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Evaluating human capital: an exploratorystudy of management practice

Juanita Elias, Manchester University Harry Scarbrough, Warwick Business SchoolHuman Resource Management Journal, Vol 14, no 4, 2004, pages 21-40

The article explores the development of systems of human capital evaluation in anumber 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 thevalue of their employee base. An extensive human capital literature has developed inwhich the authors propose elaborate systems for measuring a firm’s human assets. Thisarticle does not seek to offer yet another human capital model. Rather, the aim is toexamine the management practices through which human capital evaluation isundertaken. The article is based on an exploratory study of such practices in 11 majorfirms in the UK. The findings are highlighted as follows. First, we note the preferencefor internal over external (static accountancy-based) reporting. Secondly, we highlightthe diverse nature of human capital evaluation systems that exist across UK business.Thirdly, we explore the relationship between practices of evaluation and the role andposition of the HR function within the firm. Finally, in conclusion, we address theimplications of the human capital perspective for practitioners, arguing that there is nosingle formula that can be applied to its evaluation. We go on to suggest that theimportance of the human capital concept and its measurement may lie in its ability tore-frame perceptions of the relationship between the contribution of employees and thecompetitive performance of the business. Contact: Juanita Elias, School of Social Sciences, The University of Manchester,Oxford Road, Manchester, UK M13 9PL. Email: juanita.elias@manchester.ac.uk

The recognition that much of the added value created by firms is becoming moredependent on assets other than physical capital has stimulated a vast literaturein 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 company’shuman capital – the value-creating skills, competencies, talents and abilities of itsworkforce – as an essential component in gaining competitive advantage (Bontis andDragonetti, 1999; Leadbeater, 2000). As a result, there have been calls for human assetsto be incorporated into company accounts, thereby giving investors a much clearerpicture 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 ongovernment policy. In response, a UK government taskforce was established, and thishas recently published its report, ‘Accounting for people’.

1

Approaches to human capital have been widely debated over the 40-year periodsince the concept was first popularised by studies of the role of education in economicdevelopment (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 withknowledge – together with the application of such competencies, often in the form ofemployee commitment (Ulrich, 1998). All of these writings agree that human capital issomething that employees bring to the organisation (and take with them when theyleave), yet is also something that is developed within the workplace through trainingand work experience (Miller and Wurzburg, 1995: 17). From this wide and burgeoningliterature, however, it is possible to identify several distinct schools of thought, whichrange in their interest from theory building to the development of tools. One importantschool of thought, for instance, is human resource accounting (HRA), which hasexisted 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 competitiveadvantage, these features are seen as significant because they reinforce the causalambiguity of human capital and hence its inimitability by competitors (Carpenter et al,2001). A third school, which has developed recently, focuses more narrowly on thecompetitive value of scarce and inimitable skills. Inspired by the notion of a ‘war fortalent’ (Haker, 2001; Michels et al, 2001), a number of writers have addressed questionsof recruiting and retaining the most valued employees – often technical specialists oryoung managers of high potential (Annunzio, 2001; Sadler and Milmer, 1993). Thisfocus, 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 talentedindividuals risks neglecting the development of the workforce as a whole.

A fourth set of studies is explicitly tools and systems-orientated, and seeks todevelop 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 andRessler, 2000). Similarly, several major consultancy firms have developedmethodologies relating to human capital management as part of their productofferings. What these approaches have in common is that they all share a commitmentto building robust metrics for measuring one of the most intangible of intangibles, andrecognise that the development of such metrics will help firms and investors tounderstand the drivers of corporate performance, enabling firms to identify futuresources of value in a competitive business environment.

