By Jon Miller | Post Date: November 24, 2005 11:06 AM | Comments: 0
Why do organizations fail to invest sufficiently in their people?
The term Human Capital was introduced over 40 year ago by University of Chicago Professor Gary Becker. Human capital are the assets a person owns in for form of job skills or knowledge and can be defined even more broadly to include personality, relationships, etc. Human capital is unique in that it doesn't deteriorate with age and use (like machines) but actually improves with experience.
The sum total of a person's assets in the form of "know how", "know who", "know why" etc. is their Human Capital and by extension, people are assets of an organization. This does not mean that corporations and businesses or non-profit entities "own" people in the same way they own fixed assets such as machines. But people create value in the same way that fixed assets do. Yet organizations under-invest and get rid of their people assets much more readily than they get rid of fixed assets.
Why does this happen? I think it's there are three main reasons this happens:
1) People have legs. When you fire them and ask them to go away, people can walk away. Buildings, machines, inventory, and intangible assets like goodwill generally don't go away just because you tell them they are fired.
2) People don't show up on balance sheets as assets. Wall Street frowns when you strike out assets on your balance sheet. It throws off the balance. Wall Street smiles when you get rid of people assets to increase profits. When your short-term reward is tied to the expression on Wall Street's face, you do what makes them smile.
3) You can't sell Human Capital. Most assets have value and can be sold to another organization that wants them. Human Capital becomes the property of the person who was educated or trained. Organizations can't strip you of this and sell it. The only way people make you money is if you continue to gainfully employ them. Where there is a lack of commitment for long-term employment, there is typically a reluctance to invest in people.
With regard to reason #3, or maintaining employment to protect their people assets, a good solution is what Toyota and many major Japanese manufacturers do when times are slow. They shift workers from one factory to another, in some cases one company to another in order to maintain employment and social stability.
A notable example is the transfer of workers between Toyota Home, a manufacturer of beautiful and earthquake-proof steel-frame modular homes and Toyota Motor Corporation. When homebuilding is in the slow season, and automobile production is in high gear, people are sent from the home factory to the car factory. Takt time on the home line is 6 minutes, 60 seconds on the car line. One is carpentry, one is mechanical assembly.
These people are trained to be productive working in a position in a production line that they will hold for 4 to 8 weeks at most. You could argue that the cost of training is very high relative to the payback time. Certainly this would be true if Standard Work, stop-the-line and jidoka, pokayoke and other systems were not in place at Toyota to simplify and error proof induction of new workers. Even then there is certainly a cost.
In some cases this lending of people assets between Japanese firms can extend to shifting production workers between customer and supplier within a keiretsu. Done well, and when the demand peak at one company is the low point in another company, this works beautifully.
But there are challenges. I've heard more than one supplier admit that they don't always need these workers, but accept them to help keep their customers' employment stable. How would it work if your biggest customer sent you dozens or hundreds of workers to work in your factory during their slow season?
Economists will tell you that one of the downsides of this is that this type of commitment to keeping people employed creates artificially low unemployment in a country like Japan. Activist shareholders will demand that executives cut staff to pump up stock prices. Socialists will tell you that the total cost to society of not keeping people employed is greater than the profits returned to shareholders (witness the burning streets of France). But economics on that level is a multi-faceted and complex thing, and is beyond the scope of this posting.
A wise old retired executive in southern Indiana named Basil once told me "In life you do what you want, and you pay for it." Whatever decisions you make, in the end you pay for them one way or another. These are humbling words. The lack of a skilled and ready workforce in U.S. manufacturing is a result of the historical lack of coordinated and comprehensive policies to support and develop Human Capital at the employer, educator, and government levels. This may have worked for America in the past, but it will not continue to serve us in the future.
I am not knocking America and I am not being an apologist for Japan. Both are great countries with great people, and have good and bad things about both economic and social systems.