Human capital management

Human capital management
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67 05 Human capital management Key Con Ce Pts and terms Balanced scorecard Human process advantage Human capital Intangible resources Human capital advantage Intellectual capital Human capital index – Watson Wyatt Metrics Human capital management Organizational capital Human capital measurement Organizational performance model Human capital monitor – Andrew – Mercer HR Consulting Mayo Social capital Learn Ing out Comes On completing this chapter you should be able to define these key concepts. You should also understand: ● The nature of human capital ● Reasons for interest in human capital management measurement ● The concept of human capital ● Approaches to measurement ● Characteristics of human capital ● Measurement elements ● Constituents of human capital ● Factors affecting choice of measurement ● Significance of human capital theory ● Criteria for HCM data for managers ● Importance of human capital measurement68 Part 1 The Practice of Human Resource Management of people – their education, experience, skills and Introduction health.’ Individuals generate, retain and use know- ledge and skill (human capital) and create intellectual As defined by Baron and Armstrong (2007: 20), capital. Their knowledge is enhanced by the interac- human capital management (HCM) is concerned tions between them (social capital) and generates the with obtaining, analysing and reporting on data institutionalized knowledge possessed by an organ- that inform the direction of value-adding people ization (organizational capital). This concept of management, strategic, investment and operational human capital is explained below. decisions at corporate level and at the level of front- line management. It is, as emphasized by Kearns (2005), ultimately about value. Human capital defined Human capital consists of the knowledge, skills and abilities of the people employed in an organization. The nature of human capital As Wright and McMahan (2011: 101) explained: Each individual in the organization has management characteristics that comprise human capital. He/she also engages in the processing of The Accounting for People Task Force report (2003) information, interpretation and reaction to that stated that HCM involves the systematic analysis, information in making choices about how to feel measurement and evaluation of how people policies and behave. The aggregation of human capital, and practices create value. The report emphasized we propose, constitutes the organization or unit’s that HCM should be regarded as an approach to ‘human capital’. people management that deals with it as a high- Human capital constitutes a key element of the level strategic issue rather than a matter to be left to market worth of a company. A research study con- HR. However, Wright and McMahan (2011: 102) ducted in 2003 by CFO Research Services estimated warned that human capital should not be treated as that the value of human capital represented over a form of capital owned and controlled by the firm: 36 per cent of total revenue in a typical organization. ‘To do so would miss the complexity of the construct The significance of the term was emphasized by and continue to ignore the “human” in strategic Schultz (1961), who defined it as follows. HRM.’ The defining characteristic of HCM is the use of metrics to guide an approach to managing people that regards them as assets and emphasizes that com - petitive advantage is achieved by strategic invest- ments in those assets through employee engagement and retention, talent management and learning and Source review development programmes. HCM relates HR strat- egy to business strategy. The concept of HCM is Human capital defined – Schultz underpinned by the concept of human capital, as (1961: 1) explained below. Although it is obvious that people acquire useful skills and knowledge, it is not obvious that these skills and knowledge are a form of capital, The concept of human that this capital is in substantial part a product of deliberate investment, that it has grown in Western capital countries at a much faster rate than conventional (non-human) capital, and that its growth may well Adam Smith, cited by Schultz (1981: 140), originated be the most distinctive feature of the economic the idea of human capital (like so many other eco- system. nomic concepts) when he wrote that: ‘The acquired wealth of nations derives from the acquired abilities Chapter 5 Human Capital Management 69 He also noted that: ‘Attributes... which are valuable carrying out their role (discretionary behaviour refers and can be augmented by appropriate investment will to the discretion that people at work can exercise be treated as human capital... Consider all human about the way they do their jobs and the amount abilities to be either innate or acquired’ (ibid: 21). of effort, care, innovation and productive behaviour A later detailed definition was put forward by they display). They can also choose whether or not Bontis et al (1999). to remain with the organization. The constituents of human Source review capital Human capital defined – Bontis et al Human capital consists of intellectual, social and (1999: 393) organizational capital. Human capital represents the human factor in the organization; the combined intelligence, skills and Intellectual capital expertise that gives the organization its distinctive character. The human elements of the organization The concept of human capital is associated with the are those that are capable of learning, changing, overarching notion of intellectual capital, which is innovating and providing the creative thrust which defined as the stocks and flows of knowledge avail- able to an organization. These can be regarded if properly motivated can ensure the long-term as the intangible resources associated with people, survival of the organization. which together with tangible resources (money and physical assets) comprise the market or total value of a business. Scarborough and Elias (2002: ix) commented that: ‘The concept of human capital is most usefully Social capital viewed as a bridging concept – that is, it defines the Social capital is another element of intellectual link between HR practices and business performance capital. It consists of the knowledge derived from in terms of assets rather than business processes.’ networks of relationships within and outside the They pointed out that human capital is to a large organization. Social capital has been defined by extent ‘non-standardized, tacit, dynamic, context Putnam (1996: 66) as ‘the features of social life – dependent and embodied in people’. These charac- networks, norms and trust – that enable participants teristics make it difficult to evaluate human capital, to act together more effectively to pursue shared bearing in mind that the ‘features of human capital objectives’. It is important to take into account that are so crucial to firm performance are the flex- social capital considerations, that is, the ways in ibility and creativity of individuals, their ability to which knowledge is developed through interaction develop skills over time and to respond in a motivated between people. Bontis et al (1999) commented that way to different contexts’ (ibid: ix). it is flows as well as stocks that matter. Intellectual It is indeed the knowledge, skills and abilities capital develops and changes over time and a signi- of individuals that create value, which is why the ficant part is played in these processes by people focus has to be on means of attracting, retaining, acting together. developing and maintaining the human capital they represent. Davenport (1999: 7) observed that: ‘People possess innate abilities, behaviours and personal time. Organizational capital These elements make up human capital, the currency Organizational capital is the institutionalized know - people bring to invest in their jobs. Workers, not organizations, own this human capital.’ ledge possessed by an organization that is stored in databases, manuals, etc (Youndt, 2000). It is often The choices they make include how much discre- tionary behaviour they are prepared to exercise in called ‘structural capital’ (Edvinson and Malone, 70 Part 1 The Practice of Human Resource Management 1997), but the term ‘organizational capital’ is pre - Human capital measurement is about finding links, ferred by Youndt because, he argues, it conveys more correlations and, ideally, causation, between different clearly that this is the knowledge that the organiza- sets of (HR) data, using statistical techniques. tion actually owns. The need for human capital Approaches to people measurement management raised by Human capital measurement provides a basis for people management decision-making. It means human capital theory identifying the people management drivers and modelling the effect of varying them. The recognized An approach to people management based on human importance of achieving human capital advantage capital theory involves obtaining answers to these has led to an interest in the development of methods questions: of measuring the value and impact of that capital for these reasons: ● What are the key performance drivers that create value? ● People in organizations add value and there ● What skills do we have? is a case for assessing this value to provide ● What skills do we need now and in the a basis for HR planning and for monitoring future to meet our strategic aims? the effectiveness and impact of HR policies ● How are we going to attract, develop and and practices. retain these skills? ● The process of identifying measures and ● How can we develop a culture and collecting and analysing information relating to them will focus the attention of the environment in which organizational and individual learning takes place that meets organization on what needs to be done to find, keep, develop and make the best use both our needs and the needs of our employees? of its human capital. ● Measurements can be used to monitor ● How can we provide for both the explicit and tacit knowledge created in our progress in achieving strategic HR goals and generally to evaluate the effectiveness organization to be captured, recorded and used effectively? of HR practices. ● You cannot manage unless you measure. Human capital theory helps to determine the impact of people on the business and their contribution to The need is to develop a framework within which shareholder value. It demonstrates that HR practices reliable information can be collected and analysed produce value for money in terms of, for example, such as added value per employee, productivity , return on investment. It also provides guidance on and measures of employee behaviour (attrition and future HR and business strategies and data that will absenteeism rates, the frequency/severity rate of inform strategies and practices designed to improve accidents, and cost savings resulting from suggestion the effectiveness of people management in the schemes). organization. However, the Institute for Employment Studies (Hartley, 2005) emphasized that reporting on human capital is not simply about measurement. Measures on their own such as those resulting from Human capital measurement benchmarking are not enough; they must be clearly The role of human capital measurement is to assess linked to business performance. It was established by Scarborough and Elias (2002: x), on the basis of the impact of HRM practices and the contribution made by people to organizational performance. their research, that:Chapter 5 Human Capital Management 71 Measures are less important than the activity The human capital monitor – of measuring – of continuously developing and Andrew Mayo refining our understanding of the productive role of human capital within particular settings, Andrew Mayo (2001) has developed the ‘human by embedding such activities in management capital monitor’ to identify the human value of the practices, and linking them to the business enterprise or ‘human asset worth’, which is equal to strategy of the firm. ‘employment cost × individual asset multiplier’. The latter is a weighted average assessment of capability, potential to grow, personal performance (contribu- Approaches to measurement tion) and alignment to the organization’s values set in the context of the workforce environment (ie how Three approaches to measurement are described leadership, culture, motivation and learning are dri-v below. ing success). The absolute figure is not important. What does matter is that the process of measure- The human capital index – Watson ment leads you to consider whether human capital Wyatt is sufc fi ient, increasing, or decreasing, and highlights issues to address. Mayo advises against using too On the basis of a survey of companies that have many measures and instead to concentrate on a few linked together HR management practices and market organization-wide measures that are critical in value, Watson Wyatt Worldwide (2002) identified creating shareholder value or achieving