Human Capital (not Cattle) by guest blogger Ron Baker.

In the knowledge society, the most probable assumption for organizations--and certainly the assumption on which they have to conduct their affairs--is that they need knowledge workers far more than knowledge workers need them.
-Peter Drucker

The term human capital was first used by Nobel Price-winning economist Theodore W. Schultz in a 1961 article in American Economic Review.  His basic thesis was that investments in human capital should be accounted for in the same manner as investments in plant and machinery. 

The obvious challenge is that investments in tangible, physical assets can be counted and comprehended, but those in people cannot.  It is as if accountants would value the average human being at $50 since that is the approximate worth of our various chemical components.  Human capital is like the dark matter of the cosmos, we know it's out there but we can't measure it. 

Once again, Peter Drucker was at the forefront of thought when he coined both the terms knowledge society and knowledge worker in 1961 and positing it was the G.I. Bill of Rights--which made available higher education to some 2,332,000 veterans and was certainly the largest single investment in human capital up to that time--which caused the shift to a knowledge society. 

Presently, less than one-fifth of the labor force is employed in blue collar occupations, and approximately two-fifths are "knowledge workers"--those who work with their heads, not their hands.

Knowledge Workers Have Nothing to Lose but Their Chains

Knowledge workers are not like workers from the Industrial Revolution who were dependent on the employing organization providing the means of production (factories and machines).  Today, knowledge workers themselves own the firm's means of production in their heads.  This has been a tectonic shift in our economy, the ramifications of which we are still trying to comprehend. 

For example, how does one measure the productivity of knowledge workers when what goes on inside their heads cannot be observed, let alone objectively measured?

In a factory, the worker serves the system; in a knowledge environment, the system should serve the worker.  Knowledge work can only be designed by the knowledge worker, not for them.  Unlike work on an assembly line, knowledge work is not defined by quantity but by quality.  It is also not defined by its costs, but by its results. 

It may be possible in a widget factory to work harder, but in a knowledge factory working smarter is the only option.  The traditional metrics of productivity need to be replaced by judgment, and there is an enormous difference between a measurement and a judgment:  a measurement requires only a stick; a judgment requires knowledge, insight, wisdom and discernment.

Knowledge Workers are Volunteers

There is a Chinese Proverb that teaches the beginning of wisdom is to call things by their right names.  Your people are not assets, resources, or inventory, but human capital investors seeking a decent return on their investment. 

In fact, your people are actually volunteers, since whether or not they return to work on any given day is completely based on their own volition.  Consider for a moment how people decide which volunteer organizations to contribute some of their talent.  It's usually based on a desire to contribute to something larger than themselves.  They work hard--some would say harder than at their jobs--for these organizations because they are dedicated to the cause, they have the passion, the desire and the dream to make a difference in the lives of others.  All for zero pay.  Why? 

This is not just an economic decision, it is a psychological and emotional decision.  With all this evidence of human behavior, many firms still treat their people as if they will slack off if they're not held accountable for every six minutes of every day.  Is this any way to inspire people to be their best?  Is this any way to instill a spirit of service, creativity and innovation?

Or is this nothing but antiquated thinking about the nature of man being lazy and slothful unless forced to work, redolent of Frederick Taylor's time-and-motion studies?  Your people may hang their hat at your firm, but where is their heart?

Becoming A Lightning Rod for Talent

It doesn't make sense to hire smart people and then tell them what to do; we hire smart people so they can tell us what to do. – Steve Jobs, Founder, Apple Computer

Attracting, hiring, developing and retaining talent are the most important jobs to which everyone in the firm can contribute input and ideas.  Partners spend more of their time--or at least they should--making people decisions than any other.  No other decisions have as many repercussions throughout the firm, or have lasting significant effects than who to hire. 

Typically, a firm is batting 0.333 on its hiring decisions--that is, one-third turn out to be good decisions, one-third are minimally effective, and one-third are abject failures.  It is rare in any other area that firm leaders would accept this level of performance.

The issue of attracting Human Capital investors is a marketing issue.  As in all marketing, it does not look inward and ask, "What do we want and need?"  On the contrary, it looks outward and asks, "What do you want and need?"  There is an enormous difference between these two approaches. 

In effect, firms have to do the same to win over people as they do to gain new customers--show them why the firm is their best competitive alternative. 

Because knowledge workers are investing their Intellectual Capital with firms that will pay a fair return, the question should not be, "How much is this person worth to the firm?"  The real questions are:  "How much is the firm worth to this knowledge worker?  How can the firm add to this person's Intellectual Capital, and develop it even further?"

A New Order of the Ages

Characteristics like passion, desire, obsession, motivation, innovation, creativity and knowledge may not show up anywhere on a firm's financial statements or timesheets, but they are the traits that will ultimately determine the fate of your firm.  Knowledge work is non-linear and not subject to the cadences and rhythms of an assembly line; rather it moves by iteration and reiteration, a process of the mind. 

My favorite one dimensional test for creating a culture worthy of the respect and dignity of the people you are trying to attract is simply this:  Would you want your son or daughter to work in your firm?

My colleague Dan Morris flies a flag over his firm's office building with its name and logo in three colors.  It is interesting to me because when I first saw it, I recalled those who first called themselves liberals--in the classical definition of the word--had in mind three liberations (which explains why the appropriate liberal flag is always tricolore).  

They intended, first, to liberate humans from tyranny and torture; second, to liberate humans from poverty; and, third, to liberate humans from censorship and other oppressions of conscience, intellect, and art.

It is time we hoist a new flag over The Firm of the Future and usher in a new order of the ages, one that respects the dignity, and earns the rewards, of its Human Capital investors.