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I am very grateful to Mr. Rajul Dutt for giving me the opportunity to undertake the Research Project Report titled A Study on Human Resource Accounting Process in an Organization A case study. I am very thankful to Mr. Vivek Aggarwal (MBA Department) for having allowed me to undertake this Research Project Report and this making me experience the work culture under different conditions.
(Lalit Saini)
CONTENT
Acknowledgement Introduction Objective Study Research Methodology Defining HRA The Policy Dimensions Challenges of HRA The need of HRA HRA Scenario Cost Analysis Human Capital Accounting & valuation Management information system The rational for emergence of HRA o Macro level o Micro level Benchmarking o Procedure o Cost of Benchmarking o Bait & Switch o Accounting & general Audit in general o Human resource audit o Social audit Budgeting o Structure for intellectual capital o Indications of stakeholders Different interest of HRA o Government
o Trade union o Enterprise o Employees Re-engineering o Criticisiom of Re-engineering Case study Conclusion Recommendation Limitation Bibliography
INTRODUCTION
Human resource accounting is not a new issue in economics. Economists consider human capital as a production factor, and they explore different ways of measuring its investment in education, health, and other areas. Accountants have recognized the value of human assets for at least 70 years. Research into true human resource accounting began in the 1960s by Rensis Likert [Bowers, 1973]. Likert defends long-term planning by strong pressure on human resources' qualitative variables, resulting in greater benefits in the long run. Looking at different proposals [Conner, 1991], the resource theory considers human resources in a more explicit way. This theory considers that the competitive position of a firm depends on its specific and not duplicated assets. The most specific (and not duplicated) asset that an enterprise has is its personnel. It takes advantage of their interdependent knowledge. That would explain why some firms are more productive than others. With the same technology, a solid human resource team makes all the difference [Archel, 1995]. The American Accounting Association [1970] defines human resource accounting as "the human resources identification and measuring process and also its communication to the interested parties." There are two reasons for including human resources in accounting [Ripoll and Labatut, 1994]. First, people are a valuable resource to a firm so long as they perform services that can be quantified. The firm need not own a person for him to be considered a resource. Second, the value of a person as a resource depends on how he is employed. So management style will also influence the human resource value.
Human resources is an old field of research in economics, as reflected by accounting treatments. This paper reviews this contribution from accounting literature and the European legal framework. Different institutional attitudes toward this topic were collected from such organizations as the Financial Accounting Standards Board [1984, 1993] and the American Accounting Association [1970]. After that, a detailed revision is made of the main costs related to human resources: training and selection costs and exit costs. This analysis is made from the points of view of external and internal (or managerial) accounting and from historical costs and opportunity costs. Finally, no unique solution to this problem is given, but all possible alternatives are evaluated and open for discussion. Defining human resource accounting Human resource accounting (HRA) as an approach was originally defined as the process of identifying, measuring and communicating information about human resources in order to facilitate effective management within an organisation. It is an extension of the accounting principles of matching costs and revenues and of organising data to communicate relevant information in financial terms. The accounting of human resources can be seen as just as much a question of philosophy as of technique. This is one of the reasons behind the variety of approaches and is further underlined by the broad range of purposes for which accounting human resources can be used, e.g. as an information tool for internal and/or external use (employees, customers, investors, etc.), and as a decision-making tool for human resource management (investments in human resources as well as personnel management in general).He voluntary market-based method (the ISO standard method), i.e. develop a consistent framework which can be operational across sectors and countries and promote this through a rewarding and image campaign, the voluntary rewarding method (the Investing in People method in the United Kingdom), i.e. develop a consistent framework supported by rewarding mechanisms once it is introduced and approved at enterprise level (enterprises pay
for their training evaluation whether they meet the standard or not), the compulsory method (the Green accounting method in Denmark), i.e. identify disclosure on human resources as a societal concern and prepare (inter-)national regulations. The policy dimension: The focus on HRA in enterprises has lead to a growing interest by stakeholders who have started to identify and formulate their positions. The main stakeholders, such as the enterprises, investors, employees, trade unions and governments, are therefore gradually becoming aware of the potential of HRA, albeit from different perspectives. The basic questions in this perspective are:
Should HRA be mandatory for enterprises alongside financial statements, i.e. should HRA be regulated by law and/or social partner agreements?
If mandatory, what kind of information should be included in such statements? If voluntary, how to secure the interests of, say the employees, at enterprise level?
Governments, notably in the Scandinavian countries, and the European Commission have identified public sector interests in HRA. This ranges from a desire to support further improvement of enterprise competitiveness to an interest in diminishing the public sector funding of vocational education and training and, more generally, the implementation of lifelong learning.
The voluntary market-based method (the ISO standard method), i.e. develop a consistent framework which can be operational across sectors and countries and promote this through a rewarding and image campaign,
The voluntary rewarding method (the Investing in People method in the United Kingdom), i.e. develop a consistent framework supported by rewarding mechanisms once it is introduced and approved at enterprise level (enterprises pay for their training evaluation whether they meet the standard or not),
The compulsory method (the Green accounting method in Denmark), i.e. identify disclosure on human resources as a societal concern and prepare (inter-)national regulations.
Many unanswered questions about HRA: There are still immense problems to overcome before a coherent and reliable measuring technique is established. Part of the dilemma originates from basic questions such as:
Is HRA only for internal use in enterprises? Should HRA have a standard format for comparability purposes? Should HRA be included in traditional financial statements?
Is it possible to obtain data on human resources, which are reliable and comparable across enterprises? Will the costs of gathering and processing this information exceed the benefits of doing so? How to establish a coherent terminology? How to link reporting on human resources with improved human resource management?
Yet, despite the many problems and unanswered questions, the reasons for developing HRA methods can be summarized in the following six points:
Inadequacy of traditional balance sheets in providing sufficient information on enterprise performance, Measuring problems deriving from the valuation of human resources, Redistribution of social responsibilities between the public and private sectors, Security versus flexibility in employment, Improved human resource management, Formal learning versus in-firm competency acquirement.
The policy dimension of HRA : The focus on HRA in enterprises has lead to a growing interest by stakeholders who have started to identify and formulate their positions.
The main stakeholders, such as the enterprises, investors, employees, trade unions and governments, are therefore gradually becoming aware of the potential of HRA, albeit from different perspectives. The basic questions in this perspective are:
Should HRA be mandatory for enterprises alongside financial statements, i.e. should HRA be regulated by law and/or social partner agreements?
If mandatory, what kind of information should be included in such statements? If voluntary, how to secure the interests of, say the employees, at enterprise level?
Governments, notably in the Scandinavian countries, and the European Commission have identified public sector interests in HRA. This ranges from a desire to support further improvement of enterprise competitiveness to an interest in diminishing the public sector funding of vocational education and training and, more generally, the implementation of lifelong learning. If, and this is still a big IF, the public sector, nationally or internationally, decides to promote HRA, three ways forward can be identified:
The voluntary market-based method (the ISO standard method), i.e. develop a consistent framework which can be operational across sectors and countries and promote this through a rewarding and image campaign,
The voluntary rewarding method (the Investing in People method in the United Kingdom), i.e. develop a consistent framework supported by rewarding mechanisms once it is introduced and approved at enterprise level (enterprises pay for their training evaluation whether they meet the standard or not),
The compulsory method (the Green accounting method in Denmark), i.e. identify disclosure on human resources as a societal concern and prepare (inter-) national regulations.
Training and Selection Cost Analysis: Concept No doubt, when a firm invests in human resources by acquisition and training, it anticipates a future generation of profits and services that will be produced by these assets. Referring to training, the (AECA) [1994] states that
one of the techniques showing a greater capacity to stimulate efficiency is based on the idea that an employee who is induced to get to know his job better is more productive and quicker on the job. 1) When does training take place? It can be at the contracting moment or any moment during employment. 2) How long is the training period? It can take from one or two days to one or two weeks. In some cases, it can take six months, one year, or more. 3) Does this training relate to the nature of the job by updating an employee's knowledge and teaching new techniques or does it open doors to new skills not related to the worker's professional activity? 4) Is there internal or external training taking place?
Treatment from a Managerial Accounting Perspective: Personnel working for a determined enterprise are actually participating in a value-creation process. That is, any economic activity makes the firm incur
costs. One traditional classification takes into account the cost categories of raw materials, industrial plants, and personnel. When adding income flow to an organization's market goods and services, if it is superior to the cost flow, it becomes added value. This value is a consequence of the interaction between material and human resources in production. Because it is difficult to know and measure value, accounting has used substituted measures such as acquisition cost, substitution cost, and even opportunity cost.
Exit Cost Analysis: Concept Exit costs can be classified into the three categories [Ripoll and Labatut, 1994] of lost efficiency prior to separation, job vacancy cost during the new search, and termination pay.
HUMAN RESOURCE ACCOUNTING - INTERESTS AND CONFLICTS: Human resource accounting - interests and conflicts The purpose of a recently published CEDEFOP report* is, using case studies, to provide an overview of the main terms within human resource accounting (HRA) and to present the positions of the main stakeholders. The challenge Until recently, the "value" of an enterprise as measured within traditional balance sheets, e.g. buildings, production plant, etc., was viewed as a sufficient reflection of the enterprise's assets. However, with the growing emergence of the knowledge economy, this traditional valuation has been called into question due to the recognition that human capital is an increasingly important part of an enterprise's total value. This has led to two important questions: how to assess the value of human capital in addition to an enterprise's tangible assets and how to improve the development of human capital in enterprises. The emergence of methods for accounting human resources aimed at measuring, developing and managing the human capital in an enterprise, can thus be said to reflect the need for improving measuring and accounting practices as well as human resource management.
how to assess the value of human capital in addition to an enterprise's tangible assets and how to improve the development of human capital in enterprises. The emergence of methods for accounting human resources aimed at measuring, developing and managing the human capital in an enterprise, can thus be said to reflect the need for improving measuring and accounting practices as well as human resource management
Defining human resource accounting on the basis of management: Human resource accounting (HRA) as an approach was originally defined as the process of identifying, measuring and communicating information about human resources in order to facilitate effective management within an organisation. It is an extension of the accounting principles of matching costs and revenues and of organising data to communicate relevant information in financial terms.
The accounting of human resources can be seen as just as much a question of philosophy as of technique. This is one of the reasons behind the variety of approaches and is further underlined by the broad range of purposes for which accounting human resources can be used, e.g. as an information tool for internal and/or external use (employees, customers, investors, etc.), and as a decision-making tool for human resource management (investments in human resources as well as personnel management in general.
