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Thursday, October 19, 2000

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The power called people

Kalidas Muralidharan on human capital valuation in practice.

GLOBALISATION, technology and wide access to capital are narrowing opportunities for competitive differentiation. As such, companies are being forced to look at long-term, sustainable sources of strategic advantage, and many are turning to their real ass ets -- the people. The industry paradigm is shifting and companies are aligning their own human capital with their strategic objectives. The notion of employees being a variable cost has long disappeared and they are considered as investments.

With companies realising that it is their people who give them the winning edge, valuing human capital becomes imperative. For the last three decades, there have been many efforts to calibrate human capital by an objective measure. However, the subjectiv e elements of human capital create difficulty in arriving at objective measures. Given that, unlike financial statement, a statement of human capital is subjective, the issue is what can this subjective measure be used for?

The valuation, if used properly, can be an effective tool for motivating the employees. Every person is proud of his/her worth. The valuation can indicate a person's worth and how it can be enhanced with acquiring of more knowledge and skills.

Critics might argue that putting a `rupee' figure on the employees might pique them. Is it ethical to say `You are worth Rs xxx?' Are not we in a sense depriving the individual of his dignity? Are not we treating the human as a commodity that can be trad ed in the market? But consider this: The football market in Italy, the UK, the Netherlands, Argentina, and so on, work on the premise that soccer stars are commodities that are bid for in the market. A classic example would be that of Inter Milan purchas ing Ronaldo for 19 million from Barcelona.

Human capital valuation will enable a constant monitoring of the success of policies of recruitment, selection, motivation and retaining the best people. Thus, a fall in the value -- as long as the methodology of valuation is constant across the years -- will indicate a dip in the quality of its people even if the decline is not visible in the quality of the market offerings, that is, its products and services.

The measure of human resources can also be used as an important tool while deciding on the future growth in employee strength, the skills needed, designing remuneration packages, estimating the replacement costs for employees, and so on. Human capital me asure is thus a futuristic tool.

What is the Indian scene in this regard? Not much literary work has been done here and companies are not taking the concept of human capital seriously. In the two infotech companies visited, the human resource (HR) department was not performing valuation of human capital -- it seemed to be the exclusive domain of the finance department. The HR department was oblivious to the concept itself. This raises the obvious question: Do domestic companies use human capital value merely as an accounting figure? If yes, then is there a need for companies to value their human capital at all?

Whatever purposes the Indian companies use (or not use) the figure for, what is satisfying to note is that a start has been made. With time, companies will realise the utility of the human capital valuation. An interesting parallel can be drawn to the fi eld of quality. Line managers across the globe used to ignore the importance of quality. Competition was based on price, until Joseph Juran shot to fame with the concept of cost of quality.

Given mangers' obsession with monetary figures, the calibration of quality gave them an incentive to improve quality. Capturing the effect of improving quality in financial terms made managers see the light and focus on quality improvement. It is not sur prising that quality has improved manifold ever since. Likewise, why not put a monetary figure on the employee? Will not that improve the way companies treat their employees, and give an impetus to managers to take human capital valuation seriously?

The professionals of the day are far more exacting than they have been in the past. They possess the capabilities to determine their performance. Compelled to meet the demands of each of its employees even as it wakes up to the bewildering and confoundin g reality of free competition, total quality, cross-cultural alliances, mergers and acquisitions and WTO norms, the Indian corporates have to realise the power of people in the new paradigm of business.

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