Human Potential vs Human Capital

“To me, the function and duty of a quality human being is the sincere and honest development of one’s potential” – Bruce Lee

Human Potential is the potential in the human resource of an organisation, and its capacity to be an asset to the organisation. Left untapped, human potential can remain just that, the potential to become something great.

Human Capital is the tapped potential – the human resource that is productive, efficient, and actively bringing in revenue to a business. The premise of Human Capital is that the quality of labour can be improved by investing in them.

So how organisations can invest in human potential to convert it into capital? And what is the long term benefit to a business if it invests so much in a human resource, and that resource leaves the organisation?

Human capital investment

“The most valuable of all capital is that invested in human beings” – Alfred Marshall, Principles of Economics.

Knowledge and skill are the two prime components of human capital investment. Knowledge and skill lead to innovation, new technology and competing ideas, which make the backbone of growth for business. These are organisational capabilities that are intangible and are made possible by education and training.

There isn’t one single way to achieve this. Each business needs to determine what kind of training and development their employees will benefit from. The American Society of Training and Development says that supervisory, compliance, and processes and procedures are the top topic areas for learning and development. Here are some other popular kinds of professional development and their benefits:

  1. Sales and product knowledge training leads to increased revenue and market share
  2. Service training for better client experiences and brand loyalty
  3. Innovation training increases the creation of new ideas and technology
  4. Leadership development trains employees to qualify for internal promotions

Return on Investment

ROI has always been difficult to determine when it comes to intangible investments like Human Capital Investment. Investment in the professional development of employees is no small sum as proved in the presentation, “Redefining Measurement for Continuous Learning” at Bersin’s IMPACT 2014 conference. According to the report, the total spending on employee training in the US alone was estimated to be USD $150 billion! Tech firms were spending an average of USD $1,847 each year per employee in 2013. The numbers have definitely grown since.

This brings us to the big question: With this much money being spent on an employee as part of human capital investment, what is the long term ROI, considering the fact that an employee may leave the business anytime?

As in all investments, there is an element of risk involved, especially in the case of intangible assets like human resources. However, the success rate of businesses around the globe gives us a measure of reassurance. The annual survey by Great Place to Work showed the following numbers for 2014:

• Average time spent on training and development for salaried employees: 73 hours
• Average time spent on training and development for hourly employees: 58 hours
• Number of 100 Best Companies who offer tuition reimbursement to employees: 88
• Average tuition reimbursement given to each employee: $7,375

The pros of investing in people:

Cost of rehiring is much greater than cost of training
A new report, published by the Centre for Economics and Business Research (CEBR) and the UK’s Federation of Small Business calculates that on average, small businesses face an average employment cost of £35,500 (AUD $76,416) per worker, and for a business in the 20-49 employee range, the cost is £25,100 (AUD $54,000) per worker. Training existing workers to qualify for higher positions eliminates much of this cost and builds employee loyalty.

Employees feel more valued
When employees see the investment made towards their betterment and development, they develop more loyalty, effectively reducing attrition.

Improved Efficiency
Even if the employee were to leave the business, their productive time at work is better utilised as a result of training and professional development. According to a fiscal study on the returns of Human Capital Investment, the available skills of an organisation’s work-force not only improves the quality of the products and services but also increases flexibility and the speed of production.

Benefits from Innovation
The same study showed that “more-highly-educated and more highly-skilled workers have been found not only to be able to adapt more rapidly and efficiently to new tasks and technologies, but also to be a direct source of innovation. In fact, education and even previous informal training have been found to increase substantially an employee’s ability to be innovative on the job.”

Investment in human resource conclusively converts human potential to productive human capital.