Our main asset is our people! How true is this oft-repeated statement made by the management of all knowledge-driven companies? The problem in fact starts when it comes to assessing the real value of human assets. While most organisations can readily give detailed information about their tangible assets like plant and machinery, land and buildings, transport and office equipment, there is no formal record of investment in employees. Human assets accounting or human resource accounting (HRA), which stands for measurement and reporting of the cost and value of people as organisational resources, is still to become an accepted trend in the Indian IT industry. HRA scenario It is true that worldwide, knowledge has become the key determinant for economic and business success, but Indian companies focus on Return on Investment (RoI), with very few concrete steps being taken to track Return on Knowledge. What is needed is measurement of abilities of all employees in a company, at every level, to produce value from their knowledge and capability. Human Resource Accounting (HRA) is basically an information system that tells management what changes are occurring over time to the human resources of the business.
HRA also involves accounting for investment in people and their replacement costs, and also the economic value of people in an organisation, says P K Gupta, the director of strategic development-intercontinental operations, of Legato Systems India. The current accounting system is not able to provide the actual value of employee capabilities and knowledge. This indirectly affects future investments of a company, as each year the cost on human resource development and recruitment increases. Experts point out that the information generated by HRA systems can be put to use for taking a variety of managerial decisions like recruitment planning, turnover analysis, personnel advancement analysis and capital budgeting, which can help companies save a lot of trouble in the future. On balance sheet Organizations can actually find out how much they can earn from an individual, as the intellectual assets of a company are often worth three or four times the tangible book value. Human capital also provides expert services such as consulting, financial planning and assurance services, which are valuable, and very much in demand. Realizing this, many companies world-over are making HRA as a necessary element on their balance sheets. One of the best examples is of the Denmark Government. The Danish Ministry of Business and Industry has issued a directive that with effect from the trading year 2005, all companies registered in Denmark will be required to include in their annual reports information on customers, processes and human capital. A minimum of five measures for each is required, and comparison with the previous two years must be shown. Figures for investment in intellectual capital must be shown and compared with the previous two years. A narrative should accompany each set of figures. Information for investors about
intellectual capital, both current and future, should occupy at least one third of the report. Where relevant, information must also be provided regarding care for the environment. In India, there are very few companies like BHEL, Infosys and Reliance Industries, which have implemented HRA and some are working on it. Infosys, which started showing human resource as an asset in its balance sheet, has been reaping high market valuations. NIIT has been following a similar method called Economic Value Addition (EVA), which also helps in assessing the real value that an employee can fetch for the company. Experts point out that companies can derive many benefits by going in for HRA. Not only can they measure the return on capital employed on total organizational assets (including the human assets), but the resources can also be planned accordingly. Once organizations realise the actual benefit and take it as a growth process, it will only help them in increasing their shareholders value. When a company is able to assess an individuals worth, it helps in increasing its own worth,
Ajay Sharma (Senior HR manager of Cadence Systems) Basically HRA can be tracked through two methodscost-based analysis and value-based analysis. The cost-based approach focuses on the cost parameters, which may relate to historical cost, replacement cost, or opportunity cost. The value-based approach suggests that the value of human resources depends upon their capacity to generate revenue. This approach can be further sub-divided into two broad categories: non-monetary and monetary.
The disposition of resources can also be examined by allocating relative human asset values to different job grades. HRA also helps in examining expenditure on personnel and in re-appraisal of expenditure on services and training. It can also serve as a key factor in case of mergers and takeover decisions, where the human asset value becomes a relevant factor. Another very significant role, which HRA can help in creating, is goodwill for a company. The company can project itself in having best practices with superior policies in place. Experts believe that this may help the organisation attract more investments. The deterrents While HRA as a concept has been present in India for more than a decade, with BHEL taking a lead, it is only now that the awareness is being translated into application. However, Gupta points out that in terms of awareness and acceptance, the level is still low as many companies take little initiative to make the numbers public to shareholders, despite having the data. Another major deterrent is the lack of an industry standard. This means that every company has to evolve its own standard, Which can become a tedious process, considering that most of them are still involved in improving their business. Industry bodies like Nasscom can help set a standard. Another aspect working against the acceptance of HRA is the need for extensive research that it entails. Many companies do not want to go into the intricacies of finding the value of their human resources. While most big companies (with a large manpower) can afford to dwell into such best practices, it is not an economically viable option for small and medium companies, says Sharma of Cadence. Naresh Taneja, the head of human resources of HCL Technologies (Mumbai, formerly Gulf Computers), believes that one cannot totally rely on this concept. Considering the dynamism of this industry, it is very difficult to
predict as to what is going to be your future requirements and how technology is going to shape in the near future. This only raises the question on the benefits of HRA. Gupta is however optimistic about the future. As HRA is not directly related to ROI, many companies do not take it very seriously. However, in the past few years organizations have been investing a lot on improving their systems and infrastructure. And the next obvious step would be measurement of human assets. However, its ultimately the people who deliver results. Realizing the benefits, which it can provide, the responsibility lies on the companies, as to how much importance can they or do they give to their HR.
Human Capital Accounting & valuation An organization is made up of competencies, which we loosely call `capital'. When we use the term `capital', we basically refer to structured capital - both fixed and working capital. The profitability and liquidity of an organization is assessed on the strength of its ability to optimally utilize and achieve maximum return on its capital employed. Even Market Capitalization, which is the hallmark of valuation of a company, is also dependent on the degree of Financial Leverage, which is essentially a study of the capital structure. In this web-linked world, where no quarters are given or taken, management of structured capital is critical and challenging. It is being increasingly discussed in corporate circles that a company's value depends more on intangible assets like brand strength, human capital, and governance norms than in tangible assets. A comparative analysis of the data from The Brookings Institution highlights the growing importance of intangible assets.
In 1992, the figure rose to as high as 62%. Most recent studies have revealed that the average market value of tangible assets in many companies is as low as 15%.
Marketing professionals are nowadays referring to customer capital which, in essence, implies that the inherent strength of an organization lies in its customer base - its ability to create brand loyalty and cater to innovative product and service packages desired by the customer. Towards this end organizations are increasingly focusing on enhancement of customer capital, through Customer Relationship Management innovations. Most organizations have come to the realization that the control of the business is not within the confines of its four walls but outside - with the customer. In its endeavor to maximize stakeholder value, the customer has become the kingpin. Customer capital is indeed the buzzword today. As we move forward in a knowledge-driven economy, human capital becomes one of the major building blocks towards sustainable growth. The shock waves of globalization and changed parameters of the new economy are shaking the very foundations of businesses across the globe. The knowledge worker, more than ever, has everything to gain. To entice the professionals, companies are trying out innovating methods and new tools. The changing business scenario and the infallibility of some basic truths about human resource management in general and employee retention in particular have prompted the creation of this book "Human Capital - Accounting and Valuation".
It is now imperative for companies to delve deep into the minds of people, and establish a comfortable space for the organization towards ultimate employee loyalty. But how does one go about performing this rather daunting but critical assignment? The easiest approach seems to lie in the creation of value perception in an organization about its employees. It is unfortunate that the most valuable asset of an organization, its people, is neither valued nor included as an asset in the company's Balance Sheet. Traditional accounting has, for far too long, refused to look beyond the confines of Schedule VI to the Companies Act and Accounting Standards that regulate valuations. Similarly Human Resource Managers need to look beyond the ambit of routine personnel management, industrial relations and training functions and delve deep into the need to interface and integrate Human Resource Management and Financial Management concepts like Return on Investment, Internal Rate of Return and similar concepts of Valuation and Financial Analysis. This is the age of integration and multi-skills. In this environment, the HR professionals have to be converse with financial tools while Finance professionals have to be aware of the ground realities of People Management. The logic of this book stems from this realization. The growing importance of human resources has brought about a change in the manner employees are being treated in an organization. Employees are now not treated as human capital but as human capital owners and investors. In one of his articles, "The Value of People: The Challenges and Opportunities of Human Capital Measurement and Reporting", Leslie A Weatherly refers to the realization of HR as an asset generating future revenue and profitability. This has resulted in significant reduction in the number of layoffs. Human capital measurement systems at
activity level, functional level and strategic level help in making the transition to a measurement-knowledge organization.
Having said that, it is important to note that communities at work are getting consolidated. Companies that can bridge the tension between people's inherent need for community, and the forces pushing toward the flexible, networked world of the future will create ta both sides can share and enjoy. Collaboration, reciprocity, and mutual advantage are the essence of the organization of the future, as are authenticity, meaning and trust. It is important to fully understand and appreciate the nature of intangible assets in general and human capital in particular. Among these, "intangible assets" are organizational capital, such as business alliances; customer capital, the value of branding and reputation for quality or service; and intellectual capital, such as patents and proprietary technology. But the most important is human capital, the ability of employees to do the things that ultimately make the company work and succeed. Hard to define, and even harder to measure, intangible assets are becoming increasingly essential to the success of many organizations in the 21st century. Every company has employees. But not every company understands their contribution to the bottom line or knows how to manage them to drive even better financial results, even though they account for as much as 80 percent of the worth of a corporation. In one of his articles, "Measurement of the Value of Human Capital", Steve Bates discusses the importance of a change in philosophy and the need to adopt an `incremental approach'. He contends that instead of tracking tried and trusted metrics, HR professionals are devising original approaches to measure the value of human capital. Globalization has simply made cost reduction in product delivery a must for staying competitive in the global market. Thus, improvement in temporal and
functional flexibility in the business processes has become a must and to accomplish this corporates are spreading their recruitment net even beyond their state boundaries. The search for skills and competencies at the middle level management and upwards has today become an international affair. This has set in motion active mobility of people across the globe. Thus, employee profile of businesses has become more and more international, besides being spread across many countries. This resulted in greater diversity among the human resources deployed at various work places within and outside the nation. A need thus arises to manage these cultural and institutional differences between countries where the business has spread, so as to keep the productivity and profitability on par with global competitors. In this context, the valuation matrix has to be diverse with built-in parameters to accommodate cultural diversities in the valuation process. Human capital is not merely a component of capital; it is the most critical attribute that forms the basis for other forms of capital. Arguably, human capital is considered to be the most important asset held by an organization. In today's environment, the key lies in understanding the value of people. We have come to realize that there is no management without measurement. If the HR practice leaders of today have to lead in maximizing the value of internal stakeholders, they have to adapt and learn valuation and accounting methodology. This book is divided into three sections. Section I deals with the essence of the human capital, Section II deals with the valuation and accounting aspects, and Section III refers to a few case studies.
The title of the first article in section I is "The Human Capital Metaphor What's in a Name?" According to the author, Thomas O Davenport, Human Capital comprises all the intangible assets that people bring to the jobs. He considers knowledge, skill, talent and behavior as the four key elements of Human Capital. The article throws light on some of the more enlightening aspects of Human Capital, notably, Risk and Return on Human Capital Investment and the psychological or implicit contract that takes place between the employer and the employee. The second article "Human Capital Management: The CFO's Perspective" is by Don Durfee. This article is based on a research study to ascertain the increasing role of the CFO in the present Human Capital Management scenario and its integration with corporate strategy. The research yielded 180 responses from CFOs and Senior Vice Presidents of large organizations. Some of the key findings of the research were as follows: Despite high spending, only a few CFOs know about the return on human capital investments. CFOs consider human capital as a key value driver. The top workforce priorities are building leadership capabilities and raising workforce productivity. During mergers and acquisitions, human capital becomes a major factor in pricing.
