While there are well-established principles for accounting for tangible items of production there is a gapping hole in our ability to account for intangible items of production such as people. As we move into the knowledge economy, this shortfall in our collective accounting becomes a critical problem. Without a rigorous way to do this, we cannot provide a feedback loop that enables rational and proactive decisions that enhance the value and productive application of human capital.

As value creation moves from the machine (capitalized) with its well understood productive life time (depreciation), and its need for maintenance, upgrades and repurposing (expensed) to knowledge workers, there is no accounting corollary that allows management to measure, track and manage the acquisition and application of human capital. Decisions to add a new piece of machinery are made based on well-established ROI analysis. A decision to add a new knowledge worker has no comparable analysis. Does this situation exist because it cannot be done?

I believe that it can be done. Of all the areas that are ripe for academic research and development, accounting for human capital has to be high on the list. Currently, managers of knowledge workers are left to intuitively experiment with how to measure, develop and apply their intangible human capital. Unfortunately, they have few tools that help them in this effort.

Human Accounting 101

What are some of the key accounting issues related to accounting for human capital?

First, is a person an expensed or capitalized item? Right now everyone is expensed. However, the argument is that Steve Jobs who was paid a dollar a year was not an expense but rather a capital asset. Apple’s balance sheet value was clearly misstated as the decline in the capitalized value of the company since his death has demonstrated.

Second, in a creative knowledge intensive industry where the half-life of a current skill is measured in years or even months, is significant annual training and repurposing of an individual a department expense or a cost of production? An easy example is computer science, where programming languages shift dramatically every 3-4 years, but this is evident in all knowledge industries. Hundreds of jobs roles, such as print designers, travel agents, or journalists, have had to either gain new skills, or reinvent themselves into new careers. It is unrealistic to expect that the pace of change will slow – if anything it will increase.

Third, as a person’s skill value decreases (the skill itself may be improving) and the cycle time required to repurpose that skill remains the same, the individual and organization is on a course to assured obsolescence. How do we account for the volatility of a skill and the time required to repurpose it?

We have seen this movie time and again from service station attendants to self-service pumps, bank tellers to ATMs, travel agents to Kayak.com, and coming soon a mail carrier near you. Further into the future, what does Google’s robotic car technology portend for truck, taxi and even pizza delivery drivers? And of course, expert systems like Watson have the potential to dramatically reduce the need for attorneys and professional “experts”, even if it is many years into the future.

Fourth, how do we account for the social network value of an individual? Does a marketing manager with 10,000 Twitter followers within the industry provide more value to the organization than does one who only does email? Certainly both items are quantifiable, but how do we assign them value?

Without systematic ways to measure, track and make decisions in the above areas we are rapidly heading into a shooting from the hip wild west of management.

So let’s do some vision-eering on what features such a system would have.

Imagine a dashboard at a person, organization and industry level. At the industry level, trends would be mapped and rated on a Gartner Hype Cycle like system.

Emerging products or services would be identified along with the organizations or types of organizations most likely to produce them – giving a shape of what the future holds (this is typically during the initial rise seen above). At the organizational level, there would be a more detailed view of the specific talents required now and in the future to develop and produce those specific products and services. At the personal level, the individual would be able to see on a daily basis how their current skills are valued, and the rate at which those skills need to be replaced. Not only would individuals see what is happening with their skills for a shifting market, but they would also see how their current position and future potential compare with both their peer group and any potential skill that could make them obsolete.

The dashboard would reflect not only knowledge, but also the currency/up-to-dateness of the knowledge. Even current knowledge held by one individual has little value until it is shared, not with the entire organization, but only with those that can use it. The dashboard would be constructed around the objective of improving the efficiency and reducing the cycle time from the development of a creative idea that meets an emerging need to its delivery to fill that need. At a conceptual extreme, a need could be identified, a creative solution developed, implemented and delivered, and the product obsoleted within a single day.

Now how do we develop an accounting system that can handle that?

The post Accounting for Human Capital appeared first on SkilledUp.com.