employees emotional loyalty. This units work revolved around means of
quantifying and operationalising such terms through, for example, the targeteddesign and distribution of employee feedback questionnaires. The work of the EIU
thus exemplified certain aspects of a human capital approach, inasmuch as it was
based on measuring what would previously have been regarded as unmeasurable,
intangible and soft.
The development of these innovative units could also be seen as a response to the
credibility concerns voiced by many HR managers about developments in this area. A
senior manager at EngineeringCo, for example, commented on his worry that their
systems for human capital evaluation would not be taken seriously across the whole
business:I was absolutely determined that this was not going to be an HR
initiative At the launch of the programme.. the chief exec presented it
all, supported by the three chief operating officers who took everyone
through the details I didnt stand up and do anything. This was
absolutely important because if you are not careful it becomes an HR
initiative, not a business strategy. Director of HR, EngineeringCo
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TABLE 2 Human capital evaluation and HRM in practice
Emphasis
An emphasis onmeasurement of
the value of the
organisations human
assets. Such a
concern reflects: a) a
recognition of what
gets measured gets
managed therefore
want to ensure that
people issues are
taken seriously and
viewed strategically by
the firm; b) a desireto show the value and
importance of HRM as
a strategic business
function; and c) a desire
to assess accurately
HR performance and
thereby improve the
ability of HRM to add
value to the firm.
Want to ensure
that the value that
people bring to theorganisation is properly
recognised. A desire to
show the importance
of people in creating
value for the company/
customers/shareholders.
Tools
Utilising tools for themeasurement of human
capital that are already
well established within
the organisation: eg
appraisal systems,
training data and
employee surveys.
Redesigning some of
these tools to make
them more appropriate
for the evaluation of
human capital. Keeping
changes to a minimumso as to avoid opposition
to another HR initiative.
Impact on organisation
As an HR-owned process, astrong emphasis on
evaluating soft skills and
the importance of company
values permeates the
process. However, there is
clear recognition that this
should not be an HR-led
process need for senior
managerial sponsorship of
the entire process.
Impact on HR
Enhances the strategicposition of HRM within
the organisation.
HRM is better able to
communicate with the
rest of the business.
Emergence of
dedicated units
involved in
measurement.
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Such concerns among HR practitioners were also apparent in Bell et als study of IiP,
in which the personnel and training managers were keen to undermine the perception
that the process was essentially a personnel thing (Bell et al, 2001: 209).A summary of the findings from this study relating to the interplay between human
capital evaluation and the changing role of HR are presented in Table 2.
IMPLICATIONS FOR PRACTITIONERS
Table 2 highlights the impact of human capital evaluation on the HR professionals in
many of the firms that we studied. It is useful, therefore, to turn to some of the wider
implications for practitioners to ask what human capital evaluation means for the
HR profession.While recognising that this was an exploratory study confined to a sample of 11
large UK firms, a number of themes emerge that have direct relevance to theevolution of HR practice in the UK. First, our research suggests that there is no holy
grail no universal formula to measure the value of employee skills and
competencies. Human capital is tacit and dynamic and therefore needs to beevaluated with the (constantly changing) needs of the firm and other stakeholders in
mind. From our study, the nature of human capitals contribution to the business
varies significantly between firms.
Although our research does not allow us to elaborate on the contextual sources ofsuch variation, it does suggest some future avenues for research. In particular, one
initial observation derives from the broad distinction between a broad and narrow
focus on human capital evaluation. These differing managerial responses seem to belinked to different dynamics in the formation of human capital. Thus, the broad focus
was developed in relation to widely dispersed customer service skills. Such front-line
skills involve a significant element of emotional labour (Korczynski, 2002), and thiswas reflected in the more affective emphasis of evaluation in such settings. Conversely,
we found that the narrow focus had developed in response to specific concentrations of
expertise which were more closely evaluated in relation to technical-managerial
competencies. Such findings suggest that, above and beyond industrial sectordifferences, the interplay between the organisational context and the distribution and
formation of human capital may be an important component in the variations found inour sample.