Organizations all over the world have witnessed business growth by following enabling HR practices like competence building, commitment building, culture building, etc. According to the author Shambhavi Sharma of the third article "The Impact of Strategic Human Resource Management on Firm Performance", These attributes lead to organizational excellence. The paper highlights the impact of Strategic HRM interventions on a firm's performance and suggests the approaches to evaluate HR functions. Strategic HRM quantifies HR and transforms HR from a supporting role to that of strategic decision-making. The author also refers to research evidence relating to HR practices in three key areas - best practices, contingency practices and configuration practices and links these to business environment. The focus of the book then shifts on to the return on investment on Human Capital and its impact on the financial success of an organization. According to Graham Brown, author of the fourth article "Human Capital ROI Study: Creating Shareholder Value through People", human capital practices contribute substantially to market value of a company. The research identifies items relating to HR practices, which are critical in driving superior financial performance. According to the study, human capital practices explain as much as 43% of the difference in the market-to-book value of one company as compared to another. Some of the key findings of the survey revealed the following: Certain HR practices that may work for one organization may not be as effective for others. Such HR practices are setting starting salary, measuring employee performance and enhancing productivity through teamwork, training and communication. Turnover ratios may not be a good indicator of financial performance.
Valuation and Accounting of Human Capital are allied areas. Therefore, the fifth article "Human Resource Accounting - An Accountant's Dilemma" by T Raju, M Ashok Kumar, and Sangeetha Mohandas T focuses on the dilemma concerning Human Resource Accounting (HRA). The traditional accounting approach doesn't provide any scope for HRA though the costs related to HR are accounted for. With the growing importance of HR in the overall performance of the organization, the author believes that it has become imperative to quantify HR and exhibit the same in the financial statements. The article suggests various techniques of measuring employee performance that could lead to valuation of the workforce. Section II of the book deals with Valuation and Accounting. There are four articles in this section. In the first article - "Valuation of Human Capital" - Navin Bhutoria covers all the parameters in the process of human capital valuation in the present knowledge era. According to the author, the importance of human assets is reflected in the gap between the market value and book value of corporates. The shift from viewing HR as a cost center to an asset provider has prevented baseless cost cutting through layoffs and retrenchments. HR is now viewed as an asset generating future revenue and profitability. The author contends that the most commonly followed valuation technique is ascertaining the Present Value of Future Earnings of each employee and the sum total of the value of all employees leads to the human capital valuation of the organization. The second article in this section is titled "Human Capital Valuation - Pricing the Priceless". In this article the author, Santanu Ray, deals with the emerging trends in human capital as a foundation asset. It focuses on the value of the company residing in the intellect of the employee instead of in the tangible asset. The paper discusses the basis of
valuation of human capital and the models connected therewith including activity-based valuation along with the concept of human capital ROI. The section on human capital ROI deals with the ratios that have been developed to measure the performance of various parameters connected to HRM. The Human Capital Accounting (HRA) section deals with the analysis of some of the approaches/models in HRA. Human Capital Valuation is dependent upon Human Resource Accounting (HRA). In his article "The Changing Perspective of Human Resource Accounting", the author, Arup Choudhuri, states that Human Resource Accounting is nothing but an evaluation of employees' effectiveness. HRA was advocated as a way of enabling firms to estimate the current value of human assets of the enterprise. The article depicts the evolutionary process of HRA and provides the major research approaches (i) (ii) (iii) Historical Cost Approach, Replacement Cost Approach and Opportunity Cost Approach.
The last article in this section is "Human Resource Disclosures - A Comparison of Information, Providers and Users in Two Corporations" by Gunnar Rimmel. This paper is concerned with the relationship between information, providers and users of HR disclosures in advanced annual reporting practice and analyses and compares users' perception of voluntarily disclosed information on HR with providers' intentions of making HR information publicly available. The study is conducted by applying a tripartite model studying information, providers and users together. The results of the research findings contribute to better understanding, possibly reducing deficiencies between providers and users of voluntary HR disclosures. The research paper highlights the voluntary disclosure policy of HR related information by two organizations - Allianz and Skandia.
Section III deals with Case Studies. The first case highlights the human resource accounting practices followed at Infosys. The company follows the Lev and Schwartz model for valuing its human capital. The case "Human Resources Accounting in Infosys" by P Mohan Chandran details the application of the model in the context of the ground swell at Infosys. Infosys' HRA model is based on the present value of the employees' future earnings with the following assumptions: An employee's salary package included all benefits, whether direct or otherwise, earned both in India and abroad. The additional earnings on the basis of age and group were also taken into consideration. The concluding part of the article exhibits the various human capital accounting models and also a brief summary of the human resource accounting model followed at SAIL. The second article "Effective Human Capital Measurement at RBS" by Greig Aitken describes the HR measuring strategy of RBS. Based on global HR data, the bank has developed an effective human capital model. The human capital model links people strategies to business performance and the model supports the business in improving its people strategy in clear and manageable ways. Certain key impacts of the model are as follows: A better understanding of what attracts people to the organization and what retains them. Building HR competence in using multiple HR data to diagnose human capital issues and support business decisions. Accounting and Valuation of Human Capital empowers companies to realize the power of their people and to leverage them to their full business potential. Human Capital Valuation is a unique proposition that gives companies a strategic weapon to combat competition. Human Capital Valuation helps
management review its strategy of investment in Human Assets. The accounting concepts help ascertain effectiveness of the entire gamut of Human Resource Management Management information system WordNet described an information system as a system consisting of the network of all communication channels used within an organization. An information system is comprised of all the components that collect, manipulate, and disseminate data or information. It usually includes hardware, software, people, communications systems, and the data itself. The activities involved include inputing data, processing of data into information, storage of data and information, and the production of outputs such as management reports. The area of study should not be confused with Computer Science which is more theoretical and mathematical in nature or with Computer Engineering which is more engineering. The study of Information Systems is usually a commerce and business administration discipline, and frequently involves software development, but also distinguishes itself by concentrating on the integration of computer systems with the aims of the organization. In business, information systems support business processes and operations, support decision making, and support competitive strategies
The
Rationale
for
the
Emergence
of
HRA
(Human
Resource
Accounting)
The development of HRA can be seen as a part of and a response to the changes and developments at macro level (societal) and the micro level (enterprises), to which enterprises must adjust. Furthermore, the increased importance of intangible assets, which now contribute more to the creation of global wealth than tangible assets, poses both theoretical and practical problems, which both stakeholders and researchers address using HRA. This section presents briefly some macro and micro perspectives, which have fuelled the development of HRA. The macro level This section highlights some of the macro level charges, which have influenced the revival, and further development of HRA, such as
The changing roles of governments, enterprises and individuals ion patterns, work organization and employ The change in production patterns, work organization and employment patterns Modern economies are changing fast; services, information and technology are increasingly important and innovation is taking place at a rapid rate. This on going transformation has already changed production patterns, work organization and employment practices and has thus underlined the need for adequate responses.
The shift from traditional industrial manufacturing to intangible knowledge production has led to a dramatic increase in immaterial production, and some
analyses show that 'total intangible investment had passed physical investment in Germany, Sweden and the UK by 1987. In short, labor-market development is shifting from production-based economic units to learning-based economic units, emphasizing the shift from traditional production factors to knowledge as a primary input in production processes and, hence, in output. Further, new forms of work organization such as self-organising work groups and quality circles seem to be gradually replacing tayloristic production methods based on work division. This 'business process re-engineering' aims at a vertical integration of all production processes and a new division and organization of work within and beyond enterprises, and it implies 'changing demands on the competences and skills of workers when taking over a broader variety of tasks and responsibilities.' Both the supply side and the demand side of the labour market will be affected, since there will be a gradual change from permanent, stable employment, to individualized flexible employment patterns.
This can be exemplified by the dilemma between security and flexibility in employment, which may be viewed differently by employees and by firms: 'Middle and lower-end labor may well want much more job security than these high-tech firms (in Silicon Valley, ed.) want to give, while highly-skilled workers want less job security than is optimal for the firms.' Consequently, in order to retain highly-skilled workers, firms will 'try to design compensation and training schemes that will reduce turnover - thus in effect trying to make the highly skilled labour force less flexible. Nevertheless, the shift from long-term employment to flexible employment is clear and can be seen in the development in part-time time work increased by 100% in The Netherlands, 70% in Belgium, 59% in Ireland, 46% in France and 33% in the United Kingdom, and the European Commission states that part-time jobs accounted for all net job creation in the EU from 1990 to 1996.
The above examples indicate the variety of the new and more complicated problems created by a more unstable labour market. Work: from 1979 to 1990 partThe changing roles of governments, enterprises and individuals
Economic and social change, combined with a need to minimize public spending while optimizing public services, have put pressure on governments' abilities to sustain and develop a large range of formerly institutionalized public services. The persistent and increasing public sector debt in most Member States of the European Union, which began in the early 1970s and has continued until the late 1990s, has underlined the limitations of the public sector's being the sole provider of social security systems and of other public goods such as social stability, a clean environment, etc. Rising unemployment has been seen in part as a consequence of inflexible labour markets, which resulted in a massive loss of especially low-paid and unskilled jobs as well as a loss of international competitiveness. However, with the experience we have today it can be argued that the loss of competitiveness and of low-skilled jobs was equally due to the failure of enterprises and the labour force to adapt to the new situation, where knowledge and, consequently, the continuous updating of knowledge are the main impetus for remaining competitive, both for individuals and enterprises. Many factors contribute to the changing role of enterprises: the globalization of markets, increased competition, the relocation of enterprises to low-wage countries, the need for ever faster product development and innovation, the faster rate at which of knowledge becomes outdated and the changing role of governments which, generally, generates change for enterprises. Those changes can be exemplified by the formation of local partnerships, witnessed in many countries, aimed at combating unemployment, poverty and
social exclusion. The participants in these local partnerships include national, regional and local governments, the social partners, non-governmental organizations, local communities and the excluded groups themselves. To some degree, this can be seen as one way of establishing what Coleman defined as social capital, i.e. the networks, norms and relationships which enable the development of human capital. Other phenomena are the arrival of the political consumer and, generally, a change of values in society; either through regulation or through direct consumer action, these phenomena have put pressure on enterprises which have not already adjusted to the new situation to develop policies and strategies encompassing more than economic cons The notion of the political consumer as been accompanied by individualization as another phenomenon in society, and in the labour market in particular, which must be incorporated into the innovative strategies of enterprises. In addition, labour markets in the European Union are gradually returning to a situation of low unemployment, especially within the knowledge sectors of the economy, thereby leading to increased competition for the qualified workforce. The latter trend is being reinforced by the demographic development of the ageing of the population, which may lead to a shortage of qualified labour in the future. At the macro level, HRA reflects socio-economic developments emphasizing the changing distribution of responsibilities among individuals, enterprises and the public sector, and a change in expectations and demands among the various actors. This is exemplified throughout this report and by the case studies presented in Section 5. The micro levels The micro level perspectives are directly linked to HRA which, again, could be developed both for internal and external use. For internal use HRA can be considered a management tool, and for external use, a tool for profiling the enterprise/organization.
