Human capital management in rwanda: challenges and prospects for microfinance institutions

2.2.3. Human capital Management

Let us first look at the definition of human resources management. According to Wikipedia, human resource management is a strategic and coherent approach to the management of the most valuable resources of the organizations: people working there. Or, simply put, it means employing people, developing their capacities, utilizing, maintaining and compensating their services in tune with the job and organizational requirement ( http://en.wikipedia.org/wiki/Human_resources_management).

Human capital management is the term which is used to describe an organization's multi-disciplined approach to optimizing the capabilities and performance of its management and employees ( www.ishcm.com).

How do these two definitions connect? Adam Smith outlined different resources, human capital inclusive. It is against this backdrop that emphasis was to be put on human resources' attracting, developing, and retaining ( http://en.wikipedia.org/wiki/Human_capital).

More to that, the term human capital is recognition that people in organizations and businesses are important and essential assets who contribute to development and growth, in a similar way as physical assets such as machines and money. Organizations cannot perform without the right attitudes, skills and abilities of people. Any expenditure in training, development, health and

support is an investment, not just an expense ( http://derekstockley.com.au/newsletters-05/018- human-capital.html).

Drawing from discussions and the definition above, we can retain the fact that human capital has to do with knowledge, skills and abilities that make it possible for people to do their jobs. But let us look at the theories below.

2.2.3.1. Why Human capital management?

Businesses are separate legal entities. Despite this fact, however, there is another strong fact. Lack of right people means death of business. Competition cannot be dealt with without people; nothing else can be a long term source of competitive advantage without people. Leaders must recognize that people make a difference. Without them, companies cannot adapt to new changes in the business environment ( http://derekstockley.com.au/newsletters-05/018-humancapital.html).

Good human capital management practices should help organizations deal with human capital management challenges. Which challenges are these? Profiles International highlights major human capital management challenges in terms of massive employee turnover, having the wrong people in the wrong offices, high absenteeism, dishonesty among employees, inadequate team development, poor workforce development, substandard productivity, poor responses to stress and conflict, poor employee engagement, poor employee motivation, etc ( http://www.profilesinternational.com/syc_intro.aspx).

This is unfortunately a reality in almost all the organizations. Almost daily, business owners, executives, managers, and professionals are challenged by frustrating employee related challenges. Human resource management challenges cost company time, money, resources, lost opportunities, and reduced productivity, to name just a few ( http://www.profilesinternational.com/syc_intro.aspx).

So, there are many authorities whose contributions make good human resources management a winning case. Among others, Jim Collins (2001) came up with a rather challenging aspect about good -to - great companies. This was meant to see how proper human resources management practices guide companies in their traverse from good to great. It was found that celebrity leaders who ride in from outside are negatively correlated with taking companies from good to great. Ten of eleven good to great CEOs came from inside the company.

In the same light, according to Roos et al., 1997 (in Anastasios E. Politis, 2004), in modern societies, the hidden or unseen values of knowledge and competence are often given a priority. In this respect, persons, carriers of these «hidden» values, are becoming more and more important. It is, therefore, considered important to explore the way this happens today, by explaining individuals and their development.

Accountants do a good job. It is however some five decades down the road that they realized that accounting should focus its primary attention on supporting the decisions of managers and external stakeholders. They have been busy trying to serve as business stewards in terms of provision of mostly factual information, to those with a financial interest in a business, about its past transactions. Cost of labor was treated as expense and little attention was accorded to intangible assets like rent and human capital. The relatively new management accounting did not improve the situation ( http://www.ukessays.com/essays/accounting/accounting-humancapital.php ).

They have not yet done much, unfortunately. One of professional developments in corporate affairs is the three tier model of corporate transparency put in place by Price Waterhouse Coopers, 2003). It can be interpreted in a way that challenges an «incorporate picture of the company» as given by professional accountants. Following the Generally Accepted Accounting Principles (GAAP), they publish the health of the organization. This information may be lacking however because they speak a little on industry specific standards and company specific information as they do not include the value of the most valuable resources that run the organization, i.e, human resources. ( http://www.ukessays.com/essays/accounting/accountinghuman-capital.php).

In actual sense, however, once there is recognition that human capital represents an asset, it implies that necessary strategies will be put in place to milk the best out of it. Again, it is worth noting however that effort put in place to show link of human capital and business value has been challenged, the debate has not yet ended. The reality is however that «good» HRM practice will improve organizational performance, but this has been difficult to prove conclusively, given the many confounding variables. It is even possible to suspect a reverse causation - profitable companies can afford to treat their employees well ( http://www.ukessays.com/essays/accounting/accounting-human-capital.php).