Despite their diversity in approach, a common strand of many of the existingschools 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 capitalleads directly to improved performance (Becker et al, 2001: 13). Issues of theproblematic relationship between information and decision-making (March andSimon, 1958), and the mediating role of management practice and systems (Guillén,2003), are somewhat neglected. In contrast, the principal contribution of this article isto provide an exploratory account of the actual development of systems of humancapital evaluation at firm level. Our empirical study of such systems across a range offirms allows us to shed some light on the relationships between human capitalevaluation and management practices within particular contexts. This study not onlyhighlights innovations in the methods employed by firms to evaluate human capital

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but also links these developments to management practices and the influence ofparticular sectoral contexts.

EVALUATION OF HUMAN CAPITAL IN PRACTICE

The gap between existing theories of human capital and its evaluation withinparticular contexts is a significant one. The features that are seen as critical toorganisational performance include the flexibility and creativity of individuals, theirability to develop skills over time and to respond in a motivated way to differentcontexts (Davenport, 1999). Yet, many of these features depend on the acquisition andapplication of ‘tacit knowledge’ (Lave and Wenger, 1991), and are thus not readilyamenable to measurement and representation. This paradox poses a major challenge tosystems designed to evaluate human capital in practice. Given evidence that there isunlikely to be a universal formula for measuring human capital (Mayo, 2002), itsuggests 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 anumber of contextual features that were seen as likely to influence evaluation inpractice. These features served to inform the development of our research questions asoutlined below. First, existing work suggests that HR systems may be implementedwith different types of objective, ranging from ‘strategic’ objectives linked to theoverall goals of the organisation, to ‘operational’ objectives that are concerned withthe 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 usefulshorthand means of identifying the kind of business objectives that were served byhuman capital evaluation.

Secondly, HR systems are seen as varying significantly in their scope, depending onthe status and numbers of employees they encompass (Keegan, 1998; Scarbrough,2000). This suggested that the scope of the evaluation system was an importantquestion. Thirdly, a number of studies have highlighted the relationship between theimplementation and effectiveness of HR systems and the role played by the HRfunction within the organisation (Guest et al; 2000; Legge, 1978). Fourthly, animportant issue in the arena of accounting systems, though less well advanced in thehuman 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 anexternal audience (conventionally termed ‘financial accounting’) and those thatgenerate information for internal use (labelled ‘management accounting’). In applyingthis distinction to human capital, we were keen to establish whether evaluationsystems 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 relationto 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 theintroduction – which was designed to inform and contextualise our researchquestions. Subsequently, fieldwork based on comparative case study methods of

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data-gathering was conducted over a six-month period. Although lacking theadvantages of single-shot longitudinal studies (Pettigrew, 1985), such an approachdoes enable a comparative analysis based on within-group similarities and differences(Eisenhardt, 1989). Our selection criteria for the sample were threefold. First, weacknowledged the context-dependent nature of human capital by drawing cases froma range of different sectoral contexts. Secondly, given our concern with managementpractice, we sought to include firms that were understood from external reports orfrom personal contacts to be developing systems for the collection of data on humancapital (although we acknowledge the potential bias towards more visible, largercorporations implicit in this approach). Thirdly, we sought to ensure that our casesreflected a range of workforce skill-sets, ranging from production line and ‘front-lineservice’ 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 significantobservation here was that in all instances the key respondents identified to us wereeither located within the mainstream HR function or within specialist units attached tothat function – a point to which we return later. Our final sample of 20 HR managersfrom 11 organisations included 11 director-level managers (see appendix for furtherdetails). 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 madeavailable 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. Asbefits 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 toensure the accuracy of our findings. Wherever possible, interview materials weresupplemented by extensive documentary evidence on existing management policiesand practices in this area.

