"ManagingStrategiesfor

SustainableCompetitiveAdvantagefl

Editedby :Ashutosh Bhambhani

Sampada KapseSuresh Lalwani

Conference Co-ordinator:

Sampada Kapse

CONTENTSPreface

AcknowledgementsConference Committees

VIIIX-XI

XII

I';;:~;:'>' ';.., ,"§~ti9~'(:;.@ffiijfi~n R~~Qrirces';M~h~gem~9~:'(I>~!i~~::'~.8rj~\;<11. Stress Management & Health: Causes and Ways of Coping

Dr. Jag(J}1JllIthKlIkkudi & D,; R(J}lI£shAgadi -GlIlbarga University, Kamn1aka

SCA through EmployeeEmpowennentDr. S. K. Moharana, Regional College, Bhubaneswar; OrissaHuman Resources Training in Organization for DevelopmentDr. Mehdi, Islamic Azad University,Pune

Motivation -A powerful strategy to maximize Intellectual CapitalMamta Sharma (Alumni-TlMS), Gandhidham

Employee Engagement means Higher PerfonnanceUma Shreedhar;Alliance B-School, Bangalore

032.

103.

154.

235.

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1.

":§~~I!9ij;0~;I,:j!ipm~A::R~$91!r£g§::M~i1~g~m~!tt(

Leadership beyond traits and traditionsMr. G.S. Venugopal,Acharya Institute of Tech., BangaloreA Study on Business Partnering role of HRMrs. A. Shameem, VelTech Engineering College, Chell/wi

Managing strategies for HRM under private Colleges!Universities for SCAProf B. V.Solanki, Tolani Commerce College, Adipur.

Managing International Career -A strategic analysis with HR sightDr. Mita Vora,R.K. College of Business Management, Rajkot

Commitment across OrganizationsDr. A.A.Raashid, Tolani Education, Mumbai

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2.47

3.

534.

575.

63

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1. Total Quality Management in BankingProf Prashant Jariwala, C.U.Shah City Commerce College, Ahmebabad

2. SCA through Lean Management for Indian SMEsProf Sunil Pevekar;IlPM, Bangalore

3. Web Services and IndustryProf V.Krishna, CMR College of Eng. & Tech.,Andhra Pradesh

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1. Human Competence ValuationMr. Samish Dalal, Management Consultant, Vadodara

Paradigm Shifts in the Capital Structure and Investmentpatterns in Indian Hotel IndustryDr. Padma Srinivasan, ICFAI Business School, Bangalore

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Managing Strategies for Sustainable Competitive Advantage

HUMAN COMPETENCEVALUATION

Samish Dalal*

Abstract

Human competence valuation is the valuation of competencies of human capital of a business.It opens a new topic in the combined subject of finance and human resource. As understoodthat no management theory is perfect, Human Competence Valuation is also open to challenges.However, it is an option that businesses could consider whilst taking employee relateddecisions.

This valuation technique has many applications, such as motivating an employee, trainingand developing an employee for increasing productivity and comparing the competenciesacross the employees in an organization. HCV would also playa pivotal role in mergers andacquisitions of human resource intensive organization.

1 Introduction

Human resource, people, or muscle force, is one of the most important resources of a businessenterprise. The growth of an organization is largely dependent on them. As per figure 1,Human Resource and Finance are the key that would initiate the production activities,marketing activities and finally attain success for an organization.

Figure 1- Logical Pyramid of important Business ParametersA telecom company might say that its prime resource is telephone cables and towers, but ifthe company does not have people to operate it, such infrastructure would be useless andworthless. In the same vein, a bank would say that its network system is its prime resource,however without proper employee force, the resources are useless. In a live case study,Reliance IndustriesLimited, which is planning its foray into retail activities, is on a hiringspree. Although land is important for such a business, but people are more important. Theyare the ones who would run the enterprise. They are the actual brand builders or destroyers.They are the ones who would ruin or retain an enterprise. Imagine you are heading for animportant meeting and an airhostess spills some coffee over your business attire, what wouldbe your reaction. Human Resource is important in all types of organisation.

*Management consultant, Vadodara

The other area is Finance. Many times a question in management is raised as to which is themost important department in an organization -HR, Finance, Marketing, Production. Indi viduallyspeaking, the answer Was obvious - finance, because it is indeed the seed to an organization.Many times technocrats and professionals who have the right skill, know -how and physicalresources, but do not have funds to ignite the spark. Commonly, finance is also referred to asthe life - blood of an organisation.

Within the broader outlay of finance, valuation has been a pet of many researchers andacademicians. HCV is probably no exception. The origin ofHCV lies in innovative anu appliedresearch. The objective behind propounding HCV is to create an innovative business-handlingtool, such that entrepreneurs can place reliance on it for business related decisions.

2 Fundamentals of the concept

HCV, rests on two major fundamentals. One of them is "human competence" and other is"value".

Human competence has been widely defined in management literature as attributes possessedby an employee such as knowledge, skills and abilities (KSA). However, according to anotherresearch, conception of work or understanding of the employee towards work precedes thetraditionally pounded "attribute theory" and that is human competence at work.