Reasons for developing HRA for internal: purposes To improve human resource management So far human resource management (HRM) has often been carried out on the basis of strategies, plans and goals which have been defined and managed without simultaneous definition of specific targets, indicators, measurements, etc. Informal management systems and the intuition of the management have been sufficient to ensure that human resource management projects have been successful. Increased focus on human resource management and improved information technology has now led to the adoption of the saying: 'what you cannot measure, you cannot manage'. In principle HRA is a tool to be used when implementing or improving HRM. The connection between HRM and HRA can be described on the basis of this diagram: The circle describes the Human Resource Management The lower and left part of the circle, it appears that registrations, procedures and internal and external reporting should take place. This covers the basic elements in HRA. From the literature and experience we know that enterprises and organizations register up to 150 variables on each employee. These data present a tremendous potential for developing measures, performance indicators, etc. But very often the data are collected only for specific use (for example, reporting to authorities) and not for aggregation, analysis and reporting to management System as a whole. If management were to focus on data already available in their organization to set up management reporting systems, much would be gained, and it is only a small step from reporting periodically to management on key human resource indicators in a standardized way to setting up management systems. It
requires management to: set goals and targets for key performance indicators; decide what action should be taken to meet the goals Implement the action; measure and report on the results of the action, and adjust the goals and targets, etc. A virtuous circle would then be established To focus on employees as assets Until recent years, management's main concern was whether production equipment and buildings were well maintained and functioning; the focus was on fixed assets, and employees were considered as overheads. The development of technology was rather slow, and the enterprise's ability to change and to be innovative was less crucial. Nowadays, technological development is fast and new products have to be developed in order to meet market demands and competition. Consequently, the enterprise's ability to manage change and to be more innovative than its competitors is critical. The shift in focus from fixed assets to employees still depends largely on the specific business sector. In this connection human resource accounting, knowledge accounting, measurement of intellectual capital, balanced scorecards, etc., are important tools for management. Employees are considered not as overheads but as assets, as it is the employees and not the outdated buildings and production equipment, who will carry the enterprise into the future. To retain qualified labour force Years ago many employees, e.g. in factories, were low skilled and received only the absolute minimum of training needed to carry out their jobs. Now enterprises and organizations have to invest huge amounts in training, updating the labour-force's education and qualifications, etc., in order to meet market demands. At the same time, enterprises and organizations have to convince employees that their present job and employer are more attractive than those on offer in
the market, as qualified labour is now a scarce resource in many Western countries. This means that management has to invest in employees while also ensuring that the enterprise or organization maintains a reputation as a good place to work, i.e. maintaining a high profile on social and ethical issues, etc. This investment in human capital encourages management to measure and to collect data on human resources and to manage those resources as an important asset for the enterprise. HRA is also about making these investments more efficient from a strategic point of view as well as from a cost/benefit point of view Reasons for developing HRA both internally and externally To overcome problems deriving from valuation of intangible assets Usually most of the intangible assets of an enterprise, such as goodwill, patents and licenses, research and development, human capital, etc., are not included in the net book value of the enterprise. Costs are entered in the profit and loss account as an expense at the time they are incurred. Key performance indicators for many areas within HRA are now recognized, but there is still no generally accepted accounting practice for assessing the financial value of these assets; although the value of a highly-skilled, wellperforming and highly-motivated workforce is 'nil' in financial statements, the increasing profit from these factors will be entered in the accounts. Further, a company's good name will be determined by the market position of the products, its production and distribution network, customer lists and marketing rights and the market expectations of employees' qualifications, innovative abilities, motivation, etc. It is therefore crucial that not too many negative events be linked to the name of an enterprise. If the goodwill in general terms are positive it means that:
People working for the enterprise will be proud, which will attract new employees Investors will be attracted
Other enterprises may be attracted to the enterprise, for example through mergers and takeovers or new alliances. Other assets deriving from excellent human resource performance are patents, licenses and innovative ability, especially in science-intensive businesses. Usually research and development expenditure is included in account. Costs related to purchase of patents, licenses and similar rights can be capitalized and thus included in the net book value of the enterprise. As most expenses are included in the profit and loss account, the enterprise must communicate information about new inventions, new products, human capital, etc., by other means. To redistribute of social responsibilities between the public and the private sector In recent years we have seen within the EU a tendency among enterprises and organizations to take over more and more social responsibility from the public sector. Local and international industrial networks, union leaders, etc., argue that enterprises and organizations should be seen as an integral part of society and thus accept their share of responsibility. At the same time, EU and national governments encourage such initiatives; for example, an industrial network in Denmark - 'Partnership for Social Cohesion' - launched at the initiative of the Ministry of Social Affairs, has been active for four years. Union leaders are realizing that the time has come not only to demand higher salaries but also to go for better working conditions, better quality of living, etc. All these initiatives put pressure on the private sector to measure, monitor and report on human resources. Reasons for developing HRA externally
To overcome the difficulties in traditional balance sheets in providing sufficient information to investors A lot of discussions and work are being done at present by accounting, financing, investors' and other non-governmental organizations (NGOs) in order to overcome the difficulties in providing this new type of information to investors. Organizations such as the International Accounting Committee (IAS) and Federation des Experts Comp tables Europeans (FEE) are active in this area. The discussion particularly concerns companies listed on stock exchanges. Sustainability - an NGO that periodically carries out a benchmark survey on company environmental reporting for the United Nations - concluded in its 1997 survey that the enterprise of the future will have to report a triple bottom line: the triple bottom line includes financial, environmental and social performance. Companies such as Shell, The Body Shop, have already adopted this concept To create and improve the company image through HRA is already be a way of profiling enterprises and continue to be so in the future, even though human capital is not included in the net book value. This is especially the case for listed companies with a wide circle of owners/investors, where management will focus on reporting on intangible assets in order to improve the reputation of the enterprise. This being the case, management will focus on increasing the market value of the enterprise, even though the net book value does not reflect this in the short run. The market value of the enterprise reflects the net present value of the expected future cash flow of the enterprise. In the private sector the difference between the net book value of the enterprise and its market value depends largely on the line of business of the enterprise, as is shown in an analysis from 1995:
To attract future employee In the Western world we now face a period where the number of young people entering the labour market will decrease. At the same time, many young people demand honest work, want to work for a well-respected enterprise and want to be able to have a decent life outside working hours, etc. All of these are quite new requirements; into the past, high salaries were the most important factor. This new trend puts pressure on enterprises and organizations that want to attract these young employees; employers have to focus more on their employees than they did in the past, and this requires better HRA, since HRA is an important external reporting tool, which allows the enterprise to document its investment in its employees.
Benchmarking Benchmarking is a process used in management and particularly strategic management, in which businesses use industry leaders as a model in developing their business practices. This involves determining where you need to improve, finding an organization that is exceptional in this area, then studying the company and applying it's best practices in your firm. Benchmarking systematicly studies the absolute best firms, then uses their best practices as the standard of comparison, a standard to meet or even surpass. Benchmarking recognizes that no company is exceptional at everything. That is why it is an ongoing process involving firms from any industry and any country. It is not a one-shot event. There is no room for complacency. Benchmarking requires that you constantly search for better solutions. The rationnale is, If you continuosly search for best practices in the best firms around the world, you should become an exceptional company. Every function and task of your business can be benchmarked, from production, to marketing, to purchasing, to information technology management, to customer service. Some authors call benchmarking "best practices benchmarking" or "process benchmarking". This is to distinguish it from what they call "competitive benchmarking". Competitive benchmarking is used in competitor analysis. When researching your direct competitors you also research the best company in the industry (even if it serves a different location or market segment and is therefore not a direct competitor). This benchmark company is then used as a standard of comparison when assessing your direct competition and yourself. A process similar to benchmarking is also used in technical product testing and in land surveying. See the article benchmark for these applications.
PROCEDURE 1) Identify your problem areas - Because benchmarking can be applied to any business process or function, a range of research techniques may be required. They include: informal conversations with customers, employees, or suppliers; exploratory research techniques such as focus groups; or indepth marketing research, quantitative research, surveys, questionnaires, reengineering analysis, process mapping, quality control variance reports, or financial ratio analysis. 2) Identify organizations that are leaders in these areas - Look for the very best in any industry and in any country. Consult customers, suppliers, financial analysts, trade associations, and magazines to determine which companies are worthy of study. 3) Study their best practices - An initial study can be done at a good university library or online. This will give you an overview, however more detailed information will require an in-person visit. Phone the CEO and ask if a group of your managers and employees can visit their operations for an hour. Be forthright as to the purpose of the visit. Most CEOs will be flattered and agree to the request. Make it clear that any information obtained from the visit will be shared with them. Determine what subject areas will be off-limits. Ask if camera or video recorders are acceptable. Prepare two lists well in advance: a list of your objectives, and a list of questions. Choose 2 to 5 visitors, people that are closest to the issue, that will be responsible for implementing any recommendations, and cover a broad range of functional responsibilities. Occasionally an outside consultant is included in the visit team so as to provide an alternative perspective. Meet with your employees to explain the purpose of the visit and assign one or two questions to each employee. Explain what subject areas are off limits. Ask them to think about how the visit could benefit their area, and ask them to device more questions. Stay away from questions that could cause legal problems (eg., price fixing or new product development).
Send a confirmation letter one week before the visit stating the date, time, and location of the visit, the number of visiters and their positions, your objectives, and a list of possible questions. Visits are typically 1 to 3 hours long. When at the site, provide a token gift to show that you appreciate the opportunity, keep focused on your objectives, give praise where it is due, and do not criticize. Look for anything remarkable or unexpected. As soon as you get back to your office (or hotel), have an immediate debriefing. Discuss what you have learnt and how you can apply it. Make sure that every visitor has an action plan detailing how they will be implementing the new information in their job. Some formal analysis (such as process mapping) of the benchmarked process may be necessary. After several weeks, phone back the CEO to express your appreciation and give concrete examples of how the knowledge gained from the visit will be used in your company. Send them a copy of any written reports about the visit before they are distributed. This allows them to correct inaccuracies and modify sensitive or propriortory information. 4) Implement the best practices - Delegate responsibility for actions to individuals or cross-functional teams. Set measurable goals that are to be accomplished within a specified time frame. Monitor the results. Get key personnel to give you a brief (one page) summary of how the immplementation is proceeding. Spread the information through out the entire organization. 5) Repeat - Benchmarking is an ongoing process. Best practices can always be made better.