As we noted above, there are many different interpretations of human capitalavailable within the existing literature. To avoid a pre-emptively restrictive approach inthis exploratory study, we adopted a broadly based definition of human capital whichsaw it as encompassing the whole range of value-creating skills, competencies, talentsand attributes that employees bring to the firm. Moreover, since the term ‘humancapital’ was not itself in wide circulation among practitioners (although it has beenmore recently popularised by the government taskforce described earlier), thisdefinition helped us to operationalise the concept in relation to specific practices andsystems for evaluating workforce competencies and attitudes. Interviews withmanagers often revealed some managerial resistance to the term ‘human capital’ itself,which cloaked both normatively positive and negative views of its evaluation inpractice. Thus, one manager commented:

The term human capital is interesting. I wouldn’t say that I’m pursuing ahuman capital agenda… But if we talk about competency and the value ofcompetence in fulfilling our value proposition to our customer – that I cantalk 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 notsomething that is easily measured. It’s measured very easily as a costbecause this is very simple to do. HR director, CarCo

Despite these concerns about the terminology of human capital evaluation, whatwe did find was that many of the companies in our study possessed extensive systemsfor measuring and reporting on the knowledge and skills of their employees. Thesesystems typically focused on competency-based definitions of such knowledge andskills 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 theidea that there was a need for constructing meaningful systems for the reporting of afirm’s human assets (and other ‘intangible assets’) alongside its physical and financialassets (Berkowitz, 2001; Roslender and Dyson, 1992). It should be acknowledged,however, that, unlike other intangibles, human capital has certain unique qualitiesthat make valuation very difficult. The most important of these is that human capitalis 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 alreadyhighlighted, 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 reportingsystems was noted in the fieldwork. The lack of external reporting by firms is partly todo with the problem associated with measurement, as well as there being no legalobligations for firms to report this information externally. It is also an indication of therelative lack of interest that the UK investor community (in common parlance, ‘theCity’ – ie the City of London) has in all forms of intangible assets (Vance, 2001). An HRdirector of an insurance firm commented:

The City is not really that interested. The City isn’t even that interested inour brand, and brand is one of the more tangible intangibles… It is onlyreally interested in the impact on the bottom line… and that’s OK – we asan organisation have to believe that service and morale are key toachieving profit long term. For me it’s not just about short-term or long-term focus – they all enable you to deliver profit – but you’ll only deliversustainable profit if these other things are right.

Director of HR projects, InsuranceCo

A senior training manager at a telecommunications company, interviewed shortlyafter a meeting with City analysts, commented:

Judging from some of the market analysts’ questions that I’ve heard thismorning, this says to me that they are a long way off from showing anykind of interest in that kind of information [on human capital]… Therewere six or seven priorities that the CEO listed in terms of focus for ourthree-year strategy. One of them was motivating people. But there wasn’ta single question on motivating people. All the questions were aboutwhat are the financial returns on this and that and the other, what is your

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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 company’s 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 (eg peer 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 andretaining 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) wasdesigned 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 thefirm’s 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 thisproduct to the market. Not a single question on motivating people as apriority. So my judgement from that would suggest that market analystsare still some way off the concept of human capital being measured.

Head of learning, TelecommsCo

Reflecting this indifference, our practitioner interviews revealed a strong preferencefor internal systems of reporting – that is to say, information generated about membersof staff is used for internal, management accounting purposes only. Internal reportingis non-standardised and enables the firm to develop a system of human capitalevaluation that best serves its business needs.

A summary of the main features of each case’s approach to human capitalevaluation is provided in Table 1. It is notable that there is considerable divergence inthe different approaches. In part this reflects the flexibility of design granted by internalsystems of reporting. But, as we shall see in the following section, these divergences inmanagement practice also reflect the factors influencing the adoption of human capitalevaluation, as well as the real difficulties that firms face in dealing with such anintangible concept. Although some of the academic literature associated withaccounting and human capital has been influential within certain case study firms – wenoted, for example, the widespread use of the ‘balanced scorecard’ (Kaplan andNorton, 1996) – managers also pointed out that there were limitations concerning theextent to which the ideas have been adopted wholesale by firms:

