Human capital is one of those words that are thrown around in business classes across the world. Despite this, people seem to have varying understandings of the term and what it really covers.
In this blogpost, we will not only attempt to specify what human capital is and is not, we will also tell you why it is an incredibly important term for you to know. Finally, we have included a simple guide to help you determine and utilise the resources already existing in your organisation.
Human capital really has three definitions, firm-specific, industry-specific and individual-specific. Firm-specific human capital concerns skills and knowledge that are only valuable for a specific company. Slightly similar is industry-specific capital, which covers knowledge obtained through working in a specific industry. Lastly, we have individual-specific human capital, which as you can probably guess, is a knowledge that is not constricted to a specific company or industry. In general, when people discuss human capital and its importance in modern businesses, they are referring to individual-specific human capital, as this covers academic education, entrepreneurial experience, and age, among other things. To simplify human capital, it is the knowledge a specific person and/or a group of people have, that can be helpful to your business in some way.
But how and why can human capital be helpful to my business, you might ask. The answer to that question is actually two-fold. Firstly, a business is only as good as it’s people. The more knowledge and experience employees have the more successful a business. This assumption has scientific back-up, with researchers finding a positive correlation between human capital and the number of patents filed, expenditures in R&D, and high-technology export.
Secondly, human capital is a renewable resource. This makes it a great source for continuous innovation and creativity.
As employees and their knowledge is the most important asset for any organization, being able to nurture and use the already existing resources in your company should be one of your highest priorities. Discussions about how to use human capital usually focus on how to keep employees happy. While this is important, it does not help you when you want to use the human capital you already have.
Collect: Before you can use human capital, you have to know what you have. What skills do your employees already have? What teams you have, and what are their specific business skills? A way to get this information is to outline the skills your employees already possess. This will not only give you an idea of where they are strong but also where they could use some guidance and help. This should be done both on an individual and team basis.
Cultivate: Now that you know what areas you employees are succeeding and lacking in, time to cultivate those skills. This can include courses and other knowledge building exercises. Cultivation also includes noting and appreciating the skills your employees already have.
Incorporate: A risk with human capital is the employee-ownership of it. The fact that employees can leave with the knowledge accumulated during their tenure, makes many managers hesitant to invest too much time and financial resources. A way to prevent too much loss of resources, should an employee leave, is to incorporate the skills into your business strategy. A way to do this is to incorporate your human capital goals with your business strategy. Thereby, even if an extremely talented employee leaves, you have a system in place to cultivate the necessary resources in a new employee.
Human capital is one of those basic business terms, that are thrown around, but never described in depth. To summarize, human capital encapsulates all the skills an employee has, that has the possibility to help a company. Moreover, human capital is a renewable resource, that will pay back whatever you put into it.
Now that you’re here, you might also wanna check out our post on how to stop your innovation from failing.
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