The Human Asset - A Liability?

One of my earliest accounting lessons was on understanding Balance Sheet and P&L in simple terms. Our Professor called it the Four Box Approach. These boxes are: Assets, Liabilities, Revenue and Expenditure. In extremely simple words, all Assets become expenditure, every expense creates Revenue and the revenue gets converted to Liability. In short, eventually All Assets become Liabilities.

Is this also true for “Human Asset”? Reams and Reams of management articles and books have been spent on defining and extolling the virtue of the Human Capital, Human Asset, our-people-are-our-biggest-strength (assets) etc. etc.

True to the fundamental accounting principles, I see that the Human Assets also get converted to Liabilities sooner or later. The famous Peter's Principle aptly describes this situation "employees within an organization will advance to their highest level of competence and then be promoted to and remain at a level at which they are incompetent"

Let us not confuse "incompetence" with Technical knowledge and skills alone. This also could be lack of understanding of business principles, market dynamics and changes, refusal to align to shifting demands, capacity to handle larger scale of operation or even as innocuous as the ability to handle change.

Yet, in many companies, the managers fail to see, or at least acknowledge, that many of their valued assets have quietly slipped into becoming liabilities and need to be dispensed with. On the other hand, there are several evolved companies that practice “planned attrition”.

One of the reasons of assets fast depleting into liabilities is depreciation of the assets for too long. Let me explain. In any company, in any department, there comes a stage when the management has to struggle with the same dilemma of “make-or-buy” as in real product manufacturing. Should we stick with home-grown people who understand our business so well and are well versed with the company’s history, problems, constraints etc or should we blood in new talent from outside, someone who is not only free of our historical baggage but also has different set of experiences and probably a different approach to handling the same complexity? Do the home-grown people have the necessary competence and more necessarily the attitude to change the status quo?

Like in any make-or-buy decision, here too both the options have their factors of favourability. These factors largely depend on the context but more on the leadership style of the top management. In any case, it is a painful decision and the management has to be prepared to face the consequences whichever path it chooses.

I am firmly of the opinion that optimism and pragmatism rarely go together. Rather, a certain degree of pessimism may be handy when evaluating options.

I believe that more often than not, if you are driving change or are being driven by it in your environment, one might want to consider blooding-in the new talent from outside to complement the home-grown strengths, especially if the task at hand is a complex one. It has a lot to do with the skills, knowledge, experience and emotions. There is a lesser possibility of the new incumbent getting emotionally influenced and hence might be better placed to take hard decisions and act faster when suitably empowered apart from bringing additional critical skills and experience on the table.

The second aspect of the assets converting to liabilities is the ratio of finished goods to WIP stock. The finished goods if not employed gainfully tend to rot. The WIP stock is the future of any company. The managements must strive to keep their Human Asset in a perpetual state of WIP through appropriate and continuous training. Like any WIP material, the existing people must be constantly worked upon and not allowed to drift into comfort zones.

My worst nightmare begins when someone responds to a discussion with, “Yes, right, but we can’t do …..”, or worse still, “it is not possible to …..”. Such people have generally resigned to the status quo, have stopped looking for solutions beyond the obvious and can not be expected to drive change for the better.

Finally, one must protect the “real” Assets. How does one do that? Well, to begin with, keep them busy. Tap their potential and use them suitably before they slip into fast exponential depreciation mode. In my personal experience, nothing is more de-motivating for an employee than to see that despite the best efforts put in by one unit, the customer, who is usually touted to be at the center of the organization’s universe, can not be given a superior and integrated delivery of products and services. Allow these employees to work across the organization to see what really goes on, where are the challenges and if possible utilize this third eye to propose solutions. You might actually use your assets better.

We tend to box people into their roles and do not utilize their latent potential. We end up focusing more on methods rather than on people. Very often, we fail to recognize that the asset has a lot left in it but we have allowed it to reduce itself to its book value.

Deterioration of the human asset owned by an organization must be arrested. If the Human Asset is the most important asset of a company beyond the balance sheet, then it must act significantly to protect, grow and evaluate this asset on a routine basis.