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Home > Human and Intellectual Capital Best Practice > Return on Talent

Human and Intellectual Capital Best Practice

Return on Talent

by Subir Chowdhury

Table of contents

Executive Summary

  • The performance of an organization is determined by the performance of its employees.

  • Organizations must therefore measure return on talent as well as return on investment.

  • Knowledge is one of the most important factors for business success. If knowledge assets are increased, related factors such as sales will also increase.

  • Talent—or intellectual capital—has fast become one of the most significant areas of business activity and competition.

Introduction

The performance of an organization is entirely determined by the performance of its employees. This bold statement deserves further study. If the determinant of corporate performance is not its employees, what is? Is it strategic intent? Core competencies? Manufacturing? Is it proprietary technologies? The best equipment and laboratories? A visionary CEO? Yes, it’s all of these things. And all of these things are created and constantly improved by employees. Talented employees are the agents of change. Good employees join in to help implement new initiatives. Others follow at various times, depending on when they can break the bounds of their comfort zone to enter the area of change, uncertainty, and opportunity. They fall by the wayside because they were in the wrong job.

It is broadly recognized that past performance is not a reliable indicator of potential or future success. Yet many organizations continue to use past performance to identify high-potential employees. How much true talent is overlooked by this practice? Overlooked and misplaced high-potential employees stagnate. The problem of identifying, positioning, and compensating high-potential employees spans all disciplines and levels, from the loading dock to the boardroom. Lost and underused employees represent enormous, largely unreckoned financial loss. A second problem is the difficulty of measuring the financial contribution of employees beyond global measures such as revenues per employee.

To focus a successful organization, managers must use a new tool called return on talent (ROT). Most organizations focus on return on investment (ROI), and fail to understand the key strategy of how to increase ROI by increasing ROT.

Harnessing Talent

ROT has the power to revolutionize business. ROT is calculated by dividing the knowledge generated and applied by the investment in talent. You need to address the dilemma of how to measure an intangible asset and how to generate high ROT value. For decades, organizations have used key metrics like ROI and ROA (return on assets) to determine value. But increasingly an effective new-economy organization will use ROT. Current business measurements merely measure the use of capital, but ROT is expressed as follows:

ROT = Knowledge generated & appliedInvestment in talent

If you have talented people, knowledge is just one component. The generation of knowledge is the most important thing talent can provide. Now you may realize that knowledge generated by the talent doesn’t equal knowledge applied, right? And if knowledge isn’t applied, the company loses most of the market value of that knowledge. Whatever knowledge a person generates in a year divided by how much is invested in that particular person is the value.

If an employee generates many innovative ideas but never implements any of them, that person fails to generate any value because the return to the company is zero. Knowledge generated does not necessarily mean knowledge applied. So value is knowledge generated and applied. Knowledge becomes an asset only when it’s captured and used effectively; if it isn’t effectively applied, it can’t generate any yield or ROI. Generating a lot of knowledge within organizations doesn’t add any value unless that knowledge is used in effective strategy formulation. Knowledge assets, like money or equipment, are worth cultivating only in the context of strategy. You can’t define and manage intellectual assets unless you know what you are trying to do with them. This is the backbone of the knowledge economy; success in this field depends on mastery of talent, just as success in manufacturing relies on the skilful employment of plant and supply chains.

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Further reading

Books:

  • Becker, Brian E., Mark A. Huselid, and Richard W. Beatty. The Workforce Scorecard: Managing Human Capital to Execute Strategy. Cambridge, MA: Harvard Business School Press, 2005.
  • Brockbank, Wayne, and David Ulrich. The HR Value Proposition. Cambridge, MA: Harvard Business School Press, 2005.
  • Chowdhury, Subir. The Talent Era: Achieving a High Return on Talent. Upper Saddle River, NJ: Financial Times Prentice Hall, 2002.
  • Kaplan, Robert S., and David P. Norton. Alignment: Using the Balanced Scorecard to Create Corporate Strategies. Cambridge, MA: Harvard Business School Press, 2006.

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