Human Capital Management in Banking
In an address to MIT graduates, Carly Fiorina, the legendary HP leader has been quoted as saying, “….the most magical, tangible and ultimately the most important ingredient in the transformed landscape is people” (Fiorina, 2000).
The pervasive question in strategic management on why some organizations are more successfully than many others is answered by their varying management of human capital (Hitt et al 2001). According to the resource-based view of organizations, organizations vary in their performances because of their varying resources and associated capabilities. Resources can be tangible and intangible. The intangible resources and capabilities are difficult to replicate and are socially complex and can be built or changed only in the long run (Hitt et al 2001). Thus, the competitive advantages produced from intangible resources are very unique, rare and difficult to replicate. The intangibility of human resource management is removed with an approach called human capital management which urges the organization to view its human resources as a financially quantifiable function – to analyze impact of people on contribution to shareholder value, to demonstrate value of HRM with ROI calculations and provide direction for future HRM practices (Angela & Armstrong, 2007).
Human capital theory views human resources and its skills as an asset of an organization and that the organization must strive to grow and safeguard this asset (Lepak & Snell, 1999). Human capital is a term applied to the approach of considering people as assets for the organization, putting people on the right side of the balance sheet, in a lighter vein. The human capital approach puts the HR function at a more quantifiable level thus rendering it strategically relevant. The approach enables the organization to orient and align its human resources to effectively meet organizational objectives (Lepak & Snell, 1999).
The scope of human capital management covers reporting the human capital of an organization. Such reporting enables stakeholders to develop another performance metric to evaluate the organization. The human value of an organization points to the potential it possesses for future performance, the strength of its internal processes and the sustainability of the business model.
The Implications of Human Capital Management
Human knowledge can be classified into articulable knowledge which can be codified and passed on easily and tacit knowledge which is based on organizational routines and social in context (Lane & Lubatkin, 1998). Tacit knowledge is unique and cannot be replicated and gained on the job and are unique in every organization for a particular role (Lepak & Snell, 1999). Hence there is a need to classify and segregate knowledge into core and peripheral assets.
The value of human capital is dependent on its potential to contribute to the organization’s core competencies and thus to achieve organizational objectives. The core assets contribute most and hence need significant continuous internal development and nurturing. As organizations move to more advanced technologies, the role of knowledge workers increases and hence the need to effectively manage core assets is more important (Lepak & Snell, 1999). Human capital is not owned by organizations, but merely secured through relationships (Angela & Armstrong 2007, p9) and hence the need to manage the same and ensure that the asset stays within the organization.
The pressures on efficiency and costs drive organizations to make or buy labor. This make or buy decision is based on the importance of a particular skill. Core assets cannot be outsourced and an organization that does this is under peril of losing its competitive advantage (Porter, 1985). Developing peripheral assets within the organization leads to higher overhead and transactional costs. Thus, these peripheral assets can be externalized or acquired from other parties for whom this is the core asset.
The implication of human capital management is that there is a positive correlation between leveraging human capital and organizational performance. The value of human capital is defined as the ratio of strategic benefits to customers derived from skills related to the costs incurred (Lepak & Snell, 1999). Human capital management forms the bridge between HR practices and strategic business performance. This argument places human capital management as a value creating activity for the organization. Thus, human capital is always measured in relation to the value it creates for the customer.
Investment in Human Capital – Theoretical Analysis
An employee gains knowledge on-the-job, by schooling and through other sources. The fact that an employee gains in experience and knowledge and thus becomes more skilled leads to the development of innate knowledge which is very important in the understanding of the uniqueness of a particular individual. What he gains through formal education is the foundation on which his social behaviors and personality are rooted within the organizational context. The other sources include access to information, inquisitiveness and developing skills out of the scope of the role (Becker, 1962). Hence, the education or the prior preparedness of the employee to be based within the organizational context in social behaviors and attitudes is very important to how effectively he is able to contribute to the organizational goals and objectives.
