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Human resource controlling

An approach towards a holistic human resource management tool

Seminar Paper 2009 16 Pages

Business economics - Personnel and Organisation

Excerpt

Table of Contents

1. Introduction and Purpose Statement: The Significance of Intangibles and Human Resources

2. A holistic tool as a measurement system for Human Resources
2.1 Human Resource Accounting
2.2 Human Resource Balanced Scorecard
2.3 Discussion - A “new” Human Resource Balanced Scorecard

3. Findings and Future Implications

4. Appendix

5. Table of Literature

Table of Charts

(1) The HR Balanced Scorecard Process

(2) Chances and problems of the “new” HR Balanced Scorecard

1. Introduction: The Significance of Intangibles and Human Resources

„ Wealth and growth in modern economies are driven primarily by intangible assets, defined as claims to future benefits that do not have a physical or financial form. {...} Dominant market positions, abnormal profits, and even temporary monopolisitc advantages are today most effectively achieved by the sound deployment of intangible assets. “ John R. M. Hand and Baruch Lev1

Following this argumentation, intangibles are nowadays a crucial point of relevance for every company. In this context, the term “intangible asset” could be defined differently, but always includes concepts such as property rights, brand names, networks, employee know - how or human resources.2 The unifying fact of all “intangibles” is that “ it is often very difficult { … } to allocate an orthodox valuation to intangibles as they rarely have an exchange value”.34 All intangibles are nonetheless of highest importance for the present value and the future development of the company, as Johnson and Kaplan noted in 19875: “A company ´ s economic value is not merely the sum of the values of its tangible assets{ … }. It also includes the value of intangible assets. ”

With these assets, a company is able to produce sustainable competitive advantages and future earnings following the resource based perspective in the strategic management developed by Wernerfelt in 1984 and Prahalad and Hamel in 1990.67 In the service-oriented age displacing the industrial age of the 1900s8, the importance of intangible assets, especially of customers and employees is growing.9 McGregor states that “ when the final products are ´ smart ´ products and complex, knowledge intensive services, human beings become the critical input ” .1011 Besides that, the investment decisions of analysts are more and more based on non-financial information about intangible assets.12 This reasoning puts a problem into place: how to measure the crucial input factor of intangible assets.

To come from the general term “intangibles” to a precise object of examination in my paper, I focus on the Human Resources, the employee know-how and the human capital as part of the intangibles. I will follow the definition of Kaplan/Norton whereupon Human Capital is the “skills, talent, and knowledge that a company´s employees possess13 My choice is, moreover, justified with Hall´s study stating that “ employee know-how was rated as one of the most important contributors to business success, {and} { … } as one of the most durable resources”.14 Human Capital (HC) is - following Snyder et al. - widely believed as the most valuable resource for an organisation.15 In this way - following the argumentation of Coyne16

- sustainable competitive advantages can emerge from HC. Human Resources and their management are therefore the crucial factor for a company nowadays and can result in distinctive competencies17 as a key element of strategy.18

Since there is this perceivable necessity to care for intangible assets, there is also an urgent need to establish measurement systems. Andriessen does give seven reasons for the necessity of internal measurements of intangible assets including the then presented link between strategy and action and moreover a focus of attention for the management and the employees.19 There is a need to find a measurement system which is holisitic and can be used for both, strategic and operational purposes. In the following section, I will present different ideas of such a tool leading to a “new” Human Resource Balanced Scorecard.

2. A holistic tool as a measurement system for Human Resources

2.1 Human Resource Accounting

Already in 1968, the first approaches towards a Human Resource Accounting were made. Flamholtz describes this area as „ the process of identifying, measuring, and communicating information about human resources to facilitate effective management within an organization “.20

In the so called “Personalstatistik21, a first step towards a holistic tool for HRA can be identified. Within this descriptive approach, the firm collects data about its employees concerning demographical variables, such as age and sex, and variables describing the qualification, such as knowledge of foreign languages or specific “work - knowledge” coming from training and education.22

An advancement of this “collection only” - tool is the so called “Humanverm ö gensrechnung ”. Within this tool the collected data from the “Personalstatistik” is economically evaluated. The major goal is to detect the value of the “Human Resources”. Different ideas coming from cost accounting or value accounting can be used to create a “market value” for HR:23

Human Resource Value Accounting

- performance value24: discounted value of future earnings
- market value25: difference between market value and book value
- workonomics26: CVA = (VAP - ACP) * P

VAP = Value added per Person (VA/P = (Revenue - material costs)/P)

ACP = average costs per person/employee

P = number of employees

Human Resource Cost Accounting (HRCA):

