Human Resources or Human Capital?

Managing People as Assets

Andrew Mayo

• Publisher: Routledge
• Year: 2016
• Print ISBN:
  9781138253544
• eBook ISBN:
  9781317119913
• Topic: Business
• Subtopic: Business General
• Index: Business

Are people really an organisation's most important asset? Not necessarily; some may be liabilities - but others are the most important drivers of value that an organisation has. But...who are they? How do you know? How can you maximise the value they have and the value they provide? Finding the answers to questions like these is what human capital management is about. Whether public or private, successful achievement depends first on the capability of people, and secondly on their commitment and productivity. Andrew Mayo's Human Resources or Human Capital? discusses how you can ensure the most effective management of these value creating assets. The first part of the book also shows how to create an integrated framework of measures that can become an integral part of the organisation's performance management - and how companies have done this in practice. Part Two shows how to do this strategically and successfully, and how HR can be a serious and credible 'Business Partner', enabling managers to achieve their goals through their people and adding real value to all the stakeholders of the organisation.

Part 1 People and Value Creation

1 How Organisations Create Value Through People

DOI: 10.4324/9781315587479-1

‘Maximising shareholder value’ as the raison d’être of a commercial organisation slips easily off the tongue, and yet it is an outcome that is the result of a complex process. No outcome is successfully achieved without an understanding of the chain of cause and effect that lies behind it. This chapter leads us through a holistic analysis of how value is created, and uses an approach that is equally valid for both commercial and non-profit organisations. The different kinds of value that are the desired outcomes are discussed, and the ‘value creating process’ that leads to them is introduced. The success of this process depends on two key factors – the value of the resources an organisation has at its disposal, and its efficacy in harnessing them.

1.1 The Creation of Value – What Organisations are For

All organisations only exist to create value, or worthwhile benefits, for their stakeholders. The concept of ‘value’ is not as simple as being purely economic. Just as we all mourn the loss of sentimental items in a burglary much more than replaceable, more expensive goods, so much of the value created by organisations is qualitative. The stakeholder map for many, especially in the public sector, is complex. Usually there is one prime stakeholder group, but the satisfaction of others is essential to the long-term interest of that group. In the case of purely commercial organisations, the ultimate stakeholders are the owners or shareholders, and the prime created value is financial. The pursuit of ‘shareholder value’ has been the mantra of American capitalism – albeit under question and scrutiny more recently – with or without the word ‘sustainable’ added to it. Success, however, is dependent on loyal, profitable customers and loyal, productive employees.

Not-for-profit organisations create different kinds of value/benefits for their stakeholders. A charity primarily serves its beneficiaries – providing value in the form of healthcare, education, economic support and so on. Government organisations are the most complex of all. In a democracy they primarily exist to serve the public (though this is not always obvious); in a totalitarian state they serve the interests of the rulers.

There is both a tension and interdependency between stakeholders. What is in the interest of one may not be seen as beneficial to the other – for example, providing excellent customer service costs money and this comes out of potential profits. On the other hand – as my one time business partner said to me – ‘Remember, my friend, if you don’t have a customer you don’t have a business’. Without customers wanting to buy, there won’t be any profits. In more socially minded countries, the interest of the community in having local jobs and the close connections between politicians and business, may lead to decisions that are not ideal for shareholders. I recall an acquisition in Germany of a company called Mannesmann-Kienzle that one of my employers, ICL Computers, was planning back in the 1990s. Our financial analysis indicated we would need to close a rural factory. As soon as the Mannesmann group heard of this, they secretly did another deal with Digital Equipment who promised no closure. That company bitterly regretted the acquisition in years to come, and itself was soon taken over by Compaq.

Some stakeholders have more power than others. Institutional shareholders have increasing power over commercial companies, as a counter to the excesses of managers. Monopolies have power over their customers who have no choice. When excessive power exists, it will (normally) be used to the disadvantage of other stakeholders and a disproportionate amount of value extracted. The hierarchy of power of stakeholders, and the dependencies between them, needs to be well understood. A common example of how this can be misunderstood is when in the case of an acquisition, in the interest of ‘synergy’ (that is, profits and perceived shareholder value), sales resource is ‘rationalised’, and suddenly the company finds the customer base (for which they paid a premium) is falling away. Key customer relationships are destroyed. Exit revenues, and as soon as this is realised in the market, down goes the share price and up go the statistics of the percentage of mergers and acquisitions which lose shareholder value.

The ‘Exchange of Value'

In a steady state of interdependency between an organisation and a stakeholder group, there is equilibrium between what a stakeholder offers an organisation and what it receives. Illustrated in Figure 1.2, the ‘Stakeholder equilibrium’ is about the exchange of value that takes place between an organisation and its stakeholders. Where the expectation of value delivered on either side is perceived as inadequate, the party will seek to redress the balance, and if unsuccessful will think about working with an alternative. The value that is exchanged may be either financial or non-financial or a combination of both. The principle works provided the stakeholder has choice – in the case of beneficiaries from a charity, or the public dealing with a government department, this may not be so. Choice, however, is a fundamental platform of western capitalism, and over recent years it has extended into many public services also.

Figure 1.2 Stakeholder equilibrium

Not everyone exercises their choice, even under provocation. Customers of banks are traditionally reluctant to change even though they may be frequently angry with their bank of many years. Employees may put up with a lot because of resistance to change or a lack of confidence in their ability to get another job. I think of a certain airport car park which simultaneously put the daily price up and cut the service from six buses an hour to four. That’s a good recipe to send your customers looking for a better choice. But sadly in this airport, choices are limited. Organisations themselves put up with poor performance of employees due to inertia in tackling the issues; they continue with loss-making customers because they cannot contemplate telling anyone they do not want their custom. The ‘healthy value creating’ organisation, however, encourages this equilibrium to be alive and sustained by dialogue. For good reason – this is an equilibrium that is ‘upwardly mobile’ as each party seeks more value over time – to deliver the same, year in and year out, is inconsistent with the modern concept of progress. We are all on an escalator of ever improving performance. Most stakeholders expect more as time progresses from their relationship with an organisation. As the value given on one side increases, so the expectation of value received increases too.

The way this works can be illustrated as follows; the organisation offers new services to customers, not directly for extra revenues, but to retain loyalty – and is rewarded by a higher spend. However, the level of expectations has been reset on both sides; it is hard to go back, so the overall level of value exchanged has increased. Or an employee provides excellent performance and is promoted; what is expected of the employee in the new position is increased and naturally a commensurate reward is expected in return. The value exchange ‘equilibrium’ for that employee has increased to a new level.

When an organisation is bought or sold the price is typically well in excess of the balance sheet net assets – the ‘tangible assets’. A large premium is paid for the ‘intangible assets’ which represent the underlying strength of the organisation and its future. Combining Figures 1.1 and 1.2 expresses this in another way – it could be said that the total value of the organisation is, at any given time, the sum of all these ‘stakeholder equilibria’ v...

Table of contents

• Cover Page
• Half Title Page
• Title Page
• Copyright Page
• Contents
• List of Figures
• List of Tables
• Acknowledgements
• Introduction The Essential Need for Human Capital Management
• Part 1 People and Value Creation
• Part 2 Human Resources Professionals in Partnership with the Business
• Appendix: Examples of Non-financial Added Value to Stakeholders
• Index