A further key implication for practitioners, reflecting the context-dependent nature
of human capital, is the need to review continuously the indicators that they use inthe light of a changing business environment. This suggests that human capital
evaluation is best viewed as a learning process through which managers come to
appreciate the often tacit or misunderstood contribution that employee skills and
competencies make to the achievement of business objectives. This, certainly, is amore robust approach than one that emphasises the generation of statistics, which are
in themselves inevitably provisional and context-dependent. Such considerations
lead us to the conclusion that the process of human capital evaluation is at least asimportant as its immediate outcomes.
In terms of management practice, we also need to address Armstrongs concern
about the shift towards a management accountancy perspective and its implications forthe HR function. Here, our study suggests that metrics-driven approaches are double-
edged in their effects, having the potential to act as both deviant and conformist
innovations. Although developments in our sample companies are still at an earlystage, we found that in certain firms, notably those with HR-led measurement units,
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HR practitioners are setting an agenda for measurement that avoids the reductive
assumptions of the management accountancy approach. We note, for example, the
emphasis of measurement systems at ShopCo on the determinants of employee loyalty
and commitment. It is too early to say whether such initiatives represent a significant
deviation to the institutional weight of accounting practice (Armstrong, 1995: 151),but in this case and in others in our sample metrics helped to legitimise activities
that are integral to the HR function.
CONCLUSIONS
The contribution of this article was defined at the outset in terms of the need for
evidence on the practice rather than on the theory of human capital evaluation. We
noted that existing normative approaches tended to gloss over the practical aspects of
evaluating human capital, and of linking that evaluation to action. In contrast, our
study was concerned to explore the development of management practice, and ourresearch questions were consequently focused on what were seen as important
dimensions of such practice: scope, level of application and overall style. In this
respect, our study sought to illuminate both the varieties of current practice and the
reasons for such variety. Without rehearsing our major findings once more, it is worth
noting that the uniform preference among our case firms for the internal reporting of
human capital seems to have reflected not only the lack of interest among important
external audiences, but also the absence of any universal formula that could be applied
across different industrial contexts. Our experience in the field was that firms, while
drawing on ideas such as the inclusion of people metrics in the balanced scorecard,actually adapted these approaches to their own company needs, preferring flexibility to
standardised systems of reporting. Moreover, systems for evaluation were not only
organisation-specific in terms of the definitions of competence employed reflecting,
we would argue, the context-dependent nature of human capital itself but also in
terms of the factors that shaped their design and use. These latter factors draw
attention to the influence of the organisational context on management practice in this
area, and the greater part of the article was thus devoted to exploring and unpacking
that influence.
We did this, first, through an account of the different styles of human capital
evaluation evident in our study. In relating these different styles to context, it is
possible to identify, first, a broad influence on practice relating to sector and/or forms
of human capital. Thus, the high-tech firms in our sample were concerned with
specialised skills and focused on the value of highly talented individuals. The retailers,
on the other hand, developed measures that were applicable to the whole of their
workforce and which were focused on the creation of customer value and loyalty.
Beyond these influences, however, our study also suggested an organisational effect,
whereby practice on human capital was linked to the role of the HR function within the
firm. Variations here seemed to be related to the different goals that HR professionals
were pursuing with evaluation, ranging from what were seen as strategic goals to morenarrow operational concerns. Thus, our study suggested a reciprocal relationship
between the forms of human capital evaluation adopted and the development and
differentiation of the HR function itself.
This latter finding highlights the generative possibilities of new practices based on
the concept of human capital. It thus brings us to our final conjecture on the role that
human capital may help to play in mediating HR-business interactions. As an
exploratory study, our research has tended to reveal not only the specific usages of
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human capital in particular settings but has also helped to reveal more immanent
tendencies in its development. In particular, a recurrent theme in our study, as reflected
in the findings above, is the role that human capital plays as what can be termed alinking concept in ongoing organisational debates and struggles on the contribution ofemployees to corporate performance. Human capital can be seen as providing such a
linkage in several different areas of existing practice. First, the development of metrics
centred on human capital provides a link between the HR function and other
managerial groups, not least senior management, whose practices are typically drivenby quantifiable objectives and metrics. The ability to translate what are sometimes seen
as nebulous aspects of employee motivation and behaviour into measurable (hence,
arguably manageable) phenomena may be a significant development in gaining greater
credibility for the HR role. Secondly, for HR practitioners themselves, the ability torelate their activities to an identifiable and measurable set of outcomes, which are
employee and not financially based, may provide a way of linking so-called hard and
soft variants of HRM (Storey, 1989). Finally, taking these points together is to identifysome of the means through which HR functions may be able to develop a link between
the effects of their day-to-day practice and the strategic aspirations of the firm and
without bracketing such aspirations in narrowly financial terms.