COST OF BENCHMARKING Benchmarking is a moderately expensive process, but most companies find that it more than pays for itself. The three main types of costs are:
Time costs - Members of the benchmarking team will be time in researching problems, finding exceptional
investing
companies to study, visits, and implementation. This will take them away from their regular tasks for part of each day so additional staff might be required.
Benchmarking
database
costs
Organizations
that
institutionalize benchmarking into their daily procedures find it is useful to create and maintain a database of best practices and the companies associated with each best practice.
Bait & switch A bait and switch is a form of fraud in which the fraudster lures in customers by advertising a good at an unprofitably low price, then reveals to potential customers that the advertised good is not available but that a substitute good is. The goal of the bait-and-switch is to convince some buyers to purchase the substitute good as a means of avoiding disappointment over not getting the bait, or as a way to recover sunk costs expended to try to obtain the bait. Note that in order to constitute a bait and switch, there must be no intention to sell the original bait. Other advertising practices, such as the use of loss leaders or the use of sales techniques to steer customers away from low-profit items, depend on many of the same psychological mechanisms as a bait and switch, but do not constitute a bait and switch as long as it is possible to purchase the original item
Corporate crime Refers to criminal practices by presidents, CEOs, managers, directors and chairmen of corporations and companies. These can regard fraud, damage of the environment, corporate manslaughter, exploitation of people for labour,
and more. Corporate accountability refers to the laws governing corporations, specifically regarding these corporate crimes. Details of criminal activities conducted by corporations are available from organisations such as Corporate Watch and Corporate Watch UK The internationally recognized legal scholar Joel Bakan argued that as corporations must, as a legal neccesity, increase profitability, they often engage in criminal activity. Corporate crime refers to criminal practices by presidents, CEOs, managers, directors and chairmen of corporations and companies. These can regard fraud, damage of the environment, corporate manslaughter, exploitation of people for labour, and more. Corporate accountability refers to the laws governing corporations, specifically regarding these corporate crimes. Details of criminal activities conducted by corporations are available from organisations such as Corporate Watch and Corporate Watch UK The internationally recognized legal scholar Joel Bakan argued that as corporations must, as a legal neccesity, increase profitability, they often engage in criminal activity. Accounting in general Accounting is keeping track of an organizations affairs, records and files through systematic development and analysis of information so as to better understand those affairs, records and files or to be accountable to the organizations stakeholders, including management. An account is a set of records of an organizations actions or transactions. Human Resource Accounting HRA can be considered both an internal and an external discipline: internal as a management tool; external as a reporting tool. In HRA, human resources are viewed as assets or investments of the organization.
HRA was originally defined as the process of identifying, measuring, and communicating information about human resources to facilitate effective management within an organization. It is an extension of the accounting principles of matching costs and revenues and of organising data to communicate relevant information in financial terms. However, the process includes the concept of accounting for the condition of human capabilities and their value as provided by the measurement tools of the behavioral sciences. Social and Ethical Accounting Social and ethical accounting can be defined as the system under which organizations measure and follow up on the key social and ethical indicators which they have defined as relevant to and significant for demonstrating their social responsibility. Social and ethical indicators are sometimes identified and developed by the organization working together with its main stakeholders. Social and ethical accounting may include indicators such as health and safety, racial and sexual equality, redundancies, employee training, empdisabled, pension fund adequacy, etc. Social Report This is a document, which is made available to stakeholders, either as a summary social report to be included in the Annual Report or as a full report available to all. Audit in general Until recently, auditing was used mainly as a process to verify financial statements, in order to add credibility to the information. However, in recent years there has been a tremendous expansion in the extent and type of the information and systems being audited. Auditing has now developed to a point where it includes quality, environmental management, production, operations, sales, data processing, engineering and human resource management.
An audit is thus the examination and investigation of an organisation's affairs and records, which provides an independent opinion and assurance
Human Resource Audit Human Resource auditing is seen both as an internal management tool and as a process, which leads to a verification statement issued by an external verifier and which is intended to lend credibility to an external report. An internal human resource audit is an investigative, analytical, and comparative process, which assesses the effectiveness of the HR function. It undertakes a systematic search and gathers, compiles, and analyses data in depth for an extended period, frequently a year, rather than for formal/informal, daily reports. Social Audit The British organization Social Audit Ltd. defines social audit as the publishing of data covering an organizations interactions with employees, consumers, the community and the environment in the interests of a wider accountability and the presentation of a 'balanced view.' Owen declares that a social audit can be best understood as a reaction against conventional accounting principles and practices. A social audit perspective, reaching beyond the individual enterprise to the local economy of which it is a part, or to different types of organizations such as State agencies. A social audit attempts to embrace not only economic and monetary variables but also social ones, including some which may not be amenable to quantification in monetary terms. An individual enterprise can define a social audit as the annual process of information gathering, the review of data necessary to construct the social report, and all processes designed to substantiate and verify information used.
Verification For The Body Shop, verification means the process of ensuring that statements of fact or theory are meaningful and accurate. The process adopted by verifiers to The Body Shop involves all of the following: understanding the audit process; guiding towards a particular direction in the audit process; viewing/sampling specific stakeholder interactions where necessary; sampling stakeholder survey results; reviewing policy and other documentation; reviewing internal management audit reports; interviewing management and staff where appropriate; data sampling where appropriate; commenting on the draft of the public report; selection and management of Audit Review Panel process; and drafting of the audit verifier's statement. Performance Indicators An indicator is normally a quantitative measure of performance. Data are gathered through constant internal monitoring, and both the data and the monitoring process are subject to internal audit and verification. A performance indicator is a parameter which is selected as being characteristic of an important social, ethical or knowledge-related issue and which is regularly recorded quantitatively. The parameter should be meaningful in terms of the day-to-day work of the enterprise and should be clearly specified. Performance indicators are specific measurements of performance, with information from more than one year presented as it is gathered. Performance Standards Performance standards should reflect the available information (both national and international) on best practice concerning activities and policies which describe an organizations performance in relation to social and environmental issues.
Standards may be both quantitative and qualitative, and the relevant departments within the enterprise, which then are responsible for collecting the relevant information, agree them upon. Data are submitted by the departments and validated by the audit and verification process. BUDGETING On the flipside, governments' budget decisions impact domestic economies in more subtle ways, e.g. by spending more on education, or less on weapons. A particularly key issue is how much government spends on policing and armies. Usually, this is restricted to governments "purchasing" the services of its own citizens, who share some moral code with fellow citizens, and who believe ideologically in what they are doing. It becomes unclear how the politicians' or government's criteria, the people's criteria, and the actual law enforcement or military officer's criteria, interact. These issues are one focus of political economy which establishes what is deemed to be a valid trade good, how its movements are encouraged, discouraged, standardized or otherwise dealt with. The application of UN sanctions against nation-states is an increasingly common way for nations to standardize the way they encourage or discourage each other's trade, e.g. preventing nations from purchasing weapons of mass destruction, as in the case of Iraq Benchmarks Benchmarks are internal or external standards by which one can measure something or assess one's performance. They include comparisons of internal performance indicators with relevant data from external sources. Intellectual Capital Intellectual capital is relevant in all organizations, but most of all in knowledgebased organizations. The success of a knowledge-based organization
depends upon two factors: competent employees and good management. Two organizations with identical employee competence but different management approach will achieve completely different results. As one CEO said: 'If we only knew what we knew, we would be three times as effective.' For knowledge to be useful to the enterprise, it has to be made explicit, accessible and effective. Measuring and reporting on 'intellectual capital' has been very much influenced by the concept developed by the Swedish service and insurance group Skandia. Since 1994, Skandia has reported on different aspects of its intellectual capital twice a year. Scandias definitions refer to private companies, but they can easily be adapted for use in non-profit organizations and public agencies, etc. Skandia argues that intellectual capital is that part of the enterprise's market value, which is not included in the financial capital, and describes it as follows: Structure of intellectual capital Intellectual capital is defined as the sum of structural capital and human capital. It could be defined as 'Something that you can acquire during their lifetimes and use to produce goods, services or ideas in market or non-market circumstances. Human capital 'goes home every evening'. Structural Capital Structural capital can be defined as a residual, i.e., the value of what is left when the human capital - the employees - has gone home. Some examples of structural capital are databases, client lists, manuals, trademarks and organisational structures. Customer Capital Customer capital is the value of the customer base, customer relationships and customer potential, including the value of contracted customer relationships. The customer base is defined as relationships with existing
customers in existing markets. Customer relationships is defined as current and potential business relationships with current customers.
Organisational Capital Organisational capital is defined as systematised and packaged competence, plus systems for structuring the enterprise's innovative strength and valuecreating organisational capability. Innovation Capital Innovation capital is defined as the renewal strength in an enterprise, expressed as protected commercial rights, intellectual property and other intangible assets and val Audit Committee It is not unusual for larger organisations and groups to set up bodies which, although they do not have the authority of statutory financial auditors, can supervise the work carried out by management and the board of directors. In the Anglo-American system, only one level of management exists, the board of directors. In Britain, the financial collapse of the BCCI and Maxwell groups in the early nineties led to a sharper focus on the obligations of the board of directors. This resulted in 1992 in the Cadbury report, which contained
recommendations regarding audit committees in major enterprises. The Cadbury committee recommended the following in relation to audit committees: they should be formally constituted as sub-committees of the board of directors to whom they are answerable and to whom they should report regularly; they should be given written terms of reference which deal adequately with their membership, authority and duties; they should normally meet at least twice a year; and they should have a minimum of three members. Membership should be confined to the non-executive directors of
the company, and a majority of those serving on the committee should be independent of the company.
