What Is Human Capital Strategy?

Every company needs a human capital strategy that supports its business strategy, but what exactly does that term mean? Let’s start by revisiting the concept of human capital.

By definition, human capital is the accumulated stock of skills, experience, and knowledge that resides in an organization’s workforce and drives productive labor. Since human capital is an asset, it follows that human capital strategy is a form of asset management: a plan for securing, managing, and motivating a workforce capable of achieving business goals. We think of it as a blueprint that specifies all workforce requirements and the management practices needed to secure them and to optimize business performance. In our lexicon, the key workforce characteristics have three dimensions:

1. Workforce capabilities. These are the mix of knowledge, skills, competencies, and experience that determine what the workforce can do.

2. Workforce behaviors. These are the specific actions of the workforce as reflected in work intensity, diligence, cooperation, teamwork, and adaptation to change, among other things. These behaviors are what the workforce does.

3. Workforce attitudes. We use the term attitudes loosely to refer to psychological propensities concerning risk taking, initiative, commitment, teamwork, flexibility, and so on: what the workforce believes and values.

Together, these characteristics define the workforce of an organization and drive its productivity. Because companies try to distinguish themselves from their competitors, it stands to reason that their workforce requirements reflect the uniqueness of their business goals; that is, a unique business strategy will have a direct counterpart in a unique human capital strategy. Copycat tactics have little chance of delivering a workforce and motivating behaviors precisely tailored to a business’s needs.

HR policies and practices such as reward systems, employee training, and diversity programs alone do not constitute a strategy. They are simply instruments for influencing workforce characteristics: a means to a higher end. To be effective, those policies and practices must be consistent with each other; in the best of circumstances they are mutually reinforcing. The test of the value of those practices and policies is their impact on the workforce, not how well they conform to what others are doing.

As noted in the Introduction, the management practices that drive human capital strategy define the following:

• How people are selected and developed

• How their work is organized

• How they are supervised or directed

• How information is developed and shared

• How critical decisions are made

• How people are motivated and rewarded

Each of these factors, alone and in combination, ultimately affects the workforce and its ability to deliver value.

The relationships among workforce capabilities, behaviors, and attitudes are complex and difficult to measure. Moreover, they are contingent on the broader business context and environment (i.e., system) in which they play out. Fortunately, major strides have been made in understanding these interrelationships and in developing practical tools for measuring them (facts).

Most organizations lack an explicit human capital strategy: They cannot show anyone a blueprint. However, this does not mean that they do not have a strategy; every organization has one, if not by design, then by default. Those strategies arise as concatenations of discrete people management decisions made over the years, often forming an incohesive patchwork of practices that limits the full potential of the business.

The practices that influence human capital extend beyond the domain of traditional HR. Indeed, many are within the control of line managers and even top executives. For instance, HR often has little to do with how work is organized or how technology is deployed, yet both influence workforce productivity and have important implications for the design of more traditional people management practices, such as recruitment, training, and rewards. They must be considered in any plan to build and manage the workforce. Similarly, the structure of decision making, particularly for decisions that involve strategic issues, is a fundamental management concern, not a traditional focus of HR. However, there are few areas of management that have a greater impact on the behaviors and performance of the workforce. Clearly, this area has to be a part of any human capital strategy that purports to serve the business. The point is that many parts of the organization are involved in building and managing human capital, but their activities with respect to that asset seldom are coordinated with care. The result is that human capital management is often fractured and inconsistent. Companies that avoid this misalignment and develop coherent people strategies have a decided advantage.

What is needed is a coherent and explicit human capital strategy that (1) produces the right workforce for the business and (2) manages it in ways that optimize its economic productivity.

Does your company have an explicit human capital strategy or a mixed bag of uncoordinated polices and practices? If it has a strategy, is that strategy producing the workforce you need to be successful? Are its components aligned with each other, or do they work at cross-purposes? Is the strategy understood and accepted by key stakeholders? Is it adaptable to changes in the business environment? Is it backed by measurement so that management can track how well it is being executed and be accountable for the results? These are important questions that can guide the development of an organization’s human capital strategy. Answering them invariably involves making a comparison between current workforce capabilities and what they ideally should be and between current and potential workforce performance. The next two chapters describe a disciplined process for making those comparisons involving two core tools. The first is Internal Labor Market Analysis^SM, and the second is Business Impact Modeling^SM.

Would you like to understand your workforce and what it will look like three to five years from now assuming no major changes in policies and practices? Would you like to know how particular interventions are likely to change your workforce or workforce outcomes, such as experience and skill mix, leadership development, turnover, and diversity? Internal Labor Market Analysis can provide the answers.

Would you like to know which workforce attributes and which people policies and practices have the greatest positive effect on performance and profitability and which ones hold you back? Would you like to know how a particular intervention is likely to affect workforce productivity or customer retention? Business Impact Modeling can tell you.

Bring the output of these two tools together and you will be on the way to creating a human capital strategy that is aligned with higher-level business goals. We’ll explain how to do that in the next two chapters.