Human capital management focuses on the following HR processes (Angela & Armstrong, 2007 & Lepak & Snell, 1999):
- Resourcing strategies – the process of acquiring human capital, and managing them effectively to utilize them to achieve the organizational objectives. These strategies define the forecasting of skills required and the measures to acquire such skills through internal development or external acquisition – the make or buy decision. The make-or-buy decision also implies that the organization can outsource some of its competences to be effective, thus bearing significant ramifications for organizational effectiveness.
- Reward strategies – the fact that individuals expect return on their own investment in organizations – in skills and efforts spent on the job. Human capital theory encourages skill and performance base reward fabrication and to compensate an individual by fixing his market worth because the individual owns his own human capital. the fixing of the market worth of an individual is similar to accounting for the value of a physical asset, only that in human capital the value of an individual is in the skills and competencies of the individual.
- Retention strategies – the contribution by individuals to the organization make the organization find ways to retain this human capital either by increasing its valuation or by forming strategic alliances with its human capital for long term relationship. Thus, the role of promotions and awards play a part in ensuring that organizations are able to protect their human capital from leaving and thus aiding competitors. This multi-faceted approach to retention aids in reducing attrition and loss of human capital.
- Development strategies – organizations always try to develop their human capital – the core competencies of individuals. Core skills need to be developed internally and thus organizations go for training and knowledge acquisition for their employees. This increases the market worth of the employee by making him more skillful, and thus reiterates the importance of retention and reward strategies. The buying of core competencies results in the erosion of human capital in the organization, leading to loss of competency in many core business areas.
Valuation of Human Capital
The concept of human capital also means that the human capital has to be measured in financial terms and thus the significance and implications of the process be known. The economic value of people in the organization has to be accounted for through human asset accounting – for measurement, enumeration and analysis. Measurement and analysis help the human resources function to work at a more strategic level. It also provides investors and other stake holders with a better feedback on the working and sustainability of the business. There are three types of human resource accounting models (Bontis et al, 1999):
- Cost models, which consider the historical, acquisition and retaining costs of an individual or an asset
- Human resource model which also goes into non-monetary behavioral attributes
- Monetary models which account for discounted estimates of estimated future earnings
Human capital accounting models attempt to calculate contributions made by human assets by capitalizing expenditures in retaining the asset – salaries. Instead of putting total wage bill in the expenditure side in an income statement, a discounted cash flow of wages is classified as an asset in the balance sheet (Bontis et al, 1999). This requires a number of assumptions on the HR practice’s estimation. The average increase in wage per year and the tenure of expected employment are estimated for the workforce and all these cash flows for many years are discounted back to year one. The remaining figure is represented as the human capital value for the organization.
The assumptions made in the model explained above necessitate planning and predicting workforce strength and composition for many years ahead. Often, this proves very difficult to do accurately. Assumptions about tenure of employees, wage rises and turnover rates are not determinable accurately. Hence, all these models suffer from uncertainty and inconsistency (Bontis et al, 1999). Also, the practice of treating humans as assets is debated to be morally unacceptable as here it is assumed that the organization owns individuals.
HRA data can be utilized for three purposes (Bontis et al, 1999):
- To report human capital in audited financial statements for external stake holders
- Feedback on achieving strategic goals internally
- Developing future plans and strategy by assessing the uniqueness of the human capital prevalent in the organization
Only one of the purposes stated above needs auditing authentication – financial reporting. The other purposes are to help the organization assess and plan and strategize for itself the direction it has to take in evaluating its own human capital, its uniqueness and planning for additions or reductions or acquisitions of human capital. Hence, the focus of human capital management is in aiding in organizational effectiveness and thus to deliver more value to stakeholders. The lack of orientation towards human capital in financial statements is because of the fact that the field is constantly evolving and human capital management is still considered only a sustainability issues and not a purely financial issue.
