Moscow State University of Economics, Statistics and Informatics (MESI)

Course work on: "Return on human capital investments"

Completed by:

Sarkisyan Olga

Khytornaya Ulia

Novikova Anya

2011

Introduction

Human capital is just one of an organisation's intangible assets. It is basically all of the competencies and commitment of the people within an organisation i.e. their skills, experience, potential and capacity. Other examples of intangible assets include: brand, software, design, working methods and customer relationships. The human capital asset captures all the people oriented capabilities we need for a business to be successful.

It's important to remember, however, that individuals are only an asset insofar as they choose to invest their human capital in an organisation.

Some people find the term Human Capital somewhat mechanistic, but human capital is not about describing people as economic units, rather it is a way of viewing people as critical contributors to an organisation's success. This then throws the spotlight on how businesses invest in their human capital asset, in order for it to add value. For any commercial organisation, this is an important component to understand. If a company understands how its human capital contributes to their business success, it can then be measured and managed more effectively.

Human capital management is a reciprocal relationship between supply and demand: employees, contractors and consultants invest their own human capital into business enterprises and the business enterprises need to manage the supplier. Any organisation interested in its performance will naturally ask how well they are managing this asset to ensure maximum return on their investment . In the same way, all employees, contractors, consultants and providers of human capital want to ensure they are getting the appropriate return for their own human capital investing through salary, bonuses, benefits, and so on.

Understanding how and why people add value or not to an organisation is an important, and difficult, management skill for the 21st century.

So, in the first part we paid attention Returns on Human Capital Investments in Offshore IT, in the second to increasing of return on human capital investments. In the third how few business executives understand return on human capital.

1. Returns on Human Capital Investments in Offshore it

The revenue growth model of IT services firms has been historically been based on scaling of firm size by adding new employees. Speculation exists that revenue growth is linear in nature; however no rigorous examination of this fact exists in the literature. In this paper, we investigate the nature of growth of firms in the Indian IT services industry. In addition to scaling firms have been looking at other levers, especially employer funded training, that may be positively linked to firm productivity. We use a panel dataset of small-to-medium sized Indian IT services firms’ training investments and performance to examine the nature of growth and the returns to training investments on firm productivity.

We use a combination of econometric methodologies to eliminate the endogenous choice of inputs that are common in estimating production functions. We find that the average firm has can be characterized as having sub-linear revenue growth as it adds new employees, and that training is indeed a very important ingredient to overcome the productivity drag through sheer scale. We find that increase in training investments is significantly linked to increase in revenue per employee. Further marginal returns to training are increasing in firm size.¹