current and four major categories of HR practice that could be future organizational goals. linked to increases in shareholder value creation. He believes that value added per person is a good These are: measure of the effectiveness of human capital, espe- ● total rewards and accountability: cially for making inter-firm comparisons. But he 16.5 per cent; considers that the most critical indicator for the value of human capital is the level of expertise possessed ● collegial, flexible workforce: 9.0 per cent; by an organization. He suggests that this could be ● recruiting and retention excellence: analysed under the headings of identified organ- 7.9 per cent; izational core competencies. The other criteria he ● communication integrity: 7.1 per cent. mentions are measures of satisfaction derived from employee opinion surveys and levels of attrition and The organizational performance absenteeism. model – Mercer HR Consulting As described by Nalbantian et al (2004) the organ- Measurement data izational performance model developed by Mercer The main HCM data used for measurement are: HR Consulting is based on the following elements: people, work processes, management structure, ● Basic workforce data – demographic data information and knowledge, decision-making and (numbers by job category, sex, race, age, rewards, each of which plays out differently within disability, working arrangements, absence the context of the organization, creating a unique and sickness, turnover and pay). DNA. ● People development and performance data The statistical tool ‘Internal Labour Market – learning and development programmes, Analysis’ used by Mercer draws on the running record performance management/potential of employee and labour market data to analyse the assessments, skills and qualifications. actual experience of employees rather than stated HR ● Perceptual data – attitude/opinion surveys, programmes and policies. Thus gaps can be ident- focus groups, exit interviews. ified between what is required in the workforce to ● Performance data – financial, operational support business goals and what is actually being and customer. delivered. A summary of human capital measures and their possible uses is given in Table 5.1.72 Part 1 The Practice of Human Resource Management t ab Le 5.1 A summary of human capital measures and their possible uses Measures Possible use: analysis leading to action Workforce composition – gender, Analyse the extent of diversity race, age, full-time, part-time Assess the implications of a preponderance of employees in different age groups, eg extent of losses through retirement Assess the extent to which the organization is relying on part-time staff Length of service distribution Indicate level of success in retaining employees Indicate preponderance of long- or short-serving employees Enable analysis of performance of more experienced employees to be assessed Skills analysis/assessment – Assess skill levels against requirements graduates, professionally/technically Indicate where steps have to be taken to deal with shortfalls qualified, skilled workers Attrition – employee turnover rates for Indicate areas where steps have to be taken to increase different categories of management and retention rates employees Provide a basis for assessing levels of commitment Attrition – cost of Support business case for taking steps to reduce attrition Absenteeism/sickness rates Identify problems and need for more effective attendance management policies Average number of vacancies as Identify potential shortfall problem areas a percentage of total workforce Total payroll costs (pay and benefits) Provide data for productivity analysis Compa-ratio – actual rates of pay as Enable control to be exercised over management of pay a percentage of policy rates structure Percentage of employees in different Demonstrate the extent to which the organization believes categories of contingent pay or that pay should be related to contribution payment-by-result schemes Total pay review increases for Compare actual with budgeted payroll increase costs different categories of employees as Benchmark pay increases a percentage of pay Average bonuses or contingent pay Analyse cost of contingent pay awards as a % of base pay for different Compare actual and budgeted increases categories of managers and employees Benchmark increasesChapter 5 Human Capital Management 73 t ab Le 5.1 Continued Measures Possible use: analysis leading to action Outcome of equal pay reviews Reveal pay gap between male and female employees Personal development plans completed Indicate level of learning and development activity as a percentage of employees Training hours per employee Indicate actual amount of training activity (note that this does not reveal the quality of training achieved or its impact) Percentage of managers taking part in Indicate level of learning and development activity formal management development programmes Internal promotion rate (% of Indicate extent to which talent management programmes promotions filled from within) are successful Succession planning coverage (% of Indicate extent to which talent management programmes managerial jobs for which successors are successful have been identified) Percentage of employees taking part in Indicate level of performance management activity formal performance reviews Distribution of performance ratings by Indicate inconsistencies, questionable distributions and trends category of staff and department in assessments Accident severity and frequency rates Assess health and safety programmes Cost savings/revenue increases resulting Measure the value created by employees from employee suggestion schemes investment in HR practices. Data must be accom- Human capital reporting panied by analysis and explanation. Internal reporting External reporting Analysing and reporting human capital data to top management and line managers leads to informed The EC Accounts Modernization Directive requires decision-making about what needs to be done to companies to prepare a business review. This has to improve business results, the ability to recognize disclose information that is necessary for under - problems and take action to deal with them, and the standing the development, performance or position scope to demonstrate the effectiveness of HR solu- of the business of the company, including the analysis tions and thus support the business case for greater of key financial and other performance indicators, 74 Part 1 The Practice of Human Resource Management and information relating