A person through the textbooks of schools and universities acquires KSA. The KSA gives aperson a "price tag" to enter in the job market. For instance, let us take two accountants -Mr.A & Mr. B. Mr. A is simply a commerce graduate but Mr. B is a qualified accountant. In caseboth were to apply for a job, which required an accountant, the choice of Mr. B seems to beobvious. This simply means that a person with higher KSA is preferred than the person withlower KSA. Secondly, it also means that KSA is a ticket to enter into ajob. However, does itmean that the person with higher KSA would generate greater value for the organisation thathe or she would work? The question does not have one answer..Similarly, there are chances that two persons with the same KSA tend to perform differentlyand deliver different results. This difference is probably because both have differentunderstanding towards their work. This difference could also be due to other variety ofreasons, but "understanding towards work" is prime and important.

Having said that, humancompetence in HCV considers both KSA and "understanding towardswork". The logic behind merging both ideas into one concept is to have a balance ofconvergence because neither KSA nor "understanding towards work" could be ignored.

From a real world, perspective the KSA is the educational qualification on the resume and"understanding towards work" is the work experience on the resume.

The concept of value originates from satisfaction. For example, in case we pay Rs. 100 for amovie and derive satisfaction of Rs. 110, then we place the value of the movie at Rs. 110.Therefore, for us the value generation was ofRs. 10.Likewise, if we had been unhappy, thenwe would have probably derived satisfaction ofRs. 90, which is a loss ofRs. 10.

Now let us splice the concepts of human competence and value. In the real world, we tend topay salary to an employee, which is the price for the employee, but not the competence thatperson brings in. For instance, an engineer is hired for Rs. 20,000 per month, but the value thatis generated might be greater or less than Rs. 20,000. This value generation is due to thecompetence level of the individual. Linking it to our earlier example, price =amount paid tohire a person, value = competence of the person.

104

Managing Strategies for Sustainable Competitive Advantage

3. Human Competence Valuation

The concept of HCY is a challenge to most of the existing theories in human resource andhuman resource valuation. However, as a profound management student, I do not claim thatHCY is the only solution for human resource related problems, but I definitely claim that it isa concept that cannot be ignored.

In case ofHCY. there are hardly any estimates. On the contrary, there is more reality when theemployees themselves tend to answer the questions. One of the leading accounting firmssays that people are their most important resource. The importance of human capital in anorganisation is irrefutable. Leading management guru Tom Peters says that people come firstthan customers in a (Professional Service Firm) PSF .

It has been found that in spite of repeated calls from the management, it is finally dependenton the people to accept new ideas. This actually means that if human resource agrees to Ifhuman capital is so important for an organisation, then valuing such capital also becomesequally important. However, it would make more sense to value the competence of suchhuman capital rather than the capital itself.

To support my stand of human competence valuation, let us answer this small question.When we pay for a product, what are we buying the product or the attributes of the product?Obviously the product, NO! We are actually buying the attributes. For instance, if we buy agrinder, then are we buying a grinder or a devise that can grind? Naturally, a devise can grind.The key element here is differentiating the product and its attributes.

In any case, there are two aspects to a product -the product itself and its attributes. Like wisewith money that we spend there are two aspects -price and value. "Price" is the money paidfor purchasing the product but value is the reward generated out of the attributes of aproduct, which eventually satisfies or dis-satisfies the purchaser.

HCY is just an extension of the same principle. Any person hired is paid salary and otheremoluments, which is the price, but the KSA and understanding that the person brings towork is the attribute of the person, which generates value.

HCY is ideal for any organisation. It would help to initiate competence-based training to theones who have lower competence value. It would help an organisation to identify the valuethat is generated out of the salaries and emoluments they pay to their employees. It wouldhelp an organisation to recognise the importance of competence-based management.

Financial valuation has been a centre of vigorous parleys in the subject of corporate finance.Some of the popular financial valuation techniques such as net preserit value or discountedcash flow or economic value added or return on asset ratio or return on equity ratio havebecome multi-purpose techniques. It means that any organisation could be valued usingthese techniques.

These techniques were not wrong and are still not wrong, it is just that I have attempted tofind another alternative. HCY is a sequel to other valuation techniques of other abstractbusiness elements such as brand and goodwill. The abstract concept of human competencecould be valued using HCY while doing merger of two firms. .For instance, in case of merger of two accounting, firms, the financial value of the firms iscompared and then a merger ratio is arrived. However let us attempt to merge such two firmsbased on the concept of HCY. As known, that HCY is correct resemblance of the value of thecompetence of all theemployees. The firm with higher HCY could claim that they have peoplewith better competence; hence, they could demand a premium in the merger process.

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4. Application methodology

The methodology to apply HCY requires great precision. It requires good interpretation andassimilation skills. In the ensuing paragraphs, an attempthas been made to explain the methodof computing HCY.