Notes
1. The research reported in this paper was carried out as part of a study, conducted by
the authors and sponsored by the CIPD, on Evaluating Human Capital. As such, it
helped to inform CIPD policy in relation to the reporting of human capital. The reportof the government taskforce is available from www.accountingforpeople.gov.uk.
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APPENDIX: COMPANY INFORMATION
InsuranceCo (five respondents two director level)Part of a larger insurance group since 2000, this firm operates as a business unit that
incorporates both traditional insurance activities and a newer call-centre-organised,
lower-cost business. The firm is totally UK based, and employs 17,000-18,000 people.
OilCo (one director-level respondent)
One of the worlds largest oil companies with operations in more than 145 countries,this was one of the larger companies in our sample. Worldwide, the company employs
more than 115,000 people and 2,000 HR leaders across the whole of its global
operations. Interviews concerned the human capital evaluation process across thefirms global operations.
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TelecommsCo (one director-level respondent)
This firm provides a range of telecommunications services from its international
internet business to UK-based retail operations. Employment stands at around 110,000.
The company has experienced a rapid downsizing, with employment having halved
since the mid-1980s.
EngineeringCo (three respondents one director level)
This firm, once engaged primarily in engineering activities, has expanded into electronic
systems following a recent merger. The firm operates in numerous countries worldwide,
but has maintained a significant UK presence. Of its 130,000 employees, 70,000 are based
in the UK and 25,000 in the US. The interviews focused on the firms global approach to
human capital evaluation.
CityCo (one director-level respondent)
This investment bank employs 2,500 people, of whom 1,300 are based in the UK: 300-
400 of these employees are investors, whom the bank considers to be the key employee
group in terms of creating value for the organisation.
CarCo (one director-level respondent)
CarCo is a major vehicle manufacturing firm employing 20,000 people in the UK. The
interview focused on the firms European-wide operations.
HitechCo (two respondents)
A large US-based global company employing more than 100,000 people worldwide (ofwhom 5,000 are employed in the UK) across 1,000 locations and six continents. This
firm is one of the global leaders in wireless, automotive and broadband
communications technologies. Research and development (R&D) staff are viewed as
one of the firms key talented groups. Within the firms UK operations, 500 people are
employed in R&D activities. The interviews focused on both human capital evaluation
within the firms UK operations and its global approach to developing senior
managerial talent.
ShopCo (one respondent)
A large UK supermarket chain that has grown to take on a more global presence with
operations in Europe and in Asia. The firm has a UK employee base of 200,000. The
interview focused on the firms approach to evaluating human capital within its UK
operations only.
RetailCo (two respondents)
A major UK retailer, RetailCo operates across 300 stores serving 10 million customers
per week. The firm operates both in the UK and abroad, employing 70,000 people
worldwide 58,000 are employed in the UK. The firm has recently undergone a
restructuring process following a recent downturn, and HR strategy has been seen askey to the success of this process of change. The interviews focused on the firms newly
emerging human capital evaluation strategies in the UK and Ireland.
StoreCo (one director-level respondent)
This case study is again from the retail sector. The firm operates as a department store,
with stores in a number of major UK cities. The firm employs about 59,000 people in
the UK.
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CopyCo (two respondents one director level)
Focused in the visual graphics industry, the firm manufactures, services and retails
printing, copying, faxing, scanning machinery and software. The company alsooperates (through franchising agreements) in-house graphics services for manybusinesses. The interviews conducted at this company concerned its UK operations
only. The firm employs 4,000 people in the UK and Ireland, with its sales force beingone of its largest employee groups.
Evaluating human capital: an exploratory study of management practice