Human Capital in Banking
The Service Organization Perspective
In service organizations human capital represents a significant portion of organizational value. In a service business, the service offered to customers is readily perishable, consumed immediately and irreversible (Kotler, 2002). When a product goes wrong or malfunctions, the company can satisfy a customer by replacing the product or just by a repair, but in service, the problem created cannot usually be reversed or rectified. The experience the customer gets when accessing the services is all the more important to ensure that the customer is satisfied. This goes a long way in achieving organizational goals. When a customer is accessing a service in a bank, he is effectively touching its employees. The role of employees in ensuring a great service experience for the customer is highly critical.
The above argument implies that the quality of service delivered can vary according to human capabilities – both the server and the served. The participation of the employee and the customer in a service rendering process is equally important. The role of the customer also plays a part in ensuring that the process goes effectively. Hence, customer management through interaction with employees forms the basis of customer satisfaction. Service delivery is just one aspect of the business. But intellectual capital is a very important part of a bank, as it works primarily on accumulated knowledge and experience. Relationships are another important reason why human capital is very important. Some information is codified and present at the push of a button, but much more is tacit knowledge within employees which need careful nurturing and planning. The tacit knowledge is more social..
Professionals gain knowledge through education (articulable) and on the job (tacit). Service professionals receive extensive education and training prior to entering the profession. The quality of the knowledge they acquire varies as per the quality of the scholars and teachers they have access to. Universities and schools are ranked and evaluated by the quality of teacher’s it employs. Individuals from the best schools and universities are said to possess the highest level of knowledge in their field and membership to elite social circles (D’Aveni & Kesner, 1993). Consequently, such professionals get the highest salaries, because of the knowledge and their social networks.
After completing their formal education, professionals enter organizations in trainee roles or apprenticeships. In these roles they acquire tacit knowledge, by observing and doing things in the organizational context (Szulanski, 1996). They bring in articulable knowledge from outside and develop tacit knowledge within the firm. The tacit knowledge thus developed during employment is a very important human capital component of the organization. Such firm-specific knowledge is unique cannot be replicated. This is truer in service organizations, where people are the first interface for customers and also for the bank.
Human Capital Management in Banking Industry
The broad nature of the discussions above indicate three well definable parts of human capital management – the implications of human capital management, how it is measured and how it is managed to create positive outcomes (Sherwin, 1983). As technology evolves, global expansion has become a reality, paving the way for fast growth, leading to significant challenges in human resource management. There is also an increased demand for more information from external stakeholders on human capital and its implications on organizational performance (Bontis et al, 1999). These challenges coupled together call for focus on human capital management in banks, with global footprint, widely dispersed service delivery networks and great diversity.
There are several levels of understanding human capital in the context of banks depending on the sophistication and detailing of the metrics and subsequent managing required (Whitaker & Wilson, 2007).
Impact of Existing Processes
The impact of the existing people management processes, mechanisms and systems forms the first level of understanding. The understanding required for this is that the organization must understand the people levers or capabilities that are critical to the business performance. Once these are understood, then metrics are developed to assess how well these capabilities are developed. This understanding helps the bank to understand present effectiveness of its processes and its people.
The next level of focus is the impact the organization’s people strategy has on business performance and quantifying the same. An example of a strategic people initiative is engagement. An organization can measure employee engagement through organization-wide surveys and playing it back to understand its correlation to business performance – key metrics like transactions per teller, profit margins and employee attrition (Bartel, 2004). This is possible only with the commitment of the top management of the bank and their understanding of such measurements and metrics. Thus, the dimension of managing human capital has to woven into organizational strategy and form the basis of evaluating business leaders.
After measurement discussed in the points above, it is important that the bank or the organization translates this into action to improve on its standing with those parameters and benchmarks. Improving processes to enable people to contribute more to the business is important. Else human capital management will be stuck at number of days of training per employee (Lepak & Snell, 1999). The bank must measure the highest employee engagement levels of managers across the organization and try to find attributes and qualities which lead to such high engagement levels and try to replicate this to other managers whose employees are not measuring up so high in engagement scores, taking the example of employee engagement in point 2 further. Thus, human capital management is much more than a measurement tool. It is a management style wherein the probability of achieving the organizational goals is improved.