…there are a number of practices… but none of them are terribly welldeveloped in the way that I’m familiar with in the human capital theoriesof people like Andrew Mayo. We are some way off developing that kind ofapproach to quantifying the value of the capability within our business asopposed 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 differentapproaches to human capital evaluation have emerged in practice. Such divergence inpractice 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 ideasand 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 todo with the distribution of power within the organisation and, particularly, the rolethe HR function plays within that distribution of power. Hoque and Noon (2001), forinstance, identify a relationship between management practices and the labelling ofthe HR or personnel function within firms. Some of these questions are outside thescope of the present article. However, we did find some suggestive evidence ofsystematic variation in the forms of human capital evaluation employed by the firmsin our sample. This variation is described in more detail below, while the subsequentsection explores the linkages with the role and aspirations of the HR function in oursample firms.

Differences in human capital evaluation in our study can usefully be analysed interms of the two dimensions of practice described earlier. First, there are variations inthe focus of a firm’s 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 themanagement population (ie those whose managerial skills and competencies createmost value) or on a specific talented population (eg insurance underwriters and ITspecialists). This ‘talent focus’ seemed to contrast with firms that adopted a much widerfocus 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 toestablish systems based on the collection of aggregate data as a counter-weight tofinancial indicators. This ‘balancing act’ was often characteristic of firms that hadadopted some form of the balanced scorecard (Kaplan and Norton, 1996), andrespondents at these firms were keen to stress the strategically focused nature of thehuman capital evaluation system. For these firms, adoption of systems of humancapital evaluation was linked to the attempted reformulation of the HR function as a‘strategic partner’ within the organisation. In contrast to these ‘leading’ firms, for mostfirms in our sample the focus of human capital evaluation was on its individual aspectsrather than on the development of aggregate measures designed to contribute tocompany strategic thinking and decision-making.

Overall, then, our analysis of existing practice suggested that there were systematicvariations in the forms of evaluation adopted according to the scope and objectivesapplied to the design of systems. By analysing the practice of human capital evaluationagainst 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 wasperceived to have a strategic value to the business. Thus, at EngineeringCo andHitechCo, it was felt that systems of evaluating the worth of their senior managementpopulation would help to deliver senior managers capable of thinking strategically in acompetitive global environment. As one manager commented:

In the new era of companies that are knowledge based, if you don’tmanage your human capital and your competitors do, then they will beatyou 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 infocusing their evaluation systems on the ‘most talented’ and therefore most valuablesenior managerial population. Developments here may thus reflect the link identifiedby Sisson and Scullion (1985: 36) between the scope of HR activities and the emergenceof a core set of workforce skills as a ‘strategic contingency’. Certainly, the practice ofhuman capital evaluation at EngineeringCo seems to reflect such a link. Here, we foundthat traditional HR practices such as collective bargaining were located at the level ofthe subsidiary, with few policies in place to ensure consistency in practice across thesubsidiaries. 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 acore senior managerial group. In contrast to these cases, we also need to noteArmstrong’s (1995) contrary argument that HRM’s strategic presence may actually bedowngraded when (as is more typical) firms diversify away from such ‘core’ skills. Thisquestion of the link between human capital evaluation and the role of the HR functionis a theme that is developed later.

The second grouping that we identified was that which demonstrated a broad focuson evaluating its employee base and which displayed a recognition of the potentiallystrategic 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 valuederived largely from improved customer service. Critically, this was seen as dependenton 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 pursuingrigorous and metrics-driven approaches to evaluation. For example, in both groups wediscovered that firms were attempting to draw on a range of more traditional HRmetrics (eg appraisal data, customer feedback, data on employee training anddevelopment) and were attempting to utilise this data in order to produce moreaggregate measures of employee performance. Managers in both groups of firmsexpressed the view that such measurement systems were a vital part of building anddeveloping a strategic approach to HR (an issue that we develop later).