The audit committee should have explicit authority to investigate any matters within its terms of reference, the resources which it needs to do so, and full access to information. The audit committee system has been adopted in some organisations for use in connection with the implementation of the process leading to the preparation and publishing of social and ethical accounts. Audit Advisory Group An Audit Advisory Group can be defined as a panel of advisors from outside the enterprise which reviews and comments on the draft social report and supporting accounts and serves to advise the external auditor. Members of this group have no permanent financial relationship with the enterprise; the enterprise pays their expenses for participation in the Advisory Group as well as a small stipend if members wish to receive it. Group members are not required to affix their names to the final social report, but may do so voluntarily, without necessarily implying full agreement with all of the statements which it contains. Social Audit Review Panel The panel is comprised of independent persons with relevant expertise on different stakeholder perspectives. The panel receives documentation on the social audit process and result, comments on it and advises the external verifier on the final validation of the published statements. Identification of Stakeholders Generally, HRA is viewed as either a management tool or an information system, and as such, it is perceived primarily to be a concern for mana investors. Consequently, trade unions and governments have been relatively passive in participating in and formulating policies on HRA. This is reinforced
by most researchers and practitioners, who focus on the accounting problems and the design of individual accounts on enterprise level and, generally, fail to link the rise of HRA to the general transformation processes observable in the labour market and in society in general. However, it must be expected, given the gradual development of standardised practises and the wide variety of individual approaches, that stakeholders will have to position themselves and formulate policies and strategies within the area. This process will be further reinforced when stakeholders realise the potential of HRA not only as an accounting system but as a means of establishing new structures across interests and policies. Whereas for some, notably investors and enterprises, HRA may be just a matter of adjusting and improving existing mechanisms to keep pace with the general changes, for others, such as States and trade unions, HRA can be seen as a part of the crucial transformation of established roles and functions in society. The different interests in HRA The interests in HRA originate from different perspectives. The following six issues, although not exhaustive, are the ones dominating the debate, reflecting not only the potential of HRA but also the deviations from traditional demarcations within the wider economic and social context:
the inadequacy of traditional balance sheets in providing sufficient information to potential investors the measurement problems associated with the valuation of intangible assets the redistribution of social responsibilities between the public and the private sector security versus flexibility in employment improved human resource management
The above issues will always overlap. For instance, the redistribution of social responsibilities is two-sided: it addresses the emerging responsibility of enterprises in areas which have traditionally been the responsibility of the public sector, such as the introduction of workplaces for less able people; yet, it also reflects the problems stemming from the increased use of flexible employment and the social security questions it raises. Governments The governments' responsibility for general education, and to a varying degree for initial vocational training and training for the unemployed, highlights the need for improved information on the nature of the demand for training from individuals and enterprises. Furthermore, it must not be forgotten that the government itself is a major employer interested in optimising its human resources. Finally, governments' responsibility for providing standards and rules for the regulation of society in general, and the economy in particular, requires active public involvement in, for instance, instruments for measuring intangible assets in enterprises. Regulation, provision of education and training, cost optimisation and cost sharing are thus the four key reasons for governments to be involved in HRA. Consequently, governments and public authorities advocate social
responsibility in enterprises while adapting human resource accounting elements to their own reporting practices (see for instance Case Study 4). Thus, they are deeply involved in establishing alternative balance sheets while at the same time initiating educational reforms and introducing active labour-market policies which involve private organisations or the social partners. Based on a working paper developed by the Finnish government together with its social partners, an HRA system with the following main categories was tested in the public sector:
knowledge about the development of personnel in numbers and in structure use of working hours personnel-related costs personnel resources and the their development state of personnel, both physical and mental well-being reward systems efficiency and service ability value
how cost-effectively human resources are managed, so that the organisation benefits from its human capital as much as possible how the organisation has taken care of its personnel, so that they have both quantitatively and qualitatively adequate human resources
The HRA system was tested in public organisations, but could easily be adapted to private organisations. The aim of the system is to provide information to the owners of the organisation, management, human resource experts and staff, and personnel. Similarly, the Danish Ministry of Business and Industry is testing a framework model for intellectual capital accounts, which according to the Danish minister, Mr. Jan Trjborg, 'give an overview of the factors that create development within the company: the people working for it, their qualifications and the way in which they carry out their work. If things are not in order and are not consistent with the market or the strategy the company is following, this will become apparent in the intellectual accounts.' The Danish ministry stresses the need for a broad interpretation of knowledge and provides some examples of figures which could be included in an intellectual capital account:
costs of training
IT skills the seniority of each employee running-in time for new organisational units employee satisfaction costs per process customer satisfaction
The Danish government's interest in intellectual capital accounts must be seen from the macro perspective of maintaining the competitiveness of Danish enterprises. It also sees the testing of a framework for intellectual capital accounts as a means of establishing a common intellectual capital account internationally, thus expressing the role of governments in providing regulation. Trade unions The general weakening of trade unions, the decentralisation of the bargaining systems and the growing demand for flexible employment have dramatically emphasised the need for reconstruction. Consequently, trade unions are undergoing dramatic changes and restructuring while seeking both to maintain their traditional power bases and to establish new power structures. The latter could be exemplified by international agreements such as the European Union's Social Protocol, where some labour-market topics are dealt with by the social partners. Another example could be the formation of a more consultative function vis--vis their members on new tendencies in the labour market, for instance HRA. The problems facing trade unions have led the International Labour Organisation (ILO) to state that 'The inherent risk is one of focusing attention on a purely economic - even econometric - approach to human relations.' This concern visualises the potential consequences of the decentralised and even individualised bargaining systems which are observable in most countries worldwide. However, although in part originating from this development, HRA can also be viewed as an attempt to go beyond the economic approach.
The attempt to go beyond the economic approach is exemplified by LO, the Danish Confederation of Trade Unions, which gives as one main reason for involving itself in HRA the fact that 'LO has certain reservations about tying employee development too closely to technical principles of accounting; and for that very reason, one of the critical points in the knowledge account will be whether we can manage to include the right things.' LO views knowledge accounting as fulfilling not only economic requirements but also social and ethical ones, and it sees HRA in connection with lifelong learning and the learning organisation, i.e. as a means to improve and introduce innovation into the work place. Specifically, LO lists the following concerns and issues which led them to participate in the development of HRA tools:
How do we ensure that the employees' 'hard' and 'soft' knowledge are both included in the knowledge account? Should we work for amendments to the Act on Financial Statements that safeguard the interests of both the employees and the companies? How do we make the issues visible within the public sector in a constructive way? How do we ensure continued flexibility in the labour force when the knowledge of the staff is tied even more closely to the individual company?
How do we create a safety net for the weakest members of the labourforce, now that their knowledge will be measured in even more detail than before?
How do we ensure that the knowledge account becomes a hard-edged instrument that will support the 'Developing Workplace' and not be just a cosmetic 'gloss' on the existing financial statements?
Flexibility in this context means transferability of competences between sectors and jobs, which contrasts with the enterprises' view; they normally see flexibility as the numerical flexibility of, and competences flexibility within, the existing workforce. Flexibility and its interpretation is thus a potential area of conflict also in HRA. Both views reflect the tendencies in the labour market,
but from different angles. The central question is the dilemma between security and flexibility, reflecting not only traditional opposing sides, i.e. employers and trade unions, but also it opposing positions within and between employers and trade unions themselves In order to secure as much influence as possible for its members, LO has developed a participatory strategy, i.e. it has developed information and training material so that the members can influence the development of an HRA system. However, it is important to note that this approach is based on the common interests of both the enterprise and the employees. The cornerstone of this strategy is that the employees should be directly involved in and exert influence on enterprises' training and development programmers through informed discussions about the outcome of such programmers. The outcome is divided into work efficiency, creativity, staff turnover and absenteeism, which reflect both the enterprises' need for profitability and the employees' interest in a good working environment. Investors One of the aspects which has triggered the development of HRA is the enterprises' need to provide information externally to investors in order to attract capital: 'The lack of information about human resources in financial reports is well known and requires no documentation. Because of that omission, management and investors are likely to make sub-optimal decisions.' However, it must be anticipated that HRA will also be used increasingly to inform the public about enterprises' social and ethical policies, for instance the abolition of child labour employed by sub-contractors, as a recent case involving the sportswear company Nike exemplifies. Nevertheless, HRA remains essential as an information tool for investors and potential investors: 'In a world of increasing technological change and
shortened product life-cycles, and in a world where "knowledge-work" and intangible assets have become of profound importance, future financial performance is often better predicted by non-financial indicators than by financial indicators.' The information crucial to investors is precisely that about future performance and, since financial statements only account for roughly 40% to 50% of the market valuation, non-financial indicators will have to supplement financial statements in order to provide more precise information about a company's future potential. Some measurements show that the market to book value ratio has amounted to 177% in EUR15, 249% in the USA and 209% in Japan (1990-1995). This can explain and support a recent study on the creation of productivity and growth, which concludes that growth is not primarily due to productivity change but to investment in human and physical capital. The need for structured information on human resources thus becomes increasingly important for investors, not only because HRA will provide better information on future potential, which is the generally accepted reasoning, but also - and perhaps equally important yet less recognised - on understanding past performance. Not only are traditional balance sheets incapable of reflecting future potential, they also provide insufficient information about how last year's performance was achieved. Overall, non-financial data are important. A survey of investors revealed that over 60% of the investors asked estimated that non-financial data determined between 20%-50% of the investment decision; 20% gave the figure as 50%59% of the decision. However, an Ernst &Young survey also investigated the most-valued and the least-valued measures.
Enterprises HRA is being initiated at the enterprise level. The impetus may be external pressures exerted by investors, trade unions or governments, or internal pressures exerted by trade unions or individuals. Nevertheless, the decision
to introduce HRA is taken by the management of the enterprise. As indicated earlier, it is possible to use HRA purely internally but it is hardly possible to use HRA only as an external information tool, since 'External Human Resource Reporting is likely to have a reflective effect on management practices by inducing improved internal information systems and raising the profile of human resource management within organizations.' The introduction of HRA can be very ambitious: Skandia, a Swedish international insurance company, considers new indicators and collects new data; the Danish Environmental Protection Agency uses existing HRA data. The objectives and results differ accordingly. Moreover, enterprises in sectors with high knowledge input such as the information and communication sector or service enterprises such as consultancy enterprises will have a higher proportion of intangible values than traditional manufacturing industries. During the period 1990 to 1995 the market value/book value ratio of European enterprises on average amounted to 1.77 (EUR15). The same ratio was even higher for the USA (2.49) and Japan (2.09). This highlights two growing tendencies: the valuation of the enterprise is less and less reflected in traditional balance sheets; and a fast-growing part of an enterprise's value is its human capital. Some companies, e.g. the Greek cement company, Titan, have already started to include depreciation of its social product (salaries, taxes, shareholders' dividends, etc.) in its HRA reporting Most commonly, enterprises have introduced HRA to obtain:
an external information system in order to attract investors an internal information system on human-resource issues an cost-benefit analysis of investments in human resources
However, it is not only the relationship between the enterprise and its investors and employees which will dominate the development of HRA. Other factors are likely to grow in importance, some of which will be highlighted in the case studies:
maintenance or improvement of the enterprise's image in society an indication of social responsibility and ethical values to the outside world improved marketing to present and potential customers benchmark human resource management and development attracting qualified labour retaining qualified labour
There are a number of reasons for the development of the latter aspects. The shift of responsibilities between the private and the public spheres have made enterprises increasingly willing to take on social responsibilities: the emergence of the political consumer will force enterprises to respond to market pressures beyond the actual product being produced (e.g. working conditions, environmental protection and production methods); the Western world's rapidly ageing population will make workers with the right qualifications scarce; and, finally, the decentralised and individualised bargaining pattern will contribute to the mobility of the - well-qualified - labour force, thus intensifying the need for policies to retain the workers. Titan, the Greek cement factory mentioned above, has for 15 years released a social report which encompasses a broad approach to HRA reporting. Titan includes such aspects as the annual rise in nominal wages compared with the cost of living, its improvement in productivity, the level of training provided for the employees, accident frequency indices for the Titan group as well as its environmental policy, which includes reforestation and voluntary reduction of emissions (far) below the levels required by regulation. Titan's social reports mirror the new patterns in society where employee development is seen as crucial to overall enterprise performance and where enterprises' objectives integrate social responsibilities.
