Human capital in the new economy: devil's bargain?

The Emerald Research Register for this journal is available at www.emeraldinsight.com/researchregister The current issue and full text archive of this journal is available at www.emeraldinsight.com/1469-1930.htm Human capital in the new economy: devil’s bargain? Judy McGregor Human Rights Commission, Wellington, New Zealand Human capital in the new economy 153 David Tweed Department of Management, Massey University, Palmerston North, New Zealand, and Richard Pech Graduate School of Management, Faculty of Law and Management, La Trobe University, Melbourne, Australia Keywords Human capital, Competences, Employment, Market economy Abstract The burgeoning literature about the knowledge economy has marginalised its most important dimension – people. The development of human capital and its role in the competitive advantage of business is discussed in relation to the changed nature of the employment relationship. In particular Drucker’s concerns about the threat to business of attenuated relationships between workers and their organisations are examined. Contextual factors such as the dynamic nature of labour markets, the centrality of profit making and the definitional difficulties inherent in the new and old economy dichotomy are acknowledged. A transitional model of human capital in the new economy is suggested as a way of modernising traditional thinking. An analysis of the capabilities required by new economy workers leads to a discussion of the corresponding competencies necessary for managers. The paper concludes that changed employment relationships do not spell death to people development. Rather it makes managing talent different and more challenging. Introduction The extraordinary volume of popular and academic commentary about the knowledge economy has tended to marginalise its most important dimension – people. Human capital in the new economy is largely a Cinderella topic. This is despite Drucker’s (2002, p. 71) observation that developing talent is business’s most important task, what he describes as “the sine qua non of competition in a knowledge economy”. Human capital embraces both the broader human resource considerations of the business workforce (traditionally known as the labour market) and the more specific requirements of individual competence in the form of knowledge, skills and attributes of managers and the people they manage. Dynamic global change has impacted swiftly on the way talent is managed in businesses. At the end of the 1980s Charles Handy used the shamrock metaphor to describe the organisation of the future with three shamrock semi-circles describing the division of the workforce. These divisions were the core staff of loyal employees, those who were contracted and paid for services rather than by tenure, and the flexible rump of temporary workers. Journal of Intellectual Capital Vol. 5 No. 1, 2004 pp. 153-164 q Emerald Group Publishing Limited 1469-1930 DOI 10.1108/14691930410512978 JIC 5,1 154 While Handy’s (1989) analysis was a useful structural insight even futurists have not predicted the pace of change in the labour market. Arthur and Rousseau (1998) coined the notion of a “boundaryless career” to describe the new employment experience, while Inkson (1999) talks of the death of the company career. The notion of a psychological contract between employers and employees has been assailed by globalisation, various Government policies, cycles of labour market de-regulation, technological innovation, the breathless nature of competition, and new patterns of working. These new patterns of working include different organisational imperatives and changing worker aspirations and expectations. British researchers Rubery et al. (2002, p. 646), state that more unstable career patterns and the “increased passing-on of risk to employees are recognised to be creating problems for organisational commitment and for the trust relationship at the heart of the psychological contract”. Drucker (2002) notes the rise and rise of the temporary worker and talks of companies that have off-loaded employee relations to professional employee organisations. The Swiss company Adecco, for example, places nearly 700,000 temporary and full-time clerical, industrial, and technical associates with business all over the world. Drucker suggests the attenuation of the relationship between people and the organisations they work for represents a grave danger to business. Need this necessarily be so? This paper argues that not enough attention has been paid to human capital and its role in the competitive advantage of business in discussion about the knowledge economy. While it is generally acknowledged that “higher order” or “mental skills” are required as the psychological counterpoint to business in an information age (Neville, 2000), robust new models of human capital need to be conceptualised and debated. If this reframing occurs it could influence conventional human resource management and popular thinking about work. Then the splintering of traditional employer-employee relationships may not represent the danger to business that Drucker suggests. The notion of the employment relationship is changing not only in