In certain firms (EngineeringCo, HitechCo and ShopCo) this process was veryadvanced, and these firms sought constantly to re-appraise and monitor the kinds ofmetrics that they were using, feeding this data into strategic decision-making (oftenthrough some form of balanced scorecard mechanism) as well as into day-to-dayoperational HR decisions on training provision, promotions and remuneration. Otherfirms (RetailCo and InsuranceCo) were in the early stages of some kind of humancapital evaluation system, although interviews revealed that they aimed to emulatethose systems that were at work in leading companies such as EngineeringCo orShopCo. For example, managers at RetailCo commented that they had been visitingother 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 toretain this talented population through systems of high (and escalating) remuneration.Firms such as CityCo were clear examples of companies fighting a ‘war for talent’ witha pure focus on systems of financial reward for top performers. We were keen tointerview HR practitioners in City firms because such companies identify a corepopulation of employees (investment brokers) as a key corporate asset, and we feltthat, with their aggressive headhunting policies, they represented a clear-cut exampleof firms fighting the ‘war for talent’. Human capital was evaluated strictly in terms ofthe financial performance of the individual brokers. This is in contrast to most of theother 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. Thisapplied even at firms such as InsuranceCo, where the professional skills of a group ofinsurance underwriters were evaluated against the same competency criteria appliedto other employees.

A final group identified were those where data on workforce competencies wasgathered and utilised at the level of individuals only and was not aggregated toprovide a more composite view of human capital at firm level. In these companies theevaluation of human capital did not extend beyond narrow functional concerns to dowith 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 thediffering roles played by HR departments within our sample. Our interviews suggestthat the nature of that link operated both at a general level and through more specificaspects of the way in which HR functions operated.

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The more general and pervasive aspects of the interplay between human capital andHR seemed to derive from two principal sources. First, there was evidence that thedevelopment of a more proactive approach to human capital derived from a significantchange in the firm’s market position. In several firms, this was seen as impelling aradical reorientation of the HR function with consequent implications for the treatmentof 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 wasseen as a process that paved the way for its current systems of human capitalevaluation. 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 amechanism 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 ofprofessional individuals that is distinct and recognisable to othermanagers, the personnel manager must engage in standardisation orcodification 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 throughaccess to specialist knowledge (Friedson, 1994). We noticed similar processes at work inmany of our case study firms (particularly those that we identified as ‘leading’ firmsearlier). Although human capital is a term that many HR practitioners were reluctant toemploy, more sophisticated metrics-driven approaches to measuring employeecompetencies were frequently seen as part and parcel of a reshaping of the HR functionin line with a process of greater professionalisation. HR managers at OilCo, forexample, talked about HR ‘getting smarter’ in this context.

The drive towards professionalisation, however, also highlights the implications ofinter-professional competition in the development of human capital evaluation (Abbott,1988). In this context, Armstrong’s (1995) work is highly relevant, warning of thedanger that ‘confirmist innovations’ involving the standardisation and quantification ofHR 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 accountingterms’ (Armstrong, 1995: 158) simply encourages the contracting out of personnel workand 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 ourcase 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 thenormative 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 andMiller, 1999; Mayo, 2001). This leads to the tentative conclusion that, at this stage in itsdevelopment at least, human capital evaluation is not subordinate to accountancycriteria, but potentially provides a space within which HR tools and practices (egtraining 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 themanagement accountancy perspective.

The prospect that HR functions may actually be able to enhance their role within theorganisation although the appropriation of these measurement tools and techniquesreinforces, rather than detracts from, a concern with questions of power and control askey to understanding the practice of human capital evaluation. With this in mind, thefollowing (albeit somewhat indicative) observations can be made.