to environmental and em- It is not difficult to record and report on basic data ployee matters, social and community issues, and and, although analytical ability is necessary, the level any policies of the company in relation to these required should be possessed by any HR professional. matters and their effectiveness. At the beginning of the journey an organization may do no more than collect basic HR data on, for instance, employee turnover and absence. But any- one who goes a little bit further and analyses that Introducing HCM data to draw conclusions on trends and causation – leading to proposals on the action required sup- As Baron and Armstrong (2007) observed, the deve-l ported by that analysis – is into HCM. Not in a big opment of HCM should be regarded as a journey . way perhaps, but it is a beginning. At the other end It is not an all-or-nothing affair. It does not have to of the scale there are the highly sophisticated ap- depend on a state-of-the-art HR database or the po -s proaches to HCM operated by such organizations session of advanced expertise in statistical analysis. as Nationwide and Standard Chartered Bank. h Cm Case stud Ies on a PProa Ches to measurement Nationwide Building Society Nationwide feeds its human capital information into an indicators to give each business unit an idea of how they intranet-based information system that gives users an are faring on a number of key drivers of employee commit- assessment of how they are doing against a number of ment. This is backed up with advice on how improvements indicators. It uses a dashboard of red, amber and green might be made. Standard Chartered Bank Standard Chartered Bank uses a human capital scorecard management committee reviews key trends in order to to analyse its data. This is produced on a quarterly and specify areas they need to focus on. annual basis with various cuts of the same data produced In addition, the bank uses qualitative analysis to examine for different business segments and countries, in addition trends and this has led it to identify the role of the manager to a global report. This comprises a series of slides with as mediating the relationship between engagement and commentary to enable managers to understand the data. performance. In turn, this has led to a focus on qualitative The data is also included in twice-yearly board reviews research to identify what raises the bank’s best managers on people strategy and forms part of the annual strategy above the rest. A further example is a qualitative analysis planning process. The scorecard data is reviewed within of high performance in selected customer-facing roles to each global business by a top team ‘People Forum’. At determine the key behaviours that continue to drive cus- country level, each local chief executive and his or her tomer loyalty.Chapter 5 Human Capital Management 75 Key learning points: Human capital management ● Monitor progress in achieving strategic HR The concept of human capital goals and evaluate HR practices. Individuals generate, retain and use knowledge and ● You cannot manage unless you measure. skill (human capital) and create intellectual capital. Human capital ‘defines the link between HR practices Approaches to measurement and business performance in terms of assets rather than business processes’ (Scarborough and Elias, 2002). ● The human capital index – Watson Wyatt World-wide. Characteristics of human capital ● The organizational performance model – Human capital is non-standardized, tacit, dynamic, Mercer HR Consulting. context-dependent and embodied in people ● The human capital monitor – Andrew Mayo. (Scarborough and Elias, 2002). Measurement elements Constituents of human capital Workforce data, people development data, Human capital consists of intellectual capital, social perceptual data and performance data. capital and organizational capital. Factors affecting choice of Significance of human capital measurement Human capital theory regards people as assets and ● Type of organization; its business goals and stresses that investment by organizations in people drivers. will generate worthwhile returns. ● The existing key performance indicators (KPIs). ● Importance of human capital Use of balanced scorecard. measurement ● The availability, use and manageability of data. Measuring and valuing human capital is an aid to Criteria for HCM data as a guide to people management decision-making. managers Reasons for interest in human capital Data will only be useful for managers if: measurement ● it is credible, accurate and trustworthy; ● Human capital constitutes a key element of the ● they understand what it means for them; market worth of a company. ● it is accompanied by guidance as to what action ● People in organizations add value. can be taken; ● ● Focus attention on what needs to be done to they have the skills and abilities to understand make the best use of its human capital. and act upon it.76 Part 1 The Practice of Human Resource Management Questions 1 What is human capital management? 6 What is human capital measurement? 2 What is human capital? 7 Why is human capital measurement 3 What is intellectual capital? important? 4 What is social capital? 8 What is the main human capital management data used for measurement? 5 What is organizational capital? References Accounting for People Task Force (2003) Accounting Nalbantian, R, Guzzo, R A, Kieffer, D and Doherty, J for People, London, DTI (2004) Play to Your Strengths: Managing your Baron, A and Armstrong, M (2007) Human Capital internal labour markets for lasting competitive Management: Achieving added value through advantage, New York, McGraw-Hill people, London, Kogan Page Putnam, R D (1996) The strange disappearance of Bontis, N, Dragonetti, N C, Jacobsen, K and Roos, G civic America, The American Prospect, Winter, (1999) The knowledge toolbox: a review of the pp 34–48 tools available to measure and manage intangible Scarborough, H and Elias, J (2002) Evaluating resources, European Management Journal, 17 (4), Human Capital, London, CIPD pp 391–402 Schultz, T W (1961) Investment in human capital, CFO Research Services (2003) Human Capital American Economic Review, 51, March, pp 1–17 Management: The CFO’s perspective, Boston, MA, Schultz, T W (1981) Investing in People: The CFO Publishing economics of population quality, Los Angeles, CA, Davenport, T O (1999) Human Capital, San University of California Press Francisco, CA, Jossey-Bass Watson Wyatt Worldwide (2002) Human Capital Edvinson, L and Malone, M S (1997) Intellectual