- current replacement value27: the sum of costs resulting from the replacement of the HR as a whole
- acquisition value28: sum of costs resulting form the acquisition, development and maintenance of HR
- utility value29: calculating the percentage of the value creation which is can not be deduced from physical or financial capital

In the literature, many additional approaches can be found being very similar to the ones presented.30

One can, however, easily identify major problems within the different approaches: the first method in HRVA for example is based on the questionable assumption that the employee can be valued according to his earnings. The last method of HRCA can on the other side not differentiate between the capital which lays within the firm and the capital bound to the employees31. A general problem of these approaches is the strong focus on past data and events and additionally the disregard of social indicators such as motivation and the capacity for teamwork. Advantages on the other side are the strong link to accounting techniques and the resulting acceptance in the firm and also the possible internal and external use of the data for shareholder and managers at the same time.32 Several other general problems with these accounting measures can be identified including validity, reliability and usefulness of the systems, which I won´t address further.33

Worse is even empirical evidence: Scarpello & Theeke34 have found out that the HRVA and HRCA approaches are lacking validated measurement indicators for a practical use. Maherfound out in his study of the British hotel business that managers do not use the HRCA or HRVA approach although they believed it to be necessary.35 Only in Sweden the approaches are widely practically used as Gröjer and Johanson found out in 1998.36 Not only the HRCA and HRVA but also the “Personalstatistik” is scarcely used: A study of Semlinger (1989) shows, that only 47% of a sample of firms do have a “Personalstatistik”.37

Nonetheless, the concepts laid out above are major steps towards a holistic approach of valuing the Human Resources. These approaches, however, only describe the actual value of the employees in terms of money but not the real value for the firm in terms of strategic importance following the RBV. The Balanced Scorecard could be a system achieving this goal.

[...]


1 Hand/Lev, 2003, p.1

2 Hall, 1993, p. 607

3 Hall, 1993, p. 607

4 For further definitions of Intangibles in contrast to Tangibles see Appendix 1

5 Johnson/Kaplan, 1987, p. 202

6 Hall, 1993; Ittner, 2008

7 Prahalad/Hamel, 1990; Wernerfelt, 1984

8 Strack/Villis, 2001, p.68

9 McGregor, 1988, p. 941

10 McGregor, 1988, p. 951; compare: Reich, 1983; Brickner, 1981

11 There are even companies relying with their whole business model on intangible assets, if you think for example of Dell or Amazon (Becker et al., 2001, p. 8)

12 Becker et al., 2001, p. 8

13 Harrison, 1972; Peters and Waterman, 1982

14 Hall, 1993, p. 616

15 Snyder et al., 1980, p. 431

16 Coyne, 1986

17 Hall, 1992, p. 139

18 Itami/Roehl, 1987; Hambrick et al., 1989; This reasoning is supported also by company leaders as for example by Lawrence R. Whitman, deputy CFO at GTE. His statement can be found in Appendix 2.

19 Andriessen, 2004a; One can find additional points of reasoning in his article also justifying the importance of measurement systems, but I focused on the ones being most important.

20 Flamholtz, 1999, p. 1

21 Jung, 2006, p. 676ff

22 “Personalstatistik” in Klimecki/Gmüre, 2005, p. 411.

23 “Humanvermögensrechung” in Klimecki/Gmüre, 2005, p. 412f.

24 Klimecki/Gmüre, 2005, p. 412

25 Klimecki/Gmüre, 2005, p. 412

26 Strack/Villis, 2001, p. 71

27 Flamholtz, 1974

28 Brummet et al., 1968

29 Klimecki/Gmüre, 2005, p. 412

30 Other examples are the Opportunity Cost Method (Hekimian/Jones, 1967), the efficiency weighted method (Hermanson, 1964) or the Skandia Navigator (Advinsson/Brünig, 2000)

31 Mirvis/Macy, 1976, p. 76

32 see Scholz et al., 2005

33 Mirvis/Macy, 1976, p. 75; The authors identified these problems with accounting measures in general and explain the importance of their arguments.

34 Scarpelli/Theeke, 1989; supported by Roslender/Dyson, 1992

35 Maher, 1996

36 Gröjer/Johanson, 1998

37 Semlinger, 1989, p. 337f

Details

Pages
16
Year
2009
ISBN (eBook)
9783640534074
ISBN (Book)
9783640534135
File size
749 KB
Language
English
Catalog Number
v142172
Institution / College
Zeppelin University Friedrichshafen
Grade
1.3
Tags
Controlling Human Resources HR Balanced Scorecard Human Capital

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Title: Human resource controlling