First, we found a possible relationship between the level of sophistication of systemsof 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 newflows of information created by measures of employee performance and competencyseemed to have at least the potential to support the strategic aspirations of the HRfunction. This relationship with the role of HRM was not one way, however. Oursecond observation was that the evaluation of human capital was seen in some of ourfirms as enhancing the credibility of the HR function with other groups. At ShopCo, forexample, the interviewee suggested that the process of human capital evaluation hadenabled the HR function to be taken more seriously by the rest of the business. Thepoint was made that HRM’s human capital goals (which at this firm were viewed interms of the necessity to deliver a loyal and committed workforce in order to createcorporate value) needed to be recognised as essential components of successfullyachieving company strategic goals:

It’s a company goal to have the most loyal and committed staff, and thereason we believe that is that you can’t actually deliver engaging customerservice unless you’ve got committed people. You can see that straightaway – it’s the old stories of going into a record shop and seeing peopletotally ignoring you. But if you have got somebody who is reallymotivated 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 andyou’ll probably come back. So it’s a very sensible reason, really, and thebusiness believes that. It’s 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 hadidentified the appraisal system as the best way to generate aggregate measures ofemployee 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 torelate HR concerns to wider business issues. This echoes Johanson’s study of humancapital evaluation in Sweden, whereby a process of Human Resource Cost Accounting(HRCA) had enabled managers to identify connections between human resources andfinancial 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 aredoing it and not overloading the business. The first step in getting thebusiness to understand you is to have data and information that is arguingwhy 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 lesstangible aspects of the role of HR, as has been suggested in some studies (Grugulis andBevitt, 2002). A concern with measurement may certainly create a tension between thequest for rigorous (scientific) objective measurement systems and the traditional rolesand 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 thisprocess in our case studies seems to have avoided the simplistic equation of employeecompetencies with financial inputs and outputs. Rather, in a number of cases,managers have developed more complex understandings of what drives companyperformance. Indeed, in several cases the process of human capital evaluation wasexplicitly linked to the development of company values, which were to be ‘cascaded’throughout the organisation. At EngineeringCo, for example, the company haddeveloped a list of key competencies and behaviour for business leaders that wereviewed as driving business success. Individual performance was measured againstthese 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 managersset about achieving their targets:

We started by saying it’s [performance] about achieving business targetsand it’s about achieving individual objectives, but it is also about the wayin which you do it. So if you just achieve all your business targets andachieve 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 theperformance criteria. So these five competencies and 40 behaviours are allabout 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 inevidence of the organisational change and differentiation within that function. This wasspecified most explicitly at ShopCo:

The business came to the conclusion that we [HR] had to really shakethings up if we wanted to become a strong global retailer – which is one ofour goals – and we went through a complete relaunch of the HR functionclose 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 developmentof new specialised units dedicated to developing workforce capabilities for strategicgoals (RetailCo, ShopCo, HitechCo). These units were often closely focused onmeasurement. Perhaps the best example of this was at ShopCo. Here, they haddeveloped a ‘People Innovation Unit’ whose raison d’être was to improve how humancapital 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 unit’s work revolved around means ofquantifying and operationalising such terms through, for example, the targeteddesign and distribution of employee feedback questionnaires. The work of the EIUthus exemplified certain aspects of a human capital approach, inasmuch as it wasbased 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 thecredibility concerns voiced by many HR managers about developments in this area. Asenior manager at EngineeringCo, for example, commented on his worry that theirsystems for human capital evaluation would not be taken seriously across the wholebusiness:

I was absolutely determined that this was not going to be an HRinitiative… At the launch of the programme.. the chief exec presented itall, supported by the three chief operating officers who took everyonethrough the details… I didn’t stand up and do anything. This wasabsolutely important because if you are not careful it becomes an HRinitiative, 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 theorganisation’s humanassets. Such a concern reflects: a) arecognition of ‘whatgets measured getsmanaged’ – thereforewant to ensure thatpeople issues are taken seriously andviewed strategically bythe firm; b) a desire to show the value andimportance of HRM as a strategic businessfunction; and c) a desire to assess accurately HR performance andthereby improve theability of HRM to addvalue to the firm.

Want to ensure that the value that people bring to theorganisation is properlyrecognised. A desire toshow the importance of people in creatingvalue for the company/customers/shareholders.

