By Jake Young, CIPD Research Associate
Organisations create value by utilising the different assets available to them, such as using machinery to turn materials into saleable products. Increasingly, the asset of value to organisations is the human capital of its workforce: the knowledge, skills and abilities of its people (Schultz, 1961). But why is human capital so important and who are the main stakeholders of information about the workforce?
With its growing prevalence, human capital has challenged the common notion of physical capital as the paramount factor of economic success. Rather, human capital allows organisations to explore the financial value of the human resource, while considering ideas such as well-being, engagement, diversity and culture. An understanding of the role of people in business value creation has been established and developed in recent years. However, the depth of that role is relatively under-explored. The question of how valuable and material people can be is yet to be answered adequately. These issues emphasise the importance of further investigating people and their impact on organisational value.
The importance of human capitalHuman capital has become more than simply a theoretical concept. Its role in understanding performance, productivity and engagement is now more greatly appreciated. Human capital doesn’t just exist at the individual level. Rather, it is multi-level, in that it concerns the knowledge and skills of a workforce at an individual, team and organisational level. The interaction between human and social capital in value generation should not be underestimated. Social capital concerns the value of establishing relationships in a network (Bourdieu, 1986). Increased social capital leads to the development of human capital, as wider connections result in opportunities to generate new knowledge, often from existing expressed knowledge, or even unexpressed tacit understanding. Social capital, key in understanding collective action, is more easily measured at organisational level, where relationships are more pronounced. The social nature of work means that a combination of social and human capital is key to developing knowledge and, thus, increasing a firm’s value. Therefore, this relationship should not be ignored.
The most important asset?Unfortunately, organisations’ treatment of the workforce implies a lack of consideration towards the human value of a firm. Rather than treating people as ‘the most important asset’, the intangible nature of human capital often leads to a lack of understanding, particularly on the behalf of those making investment decisions about an organisation. While investment in human capital can result in a number of long-term benefits for an organisation, such as improved productivity and performance, investors tend to show a preference for more profitable short-term decisions. Furthermore, the complexities of human capital are often not explored by organisations, with aspects such as human capital risk disregarded. In this case, ideas such as health and safety, or executive pay, which could cause a loss of organisational value, are not considered. Human capital disclosure also varies dramatically across organisations. While there is increasing interest in human capital from investors, we do not yet know what types of human capital are deemed important. Much literature simple describes human capital, rather than delving into its nuances.
However, both investors and organisations can benefit from using human capital information. Socially Responsible Investors (SRIs) use data-screens for socially responsible indicators to filter investment targets based on ethical principles e.g. they will screen-out tobacco firms if their stakeholders are sensitive to health or environmental issues. The screens they use are developed as a result of the motivations of environmental, social and governance (ESG) investors. Screens which consider workforce issues are increasingly available, for example those which are developed to omit organisations with poor human rights records, and support those with strong ethical principles, such as a diverse workforce. Blackrock (2016) discuss the motivations of ESG investors, who look to provide a societal service through deploying capital, and subsequently tackling contemporary sociocultural issues. Further, a moral element, or ‘doing good’, is important. A combination of SRI screens and ESG focus offers a key motivation for investors to consider human capital information in their decisions. However, as discussed, human capital is often not reported to the extent that it should perhaps be. Businesses struggle to provide external stakeholders with adequate information.
People DataNevertheless, HR analytics provides a method by which organisations can more effectively report their human capital information to gain insights into workforce performance and strengthen links with stakeholders. In particular, investors have begun to see the potential of analytics due to the benefits discussed above. HR analytics involves the use of people-data in analytical processes in order to solve business problems. Marler and Boudreau (2017) analyse a number of works into HR analytics, finding that it involves more sophisticated analysis of HR-related data than HR metrics (measurements of key HR initiatives). It is argued that HR analytics offers more than HR metrics in its ability to link HR processes and decisions to organisational performance. In turn, this means that HR management has a more strategic role amongst other business functions. Having considered a number of sources, Marler and Boudreau find several patterns in definitions:
Marler and Boudreau subsequently provide their own definition of HR analytics:
A HR practice enabled by information technology which uses descriptive, visual and statistical analyses of data related to HR processes, human capital, organisational performance and external economic benchmarks in order to (4) establish business impact and enable data-driven decision marking.
HR analytics is perceived as valuable in its ability to provide understanding about how organisations can use human capital to facilitate improved performance. It allows organisations to understand and articulate important aspects of the workforce through using data and evidence. When an organisation reports on such insights, this is known as human capital reporting. HR analytics is important to measure and report key traits of the workforce, particularly its human capital – for example well-being and productivity.
It’s clear, then, that HR or People Analytics is not only beneficial to HR and business functions, but to external stakeholders. Therefore, HR professionals should look to make the most of the interest being paid to people analytics by sharing and reporting their people data, and ultimately demonstrating the impact that HR can have on the business.
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