Index: Human capital as a lead indicator of Capital: Realizing your company’s true value by shareholder value, Washington, DC, Watson Wyatt finding its hidden brainpower, New York, Harper Worldwide Business Wright, P M and McMahan, G C (2011) Exploring Hartley, V (2005) Open for Business: HR and human human capital: putting human back into strategic capital reporting, Brighton, IES human resource management, Human Resource Kearns, P (2005) Evaluating the ROI from Learning, Management Journal, 21 (2), pp 93–104 London, CIPD Youndt, M A (2000) Human resource considerations Mayo, A (2001) The Human Value of the Enterprise: and value creation: the mediating role of intellectual Valuing people as assets, London, Nicholas capital, Paper delivered at National Conference of Brealey US Academy of Management, Toronto, August77 06 Knowledge management Key Con Ce Pts and terms Communities of practice Data Explicit knowledge Information Knowledge Knowledge management Tacit knowledge Learn Ing out Comes On completing this chapter you should be able to define these key concepts. You should also know about: ● The purpose and significance of knowledge management ● Knowledge management strategies ● Knowledge management systems ● Knowledge management issues ● The contribution HR can make to knowledge management78 Part 1 The Practice of Human Resource Management when it is specific, expertise. A distinction was made Introduction by Ryle (1949) between ‘knowing how’ and ‘knowing that’. ‘Knowing how’ is the ability of a person to Knowledge management is concerned with storing perform tasks, and ‘knowing that’ is holding pieces and sharing the wisdom, understanding and exp- er of knowledge in one’s mind. According to Blackler tise accumulated in an enterprise about its processes, (1995: 1023): ‘Rather than regarding knowledge as techniques and operations. It treats knowledge as a something that people have, it is suggested that know - key resource. It was defined by Tan (2000: 10) as: ing is better regarded as something that they do. ’ ‘The process of systematically and actively manag- He also noted that: ‘Knowledge is multifaceted and ing and leveraging the stores of knowledge in an complex, being both situated and abstract, implicit organization.’ As Ulrich (1998: 126) remarked: and explicit, distributed and individual, physical and ‘Knowledge has become a direct competitive advan- mental, developing and static, verbal and encoded’ tage for companies selling ideas and relationships.’ (ibid: 1032–33). There is nothing new about knowledge manage - Nonaka (1991) suggested that knowledge is held ment. Hansen et al (1999: 106) observed that: ‘For either by individuals or collectively. In Blackler’s hundreds of years, owners of family businesses have (1995) terms, embodied or embraced knowledge is passed on their commercial wisdom to children, individual and embedded, and cultural knowledge master craftsmen have painstakingly taught their is collective. It can be argued (Scarborough and trades to apprentices, and workers have exchanged Carter, 2000) that knowledge emerges from the ideas and know-how on the job.’ But they also collective experience of work and is shared between commented that: ‘As the foundation of industrialized members of a particular group or community. economies has shifted from natural resources to intellectual assets, executives have been compelled to examine the knowledge underlying their business Explicit and tacit knowledge and how that knowledge is used’ (ibid: 106). Knowledge management is more concerned with Nonaka (1991) and Nonaka and Takeuchi (1995) stated that knowledge is either explicit or tacit. people and how they acquire, exchange and spread knowledge than it is about information technology. Explicit knowledge can be codified – it is recorded and available and is held in databases, in corporate That is why it has become an important area for HR practitioners, who are in a strong position to intranets and intellectual property portfolios. Tacit knowledge exists in people’s minds. It is difficult to exert influence in this aspect of people management. It is associated with intellectual capital theory articulate in writing and is acquired through personal experience. As suggested by Hansen et al (1999), it (see Chapter 5), in that it refers to the notions of human, social and organizational or structural includes scientific or technological expertise, oper - ational know-how, insights about an industry and capital. It is also linked to organizational learning (see Chapter 22). business judgement. The main challenge in knowledge management is how to turn tacit knowledge into Knowledge management should be based on an understanding of the concept of knowledge; this is explicit knowledge. therefore dealt with in the r fi st section of this chapter. In subsequent sections knowledge management is described in more detail, strategies for developing Data, information and knowledge its practice are described and consideration is given A distinction can be made between data, informa- to the role of HR. tion and knowledge: ● Data consists of the basic facts – the building blocks – for information and knowledge. The concept of knowledge ● Information is data that have been processed in a way that is meaningful to individuals; it Knowledge is defined as what people understand is available to anyone entitled to gain access about things, concepts, ideas, theories, procedures to it. As Drucker (1988: 46) put it, ‘information and practices. It can be described as know-how or, is data endowed with meaning and purpose’.Chapter 6 Knowledge Management 79 ● Knowledge is information used productively; Snyder (2000: 139) as ‘groups of people informally it is personal and often intangible and it can bound together by shared expertise and a passion be elusive – the task of tying it down, for joint enterprise’. The intranet provides an addi- encoding it and distributing it is tricky. tional and very effective medium. People possess knowledge that has been acquired through their own experiences at work. But it will not necessarily be shared formally or even infor - Knowledge management mally with their colleagues and crucial knowledge could be lost if it remains locked up in the minds of defined employees, or taken elsewhere by them if they leave the organization. An important issue in knowledge Knowledge management is about getting know- management is how knowledge can be identified ledge from those who have it to those who need it and distributed. in order to improve organizational effectiveness. It