Tools

Utilising tools for themeasurement of humancapital that are alreadywell established withinthe organisation: egappraisal systems,training data andemployee surveys.Redesigning some ofthese tools to make them more appropriate for the evaluation ofhuman capital. Keepingchanges to a minimum so as to avoid oppositionto ‘another HR initiative’.

Impact on organisation

As an HR-owned process, astrong emphasis onevaluating soft skills and the importance of companyvalues permeates theprocess. However, there isclear recognition that thisshould not be an HR-ledprocess – need for seniormanagerial sponsorship ofthe entire process.

Impact on HR

Enhances the strategicposition of HRM withinthe organisation. HRM is better able tocommunicate with therest of the business.Emergence ofdedicated unitsinvolved inmeasurement.

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Such concerns among HR practitioners were also apparent in Bell et al’s study of IiP,in which the personnel and training managers were keen to undermine the perceptionthat 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 humancapital 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 inmany of the firms that we studied. It is useful, therefore, to turn to some of the widerimplications for practitioners – to ask what human capital evaluation means for theHR profession.

While recognising that this was an exploratory study confined to a sample of 11large 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 ‘holygrail’ – no universal formula to measure the value of employee skills andcompetencies. Human capital is tacit and dynamic and therefore needs to beevaluated with the (constantly changing) needs of the firm and other stakeholders inmind. From our study, the nature of human capital’s contribution to the businessvaries 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, oneinitial observation derives from the broad distinction between a broad and narrowfocus on human capital evaluation. These differing managerial responses seem to belinked to different dynamics in the formation of human capital. Thus, the broad focuswas 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 ofexpertise which were more closely evaluated in relation to technical-managerialcompetencies. Such findings suggest that, above and beyond industrial sectordifferences, the interplay between the organisational context and the distribution andformation of human capital may be an important component in the variations found inour sample.

A further key implication for practitioners, reflecting the context-dependent natureof human capital, is the need to review continuously the indicators that they use inthe light of a changing business environment. This suggests that human capitalevaluation is best viewed as a learning process through which managers come toappreciate the often tacit or misunderstood contribution that employee skills andcompetencies make to the achievement of business objectives. This, certainly, is amore robust approach than one that emphasises the generation of statistics, which arein themselves inevitably provisional and context-dependent. Such considerationslead 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 Armstrong’s concernabout 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 reductiveassumptions of the management accountancy approach. We note, for example, theemphasis of measurement systems at ShopCo on the determinants of employee loyaltyand commitment. It is too early to say whether such initiatives represent a significantdeviation to the ‘institutional weight of accounting practice’ (Armstrong, 1995: 151),but in this case – and in others in our sample – metrics helped to legitimise activitiesthat are integral to the HR function.

CONCLUSIONS

The contribution of this article was defined at the outset in terms of the need forevidence on the practice rather than on the theory of human capital evaluation. Wenoted that existing normative approaches tended to gloss over the practical aspects ofevaluating human capital, and of linking that evaluation to action. In contrast, ourstudy was concerned to explore the development of management practice, and ourresearch questions were consequently focused on what were seen as importantdimensions of such practice: scope, level of application and overall style. In thisrespect, our study sought to illuminate both the varieties of current practice and thereasons for such variety. Without rehearsing our major findings once more, it is worthnoting that the uniform preference among our case firms for the internal reporting ofhuman capital seems to have reflected not only the lack of interest among importantexternal audiences, but also the absence of any universal formula that could be appliedacross different industrial contexts. Our experience in the field was that firms, whiledrawing on ideas such as the inclusion of people metrics in the balanced scorecard,actually adapted these approaches to their own company needs, preferring flexibility tostandardised systems of reporting. Moreover, systems for evaluation were not onlyorganisation-specific in terms of the definitions of competence employed – reflecting,we would argue, the context-dependent nature of human capital itself – but also interms of the factors that shaped their design and use. These latter factors drawattention to the influence of the organisational context on management practice in thisarea, and the greater part of the article was thus devoted to exploring and unpackingthat influence.

