According to the Brookings Institution analysis of S&P 500 companies 2002 - Kaplan & Norton, the source of value has drastically shifted from tangible to intangible assets. The intangible assets made up for 38% of the company’s overall market value in 1982, which went up to 85% by 2002.
Intangibles like human capital have a great competitive advantage. Various researches conducted by Towers Watson, Deloitte, Ernst & Young, and Gallup have found that HR provides added value to business outcomes. Jeffrey Pfeffer, a Professor of Organizational Behavior at Stanford University Business School, says that good HR practices account for 40% or more returns.
So the next logical question that comes up is: what are the elements of Human Capital Management that are the key drivers in affecting the market value of a firm and making a difference? Towers Watson has identified five key areas in their Human Capital Index that create shareholder value. They are:
- Having excellent recruiting and retention strategies,
- Creating accountability and total rewards point of compass,
- Making a flexible and collaborative workplace,
- Creating communication channels between the employees and the management, and
- Implementing HR-centered technologies.
But the question that remains is: which came first? Do good HR practices provide better return on investments or are companies with good financial outcomes likely to invest in HR? Regardless of the the answer, at TMGov we believe that investing in human capital is never a bad move, especially for government.