In the information age, knowledge rather than was defined by Scarborough et al (1999: 1) as ‘any physical assets or financial resources is the key to process or practice of creating, acquiring, capturing, competitiveness. Knowledge management allows sharing and using knowledge, wherever it resides, to companies to make the best use of their employees’ enhance learning and performance in organizations’. creativity and expertise (Mecklenburg et al, 1999). They suggested that it focuses on the development As Boxall and Purcell (2000: 197) noted: ‘Managing of firm-specific knowledge and skills that are the knowledge inevitably means managing both the result of organizational learning processes. Knowledge company’s proprietary technologies and systems management deals with both stocks and flows of (which don’t walk out of the door at the end of the knowledge. Stocks include expertise and encoded day) and the people (who do)’. knowledge in computer systems. Flows represent the ways in which knowledge is transferred from people to people or from people to a knowledge database. Knowledge management Knowledge management identie fi s relevant infor- strategies mation and then disseminates it so that learning can take place. It promotes the sharing of knowledge by linking people with people and by linking them to Two approaches to knowledge management strat- egy have been identified by Hansen et al (1999): the information so that they learn from recorded exper-i ences. As explained by Blake (1988), the purpose of codic fi ation strategy and the personalization strategy. knowledge management is to capture a company’s collective expertise and distribute it to wherever it can achieve the biggest payoff. This is in accordance The codification strategy with the resource-based view of the firm, which sug- Knowledge is carefully codified and stored in data- gests that the source of competitive advantage lies within the firm (ie in its people and their know- bases where it can be accessed and used easily by anyone in the organization. Knowledge is explicit and ledge), not in how it positions itself in the market. A successful company is a knowledge-creating is codified using a ‘people-to-document’ approach. The strategy is therefore document-driven. Know- company. Knowledge is possessed by organizations and ledge is extracted from the person who developed it, made independent of that person and reused for people in organizations. Organizational opera- tional, technical and procedural knowledge can be various purposes. It is stored in an electronic repos- itory for people to use, and allows people to search stored in databanks and found in reports, libraries, policy documents, manuals and presentations. It for and retrieve codified knowledge without having to contact the person who originally developed it. can also be moved around the organization through information systems and by meetings, workshops, This strategy relies largely on information techno- logy to manage databases and also on the use of the courses, ‘master classes’, written publications and ‘communities of practice’, defined by Wenger and intranet.80 Part 1 The Practice of Human Resource Management and identify what knowledge needs to be captured The personalization strategy and shared. Knowledge is closely tied to the person who has developed it and is shared mainly through direct person-to-person contacts. This ‘person-to-person’ Relating knowledge management approach means providing for tacit knowledge to strategy to business strategy be passed on. The exchange is achieved by creating As Hansen et al (1999) showed, it is not knowledge networks and encouraging face-to-face communi- cation between people by informal conferences, per se but the way it is applied to strategic objectives that is the critical ingredient in competitiveness. They workshops, communities of practice, brainstorming and one-to-one sessions. suggested that ‘competitive strategy must drive know - ledge management strategy’ and that management Hansen et al (1999) proposed that the choice of strategy should be contingent on the organization: have to answer the question: ‘How does knowledge that resides in the company add value for customers?’ what it does and how it does it. Thus consultancies such as Ernst & Young, using knowledge to deal (ibid: 114). with recurring problems, may rely on codification so that recorded solutions to similar problems are Technology and people easily retrievable. Strategy consultancy firms such as McKinsey or Bains, however, rely on a personal- Technology may be central to companies adopting ization strategy to help them to tackle the high-level a codification strategy, but for those following a strategic problems they are presented with that personalization strategy IT is best used in a supportive demand the provision of creative, analytically rigor - role. Hansen et al (1999: 113) commented that: ous advice. They need to channel individual expertise In the codification model, managers need to and they find and develop people who are able to implement a system that is much like a traditional use a person-to-person knowledge-sharing approach. library – it must contain a large cache of documents Experts can be identified who can be approached and include search engines that allow people by e-mail, telephone or personal contact. to find and use the documents they need. In the The research conducted by Hansen et al (1999) personalization model, it’s more important to established that companies that use knowledge well have a system that allows people to find other adopt either the codification or the personalization people. strategy predominantly and use the other strategy Scarborough et al (1999) suggested that technology to support their first choice. They pointed out that should be viewed as a means of communication those who try to excel at both strategies risk failing rather than as a means of storing knowledge. Know- at both. ledge management is more about people than tech- nology. Research by Davenport (1996) established that managers get two-thirds of their information Knowledge management from face-to-face or telephone conversations. There is a limit to how much tacit knowledge issues can be codified. In organizations relying more on tacit than explicit knowledge, a person-to-person The strategies referred to above do not provide approach works best, and IT can only support this easy answers. The issues that need to be addressed process; it cannot replace it. in developing knowledge management practices are discussed