Drivers of Human Capital Management – Banking
There are many human resource practices within the organization and these are organized into drivers which necessitate human capital approach. Human capital drivers for an industry can be divided into five categories with each driver having human capital practices associated with it (Massi & McMurrer, 2007):
The role of leadership in any organization is important. In the financial sector, where the implications of a business failure are destructive socially, the importance of leadership practices is doubled. The most important consistent factors are open and effective communication, rational decision making and systems thinking. Unless these characteristics are displayed, there will be no coordination and direction for a bank, especially a large multinational bank.
Employee engagement starts with a good job design and ends with evaluation. The intermediate processes are workload and job stability. In the banking scenario, employees handle significant amounts of money, hence errors are bound to be costly. The evaluation of organization-wide data on employee engagement is a pre-requisite in any bank or financial services firm. Employee engagement scores must be actively used in assessing leaders and thus form a synergy between good leadership and engaged employees. This stops attrition.
Access to Knowledge
Organizations must have the information and its enablers within the reach of its employees. Also the data available from across the organization must be able to be consolidated and analyzed to create understanding and hence value to the firm. This is true with banks, where business locations are spread out, even across continents. Also, various divisions could be operating on different solution platforms, necessitating high level commitment o data integration and subsequent knowledge creation. Hence, access and availability of data is very critical to success.
Effective training and well defined work processes, the right working environment and fair recruitment and reward practices ensure that individuals have a satisfying career experience with the firm and also for the firm to be able to retain its human assets. The process of evaluating this driver leads to make-or-buy decisions and reversing such decisions too. This is not just about cost savings through cutting jobs, but also about creating vital jobs to ensure effectiveness.
The organization must encourage innovations and promote systems thinking and a learning attitude among the workforce. This develops tacit knowledge and ensures that employees are well tuned to changes in their environment. This is true with financial institutions because of the fact that changes are frequent in this field and business is spread out globally. The ability of the firm to learn from within its processes creates cost saving opportunities and also work force optimization opportunities.
Human Capital Measurement in Banks – Implementation
In the Balance Score Card, the final quadrant, People, is the most difficult to quantify and report for many organizations. The information available to fill this quadrant is available as fragmented and un-integral data from across the globe for a bank. This is because the global organization implements different managerial systems which are incompatible to each other or use legacy systems. Even though data is available in most organizations and people know where the data is, they will not be able to compile this quickly, analyze and use it for decision making. Hence, the first and most significant driver for successful implementation of the human capital approach in banking is the availability of data. Unless contiguous data is available at the push of a button, there is bound to resistance in the system to utilize data which is available in various forms and formats.
Data is available for organizations from across the globe, across functions and divisions in business. Thus, integration of processes and the systems that run and create this data has to be accomplished and compatible with each other. Without integration, the intention will not translate to accurate measurements. Thus, an organization needs a single people management system and single global HR management system. This makes data available for strategic planning and analysis at a macro level. Thus, to implement a human capital management program within the organization, significant investments may be needed to create common platforms to enable people to utilize data more effectively and integrate the various divisions of the bank.
Banks are a people centered business, with people forming the core of the services offered and people being consumers of the services offered. Thus, the evaluation of the impact of people and their roles in ensuring customer satisfaction and to drive business performance is important (Bontis et al, 1999). Such a tool is the Human Capital Scorecard (HCS). The HCS enables an organization to (Whitaker & Wilson, 2007):
- Plan sourcing to meet growth aspirations
- Identify and analyze key human resource issues
- Informed business decisions by risk evaluation and priorities
- Monitor progress of strategic initiatives
- Tracking trends
The HCS has been successfully implemented by Standard Chartered Bank, throughout its global operations and various businesses (Whitaker & Wilson, 2007). The scorecard has measures inbuilt into it which help analyzing the effectiveness of human resources processes in helping business performance. Standard Chartered has automated its HCS enabling it to take out the scorecard for every division for every country in a matter of seconds. This is possible because of data homogeneity.