relation to temporary or contract workers. Distinctions between employees and self-employed have blurred and old conceptions of single employer-individual employee relationships, for so long the norm, have been challenged by the emergence of multi-employer-worker relationships (Rubery et al., 2002). Indeed, new theories and models of human capital have the potential to impact on the creation of true economic value for business, not least because they may mean that human capital is dealt with differently within the business context. Traditional human resource structures and functions are increasingly flat-footed in their application and relevance. It also throws up for debate the traditional distinction between “soft” and “hard” human resource management (HRM). “Soft” HRM has been influenced by American (Pfeffer, 1994) and British thinking (Guest et al., 2000). It conceptualises human resource enhancing practices such as training, teamwork and employee participation for individuals to capture their involvement. “Hard” HRM, on the other hand, usually involves the contingency approach and relates to human resource practices that are firm-related (Boxall and Purcell, 2002). But neither approach quite fits the new work environment. Clearly the modernisation of work demands new conceptions of human capital. In reality such a reconfiguration of human capital, and what is needed to attract, manage and motivate the best people, could also prove to be reassuring for workers themselves. US Federal Reserve chairman, Alan Greenspan, observed that the rapidly changing global economy has clearly raised the level of anxiety and insecurity in the workforce. Workplace angst, part of the modern condition, has been heightened by the spectacular boom-bust cycles of dot.com companies, the quintessential expression of the new knowledge economy. While specialisation has been a by-product of the knowledge economy, specialisation per se does not build profits or save jobs. Managers, too, are perpetually worried, not just about personal job security, but about what Lissack and Roos (2001, p. 57) say is a managerial perception that “continuity is but a fragile, temporary, and illusive notion, the assumption of predictability does not hold anymore . . .”. This paper urges a rethink about traditional concepts of human capital by suggesting a transitional model of work relations for the new economy. It argues that we need to rethink the competencies required by managers and workers for business success. Theory development and model-building was influenced by factors such as the selection of the right people, external environmental considerations such as skill shortages and specialisation, industrial compliance and employment relations issues. The employment relations issues include legislative requirements, creativity versus functionality, personality attributes required in modern-day work and concepts such as complementarity of skills. The paper draws on the insights provided by a number of recent studies conducted since 2000 examining aspects of innovation in New Zealand’s small and medium enterprise sector (McGregor et al., 2001; Nesbit, 2001; Tweed and McGregor, 2000). These studies were conducted within a range of new economy companies in the information technology, biotechnology and creative industries. Contemporary context Any relevant model of human capital for the new economy will be embedded in current socio-economic and cultural contexts. Three points are important here. The first is the dynamic nature of the labour market in developed nations that internationally are in transition. The rise of temporary workers is matched by related trends such as the rise of service industries, the collapse of Human capital in the new economy 155 JIC 5,1 156 manufacturing, the ageing of the work force, and the gendered nature of labour markets in western countries. For example, the allocation of employment is changing throughout major industrial sectors (Cordes et al., 1999). The new pattern involves one of “up-sizing” in small-business dominated industries and “downsizing” in large business dominated industries, particularly manufacturing. The dynamic nature of labour markets, though, does not easily find expression in contemporary debate about the “new” economy and the “old” economy which suggests the two are dichotomous. The rhetoric of “new” and “old” also suggests that one has supplanted the other and novelty equates to better. The second point is the centrality of profit making to businesses irrespective of their position in either the “new” or “old” economies. Realists accept that the factors influencing business health are common to both, a point emphatically underlined by the failure of dot.com companies. Porter (2001, p. 65), in analysing the Internet economy, says that in periods of business flux it often appears that there are new rules of competition. But, he says, “The creation of true economic value once again becomes the final arbiter of business success. Economic value for a company is nothing more than the gap between price and cost, and is reliably measured only by sustained profitability”. Profitability, then, is the core value of business whether it be a “new” or “old” economy