below. The significance of process Blackler (1995) emphasized that a preoccupation The pace of change with technology may mean that too little attention One of the main issues in knowledge manage- is paid to the processes (social, technological and ment is how to keep up with the pace of change organizational) through which knowledge combines Chapter 6 Knowledge Management 81 and interacts in different ways. The key processes that differentiate products and services and, in turn, are the interactions between people. This is the social drive competitiveness’. capital of an organization – ‘the network of rela- HR can contribute by providing advice on culture tionships that constitute a valuable resource for management, organization design and development, the conduct of social affairs’ (Nahpiet and Ghoshal, and by establishing learning and communication pro - 1998: 243). Social networks can be particularly im- grammes and systems. There are 10 ways of doing portant in ensuring that knowledge is shared. Trust this: is also required – people are not willing to share 1 Help to develop an open culture in which the knowledge with those they do not trust. values and norms emphasize the importance The culture of the company may inhibit know- of sharing knowledge. ledge sharing. The norm may be for people to keep 2 Promote a climate of commitment and knowledge to themselves as much as they can because trust. ‘knowledge is power’. An open culture will encourage people to share their ideas and knowledge. 3 Advise on the design and development of organizations that facilitate knowledge sharing through networks, teamwork and Knowledge workers communities of practice. 4 Advise on resourcing policies and provide Knowledge workers, as defined by Drucker (1993), resourcing services that ensure that valued are individuals who have high levels of education employees who can contribute to knowledge and specialist skills combined with the ability to creation and sharing are attracted and apply these skills to identify and solve problems. As retained. Argyris (1991: 100) commented, they are: ‘The nuts and bolts of management... increasingly consist of 5 Advise on methods of motivating people to guiding and integrating the autonomous but inter - share knowledge and rewarding those who connected work of highly skilled people.’ Knowledge do so. management is about the management and motiv- 6 Help in the development of performance ation of knowledge workers who create knowledge management processes that focus on the and will be the key players in sharing it. development and sharing of knowledge. 7 Develop processes of organizational and individual learning that will generate and assist in disseminating knowledge. The contribution of HR to 8 Set up and organize workshops, conferences, knowledge management seminars, communities of practice and symposia that enable knowledge to be HR can make an important contribution to know- shared on a person-to-person basis. ledge management simply because knowledge is 9 In conjunction with IT, develop systems for shared between people; it is not just a matter of capturing and, as far as possible, codifying capturing explicit knowledge through the use of IT. explicit and tacit knowledge. The role of HR is to see that the organization has 10 Generally, promote the cause of knowledge the intellectual capital it needs. The resource-based management with senior managers to view of the firm emphasizes, in the words of Cappelli encourage them to exert leadership and and Crocker-Hefter (1996: 7), that ‘distinctive human support knowledge management initiatives. resource practices help to create unique competences 82 Part 1 The Practice of Human Resource Management Key learning points: Knowledge management ● Attention must be paid to the processes (social, The purpose and significance of technological and organizational) through which knowledge management knowledge combines and interacts in different Knowledge management is about getting knowledge ways. from those who have it to those who need it in order ● The significance of knowledge workers must be to improve organizational effectiveness. appreciated. Knowledge management strategies The contribution HR can make to The codification strategy – knowledge is carefully knowledge management codified and stored in databases where it can be ● Help to develop an open culture that emphasizes accessed and used easily by anyone in the the importance of sharing knowledge. organization. Knowledge is explicit and is codified using a ‘people-to-document’ approach. ● Promote a climate of commitment and trust. The personalization strategy – knowledge is closely ● Advise on the design and development of tied to the person who has developed it and is shared organizations that facilitate knowledge sharing. mainly through direct person-to-person contacts. ● Ensure that valued employees who can contribute This is a ‘person-to-person’ approach that involves to knowledge creation and sharing are attracted ensuring that tacit knowledge is passed on. and retained. ● Advise on methods of motivating people to share. Knowledge management systems ● Help in the development of performance ● Creating an intranet. management processes that focus on the ● Creating ‘data warehouses’. development and sharing of knowledge. ● Using decision support systems. ● Develop processes of organizational and individual learning that will generate and assist ● Using ‘groupware’, ie information communication in disseminating knowledge. technologies such as e-mail or discussion bases. ● Set up and organize workshops, conferences ● Creating networks or communities of practice or and communities of practice and symposia that interest of knowledge workers. enable knowledge to be shared on a person-to- person basis. Knowledge management issues ● In conjunction with IT, develop systems for ● The pace of change. capturing and, as far as possible, codifying ● Relating knowledge management strategy to explicit and tacit knowledge. business strategy. ● Generally, promote the cause of knowledge ● IT is best used in a supportive role. management with senior managers.Chapter 6 Knowledge Management 83 Questions 1 What is knowledge management? 4 What is the distinction between data, information and knowledge? 2 What is knowledge? 5 What is the purpose of knowledge management? 