Does Human Capital Matter?

In the ever-changing business environment, human capital is no longer an abstract problem. Human capital is basically the knowledge, skills, experience, and attributes an employee brings to a company, and it is central to how an organization operates and competes.

Human capital is not just an asset. It is the force behind progress and growth. When organizations strive for success, the importance of human capital increases. 

The importance of human capital has no bounds, from company progress to creating a culture of innovation. It is also why we get so many ideas and talents that give the company a competitive edge.

What is Human Capital?

Human capital is the skills, expertise, experience, and personal characteristics that an employee brings to the table.

However, unlike tangible assets like machinery or equipment, human capital is inside the people or employees who work for the company. This capital evolves via training, education, and practical experience, which makes it ever-growing. As long as the organization invests in the people, it continues to grow.

How does human capital differ from other types of capital in the organization? Let’s have a look. 

Human Capital Vs. Financial Capital

Financial capital is monetary. It includes the funds companies use to acquire resources and expand their business operations. Companies also use financial capital to invest in necessary business areas.

Intellectual Capital

This includes all intangible intellectual property, such as trademarks and patents, that originates from human knowledge but is owned by the organization.

Social Capital

Social capital includes the networks, connections, and relationships that improve cooperation inside the organization.

Financial and intellectual capital are restricted to specific areas, but human capital is adaptable and can be used in all domains of an organization. 

Like in the technology department, software developers have programming skills and experience. These are the human capital that drives innovation and product development.

Why Does Human Capital Matter? 

For your company to achieve high performance, you need to acquire and nurture the best and brightest human capital available and keep these investments in your company. 

This is the bottom-line conclusion of a study recently published in the Journal of Applied Psychology entitled “Does Human Capital Matter? A Meta-Analysis of the Relationship Between Human Capital and Firm Performance.”

Human capital is the knowledge, skills, and abilities of your employees. Past research has shown that some of the most important aspects of human capital that drive company strategy and performance are the experiences, education, and training of managers.

The Role of Human Capital in Different Industries

Human capital has a different meaning and form in different industries 

• Data scientists and software developers are the core of innovation in technology, creating products and solutions.
• Knowledgeable analysts and advisors give informed insights for important decision-making and revenue growth in the financial sector.
• In healthcare, doctors, nurses, and training staff maintain patient care and ensure the success of the organization. 

This study, which analyzed data from 66 previously published studies, found that human capital significantly and positively impacted global measures of company performance (e.g., ROA and Returns on Sales). 

The relationship between human capital and performance was strongest when the human capital was firm-specific (e.g., years of experience with a firm) vs. general (e.g. a stockbroker). When human capital is general in nature, wages and the threat of turnover are higher because the labor market is more competitive. 

However, specific human capital is more valuable to your company’s performance because it is hard for you to replace and for your competition to copy.

How Human Capital Drives Operational Excellence

The study also found that human capital has an even stronger effect on measures of operational performance (e.g., customer service satisfaction, team performance, retention, and innovation). Operational performance, in turn, had a strong effect on global measures of company performance. 

This demonstrates that human capital drives the performance of your company through its effect on operational excellence. Your company cannot thrive with crappy operations, and your operations cannot thrive without good people.

Why Invest in Human Capital?

When I teach the service-profit chain in my MBA classes, my bottom line is that the single most important thing you need to do on a daily basis if you want to grow revenue and profit in your company is to take care of your employees. Inevitably, there are always a few know-it-all managers who smirk when I say this. Like it or not, it’s an empirical fact that your people are the key to success for you and your company.

Take care of your people. Teach them to take care of each other and your customers. Once you develop this very specific human capital in them, don’t treat them like a commodity. Treat them like your firm’s performance depends on them because it does.

Conclusion

Human capital drives an organization’s growth. There’s a clear link between employees’ skills and overall company performance. Thus, organizations that consider their people assets can grow better than those that fail to recognize the importance of human capital.

They have, in fact, higher turnover rates too. So, the most effective way to succeed is to keep investing in people and their development. 

That’s why we need more training efforts to keep the team motivated. This will create a sustainable work environment where employees feel valued and proud to be part of it, which will drive your organization’s growth.

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Bret L. Simmons, Ph.D., is an Associate Professor of Management at The University of Nevada, Reno. He earned his doctorate in Business Administration at Oklahoma State University. Bret blogs about leadership and social business at his website Positive Organizational Behavior. You can also find him on Twitter, Facebook, and LinkedIn.