enterprise. Nesbit’s (2001) research even adds profitability as a competence area for e-commerce companies. The third point has to do with the indeterminate boundaries of “new” and “old” economies. The defining characteristics of the new economy that distinguish it from the old economy are often difficult to pinpoint. For example, biotechnology, often cited as a new economy example, has been an industrial classification for decades. Some businesses, too, that are thoroughly grounded in old economy precepts have new economy components to them in terms of research and development. They may also add innovative adjunct business operations to traditional structures. While knowledge production and diffusion are frequently acknowledged criteria for the new economy, no one suggests these are not evident in so-called “sunset” industries. So while such phrases as “new economy”, “knowledge economy”, “knowledge wave”, and “sunrise” enterprises provide rhetorical and romantic certainty, particularly for governments, the business reality is much more confusing. Transitional model of human capital Taking these factors into account any rethink of human capital must allow for ambiguity. It must also acknowledge that the attributes sought by business organisations and the expectations of employees change over time. The following transitional model conceptualises the drivers that influence human capital requirements. The model is drawn as a continuum of variables that acknowledge the dynamic nature of work. For example, attachment factors relating to human capital in traditional business place emphasis on dependability of labour and long-term employment prospects for staff. New economy employees, on the other hand, are more likely to be chosen for their adaptability and responsiveness and have no expectations beyond the fixed term of an employment contract. This means that employee motivation might relate more to the intellectual stimulation of the job than its security, and job work practices may revolve around specific projects rather than continuous functions. The reward factors, too, may be more volatile and accepted notions of internal promotion up the “company ladder” may be less realistic than cross boundary advancement. New economy employees are more likely to be interested in self-development to attain transferable knowledge through education than they are in company specific training to develop skills. The cultural factors have moved from notions of collectivity towards individualism and autonomy (see Figure 1). What workers need for the new economy If the modern day labour market is developing such a different complexion what competencies do workers require? Lau et al. (1998) say work competence is made up of the requisite knowledge, skills and personal attributes needed to do the job. Taking each of the drivers identified above as influencing human capital we explore the competencies needed for the new economy. These competencies have been identified from intensive case studies and interviews undertaken in a series of recent studies within small and medium enterprises in New Zealand’s new economy (McGregor et al., 2001; Tweed and McGregor, 2000). The generic competencies were then compared with those previously identified in research located within old economy companies (Kolb et al., 1999). To validate concepts and thinking about the competencies required by new economy workers the research was then referred back to the small and medium enterprises that had been involved in the research in an iterative, industry-research process of challenging and corroborating our thinking. Using the three components identified by Lau et al. (1998) we have identified related sets of knowledge, skills and personal attributes that workers in the twenty-first century will require to be marketable and competitive (see Figure 2). It is important to note that while the taxonomy of competencies is presented here figuratively as a number of discrete elements they are in fact inter-related and work in a holistic way. The theory therefore matches the reality of new economy work where people are seldom selected on the basis of single skills or isolated attributes but for a combination of qualities working together. If the attachment factors of human capital in the new economy emphasise short term involvement as temps, self-employed or shareholders, workers will first of all need to possess knowledge that is specialised, differentiated and Human capital in the new economy 157 JIC 5,1 158 Figure 1. Transitional model of human capital in the new economy relevant to industry. No knowledge worker can afford the trap of technological obsolescence. It is imperative to sustain technological literacy. Workers need some knowledge of operations and processes and they will need at least generalised knowledge of the changed business environment and the potential of e-business. They will need transferable skills that are up to Human capital in the new economy 159 Figure 2. Competencies required by new economy workers date, technologically relevant and portable and these include the ability to work in a team. Workers need to be capable of building relationships and the ability to work on multiple projects at one time. They need