Many benefits can be hypothesized; some of these are being as follows: http://www.ukessays.com/essays/accounting/accounting-human-capital.php).

a) Measurement of business performance, based on all the assets employed, rather than just those that can be measured readily in money terms;

b) Allocation of personnel on the basis of most valuable to most critical tasks;

c) Comparison of the use of labor as against the use of other resources, such as machinery;

d) Consideration of the effectiveness of training and development expenditure;

e) Business valuation for take-over and merger purposes;

f) The provision of a basis for more appropriate calculation of wages and salaries;

g) The setting of human resources policies.

Thanks to Zivka et al, one can measure which impact the following four variables have on business value: ( www.zivkaprzulj.com/.../0/.../Challenging_Human_Capital_Measurement.doc).

a) High Performance Working System (HPWS) which is based on policies, processes and practices with high performance. This concerns selective employment, high salaries, benefit packages, shareholding, information exchange, development and training focus, participation and self-sufficiency, job protection, etc.

b) HR system linking with initiators for strategy implementation.

c) HR efficiency that indicates differentiation between HR costs and investments required for development of strategic HR within organization (e.g. training).

d) HR deliverables over which HR system is generating values within organization. These are characterized as organizational capacities relevant for strategy implementation and combine individual competencies with organizational systems and add value within organizational value chain. Becker and allies are underlining possibility for hypothetical strategic influence of HR deliverables and advice managers to secure its real influence to organizational performance.

Can we have some measurement techniques? Some warm ups before entering this endless debate are suggested, thanks to the UK Essays, ( http://www.ukessays.com/essays/accounting/accounting-human-capital.php).

Cost benefit analysis has been so cherished in business decision making. Whether one wants to build a canteen, buy a machine, this should be thought of in terms of its ultimate impact on business. Money as a means for exchange, however, may not suffice, thus some difficulties in measurement. Apart, perhaps, from footballers, human beings are fortunately no longer (legally) bought and sold, and thus the last known exchange value cannot be used as an estimate of present value. ( http://www.ukessays.com/essays/accounting/accounting-human-capital.php).

Do employees belong to employers? This question of ownership is of great importance. For the accountants' definition of an asset assumes some sort of rights over it by the recipient of the future benefit. Employees will work for the employer but will ultimately leave. Human resources are by any standards, assets (loyalty, motivation, tacit and/or specialist knowledge, and the «added value»). It will thus be inevitable to see that any measurement model will inevitably be problematical and subjective. ( http://www.ukessays.com/essays/accounting/accounting-humancapital.php).

Human capital management in Rwanda: Challenges and prospects for Microfinance Institutions 2.2.3.2. How to measure human capital?

Difficulties in human capital measurements have been the right card for those who champion the case against the «human capital theory» ( http://www.ukessays.com/essays/accounting/accounting-human-capital.php).

Zivka et al., believe that that grading performances of individual employees represents the nucleus of human capital measurement. Strengths and weaknesses of human capital should be put at surface by such techniques. Looking at other HR practices like results, knowledge, behavior, relations, etc. is highly informative. Indeed, assessment of employee's performance is the key process for decision making in relation to employees development, training, awarding, firing, etc. and in this way establish criteria that are important for organizational success. There is no human capital mindset in an organization that does not measure employees' performance. They, indeed have difficulties in having a job done. ( www.zivkaprzulj.com/.../0/.../Challenging_Human_Capital_Measurement.doc).

It is noteworthy that individual employee assessment is of great relevance. It is not only less costly but also reliable, consistent and objective, although not necessarily the most useful. ( http://www.ukessays.com/essays/accounting/accounting-human-capital.php).

Flamholz (1973) contribution was that three variables be analyzed. These are productivity, transferability, and promotability (these could perhaps be seen as surrogate ways of measuring skills and knowledge). His argument is that the value of an individual will be linked to the likelihood that that individual will stay with the organization (loyalty, perhaps measured by job satisfaction). Like any other, this is difficult to measure because of its qualitative measures. ( http://www.ukessays.com/essays/accounting/accounting-human-capital.php).

It may be tried to construct profiles of employees, assessed on key variables, such as loyalty, trust, motivation, effectiveness, experience, etc. Cataloguing these, individually, and in total, may give a useful insight into the development of the organization. It could be, for example, that a short-term increase in profit has been brought about only at the expense of an overall decline in motivation ( http://www.ukessays.com/essays/accounting/accounting-human-capital.php).

In the same regard, fortunately, Ross Blake suggests¹ a list of items to consider was suggested as exit costs, recruiting, interviewing, hiring, orientation, training, compensation & benefits while training, lost productivity, customer dissatisfaction, reduced or lost business, administrative costs, lost expertise and the cost of employing temporary workers. This list, certainly gives a case to what it means to loose a performing employee ( http://www.webpronews.com/expertarticles/2006/07/24/employee-retention-what-

employee-turnover-really-costs-your-company).