Rambll, a Danish-based international consultancy company with nearly 2 000 employees, can illustrate the new aspects. In their HRA called Holistic Balance Sheet, Rambll have three parameters for satisfaction: customer satisfaction, staff satisfaction and effects on the outside world. Furthermore, a Danish project testing existing human resource accounts, conducted by the Danish Ministry of Business and Industry, supports the idea that enterprises give a high ranking to human resource development in HRA. Of the 10 Danish and Swedish enterprises included in the project, 9 list human resource development as the main objective in having an HRA. Only 3 enterprises include customers and only 1 enterprise lists investors and external reporting, respectively, in their objectives for HRA However, when the enterprises estimate the effects of their HRA, the investors' and external stakeholders play a role almost equal to human resource development, productivity effects and the creation of an enterprise spirit. This indicates that a non-stated objective behind much HRA is actually to acquire information directed towards investors and external stakeholders. Finally, it must be underlined that the use of HRA is already widespread in some countries; in a survey of human resource managers in companies in the Stockholm area with more than 200 employees, 70% of the respondents said that they were applying HRA in some way; most of the organisations had started to do so at the beginning of the 1990s. An investigation conducted by the Swedish Association of Local Authorities found that 22% of the 276 respondents had decided to use HRA; only between 5% and 15% of the personnel, accounting, and financial managers said they were not interested in HRA Employees There are two tendencies which make it imperative to introduce employees as stakeholders along with trade unions. The first is the weakening of the trade
unions and the increasingly decentralised bargaining process, which means that an increasing number of issues are dealt with directly at enterprise level and backed by fewer and more general, centralised agreements. The second is the individualisation of the workforce and, in particular, their competences; their interests seem to vary more than before, depending on age, skill, sex, occupation and sector of activity. Further, the individualisation of competences achieved at the workplace and elsewhere, as opposed to general and uniform qualifications achieved through general and vocational educational systems, favours the creation of individualised contracts. Consequently, employees are becoming more directly involved in the bargaining process and, hence, there is greater need for individual employees to form opinions on new relations emerging at the enterprise level. This becomes evident when talking about HRA as a human resource management tool and even more so if this tool is also used for external information purposes. For instance, should information on absenteeism be so detailed as to identify individual workers? Yet, while creating risks, HRA does also provide employees with an instrument to improve the work environment (as in Case Study 2), education and training opportunities and career prospects. HRA can be viewed as an instrument 'to create a new contract between company and employee. The individual takes responsibility for his or her own training. We are trying to create key figures for the new contract. The employee undertakes to seek knowledge and education, while the company undertakes to make the employee suitable for employment This can lead to an 'every man for himself' attitude.' This may be welcomed by individuals with a strong bargaining position but is also likely to have negative effects for the weaker individuals in the labour market. Thus, developing their own knowledge accounts - and subsequent training strategy - may be a new form of security for individuals in the absence of collective agreements or as a complement to such agreements: 'What business value would it have if I took this or that course of training? Perhaps I
will be worth something for other companies - and thus the company's risk of incurring costs by getting rid of me will be less.' However, the individual level is not only about flexibility and continuing vocational training. As indicated under Trade Unions, measuring knowledge is also about transparency and transferability of competences, competences that may be prior or non-formal learning at enterprise level. Thus, a circular development, from initial qualifications to non-formal and enterprise-specific competences, to recognised, transferable qualifications, will be crucial for employees, both as regards their position in a specific enterprise and their position in the labour market in general.
CAPITALISM AND INDIVIDUALISM Karl Marx argued that the structure of production (structure of the economy) determined the structure of society, and there is little doubt that evolving trends in society, many to do with the evolution of industry and trade, influence society and the way people interact. For example, the emergence of automobile and air transportation, together with the speed of economic change, has coincided with many important changes in interpersonal and family relationship patterns. Marx called this theory historical materialism If social costs are greater than private costs, then a negative externality is present. Environmental pollution is an example of a social cost that is seldom borne completely by the polluter thereby creating a negative externality. If private costs are greater than social costs, then a positive externality exists. An example is when a supplier of educational services indirectly benefits society as a whole but only received payment for the direct benefit received by the recipient of the education: the benefit to society of an educated populace is a positive externality. In either case, economists refer to this as market failure because resources will be allocated inefficiently. (The marginal rate of transformation in production will not be equal to the marginal rate of substitution in consumption due to the effect of the externality and as a result Pareto optimality will not occur -- see welfare economics for an explanation
organization's processes, especially its business processes. Rather than organizing a firm into functional specialties (like production, accounting, marketing, etc.) and looking at the tasks that each function performs, we should be looking at complete processes from materials acquisition, to production, to marketing and distribution. The firm should be re-engineered into a series of processes. The main proponents of re-engineering were Michael Hammer and James Champy. In a series of books including Reengineering the Corporation, Reengineering Management, and The Agenda, they argue that far too much time is wasted passing-on tasks from one department to another. They claim that it is far more efficient to appoint a team who are responsible for all the tasks in the process. In The Agenda they extend the arguement to include suppliers, distributors, and other business partners. is the radical redesign of an organization's processes, especially its business processes. Rather than organizing a firm into functional specialties (like production, accounting, marketing, etc.) and looking at the tasks that each function performs, we should be looking at complete processes from materials acquisition, to production, to marketing and distribution. The firm should be reengineered into a series of processes. The main proponents of re-engineering were Michael Hammer and James Champy. In a series of books including Reengineering the Corporation, Reengineering Management, and The Agenda, they argue that far too much
time is wasted passing-on tasks from one department to another. They claim that it is far more efficient to appoint a team who are responsible for all the tasks in the process. In The Agenda they extend the arguement to include suppliers, distributors, and other business partners. CRITICISMS OF RE-ENGINEERING Reengineering has earned bad reputation because such projects have often resulted in massive layoffs. In spite of the hype surrounding its introduction (partially due to the fact that the authors of Reengineering the Corporation reportedly bought huge numbers of copies to promote it to the top of bestseller lists), reengineering has not lived up to its expectations. The main reasons seem to be that:
performance is the ineffectiveness of its processes (which may or may not be true) and offers no means of validating that assumption
performance improvement with a "clean slate", i.e. totally disregard the status quo
improvement efforts on the organization's constraint (as defined by Eliyahu M. Goldratt in his theory of constraints).
TOTAL
938.0
All this is clear vindication of the commitment of our workforce. I think our company has among the most progressive workforce in the Indian steel industry today. Before we get into the details of the financial results, we had set up a pilot group in February this year, headed by Ramanathan and Chintaman, with mandate to undertake a human resources accounting (HRA) drill. It completed the exercise early this week : the summary report, as you can see, puts the value of Sankalps human resources at Rs. 1,630 crore. This both fascinates and intrigues me. Ganesan and Desai will now make a joint presentation on how they arrived.
Genesan : Thank you, frank. We have benchmarking our human resource development (HRD) practices with the Steel Authority of India Ltd. (SAIL), which used HRD as a vehicle for turnaround many years ago, for some time now. The basis of our approach was what has been tried and tested in several companies including SAIL and is in conformity with the model proposed by Flamholtz in 1972. we formed a core group of six executives from the finance and HRD divisions for the exercise. It was the first of its kind in the companys 15-year existence and took us about six months. Sachar : May interrupt just why are we doing this it surely cant be because others even if they are best in their class are doing it. Im not sure how HRA will help us manage Sankalp better. Richard : Thats a good question. Desia : May I explain the Indian steel industry has become highly competitive, thanks to delicensing and liberalization. Customer duly on cold-rolled coils was 50 per cent in 1995-96, 40 per cent in 1996-97 and isl ikely to be crought down to 20 per cent next year. The only way to survive is to cut costs, increase productivity, and get closer to the customer. Although steel-making is essentially technology-driven the quality of manpower is equally critical to success in our business.
It wouldnt be far-fetched to say that human resources constitute an important raw material in their own right. We need to regularly monitor the skill levels of people so as to upgrade them whenever necessary. Once you put a value on your human resource, if gives you control. We can then work towards securing continuous improvements in manpower quality and better utilization of people. Genesan : Thank you, Chintaman. Could you now please explain the methodology? Desai : Do feel free to interrupt at any point of time for any clarification or feedback. The first step was what may be called employee mapping. We classified all the employees of Sankalp into six different levels : managers, executives, officers and supervisors, administrative staff, skilled workers, and semiskilled workers. Each level was further classified into the different grades used in the company. Overall we had 42 combinations of levels and grades. In HRA terminology, each such combination is refereed to as a service state. All the 42 service states were then re-classified into five age-based segments. Sachar : But that means youre leaving no room for growth. Were raising our cold-rolled mill capacity by 1.5 lakh tones per annum and our galvanizing capacity by one lakh toones per annum at an investment Rs. 360 crore. Doesnt that .2 Ganesan : Let me get back to the basics. We have defined HR value strictly in relation to the future earnings of employees currently on the payroll. That is the framework. Desai : The next was to estimate the wage rates relevant to each servie state, and to the corresponding age group, over the future. The wage rate which includes basic salary, all allowances, and long-term social secutiry benefits was taken as the average of the minimum and the maximum compensation in each service state.
