Hra Infosys case

Case Details:
Case Code Case Length Period Pub Date Teaching Note Organization Industry Countries : : : : : : : : HROB031 13 Pages 1995 - 2001 2003 Available Infosys Software India

Price:
For delivery in electronic format: Rs. 300; For delivery through courier (within India): Rs. 300 + Rs. 25 for Shipping & Handling Charges

Themes
HR concepts and issues

Abstract:
This case examines the various models of human resources accounting (HRA) for valuing human assets in an organization. It gives an overview of the HRA models adopted by the public sector and software companies in India. The case also explains in detail the HRA model adopted by Infosys, a leading software company in India. Finally, the case mentions the advantages and the hurdles in adopting HRA models in India.

Issues:
Concept and various human resources accounting models available to value human assets of an organization

Contents:
Valuing Human Resources Background Note HRA in Practice at Infosys HRA - The Benefits and Hurdles Exhibits Page No. 1 2 3 6 8

Key Words:
Various, models, human resources accounting, HRA, human assets, organization, public sector, software companies, India, Infosys

Valuing Human Resources

In the financial year 1995-96, Infosys Technologies (Infosys) became the first software company to value its human resources in India.

The company used the Lev & Schwartz Model (Refer Exhibit I) and valued its human resources assets at Rs 1.86 billion. Infosys had always given utmost importance to the role of employees in contributing to the company's success. Analysts felt that human resources accounting (HRA) was a step further in Infosys' focus on its employees. Narayana Murthy (Murthy), the then chairman and managing director of Infosys, said: "Comparing this figure over the years will tell us whether the value of our human resources is appreciating or not. For a knowledge intensive company like ours, that is vital information." The concept of HRA was not new in India. HRA was pioneered by public sector companies like Bharat Heavy Electronics Ltd. (BHEL) and Steel Authority of India Ltd. (SAIL) way back in the 1970s. However, the concept did not gain much popularity and acceptance during that time. It was only in the mid-1990s, after Infosys started valuing its employees, that the concept gained popularity in India. By 2002, HR accounting had been introduced by leading software companies like Satyam Computers and DSQ Software, as well as leading manufacturing firms like Reliance Industries. HR managers were quick to respond on the above developments by stating that more and more organizations had now started to realize the importance of skilled workforce. They felt that to be successful in highly competitive markets, companies require to continuously improve the level of performance of their workforce. HRA enabled companies to understand whether the skill sets of their human capital was appreciating or not. R. Krishnaswamy, an actuarial accountant, said, "The value can be used internally by an organization to make comparisons from unit to unit, from year to year, as well as within its industry."
Stock market analysts felt that the 'comprehensive disclosure policy' was becoming a differentiating factor among companies in various industries. Yezdi H. Malegam, managing director, S.B. Billimoria & Company commented, "In the last few years, people are realizing that their intangible assets are worth much more than their tangible ones. Now an attempt is being made to put a value to these intangibles, and to bring these hidden values to book." Analysts felt that HRA was an investor-friendly disclosure, and assured stakeholders that the company had the right human capital to meet its future business requirements.

Background Note
The assets of an organization could be broadly classified into tangible and intangible assets. Tangible assets referred to all the physical assets which could be presented in the balance sheet including plant and machinery, investments in securities, inventories, cash, cash equivalents and bank balance, marketable securities, accounts and notes receivables, finance receivables, equipment on operating leases, etc. Intangible assets included the goodwill, brand value and human assets of a company. The human assets involved the capabilities, knowledge, skills and talents of employees in an organization. In the past, less importance was given by organizations to value their human assets. Moreover, it was also considered difficult to value them since there were no defined parameters of valuation. Companies did not value human resources as these were never treated as an asset in the past. All investments related to employees, including salary as well as recruitment and training costs were considered as expenditures.
In addition, accountants also felt that the stakeholders2 of a company may not accept the concept of placing a monetary value on human resources. The importance and value of human assets started to be recognized in the early 1990s when there was a major increase in employment in firms in service, technology and other knowledge-based sectors3. In the firms in these sectors, the intangible assets, especially human resources, contributed significantly to the building of shareholder value. The critical success factor for any knowledge-based company was its skilled and intellectual workforce.

HRA in Practice at Infosys

Infosys' HRA model was based on the present value of the employees' future earnings with the following assumptions: An employee's salary package included all benefits, whether direct or otherwise, earned both in India and in a foreign nation. The additional earnings on the basis of age and group were also taken into account. To calculate the value of its human assets in 1995-

96, all the 1,172 employees of Infosys were divided into five groups, based on their average age. Each group's average compensation was calculated. Infosys also calculated the compensation of each employee at retirement by using an average rate of increment...

HRA - The Benefits and Hurdles

The benefits of adopting HRA were manifold. It helped an organization to take managerial decisions based on the availability and the necessity of human resources. When the human resources were quantified, it gave the investors and other clients true insights into the organization and its future potential. Proper valuation of human resources helped organizations to eliminate the negative effects of redundant labor. This, in turn, helped them to channelize the available skills, talents, knowledge and experience of their employees more efficiently. By adopting and implementing HRA in an organization, the following important information could be obtained: Cost per employee Human capital investment ratio The amount of wealth created by each employee The profit created by each employee The ratio of salary paid to the total revenue generated Average salary of each employee Employee absenteeism rates Employee turnover rate and retention rate...