Human Capital: The Benefits of Investing Wisely

Business textbooks teach that there are four types of capital: working, debt, equity and trading capital. All, of course, are essential levers for growth. But nothing is more important to your company than your people, without whom there would be no company at all. Human capital is akin to a company’s intellectual wealth, and it lies at the heart of every organization’s success.

What is human capital?

The phrase “human capital” may seem a little, well, inhumane. That said, it’s useful for discussing investments in an organization’s future. Investopedia’s human capital definition centers on the economic value of skills and experience. It encompasses education, training, productivity, emotional intelligence, political savvy and mental agility. Companies can evaluate it on an individual basis or for projects that need complementary skills and knowledge. They can also use it to identify needs, fill gaps and plan for the future of the organization as a whole.

Human capital theory: building “wealth” for the future

Human capital was popularized in the mid-1960s as a socioeconomic theory. It emphasizes the reciprocal nature of the employee/employer relationship. The theory posits that developing people pays off in greater productivity and performance. Developed and managed well, human capital “wealth” accumulates, and the company prospers. Underinvesting can cause it to depreciate and companies to fail. They may fall behind as technology advances. They may end up short of capacity and know-how as supply chains shift. They may find themselves at the wrong end of history when new government regulations render thriving industries obsolete. Investment in it is the bridge to the future. The World Bank Human Capital Index even measures economic potential of countries.

Management: the administrative and the strategic

Investing wisely requires a clear vision for the company’s future. The goal is to maximize people’s value to the business. Gartner defines human capital management as “a set of practices related to people resource management” specific to “workforce acquisition, workforce management and workforce optimization.” This includes human resource service centers, payroll, benefits and other administrative tasks. It also encompasses recruiting, workforce planning, compensation analysis, talent management and more.

Measuring investment in human capital

Companies’ human capital management practices vary in maturity. Understanding where people and profitable growth intersect is complex. The return on investment (ROI) isn’t always clear. As we noted earlier, some aspects are easy to measure, such as education. Others aren’t as tangible, such as political savvy. Plus, people are already compensated for their value with pay and benefits.

Well-defined goals and milestones make measuring the ROI in human capital doable. To the extent possible, be careful to draw a straight line between cause and effect. Define a baseline measurement as your starting point. Experiment against a control to illuminate what’s working and what’s not. Readjust as necessary.

For example, a company may wish to determine whether hiring people with advanced degrees is more effective than training them on the job. The former holds more up-front costs. The latter requires investment in education, skills training, mentoring and so on. It is fairly straightforward to assign a dollar value to each scenario and do the math.

If the company’s goal is to prepare leaders for the future, intangible aspects of human capital may come to the fore. Human capital investments include mentorship programs, professional coaching and stretch assignments. Success in this scenario can be assessed by the quantity of leaders developed internally, as well as their ability to meet the performance metrics established for their roles.

How to scale human capital investments cost-effectively

When it comes to human capital management, one hurdle companies must overcome is scalability. There is no doubt that people value face-to-face interactions. But that’s often not workable when you need to reach a dispersed workforce with diverse needs. Technology has opened the door to new ways for people to access the development they need. In some cases, they forge professional relationships with the experts giving them guidance.

Formal education and training programs that advance job-related knowledge (“hard skills”) abound. There are many online, on-demand options to choose from. When it comes to “soft skills” effective options can be harder to come by. Soft skills make it easier for people to connect, work in teams, negotiate and innovate. They include personal resilience and problem-solving skills. They also include the ability to mentor, meet deadlines and deal effectively with clients and coworkers, among others.

Digital coaching makes professional development available to all

According to our surveys, 77% of top managers say that soft skills are their biggest weakness. Professional digital coaching may be the answer. With an 8X return on investment (ROI), digital coaching can be a highly effective tool. Often, it’s more personal than people envision. Employees get access to regular, individualized coaching sessions with top business coaches. They can enhance those sessions with micro-lessons that reinforce the discussion. For example, BNP Parabas implemented a personalized digital coaching program to shape the behaviors and competencies of its next generation of leaders. 

Companies don’t have to limit professional coaching to leadership development. Digital coaching democratizes access to professional development at all levels of the organization. At Coach Hub, we’ve found that a strong coaching culture can increase productivity 86% and boost employee retention 32%. The 2020 Gartner Hype Cycle for Human Capital Management Technology recognized CoachHub as a leader in helping companies scale their mentoring and coaching programs across their entire workforce. “For areas such as middle management, it can soon become a standard expectation from employees,” noted John Kostoulas, Senior Director Analyst at Gartner.

Explore our site to learn more about how digital coaching helps companies manage their human capital investments.