The Importance of Measuring Human or Knowledge Capital in a Company

The Importance of Measuring Human or Knowledge Capital  in a Company

With the loss of an organization’s ability to walk down the hallway and see all of its employees at work, business owners, including government agencies, are beginning to realize the importance of the contributions their employees make to the success, or failure, of their organization regardless of their physical presence in the workplace. How does one determine the value of what an employee brings to a company in terms of physical or virtual presence? How does one measure an employee’s knowledge, experience, or education, especially when they rarely work at the actual location of an organization?

A few years ago, knowledge capital, also known as Human Capital slowly began its slow emergence into the forefront of humn capital valuation. The wealth of an organization was now being attached to their physical and intellectual capital, according to the International Accounting Standard. The work of the management was to fully utilize or manage those assets in order to increase or maximize their value to the shareholders. The shareholders, on the other hand, judged the management by the value they created as a return on their investment on both financial, physical, and human assets.

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In today’s business and non-business environments, organizations—in order to increase their competitive advantage—must depend not only on their physical and intellectual capital, but also on their knowledge or human capital. However, both the shareholders and management ignored or neglected knowledge or human capital as an asset, regarding it instead as a liability. Instead of management regarding knowledge as an asset, such as any other asset that has value, the management was referring to knowledge capital with such concepts as productivity and efficiency.

It is important for CIOs, CTOs, VPs of IT, and IT professionals to realize that the employee contribution to the advancement of a company does not change just because the workplace they exist in has changed. Instead, business owners now understand that the concept of employee ranking has also changed. It is now almost impossible to totally supervise an employee while he is on the job. If an employee is remotely located, how can the company assess his performance accurately? How does a company judge its assets and liabilities when trying to determine the financial status of the company when no physical assets exist?

By making knowledge capital a measurable object in a business scenario, the company will be allowed to properly measure the utilization of the company workforce and determine their respective values in the organization. Knowledge capital has become the focal point of most modern businesses such as call centers and information technology because such companies rely on the latter in order to remain competitive and achieving company growth targets in both the local and international market.

Any organization that wants to stay competitive in today’s challenging environment must learn to manage knowledge or human capital more effectively or they will not succeed as an organization.  Companies require a restructuring of their existing methods for measuring human knowledge or capital.  The evaluation of employees plays a critical part in the proper assessment of organizational effectiveness in order to insure that the company has quality human based capital in the corporation. The importance of human capital includes improved customer services, faster problem solving, innovation, high productivity, and a competitive advantage that will insure proper pacing of the company growth.  Therefore, a company must have an accurate tool for measuring human capital that does not rely on modified and ineffective procedures based on human resources and finance department programs.

Human capital value, though dynamic in nature, must be estimated because it results in improved customer service, faster problem solving, innovation, high productivity, and a competitive advantage. So the question remains, how does one measure human capital? One cannot estimate this as residual as the value has no impact on financial statements when a position(s) within an organization becomes vacant. One cannot apply a value to tacit knowledge but instead, one must identify the proper knowledge needed to fill the valuable knowledge needed by the company. This makes the knowledge valuable and therefore measurable.

The metaphor of Sveiby’s Pond supports and accurately represents the above idea. To illustrate, the water in Sveiby’s Pond remains at a constant level (representing tacit knowledge), regardless of how much water we draw from it. When we draw water, we do not leave a hole, nor do we see an overflow. Generations continue to draw water but the pond does not dry up. The visible surface of the pond represents the explicit knowledge and the unseen dynamic that is constantly renewing the water beneath the surface represents the tacit knowledge. It may also be further argued that the surface (explicit knowledge) is a very small proportion of the total amount of water, perhaps 1%; this represents the limited value of explicit knowledge. So the conclusion is that all knowledge starts with a tacit process, unlimited in scope and unknown. The source of knowledge is individuals or employees who are being constantly renewed; the challenge in understanding the knowledge is the same as determining the source of water that bubbles into the pond under the surface.