The use of advanced systems to compute and analyze global human resources data is applied in many banks with thousands of employees. Without such integration of systems and automation of the process of evaluating and compiling data, human capital can never be assessed and used as a basis for strategic plans and further evaluate performance. There are several software companies which cater to the need of banks in their human capital management initiatives. Such companies utilize data from other managerial systems such as ERP and CRM systems to compile and present data for human resource analysis (ACCA, 2009). Usually, the data required for implementing human capital management is available within the organization (Whitaker & Wilson, 2007), but the forms and content of such data will be radically different, arising out of legacy systems prevalent in different countries and divisions. This could lead to significant investments in managerial software and systems to ensure that data is available in the form it is wanted quickly.
Human Capital Management Solutions
Human capital management is available as customized software solutions for banks and other organizations. Such solutions specialize in extracting data from legacy ERP systems of the bank and integrate and present them in ways suitable to the particular bank. Their primary function is turn data into intelligence for the organization. This intelligence or relevant reports are alone are not enough, but the will to utilize this intelligence is more important.
We will now explore the case of human capital management solution implemented in two prominent and large banks:
Case 1: BNL –Gruppo BNP Paribas
BNL is one of the top Italian Banks raking in the top 60 among European banks. It is owned by BNP Paribas, a global financial institution which employs over 170000 people. BNL has approximately 16000 employees (SAS, 2010). This gives an indication of the complexities and the enormity of the human resource management function.
The objectives of a program implementation have to clear before embarking on the process. The bank wanted to implement a human capital management system with the following objectives:
- Using HR employee and line manager times effectively
- Identifying areas where it gets maximum return n investment in human capital
- Spending human resources budget in effective ways to align individual and organizational development needs
The solution was implemented in multiple stages, with the first stage being understanding of and evaluating existing human resource practices:
- Analyzing historical staffing and retention costs, estimating redundancies
- Effectively design career paths and skill maps
- Simplifying budgeting and reporting
- Analyze compensation components and simulating for synergies and cost-savings
Having analyzed the existing business processes, the bank then went on to creating intelligence. The solution’s second stage saw BNL adding more features and capabilities to the SAS solution:
- Efficiency studies – time and cost study
- Role and position analysis
- Performance analysis through scorecard models
The key challenge to the implementation lay in the extraction of vital information from the bank’s SAP R/3 ERP module and utilizing it in this solution. This involved significant complexities in configuring the solution for BNL. This is a major problem faced by organizations when implementing organization wide business solutions.
The successful implementation of the SAS Human Capital Management solution the bank has been able to generate return on investment because of the solution implementation. Also the solution put valuable information in the hands of human resource managers and line managers, thus reducing dependence on central planning but not reducing the quality of decisions made. This leads to significant time and cost rationalizations for the organization (ACCA, 2009).
Case 2: Standard Chartered Bank
Standard Chartered is a banking powerhouse head quartered in the UK. It employs over 60000 people in 1500 branches spanning 56 countries across Europe, Asia and Africa. The company has a high growth strategy and has doubled headcount and revenue post 2005 (Whitaker & Wilson, 2007). The organization manages human resources at a global level and places considerable importance on human resource management and is one of the pioneers in human capital management in banking.
Standard Chartered approach towards human capital management is guided by three principles (Whitaker & Wilson, 2007):
- Focus on the right talent at all levels for all roles and enabling human resources function to identify and retain high performing individuals
- Help individual employees utilize their strengths effectively and manage their limitations
- Develop exceptional managers and leaders who will help the bank achieve its human resources potential
- Manage and assess strategic human resource initiatives like diversity development
True to the classical implementation process of human capital management (Pfeffer, 1995), the bank at the first level analyzes the effectiveness of its people processes; understand the levers and drivers which contribute most to the core capabilities of the division or the organization (Lepak & Snell, 1999). The analysis happens on multiple metrics. The progress of high value individuals, their retention compared to the general population, talent management processes, succession planning for key roles are some of the processes that are measured to ensure that the various HR practices of the organization are being effective in their improvement of these key metrics.