client-focussed skills and a general marketing consciousness about products and processes in an e-business environment. The personal attributes required involve self-confidence, resilience and the ability to be flexible and adaptable. Most importantly they must be able to handle ambiguity. If job security is no longer tenure-based new economy workers will need to be psychologically able as well as technologically proficient to scan the environment and recognise opportunities. The more volatile reward structures in the new economy mean that professionals, in particular, with knowledge of their own market value and the negotiation skills to extract it will prosper. Underpinning the development of human capital is the requirement for fast learning and the need to acknowledge that learning cannot stop. The culture of the modern workplace is less about organisational loyalty than it is about team work, collaboration, relationship-building and what could be called aggregated individualism based around project work. Drucker (2002) sees the danger to business in attenuated relationships between people and organisations because of the risk of forgetting that developing talent is business’s most important task. He states, “If by off-loading employee relations, organisations also lose their capacity to develop people, they will have made a devil’s bargain indeed” (Drucker, 2002, p. 71). JIC 5,1 160 However, if it is assumed that people development can occur only in the way we have conventionally undertaken it, largely through organisational structures and processes, then it may be a false assumption. If it is instead accepted that there exists a transitional model of human capital (Figure 1) and that significantly different individual competencies are needed by workers (Figure 2), then this does not spell death to people development, it simply makes the job different. It is different because the competencies needed by workers have moved from dependability factors (loyalty, company, tenure, job security) to adaptability factors (individualism, flexibility, resilience and change-orientation). This shift alters traditional methods of people development as the control of work relationships subtly changes, both structurally and culturally. If people relations are the “glue” of human capital development in the new economy, and conventional organisational structures are increasingly redundant, the spotlight is thrown onto managerial competencies and an individual’s self-directed learning for work. A fundamental realignment of the managerial function in the new economy has occurred as increased self-management accompanies greater worker autonomy in business. This means that modern managerial competencies are more likely to be enabling and interacting rather than controlling and commanding, which does not necessarily reduce the difficulties inherent in managing the employment relationship. It may, however, shift the balance towards a combination of robust contractual arrangements and higher trust relationships. We can accept from the burgeoning literature in the field that a number of managerial competencies are generally recognised as appropriate for the new economy. These are profitability (Porter, 2001) or “profit management” as Nesbit (2001) calls it, marketing competence (Cobbenhagen, 2000) and the three recurring themes of change management, risk management and knowledge management (Turban et al, 2000; Chan and Swatman, 1999). Davis and Hajnal (1998) more specifically identified 22 management skills and competencies in a North American context that were specifically needed for e-commerce including strategic analysis and interaction with government and regulatory agencies. However, an additional and complementary taxonomy is required specifically to address the knowledge, skills and attributes managers need to develop talent in the new economy. These competencies and their linkages look quite different from the usual lists carried in management textbooks. Such a complementary taxonomy will require new thinking from management educators. For example, current human resource curricula spend considerable time on organisational behaviour that may need to give way to a greater emphasis on human behaviour and basic individual psychology. Similarly, formalised “soft skill” development in interpersonal communication may pay as much dividend as the concentration on the harder wiring of ICT literacy in management education. The Australian Report of the Industry Task Force on Leadership and Management Skills (Enterprising Nation, 1995), also known as the Karpin Report, found that nearly half of all Australian managers had difficulty dealing with people. The report recommends an increase in education in the areas of communication, motivation, leading, delegating, and negotiating. The time management industry and its gadgetry could usefully be reprogrammed with the simple message “people first” on the “to do” list, instead of itemised operational activities. Here, then, is what managers need to develop talent in the new economy (Figure 3). So how will managers develop these competencies? Government and economic development policy agencies emphasise the lack of management and leadership in innovation