We can measure the water that we draw from the pond according to our needs. So the more water we draw from the pond, the more it fills up; hence, the more value it gains. In a situation where this piece(s) of knowledge is missing, the value of tacit human capital knowledge can be determined by opportunity costs incurred. All companies value “lessons learned” and promote informal communication among employees to encourage the free flow of information or knowledge. Companies are committed to making human capital grow.

Free interaction among employees encourages the flow of information or knowledge. Communication is positively correlated with learning awareness. Company employees feel that sharing ‘lessons learned’ with others really helps. However, there does not seem to be a method in any company by which an employee can note his or her ‘lessons learned.’ This means that those companies without a process in place experience knowledge drained. It is also important to note that employee's satisfaction also comes from employee's development because the companies are invested in them.

There seems to be a positive correlation between horizontal cooperation and performance contingencies. The companies that base their recognition systems on both the individual and the team indicated that the teams work together to achieve a common goal and each team understands ’the others’ problems and difficulties. There is also a positive correlation among the horizontal cooperation, performance contingencies and productivity, and innovation.

Due to the varying ways and often inaccurate measuring techniques of corporations, as devised by their own human resources and financing departments, there is no one accurate way of accurately measuring the effects of knowledge capital on the business. Therefore, this is an opportunity for employers to increase productivity by determining exactly how employees factor into profits, and presents a way for employees to be truly appreciated for the wealth of experience and knowledge that they bring to a job. Instead of using out-dated methods to value current needs, I have proposed an enlightening method that is capable of accurately determining the value of the organizations of today.

I propose that by using the Knowledge Conversion Spiral Process model that I developed, the spiral may be considered  as the knowledge life cycle and is similar to a product or industry life cycle. One may view this in terms of: an equivalency such as: Socialization = Embryo or Entry, Externalization = growth, Combination = Maturity, and Internalization = Decline. Thereby making it easy an organization to identify at what stage they are in knowledge management. In this case, the organization can invest in the right knowledge projects without wasting resources. It is also easy for an organization to make knowledge grow and to know which variable(s) to emphasize.

With the Knowledge Spiral Conversion Concept, it is easy to differentiate between Human Capital and Structured Capital. The value created in each quadrant is equal to:

Socialization = Human Capital (x%=100)

Externalization = Human Capital (x%=?)+Structured Capital (y%=?)

Combination = Structured Capital (y%=100)

Internalization = Human Capital (x%=?)+ Structured Capital (y%=?)

Where x represents the total percentage of the Human Capital in the Externalization and Internalization quadrants and y represents the total percentage of the Structural Capital. Therefore, on may conclude that Intellectual Capital = Human Capital + Structured Capital, ignoring Customer Capital.

Any organization should be in a position to quantify human capital, depending on which quadrant it is in. For instance, if we have four organizations in the same industry, they can have different human capital values, so long as they are not in the same quadrant.

To sum up, finding the value of a company’s human capital is a separate yet valuable part of business growth and management because it allows the company executives to analyze and react to the weak points of the organization that lie within the employee workplace and conditions before it can affect the financial scheme of the corporation.

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About the Author:

Charles Njogu was born in Mukurwe-ini Nyeri, Kenya.. Mr. Njogu relocated to the United States in 2001 in order to complete higher levels of collegiate and master's education. He received a master’s degree in International Finance and Economics at Brandeis University while working towards a Master’s degree of Science in Management and Systems at New York University. Mr. Njogu is also a successfully published author whose most recent published work "Echoes of Heaven: God’s Love IS Better Than Life Itself., is considered one of the best books on the philosophies of religion. The basis for this article is Mr. Njogu's thesis "Managing Knowledge Capital: How Organizations Measure Knowledge Capital and How They Make it Grow. Mr. Njogu may be reached for inquiries as to procuring his services for your company at any of these 2 email addresses:  cnn546@yahoo.com or cnn213@nyu.edu

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