Employees as Capital

by Krishna on April 28, 2007

This idea comes from Peter Drucker‘s book, “Managing in the Next Society“. He says that in the Industrial Age, employees were treated as an expense, but in today’s Information Age, employees are knowledge workers and should be treated as capital investment.

Many companies today do talk about employees as “assets”. However, several factors still continue to promote the old thinking. Primary among them are accounting and budgeting. The company’s financial statements always reflect the salaries and benefits of employees as expenses. The tax code, which treats expenses and asset investments differently, also reinforces this way of thinking.

One sees the same behavior in customer service. Short-term thinking makes some businesses only count the direct dollars that a customer pays for the product or service. They do not count the additional benefits that a satisfied customer brings in free marketing or the costs of losing that customer. Like the previous example, the financial statements do not force one to think with a long-term vision.

Going back to the original premise, what is involved in treating employees as capital investment? Let us compare an employee you hire to a capital expenditure (like machines or enterprise software) you make: (Don’t extend the metaphor too far, such as treating employees like machines!)

  1. You would only buy the best machine you can afford. Similarly, you should hire the best employees you can afford.
  2. You would maintain the machines properly so that they can continue to work properly. Similarly, you should support the employees so that they can willingly do the best work they can.
  3. You would upgrade the machines with new parts and tools when available. Similarly, you should keep training your employees in new skills and technologies.
  4. You would use the right machine for the right task. Similarly, you would hire and use employees for the jobs that they are best suited for.
  5. Your expenses for the machine, like power, maintenance, etc. are primarily for your benefit – translated into increased or longer-term revenues. Similarly, any expenses for the employees should be not written off, but considered as an investment.

This concept is particularly important in the new economy powered by information and software. In the past, work (involving physical labor) was inherently limited by the limits of the human body. Maybe one worker was 2-3 times stronger or faster than another. Maybe.

But when we talk of “knowledge work”, there is a tremendous difference in the outputs of different persons in the order of many magnitudes. For example, in the creation of a software product, that means months of additional development effort, hundreds of more bugs and increased customer frustration (to the point of quitting) if you don’t pay attention to getting and retaining the right employees.

Companies that understand this concept are incredibly empowered. They don’t have to rely on expensive metrics collection and evaluation to drive the company forward, as each employee also has the same goal. If you look at many successful companies, you would find that they have achieved this.

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