4.1 Choice of Organisation

In respect of choice of organisation, any organisation that has employee strength of morethan 10people and less than 50 are ideally suitable. In case the employee strength is too high,then they have to be divided in sets of 50 or 100people.The management should be committedto the cause of HCY project. If the management does not give proper feedback in the firstinterview round, then there are high chances that HCY would not yield correct r~sult.

In the live case, I had personally gone to meet the managing partner of a 13 people organisation.It is a small organisation providing computer maintenance, computer renting and supplyingof computer peripheral. Computer care and maintenance was their forte. They have maintenancecontracts from some of the biggest multinational companies having their offices in Yadodara.It is a fifteen-year-old enterprise with revenues increasing at a modest pace. They have a well- furnished office with all the required back up support. Their HR division boasts of regulartraining sessions, group excursions and very positive social and business culture.

4.2 First Interview

The first interview takes place with the management of the organisation. In the interview, theinterviewer has to go with a set of questions, which are ideal to test the competence of theemployees. These questions are amendable and pro-active, which would depend on theanswers from the interview. These questions will have to be re-framed every time keeping inmind the type of organisation, structure, type of business, nature of business, number ofemployees, objectives and vision of the organisation.

The interview should preferably have direct questions, without much subjectivity, such as -"does your organisation have a vision? Yes or No". Such questions avoid ambiguity andallow accuracy to foster.

The interview should be highly interactive in order to achieve the actual outcome.

My meeting with the managing partner was highly interactive. I asked him to give brief abouthis organisation. Upon that, I began asking him questions, which revolved around theemployees of the organisation. The questions gave a detailed insight about the plans of theorganisation. The interview gave feedback in respect of the capabilities of the employees andthe training that they have passed through. The interview also gave me valuable inputs inrespect of the operation of business.

The questions helped me to prepare the benchmark, which would be used whilst valuing thecompetence of the employees. I made it doubly sure that all that was told to me in theinterview was conveyed to the employees on a regular basis through training programs.

4.3 Drafting the questionnaire

The questionnaire should be drafted in an objective manner, so that ambiguity and biaseswould not creep into valuation. The questions should be easy to understand and anyinstructions that are provided should be clear and transparent. No specific test conditionsare required, but the environment should be cohesive and friendly. The number of questions

Managing Strategies for Sustainable Competitive Advantage

should be restricted to normal parlance. The valuation might be distorted if the questionnaireis too long.

In the case, the questionnaire had only twelve objective questions and one subjective question.The objective questions had five alternatives having weights ranging from -2 to 2. Thequestionnaire was drafted with very clear instructions and in vernacular language, so thateveryone could understand. The questionnaire was self - explanatory and in simple language(Sample Questionnaire -Annexure A).

4.4 Calculations

The calculationsof the testwereplotted withthe correspondingnumerical value.The maximumtotal marks were26 (13questions x 2 marks). However, I created three levels-Low,Medium &Strong. The strong level meant that the total marks to be considered were 26, medium meant24 and low meant 22. Upon this, percentage marks obtained by each employee was found,based on the simple formula of: marks obtained DIVIDED BY total marks MULTIPLIED BY100. Based on the percentage data, a normal distribution curve was created to identify thedispersion of theemployees. Finally HCV,the annual cost to company MULTIPLIEDBY thepercentage gave HCV (HCV report -Annexure B).

4.5 Derivations

Upon the calculations, following were some of the derivations:

I. 6 out of 14employees are below the peak of normal distribution.

2. Most of the employees have their competence level much below than their cost toorganisation, which means that the potentiality to generate value is much below than theprice paid.

3. It could also be inferred that as the firm commands goodwill in the market, extractingbusiness would not be a problem, however if the service quality is affected due to the poorcompetence level of the employees, there are chances that the market share might reduce.

4. The employees' conception towards work needs immediate rectification through a rigoroustraining and development program. There is a need to inculcate an affirmative liking towardstheir customers and work. There is a need to train the employees so that their p.otentiality togen~rate value increases.

5. It is also derived that the company needs to pursue a regular system of training for itsemployees, which would increase their competence.

5. Epilogue

HCV is smaller than a sapling, which is yet to grow into a complete tree. HCV has capacity toprovide profound solution to human resource issues. It is a novel management tool, whichwould successfully shape the course of business decision in respect of human resourcemanagement and development.

In times to come, probably service intensive organisation would voluntarily publish thehuman competence value in their annual report to boast about the competence level of theiremployees and the value they generate for the company.

7 AnrwxureA

Name

Nit.tne of the Employer

Date of Birth Your cunent salary (anrwAI)

Any other fina.:tCiaJbenefit that you get (eg- ConveyiU1Ce;etc)

Write the monetary value otany non-f'marclal beaefit that you get (es. Utllionn. etc)

last EducationalQuaIificationPGD I Graduate I DiplomaI Certificate(drde the I!NWer) (PGD- PQlStGradUateDipJotN)

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Vahaeadded.mea I!mploya motivation'

YOUI' family

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I Ple&unt I Happy. I Entmuianc: t Concern I. .None tI ~ .

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