Jan-Mar 2010

Enriching Human Capital in the Knowledge Economy

Enriching Human Capital in the Knowledge Economy

The fast pace of technological innovation and quick changes in customer tastes require today’s organisations to frequently adapt to the ever changing market reality. The more nimble they are, the better their chances to come up tops in hyper-competitive scenarios that are now routine. Firms need the ability to learn about ongoing changes in the industry and the knowledge to capitalise on these changes to stay nimble. It thus becomes extremely important for firms to ensure that their employees constantly maintain top-of-the-line skills in this knowledge economy.

There are two mechanisms through which people learn and acquire skills: formal learning and informal learning. Formal learning is delivered through a structured training programme. For example, a classroom-based approach where an instructor leads sessions and provides feedback. In contrast, informal learning is unstructured – people learn when faced with difficult tasks on the job, through trial and error, and by seeking help from peers and mentors.

The use of formal training mechanisms like classroom training is very important since these are established instruction methods. Large firms like Infosys, Wipro, and Accenture spend substantial amounts of money in training their employees using formal training approaches. In the first article in this series, we find that these formal training programmes do increase the productivity of an employee. Further, the value of different types of training, for example, domain or technical, varies for different types of employees (e.g. employees with more or less experience). Firms need to carefully design their training programmes for different employee profiles to optimise productivity. What you may find even more interesting is that training is a luxury good, and that better employees are the ones who enrol in these training programs, possibly because they can translate their learning into performance gains.

Indian IT services firms are part of a growing industry, the growth fuelled largely by the outsourcing phenomenon. Unfortunately, even the stars of this industry have a growth pattern that is scale dependent – their revenues are commensurate with the number of their employees. Sustaining growth solely on the labour input may not be feasible in the long run. In the second article, we discuss the effectiveness of formal training mechanisms in augmenting the human capital pool to improve returns from scale.

Despite the investments firms make in formal training and its benefits, there is evidence that 70 percent or more of work-related learning happens through informal mechanisms. Clearly, the vast untapped opportunity in improving human capital lies in leveraging informal learning mechanisms more effectively. Open Source Software (OSS) development provides an ideal environment where gains from informal learning are extremely effective. Hence, firms can engage programmers in working on OSS development along with their usual work on commercial software. The benefits of such an approach can be quite significant for organisations that cannot afford the high cost of formal training programmes. We discuss this in our third article: How firms can use open source software development for informal training of their employees.

The essence of our work is that it is indeed all about people. The following articles provide an insight into how firms can best leverage their human capital, and get ready to take on the knowledge economy on its own turf. Enjoy the ride!

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