Posted by: mcgratha | December 30, 2010

Recording human capital and information as assets in the balance sheet

This blog explores the concept of being able to record a value in the balance sheet to both the information within an ECM and the knowledge amongst staff (especially with the increasing up-take of social computing tools used internally within organisations).

People are our greatest asset. This is something that you will hear most organisations say, and the value of this human capital is maximised by fostering an environment where people can share and re-use their knowledge and skills. This point was elegantly put by Andrew Carnegie of U.S. Steel in 1919 when he said “The only irreplaceable capital an organisation possesses is the knowledge and ability of its people. The productivity of that capital depends on how effectively people share their competence with those who can use it”. Indeed the importance of human capital is often alluded to within the annual reports (in the ‘Risk Factors’ section) of many organisations with statements along the lines of Our performance is substantially dependent on the performance of our executive officers and key employees, the loss of whose services could significantly harm our business”.

Nevertheless, despite its acknowledged importance, the value of human capital is not captured as an asset in the balance sheet. Human capital is captured as a cost (salaries) and partly recognised in the valuation of goodwill. Traditionally buildings, equipment, infrastructure, etc, have been viewed as sufficient reflection of an organisation’s assets. However, given the increasing strategic investment that companies are making in information systems to foster and maximise the knowledge of its people, the omission of the value of human capital from the balance sheet is becoming more evident.

The problem is the unique qualities that reflect the true value of human capital are intangible, and will vary greatly per industry type and per employee role, notwithstanding the union issues that would ensue with some groups being perceived as less valuable to others. Ultimately though, there is no incentive to resolve as the concept of human capital accounting (its know-how, capabilities and knowledge) is not recognised by Tax authorities and therefore has only academic utility.

You could, of course, contend that the ECM systems themselves also have an intrinsic value that ought to be captured in the balance sheet. They encapsulate a significant proportion of the documented knowledge within organisations and their value as an asset could arguably be just as important as physical assets. However, the problem is again that its value is intangible.

It is hard to envisage how it would be feasible for companies to list human capital and information as assets in their balance sheet. However, if it were feasible then it would make the business case and ROI calculations for ECM very interesting. For example, if the introduction of an ECM system enables staff to become more efficient (such as less time spent trying to find information), then does that make them more valuable and does that mean that their value on the balance sheet goes up?

A similar concept was explored by George Parapadakis in his blog, considering what it might mean if it were possible to measure the relative value of documents, in real-time, within an ECM.

 

 

Advertisements

Responses

  1. I am working on a thesis on HC and found this little piece of information very useful.


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Categories

%d bloggers like this: