Why It’s Time to Measure Human Capital as an Asset, Not a Cost

After working with companies of all sizes in more than 20 countries on four continents, Ian Williamson has come to an important conclusion: the world is about to make a quantum leap in the way we view human capital.

The dean of the Victoria University Business School in New Zealand, Williamson told the senior business leaders attending the World Business Forum in New York in November that the quantum leap will involve companies viewing human capital more as an asset than an expense. 

It's a simple enough concept, but Williamson said it will require a major change in the way we invest in and value employees.

“We are dealing with a fundamental shift in the basis of our economy, which has shaped the way organisations create value. This, in turn, ultimately shapes the way in which the people within the organisation are valued,” Williamson said in an interview prior to his keynote address to the forum.

For the most part, companies have been conditioned to view labour as an expense and assets as investments. This concept stems from a time when companies made most of their investments in physical assets necessary to produce a good or a service. Labour, which was mostly unskilled and readily available, was part of the overhead of producing a good or a service, separate and apart from assets.

That traditional view, Williamson argued, has been utterly disrupted. 

Now, higher-skill activities such as high-tech manufacturing, software design, bio-technology, healthcare, and information and communications, require higher levels of education and training. Many low-skill human processes are being phased out, while more jobs are being created for people with specialised skills who innovate and have an ability to continuously learn and adapt. 

However, business accounting does not allow a company to record talent recruitment or hiring as an investment, he said. Those activities must be recorded as an expense.

“We know that people aren’t really an expense,” Williamson said. “The technical definition of an asset is something acquired today that has a potential to generate a benefit in the future. That sounds a lot like human capital, but that is not how we record it in our financials. That’s the quantum leap in my mind.”

Even though it’s unlikely that business accounting principles will change the way companies book the costs associated with human capital, it is possible to change the way they view labour costs internally, Williamson said.

The most successful companies will start viewing human capital as a renewable resource, rather than something that can be discarded and replaced on a whim, he said. Like an asset, Williamson said, labour is something that must be managed to be sustainable and to provide the greatest value possible.

Far too many employers are still trapped in a cycle of firing employees whose skills are no longer needed and then going out to hire people with new skills that will drive future growth, Williamson said. 

The global skills shortage makes this traditional workforce strategy untenable, he added, because there just aren’t enough skilled workers to go around. Williamson noted that by some estimates, global IT companies need more than 85 million skilled workers to fill immediate openings.

With hire-and-fire no longer a viable option, companies must look at other workforce strategies to get more out of their existing labour. That could involve upskilling and redeployment, where existing employees redefine their skills to fill emerging roles, or working with government and educational institutions to train a new generation of skilled workers.

Companies can no longer make rash decisions about layoffs without determining whether the employees they are letting go could be filling future jobs.

“The decision to have individuals exit an organisation is the same as a decision by a property company saying, ‘I’m going to sell a building.’ That means I’m no longer in the business of trying to figure out ways of creating value for my customers through that asset,” Williamson said.

“If [firing someone] is just a temporary thing and then you go back and hire that individual later on, probably at a higher price, that’s a really bad decision. If you were doing that in a property company—you sold a building and … then you go back and buy that same building at a higher price—something tells me your board would not view that situation very favourably.”

Williamson has met with many company executives who are reluctant to get involved in upskilling or redeployment because they fear an investment made today will be wasted if individual employees decide to leave on their own in the future. That, he added, is a very short-term view of workforce management.

“I think there is an understanding that when you [upskill and redeploy], there are some risks associated with it but … there is a high likelihood you’re going to get a return. The more you give your people in terms of opportunity for future employment, the more you can expect to be repaid in increased engagement and productivity,” Williamson said.