We did this, first, through an account of the different styles of human capitalevaluation evident in our study. In relating these different styles to context, it ispossible to identify, first, a broad influence on practice relating to sector and/or formsof human capital. Thus, the high-tech firms in our sample were concerned withspecialised 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 theirworkforce 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 thefirm. Variations here seemed to be related to the different goals that HR professionalswere pursuing with evaluation, ranging from what were seen as strategic goals to morenarrow operational concerns. Thus, our study suggested a reciprocal relationshipbetween the forms of human capital evaluation adopted and the development anddifferentiation of the HR function itself.

This latter finding highlights the generative possibilities of new practices based onthe concept of human capital. It thus brings us to our final conjecture on the role thathuman capital may help to play in mediating HR-business interactions. As anexploratory 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 immanenttendencies in its development. In particular, a recurrent theme in our study, as reflectedin the findings above, is the role that human capital plays as what can be termed a‘linking’ concept in ongoing organisational debates and struggles on the contribution ofemployees to corporate performance. Human capital can be seen as providing such alinkage in several different areas of existing practice. First, the development of metricscentred on human capital provides a link between the HR function and othermanagerial groups, not least senior management, whose practices are typically drivenby quantifiable objectives and metrics. The ability to translate what are sometimes seenas nebulous aspects of employee motivation and behaviour into measurable (hence,arguably manageable) phenomena may be a significant development in gaining greatercredibility for the HR role. Secondly, for HR practitioners themselves, the ability torelate their activities to an identifiable and measurable set of outcomes, which areemployee 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 betweenthe effects of their day-to-day practice and the strategic aspirations of the firm – andwithout bracketing such aspirations in narrowly financial terms.

Notes

1. The research reported in this paper was carried out as part of a study, conducted bythe authors and sponsored by the CIPD, on ‘Evaluating Human Capital’. As such, ithelped 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 thatincorporates 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 world’s largest oil companies with operations in more than 145 countries,this was one of the larger companies in our sample. Worldwide, the company employsmore than 115,000 people and 2,000 HR leaders across the whole of its globaloperations. Interviews concerned the human capital evaluation process across thefirm’s global operations.

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TelecommsCo (one director-level respondent)This firm provides a range of telecommunications services from its internationalinternet business to UK-based retail operations. Employment stands at around 110,000.The company has experienced a rapid downsizing, with employment having halvedsince the mid-1980s.

EngineeringCo (three respondents – one director level)This firm, once engaged primarily in engineering activities, has expanded into electronicsystems 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 basedin the UK and 25,000 in the US. The interviews focused on the firm’s global approach tohuman 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 employeegroup 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. Theinterview focused on the firm’s 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. Thisfirm is one of the global leaders in wireless, automotive and broadbandcommunications technologies. Research and development (R&D) staff are viewed asone of the firm’s key talented groups. Within the firm’s UK operations, 500 people areemployed in R&D activities. The interviews focused on both human capital evaluationwithin the firm’s UK operations and its global approach to developing seniormanagerial talent.

ShopCo (one respondent)A large UK supermarket chain that has grown to take on a more global presence withoperations in Europe and in Asia. The firm has a UK employee base of 200,000. Theinterview focused on the firm’s approach to evaluating human capital within its UKoperations only.

RetailCo (two respondents)A major UK retailer, RetailCo operates across 300 stores serving 10 million customersper week. The firm operates both in the UK and abroad, employing 70,000 peopleworldwide – 58,000 are employed in the UK. The firm has recently undergone arestructuring 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 firm’s newlyemerging 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 inthe UK.

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CopyCo (two respondents – one director level)Focused in the visual graphics industry, the firm manufactures, services and retailsprinting, 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 operationsonly. The firm employs 4,000 people in the UK and Ireland, with its sales force beingone of its largest employee groups.

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