within the new economy (Enterprising Nation, 1995; Human capital in the new economy 161 Figure 3. Managerial competencies required for people development in the new economy JIC 5,1 162 Campbell-Hunt and Corbett, 1996). Suggested remedies include improvement in educational levels in order to move from prescriptive job titles to a focus on the desired end result (TFPL, 1999). Research has been less specific about the nature and form of such competency enhancement. It is clear while on-the-job training and up-skilling remains important to specific industry sectors such as the software industry, there is a shift from training towards self-directed education by ambitious, mobile professional workers who anticipate their own management potential. This is revealed in the global embrace of MBA-type education, generally advertised as the portable qualification for those on the move. For example in a recent professional publication on MBA competition Seligman (2001) argues that “in today’s market both students and prospective employers look for two crucial words associated with their MBA: mobility and globalisation”. Whether MBA curricula are apposite for the new global knowledge economy, though, is a moot point. While in the past competencies have emphasized skills and personal attributes it is knowledge that forms the basis of managerial requirements for the new economy. Managerial competencies are not necessarily generic, nor will they all be located in one “super-being”. They are contingent, too, on such things as the industry sector, the size of the organisation and the degree of competition in the market. What are the implications for executives if people development is required to be different, rather than off-loaded and ignored by organisations, as Drucker (2002) warns? First, executives will need to recognise and acknowledge the fundamental differences in employment relations, including worker aspirations, which underpin the modern, knowledge economy labour market. Familiar thinking about HRM may be out of date and will not necessarily lift human capital to the levels required. For example, staff development is often enclosed in budgetary data under the label training and is often primarily spent on instrumental, in house skill development. But to attract and retain quality people executives will have to under stand that workers want self-development opportunities that combine self actualisation with company enhancement. Conclusion The changed nature of human capital in the new economy requires workers, their managers and executives to possess different and sometimes unconventional characteristics to survive. Ironically the breathless nature of business, which is perhaps the only constant in the new economy, is generally blamed for the one time-deficit that can make a difference – time for people. However understanding what it is that drives the knowledge economy and how best people are attracted and attached to employment, what motivates them, the nature of the employment relationship requires a challenge to traditional conceptualisations of human resources. The development of transitional models such as the one referred to in this paper will help us understand the changes. The human capital demands of the new economy, deciding what it is that workers need to have, how managers can make them productive and the implications for executives, require considerably more attention from educators, policy agencies and governments. Business and other organisations can then test and evaluate new thinking about using talent in the knowledge economy. Only then will the devil’s bargain, not developing talent as a consequence of changed employment relationships, be resistible. References Arthur, M.B. and Rousseau, D.M. (Eds) (1998), Boundaryless Careers: A New Employment Principle for a New Organizational Era, Oxford University Press, New York, NY. Boxall, P. and Purcell, J. (2002), “Strategic human resource management: where have we come from and where should we be going?”, International Journal of Management Review, Vol. 2 No. 2, pp. 183-203. Campbell-Hunt, C. and Corbett, L.M. (1996), A Season of Excellence? 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Rubery, J., Earnshaw, J., Marchington, M., Cooke, F.L. and Vincent, S. (2002), “Changing organisational forms and the employment relationship”, Journal of Management Studies, Vol. 39 No. 5, pp. 645-72. Seligman, M. (2001), “MBAs get competitive”, Management, June, pp. 59-64. TFPL (1999), Skills for Knowledge Management: Building a Knowledge Economy, TFPL, London. Turban, E., Lee, J., King, D. and Chung, H.M. (2000), Electronic Commerce: A Managerial Perspective, International ed., Prentice-Hall, Englewood Cliffs, NJ. Tweed, D. and McGregor, J. (2000), “Linking competence with goal attainment in SMEs: an examination by management tenure, size, structure, innovation and growth”, in Sanchez, R. and Heene, A. (Eds), Research in Competence-based Management: Part C, JAI Press, Stamford, CT. 164 Further reading (The) Jobs Letter (1999), “Greenspan on insecurity”, The Jobs Letter, No. 102, 20 June, available at: www.jobsletter.org.nz/jbl10200.htm (accessed 10 December 2001). 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