The drive to evaluate operations and to contain costs is mistakenly applied as an operational issue across the board.  Too often human capital assessments are lumped into the systems theory world of process and become a technical asset for management’s diagnostic view for cuts.  The result becomes an assessment or evaluation process that is really the disease responsible for symptoms such as high turnover, low morale, and mismanagement.

Human capital is a sociological asset, an asset that does take up to 70% of your costs, but an asset that can not be treated like a process map or put on an accelerated depreciation schedule. Human capital, like all capital, however, is an asset that can be depleted, wasted, or strengthened.

Human capital also has the same risk associated with other capital options and in the world of equity valuation, high human capital valuations positively relate to a venture’s valuation:  it takes talent to create the good or service, the process does not create the good or service.

Just as financial capital is intended to reflect underlying or expected enterprise value. Valuation models should be built to reveal the proportion of intangible valuation [human capital] as tangible valuation.  And as the picture alludes, the intangible outweighs the tangible:

The disproportionate weight of tangible to intangible in assessments

The reality is few want to dissect a market projection or discounted cash flow as purely fuzzy and inherently flawed.  And fewer like to admit the longer the projected time line the more fuzzy these projections are.  A case should be made that market and financial projections are really a greater leap of faith than any assessment of human capital value.

Because human capital is an asset that cannot be controlled, it must be managed wisely and managed with a waste, preservation, or acquisition in mind.  Unlike other capital, human capital is not as an asset that can be stored, banked, or squirreled away and human capital can neither be kept in reserve nor wheeled out of the shed for future use. Human capital has to be managed daily, otherwise human capital is mismanaged.

How is human capital mismanaged in today’s knowledge economy and creative class?

The priorities of top performers* are:

1. Teamwork
2. Customer focus
3. Fair treatment of employees
4. Initiative and innovation

The priorities of average performers* are:

1. Minimizing risk
2. Respecting the chain of command
3. Supporting the boss
4. Making budget

There should be no surprise that people in organizations are often afraid to take risks.  In spite of what is said by their manager or is presented in their organization’s values statement to encourage innovation, too many organizations create a culture that it only accepts risks as long as they get it right.  People are incredibly perceptive to people who say one thing and do another and even more perceptive for organization cultures that say one thing, but reward another.

I don’t know how many organizations expect to survive with a stable of average performers, at any level.  Human capital is driven by motivation and each person’s view of their world.  If you want an organization of high performers, you have to stop treating the symptom of low morale, high turnover, missed deadlines, cost over runs, market failure, and group-think and go after the disease:  human capital as process after-thought.

Stop treating the symptoms with a Lean/Six Sigma roll out, a business process re-engineering, a Total Quality Management, a weekend retreat, or an all-hands meeting and begin to treat the disease of your executive and management team looking at human capital with an opinion that those people are lucky they have a job or that their paycheck is sufficient motivation.

In today’s world culture eats strategy for lunch.

Source:

Tagged as: human capital assessment, intangible, organization performance, private equity, strategy, tangible, valuation, VC

• twitter
• email
• linkedin
• rss