The next level of understanding comes from the “so-what” angle. The inferences captured from the first level are taken to the level of understanding on how to make them better. The key drivers of human capital management and associated human resource practices are analyzed and taken to a new level of understanding. For example, leadership practices in the organization are assessed through various tools and practices across the various functional domains. Gallup scores from subordinates are also used. Then the efficacy of leaders is studied and exceptional leaders are unearthed through such an analysis. Standard Chartered does not stop with this but goes on to the level of understanding winning traits and characteristics of its most effective leaders and trying to replicate them across the organization.
The above discussion is a vital reminder that human capital management is more about action that access to information and understanding functional efficiency and processes. The action part is not brought out by any software or enterprise solution. The top management has to understand the essence of human capital management and utilize the data to further the achievement of organizational goals (Hitt et al, 2001). Unless this is done, the actionable elements of the concept will remain undone and human capital management will remain on paper and will not help the organization or its stakeholders in any way (Bassie & Mcmurrer, 2007).
To transform information to action, Standard Chartered uses a Human Capital Scorecard. This is an adaptation of the Balanced Scorecard and gives the top management the insights they need to make decisions regarding human capital. Data from across the globe is consolidated through a single global data warehouse and a Human Capital Scorecard is generated for every country and for every division to enable its leaders to make effective interpretations of the human issues in their sphere of action. The scorecard provides leaders with tools to effectively analyze trends and identify issues with the human capital and also to measure progress of previously started human resource initiatives. Thus, the leader is able to meet the human resource goals for his division or country and is also able to ensure that he is in line with the organizational goals and the specific goals set for his division.
The scorecard is generated annually, quarterly and in every month and the bank has automated the process to be able to generate country reports in 40 seconds. The reasoning of the bank for the high level of automation is to reduce the time spent on human resource planning thus making business leaders more efficient and also to ultimately make this tool available with its line managers, so that the dependence on headquarters will go down to make effective decisions. This saves significant costs for the organization.
To utilize the scorecard further, the bank sets a strategic planning agenda every year to evaluate and plan for human resource management annually. For example, in 2006, the scorecard highlighted the trend of attrition in the first year of joining by new employees. This led to increased focus on the induction process for joiners. The results of this action will be assessed periodically again through the scorecard. This process has brought increased rigor into the understanding, planning and action parts of the human resource function and involved other functional areas into effective human capital management.
The Importance of Human Capital Reporting to Stakeholders
There are other successful cases of human capital solutions implementations in the banking sector. For example, the Banca Carige, one of the oldest banks in Italy implemented an SAS Human Capital Management Solution to increase visibility and to make better HR decisions (SAS, 2010). The plethora of human capital management solutions available in the market indicates a high level of competency and popularity of the approach to banks.
The significant stakeholders for a bank are its shareholders, the Government, the society at large and the bank and its employees. For all these stakeholders, the primary concern with respect to the working of the bank is the need to have access to transparent, well-defined and quantifiable measure of the human resource strategy and the performance of its human resources to understand how the bank’s intangible elements are related to the bank’s worth and the efficacy of its decision making (ACCA, 2007). This creates the relevance of human capital reporting, with human capital becoming a metric of organizational performance and business sustainability. The employees of the bank are also important stakeholders. By defining its human capital strategy, the bank can focus on how to develop this capital for organizational growth. For example, Standard Chartered’s human capital goals for 2007 included the following points, affecting its employees (ACCA, 2007):
- Embed sustainable lending training in core risk management training.
- Review our approach to climate risk, including raising levels of awareness amongst appropriate staff on how to assess climate risk.