We did not take individual differences into account, and excluded overtime, leave pay, and target-related incentive payments. To compensate, we introduced on Employee Efficiency factor (EEF) to provide for these. It is an accepted practice in HRA that the EEF varies between 0-45 and 0-95 we used the mear 0.60 to even out any imbalances. The final step was to arrive at the HR value using all this data. The number of employees in each service state was multiplied by three indices. Tenure of service, wage rate, and EEF. The results, added up for all employees, work out to Rs. 1,630 crore. Richard : Why was this particular HRA model chosen? Would the results be different if you had adopted any other model2. Ganesan : Well, Frank, there are three broad approaches to valuing human resources : the accounting model, and the behavioural model. Each has its merits and demerits. When you make a choice between them, you examine many questions. Is it easy to implement is it commonly followed does it represent, to use an accounting term, a fair HR value? The model we chose based on the expected reliable value, as it is called suited us. Sachar : But if we can put three different values to Sankalps human resources, how do we know which one is right Im surprised that a finance man like you, Ramanathan, is willing to accept a measure that can be calculated in so many different ways. Surely that robs the process of all objectivity which in turn, should make it meaningless as an accounting measure? Would you accept three alternative values for our factory? Ganesan : I must point out, Vidya, that I would. If we were to revalue our tangible assets, for instance, as companies do at frequent intervals, the same element of subjectivity would come into the picture. I dont think you can dismiss HRA an account of the existence of different methodologies. Malhotra : Let me raise a more basic question. Why should we disclose this information to shareholders? It isnt required under the low. Why dont we
keep it internal? In which case, sachars point becomes valid how does it help us manage Sankalp better? Where is the ling with strategy? Richard : The way I see it, we have to look for the link not in terms of day-today operations, but in terms of our expansion and diversification plans. As you are aware, we will be tapping the Euromarket for funds. We many need a rating from credit rating agencies, and one of the issues they will be examining closely is the quality of our internal controls and systems. Assume a Euro-loan of $50 million, which is what we have in mind at the moment. And that the market-up over LIBOR which is 5.75 per cent at the moment is 2.25 percent, amounting to a rate of interest of 8 percent. Now even a marginal concession in the mark-up-offered by a better credit rating to the tune of 0.2 percent, would reduce our interest outgo by $ 100,000 per annum. Which is a straight saving of Rs. 3 lakh every month. That itself will justify the costs of HRA. In fact, Id like to share with you an interesting insight into lending that a US banker I met recently gave me. He said that if Microsoft had to raise a loan today, its tangible assets wouldnt prove remotely as valuable as its human assets. Conversely, he wouldnt lend money to Microsoft if he heard that it was losing its people. These are realities that we may have to wake up to. In a technology-intensive business like ours, it is entirely possible that it is our R&D workers who will make all the difference between us and our competitors tomorrow. Ray : I think something like this was long overdue. Most companies still consider personnel relating expenses as costs to be minimized, not as assetbuilding investments if people are not being considered as assets to be invested in and developed, the blame lies with our accounting system. The anomaly is obvious. Accountants treat money spent on buying a computer as capital investment, but the spent on training a manager is an expense to be written off. This way, we can justify the expense as an investment.
Ganesan : Sachar raised the point about whether HRA will enable us to manage Sankalp better. I thinkg it will help us decide, in reversionary times in particular, whether it is cost effective to lay off people or retain them will the economy improves. If will help us to take right decisions on closing down an operation or an office, relocating personnel, and laying them off. It will identify areas for training and development. HRA does provide value.
Sachar : Im not so sure. My concern is that I dont see the big picture. And I still have my reservations on that value bit. In my view, HR value of a corporate is the sum total of value additions made by each and every individual. But ganeson and Desai do not recognize individual value. In fact, the HRA drill they have undertaken does not recognize value addition at all. All that it does is to predict potential future earnings of all current of employees which has little bearing on HR value. Desai : I must admit that it is a valid observation. But then, ascertaining individual value addition would lead us to all kinds of subjective judgments, rendering the whole exercise very contentious. I think we have taken the least controversial approach. Questions : Should Sankalp institutionalize HRA Or should it call off the experiment? Should the management committee recommended its adoption by the board for inclusion in the annual reports? Has sankalp gone about its HRA exercise in the right way? Does HRA really have a ling with strategy? Or is it just an image-building exercise?
very fact that companies are finding it difficult to implement HRA processes suggests the difficulty of melding it with other organizational processes. The second hazard is that it is subjective. Even if you go by tried-and-tested formulae as for as the accounting part of HRA is concerned, it is difficult to build logic or reasong into the value, fixation part. The emotional element of HRA is bound to generate extreme reactions from employees which it is either under valued or overvalued, depending upon which side of the fence they are on. That is another problem with HRA: it creates fences instead of building bridges among employees. The third hazard is that HRA has no customer. Whom does it serve? Not the employees, because it does not carry conviction with them. Not the investors, because it does not carry conviction with them. Not the investors, because it does not add to their wealth. Not the company, because it does not add to their wealth. Not he company, because it has not link with strategy. And not the managers, because it does not help them manage the business better.
RESEARCH METHODOLOGY
Every project work requires research, successful completion of any project and getting the genuine results from that depends upon the research method used by the research the whole process used by my as follows. 1. Problem Formulation 2. Research Design 3. Sample Design 4. Source of Data 1) Primary Source of Data 2) Secondary Source of Data 5. Collection of Data 6. Analysis of Data 7. Interpretation of Data 8. Project Report and Writing
1- Problem Formulation Tesco, the UK's leading chain, was also the biggest on-line retailer in the world. Tesco had attracted huge attention at a time when most retailers had failed to establish themselves outside their home markets and struggled in their on-line forays. In 2002, Tesco was the ninth largest retailer in the world and the third most globalised retail company (along with Wal-Mart) after Ahold and Carrefour. Tesco''s strong focus on operational efficiency and productivity gains had enabled it to keep prices low. Tesco had been a successful globaliser. Its Internet business had also been doing well. Despite this impressive record, Tesco still faced major challenges. The UK retailer was small compared with the likes of Carrefour and Wal-Mart. Tesco also had to invest substantially in both hardware and software to strengthen its competitive position in the on-line business. This case illustrates the challenges retailers face in managing rapid growth and globalisation.So my research based on , why u.k. retailers legging behind U.S.A. retailer and what makes TESCO leading company in U.K. 2- Research Design The method adopted for the research was EXPLOATOY RESEARCH which is appropriate for any for any problem in which a very little knowledge is available. Thus, in this project, I used my retailer in U.K. experience and exploratory research has been following because of major information regarding the
3- Source Of Data (i) Primary Source Of Data: In this research every data based on secondary data.
(ii) Secondary Source Of Data: Secondary data have been collected from the company reports, magazines and other books as well as from websites
Type of data used: secondary data (this is to help the solve the problem at hand. All data is collected through different different websites and magazines. No primary data is collected in this report.
OBJECTIVE OF STUDY
Provide cost value information about acquiring, developing, allocating and maintaining human resources so as to meet organizational goals. Enable management to effectively monitor the user of human resources. Find whether human assets are appreciating or depreciating over a period of time. Assist in the development of effective management practices b classifying the financial consequences of various practices.
CONCLUSION
Is HRA, after all, just old wine in new bottles? The answer is both yes and no. Yes, in the sense that HRA was introduced in the early sixties and most of the elements of HRA are well-known and found in many methods, tools and analytical frameworks relating to human resources. No, in the sense that it combines internal and external information needs vis--vis costs/benefits of investments, human resource management and the relationship between various stakeholders' interests in enterprises in an environment which is a more transparent and rapidly developing than ever. In spite of all its diverse elements, HRA can be viewed as having two connected dimensions: the first is accounting, measuring and describing, which includes improved cost/benefit analyses of investment in human resources, notably vocational education and training; the second dimension is the policies or programmes which must be established and implemented in order to alter or improve a current situation at the level of the enterprise, the sector and society. In establishing HRA and the consequent strategies, it is crucial to decide whether HRA is considered to be about improving b
traditional balance sheets. The former leads to a focus on measuring techniques and converting information on human resources into figures to be placed in the balance sheet, whereas the latter leads to a focus on human resource development and innovation in broader terms. These two views are not necessarily mutually exclusive, but will strongly affect the actual design of HRA and, consequently, have different levels of stakeholder involvement and consequences.
In supplementing balance sheets with HRA information, it may prove difficult to properly define and demarcate HRA in such a way that it becomes a regular concept alongside, for instance, green accounting, especially because the stakeholders have different perspectives on HRA. This issue is reflected in the grouping of different HRA approaches presented in this paper, a systematisation which is necessary in order to establish an overview of the current practices. Nevertheless, despite the advantages of the multiplicity of approaches to HRA in the initial phases, one of the future imperatives will be that of establishing standards of international reporting practices, even if this means adopting a minimalist approach upon which enterprises can develop individual models. Expanding the use of HRA depends primarily on the development of a standardised reporting framework. In this process, it is crucial that the standard report should address all of the primary stakeholders; i.e., it must not be limited to, for example the investors' need for information Thus it must:
incorporate the need for both general regulation and specific information incorporate the information needed by all the main stakeholders be as much an enterprise-specific tool as a standard human resource account; i.e. it must be applicable to both internal and external purposes
The actual development of a standard reporting framework will depend on whether the stakeholders start formulating clear policies on HRA; Scandinavian governments and social partners in particular have generally begun to adopt a broad definition of HRA. So far, however, research into HRA has focused mainly on the aspect of providing information to investors; less research has been carried out into the broader objectives expressed by other stakeholders, even though many
enterprise-initiated projects have those objectives, as emerges from some of the case studies presented in Section 5 of this report. Another research approach in HRA is human resource management seen primarily as a management tool. The stakeholder analysis, however, reveals that even though this is one of the main reasons for initiating HRA in enterprises, it too will be influenced by stakeholders both inside and beyond the specific enterprise. Governments, trade unions and employees, in particular, will hold strong views on the actual design of such human-resource management tools. The initiating stakeholder, the enterprise, may have a number of objectives, but these objectives can only be seen in conjunction with changes in the labour market and in society and, as such, in conjunction with the expressed or perceived objectives of other stakeholders'. Limiting HRA to only one relationship of objectives, say between enterprises and investors (which is the relationship advocated most), will seriously hamper the design of more complex human-resource strategies and place limitations on the tools currently being developed. This becomes even more evident as legislation on human-resource reporting or social reporting is becoming more widespread, notably in the Scandinavian countries, although other countries, such as France, have established regulations on social reporting. The complexity of the stakeholders' interests is best illustrated by linking key issues, stakeholders and HRA, as in figure 4.1, since developments in the labour market specifically and in society in general indicate that new structures will be formed; these structures are very much reflected in by HRA systems, albeit to a varying degree, depending on the stakeholder in question.
Microsoft Business Solutions Microsoft Business Solutions offer integrated business applications and services that allow small and midsize organizations and divisions of large enterprises to connect employees, customers, and suppliers for improved efficiency. The financial management, customer relationship management, supply chain management, and analytics applications work with other Microsoft software, including the Microsoft Office System and the Windows operating system, to streamline processes across an entire organization. This gives businesses insight to respond rapidly, plan strategically, and execute quickly. Microsoft Business Solutions are delivered through a worldwide network of channel partners that provide specialized services and local support tailored to a companys needs
LIMITATIONS
It is not easy to value the human assets in an organization HRA is full of measurement problems Employees and Unions may not like the idea, because HRA may lead to division among the ranks of employees. There is no empirical evidence to support the idea that HRA is an effective tool to measure the economic value of people to the organization.
RECOMMENDATION
1. Human resource accounting is very useful tools in an organization thus it required proper staffing for this. 2. Proper auditing is very much required for efficiency of Human Resource Accounting. 3. Each organization should follow Human Recourse Accounting process in a systematically manner.
BIBLIOGRAPHY
BSP RIO ASHWAT THAPA ROBBINS www.google.com www.hotboot.com www.wikipedia.org/en HR Journal by Alan Edvard Business Today Frontline