3 What is the difference between explicit and tacit 6 How can HR help to promote knowledge knowledge? management? References Argyris, C (1991) Teaching smart people how to learn, Nahpiet, J and Ghoshal, S (1998) Social capital, Harvard Business Review, May–June, pp 54–62 intellectual capital and the organizational Blackler, F (1995) Knowledge, knowledge work and advantage, Academy of Management Review, experience, Organization Studies, 16 (6), pp 16–36 23 (2), pp 242–66 Blake, P (1988) The knowledge management Nonaka, I (1991) The knowledge creating company, explosion, Information Today, 15 (1), pp 12–13 Harvard Business Review, November–December, Boxall, P and Purcell, J (2000) Strategic human pp 96–104 resource management: where have we come from Nonaka, I and Takeuchi, H (1995) The Knowledge and where are we going?, International Journal of Creating Company, New York, Oxford University Management Reviews, 2 (2), pp 183–203 Press Cappelli, P and Crocker-Hefter, A (1996) Distinctive Ryle, G (1949) The Concept of Mind, Oxford, human resources are firms’ core competencies, Oxford University Press Organizational Dynamics, 24 (3), pp 7–22 Scarborough, H and Carter, C (2000) Investigating Davenport, T H (1996) Why re-engineering failed: Knowledge Management, London, CIPD the fad that forgot people, Fast Company, Premier Scarborough, H, Swan, J and Preston, J (1999) Issue, pp 70–74 Knowledge Management: A literature review, Drucker, P (1988) The coming of the new organization, London, IPD Harvard Business Review, January–February, Tan, J (2000) Knowledge management – just more pp 45–53 buzzwords?, British Journal of Administrative Drucker, P (1993) Post-capitalist Society, Oxford, Management, March–April, pp 10–11 Butterworth-Heinemann Ulrich, D (1998) A new mandate for human Hansen, M T, Nohria, N and Tierney, T (1999) resources, Harvard Business Review, What’s your strategy for managing knowledge?, January–February, pp 124–34 Harvard Business Review, March–April, pp 106–16 Wenger, E and Snyder, W M (2000) Communities Mecklenberg, S, Deering, A and Sharp, D (1999) of practice: the organizational frontier, Knowledge management: a secret engine of Harvard Business Review, January–February, corporate growth, Executive Agenda, 2, pp 5–15 pp 33–4184 THIS PAGE IS INTENTIONALLY LEFT BLANK85 07 Competency-based HRM Key Con Ce Pts and terms Behavioural competencies Criterion referencing Behavioural indicators Emotional intelligence Competency Role-specific competencies Competency-based HRM Technical competencies Competency framework Learn Ing out Comes On completing this chapter you should be able to define these key concepts. You should also understand: ● The meaning of competency-based HRM ● The different types of competencies ● The contents of competency frameworks ● Reasons for using competencies ● Coverage of competencies ● Applications of competency-based HRM ● How to develop a competency framework ● Keys to success in using competencies ● Competencies and emotional intelligence86 Part 1 The Practice of Human Resource Management order to carry out and meet performance expect- Introduction ations and are sometimes known as ‘hard skills’. They are related to either generic roles (groups of Competency-based HRM is about using the notion similar roles), or to individual roles (‘role-specific of competency and the results of competency analysis competencies’). They are not usually part of a to inform and improve HR processes, especially behavioural-based competency framework, although those concerned with recruitment and selection, the two are linked when considering and assessing learning and development, and performance and role demands and requirements. reward management. It has an important part to The terms ‘technical competencies’ and ‘com- play in a number of HR activities. petences’ are closely related, although the latter has a particular and more limited meaning when applied to NVQs/SNVQs, as discussed below. Guid-e Competency defined lines on den fi ing technical competencies are provided in Chapter 51. The term ‘competency’ refers to an underlying char- acteristic of a person that results in effective or NVQ/SNVQ competences superior performance. The leading figure in defin- ing and popularizing the concept of competency The concept of competence was conceived in the was Boyatzis (1982). He conducted research that UK as a fundamental part of the process of developing established that there was no single factor but a standards for NVQs/SNVQs. These specify minimum range of factors that differentiated successful from standards for the achievement of set tasks and act- less successful performance. These factors included ivities expressed in ways that can be observed and personal qualities, motives, experience and behav- assessed with a view to certification. An element of ioural characteristics. Since his contribution, three competence in NVQ language is a description of types of competencies have been identified: behav- something that people in a work area should be ioural competencies, technical competencies and able to do. They are assessed on being competent or NVQs/SNVQs. not yet competent. No attempt is made to assess the level of competence. Behavioural competencies Behavioural competencies den fi e behavioural expect - Competency headings ations, ie the type of behaviour required to deliver The most common competencies included in com- results under such headings as teamworking, com- petency in frameworks are people skills, although munication, leadership and decision-making and outcome-based skills, such as focusing on results are sometimes known as ‘soft skills’. Criterion- and solving problems, are also popular. The more referencing, ie comparing one measure or situation common competency headings included in the fram- e with a criterion in the form of another measure or works of organizations responding to a Competency outcome, may be used to determine the relationship and Emotional Intelligence survey in 2006/7 are between them. They can be set out in a ‘competency shown in Table 7.1. framework’, which contains definitions of the The first seven of these were used in over 50 per behavioural competencies used for all employees in cent of the respondent organizations. The 49 frame- an organization or for particular occupations such works included 553 competency headings. No doubt, as managers. Guidelines on defining behavioural many of these overlapped. The typical number of competencies are provided in Chapter 51. competencies was seven, rising to eight where the frameworks applied solely to managers. Technical competencies Technical competencies define what people have to know and be able to do (knowledge and skills) in

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