By Ingrid Selene, Principal, Marketing & Communications, Aon Hewitt, Pacific

Human capital has become the most important asset today for achieving business success in Australia. This is reflected in the contribution it makes to companies' market capitalization; 75% of the market capitalization of Australia's top 100 companies is now made up of intangibles, which include human capital, compared with only 25% coming from intangibles just 25 years ago. Using the term human capital reinforces the view that people are critical contributors to an organization's success. It also throws the spotlight on how businesses invest in their human capital assets in order to optimize its value¹.

This trend is supported by results demonstrating that companies that are leaders in managing their human capital outperform the laggards. Aon Hewitt's Best Employers research (Australia and New Zealand) shows that the average profit growth for companies that were Best Employers was almost four times that of other organizations between 2008 and 2010².

Having the right talent and leaders in place can also dramatically improve organizational performance. Aon Hewitt research on employers in the US found that the ability to meet talent/skill needs for leadership roles, as well as talent management and succession planning were both rated very high in importance. However, the companies' self-reported effectiveness in delivering on these factors paled in comparison. For example, 84% said the ability to meet talent/skill needs for leadership roles had high importance, but less than half of this number (38%) said they were highly effective in doing this³.

It is therefore not surprising that human capital risks have been one of the top four risk concerns year after year in an annual study conducted by Aon⁴. Nevertheless, human capital risk is regarded as one of the risks that companies are least effective in managing. While 60% of executives say the threat of human capital risk is "very high" or "high", only 34% say their organizations manage this threat effectively⁵. Only the organization's management of natural hazard risk was seen to be worse.

Reasons for the increased importance of human capital 

The reasons why human capital is more important to the success of organizations can be attributed to three factors:

1. demographic trends
2. changes in the workforce
3. the changing nature of businesses.

Demographic trends

The ageing population is a major factor creating pressure on companies' ability to attract the talent they require. Currently in Australia, 38% of the population is aged over 45 compared with 27%, 30 years ago.

Over the next several decades, population ageing is projected to have significant implications for Australia in various areas, including labor force participation, health, housing, and demand for skilled labor. The median age (the age at which half the population is older and half is younger) of the Australian population has increased by 4.8 years over the last two decades, from 32.1 years at 30 June 1990 to 36.9 years at 30 June 2010⁶. 

This is an almost universal trend. Globally, there are 11 countries today with a median age greater than 40. By 2050 this is projected to be the case in 89 countries, 45 of which will be in the developing world⁷.

The increased mobility of workers has meant that people from the developing world have helped to fill the labor force demands in developed countries in recent years. Thus, the ageing of the population in the developing world in the future will put even more stress on organizations and their ability to meet their needs.

Workforce changes

Changes in work places due to changing social dynamics have also created new people issues and new challenges in the last couple of decades. The workforce is now:

• more diverse
• more women are working
• there are more dual-earner couples
• there are substantially more part-time workers.

There are also changes in social values that have had an impact across all aspects of organizations, creating the need for employers to place more focus on how they manage their human capital. For example, expectations about benefits, working conditions, management styles, and access to communications technology have all changed.

Employees today want a strong sense of purpose and clarity about how what they do makes a difference. They look at the organization they work for and ask:

1. Is there a compelling reason to continue working here?
2. Is it worth putting in the extra effort?
3. Am I supported to be successful in my role?² 

Nature of business

The economies of many countries have undergone major shifts in a relatively short period of time. In the developed world, the key trend has been the shift to being more of a service and information economy and less reliant on manufacturing or agriculture. For example, in Australia 40 years ago, 55% of workers were in the services sectors and 45% in production sectors. Today the split is now 75% in services and only 25% in production.

The quality, skills, capability and engagement of your people is far more critical in service or information based businesses. Companies' competitiveness increasingly derives from know-how, or people's abilities, skills and competence.

Leadership also becomes far more important when jobs are less structured and more complex. Yet this is an area in which many organizations have not kept up with the changing needs and have failed to build the required leadership capability. In Australia, less than half of employees (47%) believe they have a manager who helps them achieve their best⁸. Aon Hewitt's research shows that leadership is a skill that can be developed. By identifying the drivers of high performance and building managerial capability and effectiveness, we can improve organizational performance.

Impact of the Global Financial Crisis

While the Global Financial Crisis and the consequent high unemployment rate in some countries has temporarily alleviated the crisis in attracting talent in those countries, in Australia and much of Asia, this hasn't been the case.

But even where there is high unemployment, the focus on an organization's human capital needs to be maintained. Following the worst of the financial crisis, employee engagement experienced the largest decline seen in the last 15 years. This was a global trend affecting all regions except Latin America. Aon Hewitt's global engagement research from 2008 to 2010, which represents 6.7 million employees working in over 2,900 organizations, found that engagement scores dropped to 56% in 2010 from 60% the previous year⁹. These falls in engagement can flow through to productivity and financial performance at a time when companies can least afford it.

McKinsey and Harvard Business Review research on past recessions supports the need to maintain a focus on human capital during difficult financial times. It shows that companies that outperformed their peers during and after a recession had:

• no across-the-board head count reduction
• refocused rather than cut spending
• had higher employee productivity
• found opportunities, leveraged their advantages (e.g., innovation)
• took a long-term view
• had a greater appetite for M&A.

So regardless of the state of the labor force market in your country, the imperative for business success in the 21st century is the ability to attract, develop and lead your human capital.

Contact us

Ingrid Selene is Principal, Marketing & Communications for Aon Hewitt in the Pacific. She can be reached at Ingrid.selene@aonhewitt.com.

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