An Investment Perspective of Human Resources Management

The Strategic View of Human Resources Employees are human assets that increase in value to the organization and the marketplace when investments of appropriate policies and programs are applied. Effective organizations recognize that their employees do have value, much as same as the organization’s physical and capital assets have value. Employees are a valuable source of sustainable competitive advantage.

Sources of Employee Value Technical Knowledge Markets, Processes, Customers, Environment Ability to Learn and Grow Openness to new ideas Acquisition of knowledge and skills Decision Making Capabilities Motivation Commitment Teamwork Interpersonal skills, Leadership ability

Adopting an Investment Perspective Human assets are core competencies and have become a source of competitive advantage HCL Technologies MANTRA: “EMPLOYEES FIRST CUSTOMERS SECOND”. - Vineet Nayar, CEO

Adopting an Investment Perspective (Cont.) Required skills become less manual, more knowledge-based Appropriate, integrated, strategy-consistent approach is needed

A Dilemma Failure to invest in employees causes Inefficiency Weakening of organization’s competitive position Human assets are risky investment Require extra effort to ensure that they are not lost

Retention Strategies Employee growth and training and development Pay for performance programs

Hygiene factors (extrinsic factors) Motivators (intrinsic factors) Better pay and working condition Recognition, appreciation and providing challenging work These factors just keep the employees from becoming dissatisfied The best way to motivate a person is to provide with motivator factors Adding more of these factors will not generate extra motivation for the employees Adding more of these factors will enrich the job and get the employees further motivated

Valuation of Asset and Types of Organizational Assets/Capital

Research Findings HR practices directly related to profitability & market value Primary reason for profitability: Effective management of human capital Integrated management of human capital can result in 47% increase in market value Top 10% of organizations studied experienced 391% return on investment in management of human capital

Exhibit 1-3 HR Value Chain

HR Metrics Are Complex 90% of Fortune 500 organizations evaluate HR operations on basis of three metrics: Employee retention and turnover Corporate morale Employee satisfaction These metrics do not necessarily illustrate how HR impacts Profits Shareholder value

Mercer Model of Measuring HR Impact Identify a problem HR can impact Calculate actual cost of the problem Choose HR solution that addresses the problem Calculate the the cost of solution Calculate value of improvement 6 to 24 months after implementation Calculate specific return on investment ROI in human assets often not realized until some time in future

Exhibit 1-4 Factors Influencing Investment Orientation

Investment Orientation Factors Senior Management Values & Actions Managers need “investment orientation” toward people Attitude Toward Risk Investment in human resources inherently riskier Human assets never absolutely “owned” Nature of Skills Needed by Employees The more marketable employee skills, the riskier the firm’s investment in skill development

Investment Orientation Factors Utilitarian (“Bottom Line”) Mentality Attempt made to quantify employee worth through cost-benefit analysis “Soft” benefits of HR programs difficult to objectively quantify Availability of Outsourcing Given availability of cost-effective outsourcing, investments in HR should produce highest returns & sustainable competitive advantages.

Investment Orientation Factors: Models of Strategy Industrial Organization (O/I) Model External environment is primary determinant of organizational strategy rather than internal decisions of managers Environment presents threats & opportunities All competing organizations control or have equal access to resources Resources are highly mobile between firms Organizational success is achieved by Offering goods & services at lower costs than competitors Differentiating products to bring premium prices

Investment Orientation Factors: Models of Strategy Resource-Based View (RBV) An organization’s resources & capabilities, not external environmental conditions, should be basis for strategic decisions Competitive advantage is gained through acquisition & value of organizational resources Organizations can identify, locate & acquire key valuable resources Resources are not highly mobile across organizations & once acquired are retained Valuable resources are costly to imitate & non-substitutable

I am convinced that nothing we do is more important than hiring and developing people. At the end of the day, we bet on people, not on strategies.” – Lawrence Bossidy

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