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Human Capital vs. Human Resources – A word and a world of difference


Often when I introduce my company, I’ve been asked, “Do you mean human resources?”

Actually. Not. Fundamentally, there is a philosophical difference in the 2 concepts, thus a huge difference in the type of services and solutions. Without getting too technical, conceptually, the difference lies in the word “capital” and “resources”. While we may think it is just semantics, after all, a rose by any other name smell as sweet, we forget the psychological impact of what a good name conjures. And in this case, the association and attitude can be very different by just 1 word.

Here are some fundamental differences.

Capital can be grown, resources deplete
An organization is made up of a workforce and the resulting output with or without the help of machines. When this workforce is treated like a form a resource, the organization finds the best way to exploit it and use it for its purposes. These resources are used and depleted so more are acquired and use. And since it is a form of resource, when they are no longer useful, the remuneration stops and they are replaced.

When a workforce is looked upon as a form of capital the company is acquired, the incentive is the get the best return from investment. An organization will regard a capital as down payment to work towards future returns. A capital also grows over time with productive use. In human capital, competences, knowledge and creativity grow over time and multiply in value.

Capital is invested, resources are maintained
When an organization looked upon the workforce as a form of resource or worse a “seat warmer” and other derogatory terms such as “bodies”, then the attitude is just the function they provide. Like any machines we buy for a purpose, it is maintained at best for the purpose they serve.

When a workforce is treated as a form of capital, then people are looked upon as an acquisition for the value it can bring if properly invested. Each person’s value is based on the potential of the investment that requires sound judgment on placement and development potential. If we extract the most from the workforce, the return is no longer linear such as machines. In this case, output when well invested can bring forth multiple times the initial capital purchase.

Different psychology, Different policies
With the fundamental departure on psychology, it will also be reflected in the policies. While there are many ways to breakdown human resource management, broadly, it consists of 5 key areas: Recruitment & Retention, Compensation & Benefits, Training & Development, Sustainability & Mobility and Employee Relationship & Compliance.

From a resource point of view, the key focus is making sure employees are paid and employment laws are complied including health and safety and relationships with unions. Often it is also the 2 key areas retained by a company in the HR department while all other areas suffer due to cost cutting measures or lack of vision. After all, if there are lack of jobs and plenty of candidates, when a “resource” is unhappy or unsuitable, they can be replaced by another. HR departments tend to degenerate to payroll administration and point of contact for labour unions and compliance.

Whilst the above is an extreme view of situation, it is not uncommon where HR is dysfunctional. If we insist that workforce is a form of capital, then the key focus of management may well be very different.

The relevance of high potential?
When the workforce is considered a form of capital, then the view is everyone has potential for a return. But the level of investment will depend on the level of return and impact to organization. Often this can be governed by the role and function in the organization.

The main pitfall of a high potential program is the tendency for an organization to focus large amounts of energy and efforts in a small group of identified talents while ignoring the rest. It’s like betting on a racehorse, you win big if the horse is the first to cross the line, if it comes even a second behind, the investment is lost. That happens when high potential leaves before realizing their potential or fails in their development.

It is much more logical and motivational to consider that everyone has access to development opportunities relevant to their role and earned based on performance (the return).

The idea of “right fit” in recruitment
If we think about work as a production line, with an empty seat, the best thing is to find someone who already knows the work to fill the seat. With lower propensity to risk, most companies have behaved as such in hiring. The person they seek is someone who fits perfectly and thus presents no obvious risk in bad hiring. It also means paying the same or higher salary to attract someone to leave the existing position to fill the new role.

From a long term planning perspective when a resource is looked upon as a form of capital, then recruitment criteria will change. The focus will be the potential of the candidate and the return he or she will bring. The “right fit” is someone who will grow in the role.

The outcome is greater incentive for someone to move. The compensation will be lower than trying to attract someone who already fulfills the same role somewhere. And in effect, a cheaper option than a seemingly low risk hire. The truth is performance on the job and the future is just as unpredictable in either cases since no 2 companies are exactly the same.

The true purpose of human resource management?
Whilst we cannot do away with compensation & benefits or employee relationship & compliance, it cannot be the only focus. In effect, these areas are probably better suited in finance and legal departments.

Then people management can focus on 1 or 2 key areas while engaging suitable partners and supplies to complement the others. As businesses change, the human capital in the company needs correspond to these changes.

Human resource management will then act as the protector of the human capital and investments of the company. Their role will include finding and maintaining the right vendors to acquire, manage and develop the human capital in the company.

Should we start changing all HR titles to HC?
Human resources is still the global function that looks after the well being of the workforce in the organization. The dysfunction today is due to a narrow vision of the workforce as a form of resource. For a forward moving company, treating their employees as a form of capital changes the resulting HR policies and attitudes both at management and HR level. That is an important shift in mindset.

To do this, many companies have started using terminologies such as “People Officer”, “Talent Management” etc. Regardless, a complete view of HR is important and neither can we ignore compensation, legal and compliance. But HR can do better to focus on the other aspects either by in-house capabilities or external service providers. And companies can benefit from a workforce that is motivated and energized.

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