Once a team of accountants runs their ruler over your business, you can bet your bottom dollar that first they will be looking at the assets in terms of plant & equipment and stock in the warehouse. Second, they will then look at the intangibles such as software, trademarks and goodwill. There will be scant consideration paid to people – those ‘strange entities’ not on the balance sheet. Or if they are on the balance sheet, it will be in terms of liabilities such as pensions, health costs and medical costs. As for assigning a value to engineers and other technical professionals. Well….
I watch with bitter amusement (and chagrin) how the share price of a company soars when a large number of employees are sacked. Whenever new management takes over, it is always a winning formula to downsize. There are trickier (and longer term solutions) in improving value in the business such as creating new state of the art products, changing the product mix, putting money into R&D to look for new products and looking for product synergies but the winner is invariably downsizing, for that quick fix. There is no doubt that companies and management are under pressure everywhere to improve their return on assets. And with the continued pressure from lower cost countries on wages in the so called first world countries, the temptation is always to take the low road and cut staffing costs. Interestingly enough, while most managers constantly remark that people are their finest asset most often it is simply corporate hypocrisy. The CEO earns many multiples of the training budget, engineers and other technical professionals are dumped whenever there is a down turn in a particular business division.
Admittedly, there is an unforgiveable amount of wastage in any business with technical personnel slumped (my favourite word) in front of their computers performing meaningless designs, for example. But then that is the topic of a future comment.
Peter Drucker, one of the founders of modern management theory, and who died recently referred to “knowledge workers” as being the real name for employees. He felt strongly that people should be treated as assets, not simply as costs and liabilities to be eliminated. The world’s greatest investor, Warren Buffet, noted on May 6th at his company’s annual meeting, that: “I can make a whole lot more money skilfully managing intangible assets (such as people) than managing tangible assets”. He indicated he has been doing this for over 30 years and obviously the results speak for themselves. He is the second wealthiest man (although he has recently given away most of his wealth to charity). Dr Baruch Lev of New York University has also recently calculated that the overwhelming proportion of value is being created by investments in intangible assets (people and intellectual property), not by bricks and mortar type assets.
I am not suggesting for one moment that one should pussyfoot around our engineers and technicians and not measure and drive them to greater success or tolerate incompetence or disinterest. But what I am suggesting is that when these issues arise, they are often due to the defective management or culture of the firm.
But rather than human capital, as the HR people call it, I would like to refer to it as engineering capital and use this to refer to our engineers, technicians and other technical professionals in the firm. Firms are after smart, self motivated, self managing business oriented engineers and technicians professionals today.
So how does one create value in a typical firm with engineering capital ? According to Jim Pinto, Michael Golden and Michael Echols (2006) there are a few important suggestions to improve on engineering capital:
• Engineers and technical professionals are dynamic assets that appreciate in value in contrast to other assets which depreciate. Invest in them in terms of training and the interesting work that you give them to enhance their skills. Provide mentors and assistance to increase their skills.
• Encourage and recognise new ideas and creativity that come from the youngest, freshest minds in the firm.
• Ownership of technical professionals cannot be transferred so loyalty to a firm has to be earned. This is done by managing them fairly and not micromanaging. Make the work environment friendly and rewarding to increase the retention of your staff.
• Technical professionals should be treated as the highest level of asset – far more than land, cash and equipment and invested in.
• Company value can be dramatically enhanced by managing your human capital effectively. The best example is Google which is worth over a 100 billion dollars after only 8 years in operation. Built purely on human capital and eminently measurable in terms of the stock price and morale of the technical professionals working there.
Dr Michael Echols (2006) notes that looking after our people in our firm is not merely an academic exercise. Up to 2019, the total pool of workers in the 25-44 year old gap will not grow at all in the US. In fact, in many countries in Europe (and indeed Australia), the total pool of workers will decline quite dramatically. The result of this shortfall in engineering capital is a threat to the firm’s very existence. But if we seize this opportunity today to build up outstanding engineering capital in our firms, we will gain an enormous competitive advantage tomorrow.
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