Recognizing the difficulties of measurement through the behavioral variables proposed, Flamholz (1973) and a number of others have suggested approaching the measurement problem by applying existing techniques of economics and accounting. Accenture suggests that there be meaningful measures from an operational perspective and that measures need to be useful from an investment perspective. What an employee means to organizations should be seen in terms of their contribution to the overall company achievement ( http://www.infohrm.com/documents/articles/The_New_Frontier_of_Human_Capital_Measurem ent_(2007).pdf).

Superior performance requires managing human capital for today and for tomorrow--and to manage it in a fashion that is aligned with an organization's strategic objectives. http://www.infohrm.com/documents/articles/The_New_Frontier_of_Human_Capital_Measurem ent_(2007).pdf.

According to Mansor, Devadason and Said (2006), the importance of investing in human capital development can be justified as follows:

a) It generates differences to labor productivity and technological progress in the economy;

b) Improvements in the level of education is a major contributor to economic growth;

¹ Ross Blake of Retention Associates helps organizations improve employee retention and reduce turnover costs and problems

c) Impressive growth in Newly Industrialized countries such as Hong Kong, Korea, Taiwan and Singapore was due to the dramatic growth and transformation in education;

d) Appropriate education and trainings result from high investments in human capital. These lead to generation of higher level of skills and different kinds of skills which, in turn improve labor competitiveness in the economy.

Peter Lacy, James Arnott, and Eric Lowitt, to supplement this, they argue that companies are finding it increasingly difficult to grow; investing in talent to meet the sustainability imperative may be the most potent way to achieve high performance.

They came up with the following framework:

Figure 2.2: Five levers of human capital development

Source: Peter Lacy, James Arnott, Eric Lowitt, 2009

Somboon Kulvisaechana, (2006) suggests that organizations' market values are depending more and more on intangibles, particularly human resources. However, little work has been done on what constitutes a framework of human capital development, particularly in view of investigating the gap between rhetoric (what is espoused) and reality (what is enacted).

Recent surveys reveal that although business executives firmly believe that people are the most important asset, most executives are at a loss to prove that investments in people lead to improved business results. Common metrics like economic value added (EVA^TM) and return on investment (ROI) shed little light on how an organization's human assets are performing. They say even less about whether an organization's people development processes are attuned to its business challenges. This tends to provoke thumbs up for those who do not value human capital. ( http://www.accenture.com/Global/Research_and_Insights/Institute_For_High_Performance_Bu siness/).

It is still difficult to link investment in human resources with the company outcome. We know, for example, that companies that invest in "strategic human resource (HR) management" seem to achieve better financial performance than those that use approaches that are more traditional. Unfortunately, correlation is not the same as causation. That is, it is still not clear whether strategic HR management drives superior financial performance or whether superior financial performance make it possible to take a more strategic approach to HR management The same drawback appears in studies of employee satisfaction. ( http://www.accenture.com/Global/Research_and_Insights/Institute_For_High_Performance_Bu siness/).

The challenge of effectively linking human capital development to financial performance is three-fold: (1) measures must capture direct and indirect effects; (2) the measurement process must be simple, repeatable and lead to actionable conclusions; and (3) results need to be compiled so that plans and forecasts can be built from them ( http://www.accenture.com/Global/Research_and_Insights/Institute_For_High_Performance_Bu siness/).

Human capital management in Rwanda: Challenges and prospects for Microfinance Institutions Figure 2.3. Human Capital measurement

Source: http://www.infohrm.com/documents/articles/The New Frontier of Human Capital Measurement (2007).pdf.

The Accenture Human Capital Development Framework (HCDF) uses four distinct measurement tiers in arriving at an assessment of an organization's human capital practices. These tiers reflect the key variables that influence the relationship between a company's human capital assets and its financial performance http://www.infohrm.com/documents/articles/The_New_Frontier_of_Human_Capital_Measurem ent_(2007).pdf.

The first tier depicts business results like traditional financial analyses featuring EVA^TM, revenue growth, market share and stock performance), the second one visits the key performance drivers like productivity, quality, innovation and customer satisfaction, the third one deals with human capital capabilities, their most immediate and visible people-related qualities (including employee attitudes and abilities) critical for business success, and last human capital processes which include the core HR processes (e.g., competency management and performance appraisal) and broader human capital processes such as learning and knowledge management.

Another somehow more systematic framework has been developed by Susan Cantrell. Both of them show a relationship between business results and the human capital processes.

Human capital management in Rwanda: Challenges and prospects for Microfinance Institutions Figure 2.4: The human capital Development framework

Source: Susan Cantrell, et al, 2006 Measuring the value of human capital investments: the SAP case

Can employers with bad human resource practices attract good employees? Let us see what it takes.