People are often spoken of as assets but are generally treated as costs, because we have no credible system of valuing them.
The problem is that in today’s knowledge-based organizations value is driven more by people than by any other factor.
There are five main approaches to building a measurement system for people, or human capital.
The attempt to value people financially has not been successful; however, an index of value factors provides a necessary balance with seeing people as costs.
Current best practice looks at connecting the value of people in terms of their characteristics (and the value they produce in both financial and nonfinancial terms) via measures of their engagement and motivation.
Our people are our most important asset. This frequent statement from chief executives is often received with justifiable cynicism. The problem is that people within an organization do not always experience decisions and policies in their everyday work life that support such a belief. The accountant who once described people to me (admittedly with a smile) as “costs walking about on legs” is often closer to the reality of organizational experience. The very term “human resources” reinforces this concept of people. Organizations that are driven by an often understandable drive for increased efficiency and minimized costs see “headcount” as the easy target.
There are many reasons for this. One is the domination of management by current targets for bottom line results—often resulting in a very short-term mindset. Such single-mindedness is illogical because it is out of balance; the desired final outcomes are driven by satisfying other demands that generally get much less attention. A powerful system of financial processes and targets dominates the life of most managers. Measures of intangibles, such as employees’ capabilities or customers’ loyalty may exist, but they are frequently excluded from appearing in the monitoring and control systems in any serious way.
Another problem is that people do not fit the strict financial definition of an asset. They cannot be transacted at will, their contribution is individually distinctive and variable (and subject to motivation and environment), and they cannot easily be valued according to traditional financial principles. However if we view “assets” as value-creating entities, and in an era where knowledge and its application is the key competitive advantage, we will arrive inevitably at the foundational role people play. Organizations do employ some just for “maintenance,” but the vast majority are value adding. Some indeed should be seen as investments rather than costs—but management accounting rarely recognizes this.
Perhaps the greatest problem is the lack of credible measures that relate to people and their value. We know in detail what they cost; we have no balancing quantity for their value. We feel it when it has been lost, but often too late.
- Page 1 of 3
- Next section The Value of People