How to measure human capital in software development
A knowledge-centric approach.
Abstract
Human capital, also known as talent, is the primary intangible asset in organizations today. But how do we measure human capital in software development?
Human capital is not static, it's a dynamic entity resulting from human potential, impersonal sources of information, collaboration and efficient work processes. It fluctuates and we need to manage it as such.
To measure human capital, we need to measure the efficiency of discovery and application of knowledge. The more efficient the knowledge discovery process, the more human capital is developed.
KEDEHub offers a way to measure knowledge discovery in software development, using the scientifically-backed and patented metric, Knowledge Discovery Efficiency (KEDE). With KEDEHub, you can measure the human capital of your teams, projects and the whole company.
What is human capital?
Human capital, also known as talent, is the primary intangible asset in organizations today. Human capital is usually defined as “the knowledge, skills, competencies and attributes embodied in individuals that facilitate the creation of personal, social and economic well-being.[5]” Essentially, human capital is the economic impact or value that an employee has on the business — the role they play to affect the bottom line.
What is the problem with quantifying the human capital in an organization? In one word - measurement. Indeed, it is very difficult to measure the human capital for two reasons. Firstly, because knowledge is invisible. It is in people's brains, in books, in manuals, in working procedures, in files on hard disks, in short - everywhere. When the organization invests in acquiring new talent or in training its current people it is a challenge to measure what they have got for the money. That's why most of the organizations limit the definition of human capital mainly to a valuation of the elements which are related to the economic returns or as the education level attained, the knowledge acquired and the money invested in training[3].
Secondly, because acquiring knowledge is not enough. Attention must be paid if the knowledge is actually applied? If knowledge is acquired but not applied then there is no human capital. Human capital exists when applied to create economic value. Human capital only adds value if it can be successfully converted into goods and services that will make a profit[4]. To increase the human capital of knowledge workers means to increase the efficiency in acquisition and application of knowledge in their organizations.
If the knowledge is acquired but not fully utilized then the knowledge workers leave potential off the table.
How can you know if human potential is untapped? How do you know there is potential in the first place? How could we measure it? You have no way to get into people's heads and see the potential inside! Truth is you know the potential was really there only after you see knowledge applied.
In the picture below to the right we have Margaret Hamilton, whose code saved the Moon landing space mission of Apollo 11 in 1969, being awarded the Presidential Medal of Freedom by President Obama.
On the picture to the left we have Margaret standing next to part of the computer source code she and her team developed for the Moon landing. What we witness is an instance of the manual part of knowledge work. The software developers had to type all of those pages manually. All the knowledge went from their brains, through their fingers and ended up as symbols on sheets of paper. The symbols are the tangible output of their previously acquired knowledge and the new knowledge they discovered during the work. The symbols are not the knowledge itself, but the trace of the knowledge left on the paper.
If we replace knowledge acquisition with knowledge discovery, then as a logical chain human capital looks like this:
Knowledge discovery -> Application -> Economic value.
There is something missing in that logical chain - we apply the discovered knowledge and get straight economic value. The application of knowledge may create economic value only when there is a tangible output. The logical chain of human capital actually looks like this::
Knowledge discovery -> Application -> Tangible output -> Economic value.
The economic value is determined by the market. The market values the knowledge mediated by the tangible output. The application of knowledge can produce a tangible output without an economic value. For example, the definition of Hilbert space in mathematics has a visible tangible form, but has no economic value, at least it is not readily apparent.
If we cut the economic value from the logical chain we get:
Knowledge discovery -> Application -> Tangible output.
We call this logical chain the Knowledge Discovery process.
We know there was knowledge discovered when we see at least one question asked. A Knowledge Discovery Process consists of asking questions in order to acquire the missing information about "what" tangible output to produce and how to produce it.
Now we can define a logical chain for productivity of human capital like this:
Knowledge Discovery process -> Economic value.
According to our definition human capital is not a static thing. Human capital is a dynamic entity resulting from human potential, impersonal sources of information, collaboration and efficient work processes. It fluctuates and we need to manage it as such.
How to measure human capital?
We measure human capital with the efficiency of discovery and application of knowledge. Thus, in order to measure human capital we need to measure the Knowledge Discovery process that fuels it.
Fortunately, there is a way to measure the knowledge discovered (missing information) in software development. KEDEHub allows you to measure the human capital of your company using the scientifically backed and patented metric - Knowledge Discovery Efficiency (KEDE).
KEDE is a ratio between how much knowledge a knowledge worker discovered for a time period and a predetermined constant representing an estimated maximum amount of knowledge that could possibly be discovered for the same time period.
Prior knowledge is the easiest and the fastest to discover - it is there, one just applies it. In other words, when prior knowledge is applied then there is the most efficient knowledge discovery. Conversely, when a lot of knowledge is missing then the knowledge discovery is less efficient. The more prior knowledge was applied i.e. the less knowledge was missing the more efficient a Knowledge Discovery process is.
KEDE can be used for comparisons between human capital in different contexts.
Below is a time-series diagram of human capital for the whole life of a crypto company.
On the diagram above we have presented Knowledge Discovery Efficiency (KEDE) for each of the developers who contributed to the company. On the x-axis we have the quarter dates. On the y-axis we have Weekly KEDE values. The dark blue line is the average weekly KEDE for all developers calculated by EWMA.
A learning organization is skilled at creating, acquiring, and transferring knowledge, and at modifying its behavior to reflect new knowledge and insights[2]. It is responsive, understanding the need to keep up on things and to pivot from time to time[1]. How adaptive an organization is depends on its human capital. Being a learning organization enables agility, adaptability, resiliency and the ability to meet the evolving needs of organization's stakeholders and the marketplace as a whole. The knowledge, skills and practices are held by people. Leaders must be capable of organizing individuals into a learning organization. A learning organization starts with the CEO and must be enabled through HR processes.
Works Cited
1. Senge, P.M. 1990: The Fifth Discipline , Random House, 1990
2. Garvin DA. Building a learning organization. Harv Bus Rev. 1993 Jul-Aug;71(4):78-91.
3. Guide on Measuring Human Capital, UNITED NATIONS ECONOMIC COMMISSION FOR EUROPE, 2016 [Online]. Available: https://unstats.un.org/unsd/nationalaccount/consultationDocs/HumanCapitalGuide.web.pdf
4. Baron, A. (2011), "Measuring human capital", Strategic HR Review, Vol. 10 No. 2, pp. 30-35. https://doi.org/10.1108/14754391111108338
5. Keeley, Brian, 2007, “Human Capital, How What You Know Shapes Your Life,” OECD Insights, Paris
How to cite:
Bakardzhiev D.V. (2022) How to measure human capital in software development? https://docs.kedehub.io/kede/kede-human-capital.html
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