Wednesday, April 23, 2008

Human Capital

An article I recently read in Fortune magazine discussed the global competition for human capital. In essence, economic growth and success will be mostly driven by an economy's commitment to build and retain its human capital. From the perspective of the 6,000,000 businesses in this country with fewer than 500 employees (which happen to employ the majority of America's human capital), here is an idea of what this means.

The first or second largest expense category in almost every business is LABOR. Of all of the assets used and things input into a business, studies show that 60-75% of a company's general and administrative costs, or overhead, are consumed by labor. By adding all of this up, this means that the largest expense in almost every business is people.

Now, imagine if your labor, or human capital, could be just 5% more productive every day. Obviously, this would have an enormously positive impact on your bottom-line. So, the question of the day is: How can you improve your human capital?

On a global level, things like education and opportunity are major parts of how large countries are trying to improve their human capital to improve their economies. These strategies take a long time to implement, and even longer to measure the results. I have seen a lot of business owners think that by giving a raise or a bonus or even a stake in the company their human capital would become more productive. Generally, this does not work. Those things become entitlements and do not create sustained productivity, unfortunately. The best long-term strategy to maximize a firm's human capital is a holistic human resources strategy that has a healthy budget for training.

Just giving a training budget could be a mistake unless specific results are measured. I recently heard an employee say that the company's training was horribly boring and as soon as they went to a training class they could not wait for it to be over. Just as with any other investment you make in your business, you should measure the return on your training dollars. Sometimes this is a little hard to do, but it can be done. Part of this budget could be used for tuition reimbursement or on other incentives that encourage the staff to improve themselves.

In total, many are concerned with the United States' human capital strategy because, according to some standards, the US is falling behind relative to other large countries in terms of the education of its people. Without delving into the political realm of this subject, as business owners we can possibly learn something from this. The future of the US and the global economy rests squarely upon our human capital. The future of our businesses rests squarely on your human capital. Your ability to attract it, improve it, and retain it will have everything to do with your long-term growth and success.