What is The Importance of Human Capital in Small Business?

A series of conversations has prompted me to address the importance of the human element as it pertains to small business. It seems as though most understand the importance of financial capital and overlook the role human capital plays in successful companies. I find this interesting especially because the significance of human capital can arguably be greater the smaller the company.

Why you ask? In short, as companies grow their paradigm changes such that they have many people who know a lot about a few things (the specialists) whereas a smaller company requires fewer people to know a little about everything (the generalists). Ideally an organization wants to find employees that fit both profiles. People that know enough about the big picture to better preform at their specialty and people that know enough about the specifics to better manage the big picture. Owners of small business don’t have much say in the matter, they are forced to know both by virtue of the fact that they cannot afford to bring on much help.

What about creating specialized generalists? Training the few employees you can afford to excel in all areas resulting in a smaller skilled labor pool rather than having a bloated workforce of general laborers? This approach would be quite contrary to what is commonly practiced. Putting much stock into employees is often viewed as a good way to corner a business if anything happened to them or to the relationship. This is unfortunate. I maintain leveraging ones human capital can prove to be more profitable than discounting it to the point of making employees easily replicable. Now, I’m sure there are instances where easily replicable labor is desirable but as a small company the more you can lean on your workers the faster you will find business success.

By having a well trained workforce you will also allow be positioning yourself for a stronger competitive advantage. As we mentioned in The Competitive Advantage Spectrum a small business should be set up to provide a quality solution in a short amount of time. This is because a company’s ability to respond to its customer’s is directly tied to the human capital at all levels of the organization. Think of the last time you called a tech support line and were redirected to an overseas call center. How quickly was your problem resolved? Was it resolved? It is not that the call centers can’t point you to a solution but if you could talk directly to someone intimately familiar with the product you are calling about you would have a much faster and more pleasant experience.

Human Capital Needs to Add Value

You will be doing yourself and your customers a disservice if you subscribe to the idea that some roles in your organization don’t require trained employees. All employees need to add value to your organization beyond their daily tasks. The more everyone in your company knows the better. An example of where this isn’t true can be found in procurement departments all over the place. You would be surprised at how often purchasers buy the wrong items simply because they don’t have a grasp of the big picture. Often times finding the lowest price takes priority over buying the right items. This dynamic will play out anytime you thrust an untrained individual into a role that requires preexisting understanding.

A good progression begins by starting someone out on the basics and moving them up as their understanding grows. This even holds true at the professional level. Green college graduates can’t hold a light to a non-formally educated employee with years of experiences. As a business owner you need to recognize that if you are not an expert there is a good chance your company could be in trouble.

Design Vs. Quality  

To illustrate the point further think of a master craftsman who has been making wood odds and ends all his life. Now, someone comes to him and asks “hey mister, would you build me a guitar?” to which he replies “no problem”. Some time passes and our master craftsman finishes his work and presents it to the customer. What would you expect the end result to be? Well, unless our master craftsman had a preexisting understanding of how to build guitars the final product would probably not be what the customer had in mind. It could have the highest level of “quality” and be a beautiful product but it could also lack greatly in the area of Design. Positioning of the frets, the shape of the neck, and the acoustics of the body are all design considerations that require a deeper level of understanding than simply wood working. If this same request was given to a trained luthier not only would he know the correct shapes and positioning he would also probably know which woods would work best given the time of year and geographic location. The point is the intent or purpose of a product needs to be fully understood.

Managing Human Capital in Growth

There is no cut and dry answer to managing human behavior but much of the issues you will come across can be circumvented by simply hiring the right people. By that I mean find people who are characterized by their hard work and integrity. In his book Good to Great: Why Some Companies Make the Leap… and Others Don’t , Jim Collins refers to this dynamic as getting the right people on the bus. He says it doesn’t matter if you don’t have a job for them, if you come across a quality individual get them on your team and figure out the rest from there. The right people will bring your business to new heights, the wrong people will hold you down.

Conclusion

Small businesses must leverage the human element, not discount it. There is a lot to gain from the skills of your workers if you are willing to put the ball in their court. That said you must also be willing to compensate them accordingly. A justifiable wage should accompany quality talent.

TJ

About TJ

Engineer and Entrepreneur