STRATEGIC HUMAN

RESOURCE MANAGEMENT (SHRM)

MBA Program

Lesson-1
An Investment Perspective of Human
Resource Management

© S M Zillur Rahman-MBA-SHRM

The Strategic View of Human Resources

• Employees are human assets:
– Increase in value to organization and marketplace when investments of
appropriate policies & programs are applied.
• Effective organizations recognize that employees have value:
– Much as organization’s physical & capital assets have value.
• Employees are valuable source of sustainable competitive advantage.

© S M Zillur Rahman-MBA-SHRM

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 Sources of Employee Value
• Technical Knowledge
– Markets, processes, customers, environment
• Ability to Learn and Grow
– Openness to new ideas
– Acquisition of knowledge & skills
• Decision Making Capabilities
• Motivation
• Commitment
• Teamwork
– Interpersonal skills, leadership ability
© S M Zillur Rahman-MBA-SHRM

Adopting an Investment Perspective

• Viewing human resources from investment perspective, much as physical
assets are viewed, allows organisations to determine how to best invest in
people.
• In determining whether to invest in training program, for example, costs (out-of-
pocket and opportunity) are weighed against potential benefits (enhanced
performance, increased loyalty, motivation).
• Taking an investment perspective towards human resources/assets is critical,
because, unlike other physical assets, human assets cannot be duplicated and
become competitive advantage.

© S M Zillur Rahman-MBA-SHRM

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 Adopting an Investment Perspective
• Required skills are becoming less manual and more knowledge-based.
• Managing an organisation’s employees as investments demand the
development of appropriate and integrated approach, consistent with the
organisational strategy.

© S M Zillur Rahman-MBA-SHRM

Adopting an Investment Perspective

• A Dilemma:
– Failure to invest in employees causes:
 Inefficiency.
 Weakening of organization’s competitive position.
– Human assets are risky investment.
– Require extra effort to ensure that they are not lost.
• Organisations need to develop strategies to ensure that employees stay on
long enough for the organisation to realise an acceptable return on its
investment.

© S M Zillur Rahman-MBA-SHRM

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 Valuation of Assets
• Five major kinds of assets
organisation can leverage to aid in
performance and add value to
operations.
• Human assets/capital are very
difficult to measure.

© S M Zillur Rahman-MBA-SHRM

Understanding and Measuring Human Capital

• If employees and their KSAs constitute assets for the company, it is critical for
the organisations to measure its value and contribution to bottom line.
• Studies show that integrated, strategically focussed HR practices directly related
to profitability & market value.
• Recent study also shows that primary reason for profitability is the effective
management of human capital.

© S M Zillur Rahman-MBA-SHRM

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 Understanding and Measuring Human Capital
• This involves providing employees with rewards commensurate with their
contributions.
• Integrated management of human capital can result in 47% increase in market
value.
• Top 10% of organizations studied experienced 391% return on investment in
management of human capital.

© S M Zillur Rahman-MBA-SHRM

Understanding and Measuring Human Capital

• HR value chain: each outcome fuels success in a subsequent outcome,
establishing a causal link between HR practices and organisation’s market
value.

© S M Zillur Rahman-MBA-SHRM

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 Understanding and Measuring Human Capital
• Developing appropriate HR metrics that illustrate value of HR practices and
activities, particularly relative to accounting profits and market valuation of the
organisation, has been proved difficult and complex.
• 90% of Fortune 500 organizations evaluate HR operations on the basis of three
metrics:
– Employee retention and turnover
– Corporate morale and employee satisfaction
– HR expenses as a percentage of operational expenses
• These metrics do not necessarily illustrate how HR impacts profits and
shareholder value.
• They also treat employees as expenses rather than assets.

© S M Zillur Rahman-MBA-SHRM

Understanding and Measuring Human Capital

• Mercer Model of Measuring HR Impact:
1. Identify problem HR can impact (e.g. accident at workplace).
2. Calculate actual cost of problem (loss of productivity and cost of treatment).
3. Choose HR solution that addresses problem (training and awareness
program).
4. Calculate cost of solution (training and other costs).
5. Calculate value of improvement 6 to 24 months after implementation
(reduction in accident-related costs).
6. Calculate specific return on investment.

© S M Zillur Rahman-MBA-SHRM

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 Understanding and Measuring Human Capital
• ROI in human assets often not realized until some time in future.
• If HR continues to be seen as a cost centre, it will be the primary target during
cost-cutting operations.
• The challenge for HR is to provide senior management with value-added human
capital investments backed by solid and meaningful financial metrics.

© S M Zillur Rahman-MBA-SHRM

Factors Influencing Organisation’s “Investment Orientation”

© S M Zillur Rahman-MBA-SHRM

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 Factors Influencing Organisation’s “Investment Orientation”
1. Management Values:
– In investment-oriented organisation:
• People are seen as central to mission & strategy.
• Mission statement and strategic objectives espouse value of human
assets in achieving goals.
• Management philosophy encourages development & retention of human
assets.
• Human assets are not treated in same ways as physical assets.
– Whether management values its people will be a critical factor in its
willingness to invest in them.

© S M Zillur Rahman-MBA-SHRM

Factors Influencing Organisation’s “Investment Orientation”

2. Attitude Towards Risk:
– Investment in human resources inherently riskier.
– Human assets never absolutely “owned”.
– Organisations can attempt to gain some “ownership” of employee services
through:
• Long-term employment contracts.
• Offering financial incentives, such as stock-ownership and additional
professional development opportunities.

© S M Zillur Rahman-MBA-SHRM

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 Factors Influencing Organisation’s “Investment Orientation”
3. Nature of Employee Skills:
– The more marketable employee skills, the riskier the firm’s investment in skill
development.
4. Utilitarian (“Bottom Line”) Mentality:
– Attempt made to quantify employee worth through cost-benefit analysis.
– “Soft” benefits of HR programs difficult to objectively quantify.
5. Availability of Outsourcing:
– Given availability of cost-effective outsourcing, investments in HR should produce
highest returns & sustainable competitive advantages.

© S M Zillur Rahman-MBA-SHRM

© S M Zillur Rahman-MBA-SHRM