- Upgrade the social, ethical and environmental (SEE) e-learning. Get external stakeholders’ input.
The market has started demanding significant data on human capital management as a sustainability issue and this has resulted in ranking in the US on human capital reporting. The fact that human capital reporting is deemed a sustainability requirement makes it imperative on organizations to go in for reporting. The Dow Jones Sustainability Index features human capital reporting as criteria in rating organizations (Sustainability Index, 2008). Association of Chartered Certified Accountants (ACCA) 2007 ranking rated Wells Fargo in the top 5 among Fortune 100 companies in human capital reporting (Creelman, 2007). The importance of human capital reporting is gaining statutory importance with many countries making it mandatory for organizations. In Denmark it is a statutory requirement in management reports, while in Austria, it is mandatory in all universities (Eubusiness, 2006).
In the small entrepreneurship context, human capital reporting creates investment opportunities for banks by showing them enterprises with great promise (Eubusiness, 2006). The downside of why most SMEs do not report human capital is lack of awareness in how to report human capital and lack of clear guidelines. Thus, banks could significantly benefit from companies and SMEs reporting human and intellectual capital in their annual and management reports. So the gaining of popularity by human capital measurement and reporting can aid banks both internally and externally.
Financial institutions have created human capital strategy papers for specific periods, which strategize the human capital approach and link it with its strategy and organizational objectives (FHFA, 2009). By doing so, banks are able to create an environment where human resources function is treated as a profit center and as one which yields business benefits which are tangible and measurable.
Human Capital Reporting – In Practice
In many countries, human capital reporting, or for the matter, any form of extended reporting is optional. When human capital reporting is viewed from the CSR perspective alone, it creates a number of reporting formats, which result in incomparable reporting structures which are not of use for observing industry trends and the value of the philosophy. Hence, there is a growing demand among intellectuals for a consistent reporting structure or pattern which will enable the further development of knowledge based on understanding these reports (Cuganesan, 2007). The genuine interest taken by some leading banks have created a need for other banks to adopt human capital reporting.
Standard Chartered Bank has been a leader in human capital management and reporting. It is one of the first organizations, along with Royal Bank of Scotland to measure and report human capital. It recognizes that human capital is intangible and hence difficult to quantify as directly related to cost and financial implications, as the variables are too complex to decipher and harness. Hence, it uses proxies which are tied to performance, like cost of training, cost of increasing workforce, etc. to arrive at relationships between factors in human capital which it deems to be important and its actual performance, at a national and an international level. It reports these proxy relationships as individual metrics, indices and ratios, which indicate a certain level of competency or worth for the bank (Bentley, 2007). Royal Bank of Scotland also reports similar indices and ratios to quantify its human capital to its stakeholders. Though various standards have been adopted by various nations, the reporting is still not mandatory, meaning that organizations need not report, even if they do they can do it in their own ways.
Banks are service providers to retail customers and business. They are faced with a number of challenges – high competition, geographical business spread, high headcount and significant emphasis on people and service quality. People deliver quality here, and not machines or computers. Hence, the way banks and financial institutions manage their people is very important and in fact the most important factor in success.
Human capital management which emphasizes the role of employees in an organization as its assets is best suited and is very important for banks in today’s complexities in financial services. The rapid advancement in technologies have enabled banks to serve customers far away and also allowed banks and customers access to each other from far apart. Thus, the role of intangibles is more important than tangible advantages. Thus, a person could be using phone banking more frequently than a bank teller. Significant levels of automation have taken place and it would seem as if the whole banking process would be automated and there would be no people working in banks.
But human beings create this technology, knowledge and manage it. Hence, the underlying factor for success is always going to be the human edge, the edge of the employee. The worth of an employee is far more than the salary he gets paid, he is worth the knowledge he possesses. Unless this knowledge is quantified and billed accordingly, the organization cannot realize its full value and hence is bound to discount in unwarrantedly. This is more so in banking, where business relationships hold the key to retaining and acquiring customers.
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