Ref 11.01 The Relationship between Human Capital and Enterprising’ Public Services: A Critical Review of the Literature and Proposals for Further Research Refereed Paper Stacey Bushfield Department of Management, University of Glasgow Keywords: Public Sector; Human Capital; Intellectual Capital; Public Value; Innovation Abstract Contemporary public policy advocates a shift in focus from short-term results and efficiency towards the broader notions of client satisfaction and public value . Public value embraces all aspects of government performance and is thought to be enhanced when innovative public services work collaboratively, dynamically adapt to their complex environments and develop new solutions to the problems of ever- increasing expectations. To create such innovative public services, organisations must have the human capabilities and capacities to develop new ways of working and new models of management. Consequently, the Scottish public sector has invested heavily in its human capital through training and development, leadership programmes, and increased spending on doctors and teachers among others. However, recent reports from the Auditor General have suggested that a good deal of this investment is based on an act of faith: there is a great deal of uncertainty regarding exactly how much has been spent and whether it has led to tangible or intangible benefits for clients or public value. In this paper, which is based on the first stage of a project funded by the Scottish Government and Economic and Social Science Research Council PhD Scheme 1, we critically review the intellectual capital, human capital, strategic HRM, and public policy literature to develop a model linking human capital investment to innovation and public value. The core of our argument is that although investment in individuals might be a necessary condition it is rarely a sufficient condition for intellectual capital development and innovation in management and service delivery. Drawing on previous studies within the private sector, we identify the need for a rigorous and systematic evaluation of the impact of human capital investment on public service outcomes, especially since it is heavily dependent on complementary investments in social and organisational capital to become effective. This paper also outlines the first stage of a longitudinal study aimed at developing specific causal models of human capital management and its effects on intellectual capital development, innovation and improved public service delivery in two strategically important areas of public services reform in Scotland - the Scottish National Health Service and Scottish Schools Systems. It is anticipated that this study will provide policy makers with (i) a better basis for prediction of what is likely to result from particular types of human capital investments, (ii) greater understanding of the relationship among human capital and other types of capital investment, including social and organisational capital, and (iii) more effective allocation of future resources. The project will also contribute to an under-researched field of human capital effectiveness by showing how causal modelling can be used to assess value creation and value capture, and predict the impact of human capital and other forms of investment on intellectual capital development and, ultimately, public value. Abbreviations : Intellectual Capital = IC Human Capital = HC 1 1: Introduction and Background The past thirty years has been a period of radical change for public sector services in the UK. Successive governments have restructured and reformed the way they are managed and delivered (Flynn 2002; Hebson et al. 2003). The 1980’s and 90s saw the promotion of new public management (NPM), emphasising short-term performance and the achievement of predetermined targets (Wall 2005). More recently, public policy has advocated a shift in focus towards the broader notions of client satisfaction and public value . The second of these notions has recently become influential within the UK government. Public value is considered to embrace all aspects of government performance including: outcomes, means of delivery, trust and legitimacy (Kelly et al. 2000). It is enhanced when innovative public services work collaboratively, dynamically adapt to their complex environments and develop new solutions to the problems of ever-increasing expectations (Horner et al. 2006; Moore 1994; 1995; O’Flynn 2007; Pinnock 2006). Thus, it can be related to the concept of dynamic capabilities, which refers to an organisation’s ability to integrate, build, reconfigure and renew its resources and capabilities in response to rapidly changing environments (Teece et al . 1997; Wang and Ahmed 2007). Moreover, it is widely acknowledged that an organisation’s ability to innovate and create value is strongly related to its intellectual capital (IC) (Subramaniam and Youndt 2005). In the public sector context, intellectual capital has been defined as an organisation’s ability to use its knowledge resources for organisational learning, innovation and improved service delivery (Bontis 2002; Kelly 2004). Given that stocks and flows of human capital (employees’ genetic inheritances, education, knowledge, skills and attitudes) are considered to be a primary driver of stock and flows of intellectual capital (Bontis and Fitz-enz 2002; Lepak and Snell 1999; 2002; Nerdrum and Erikson 2007), it can be argued that to create public value, organisations must have the human capabilities and capacities to develop new ways of working and new models of management. This assertion is supported by a well-established literature on the importance of human capital to organisational performance, written from the perspective of educationalists, economists, sociologists, psychologists and human resource development specialists (Carmeli 2004; O’Connor et al . 2007; Wolf 2003). In 1999, after almost three hundred years of a shared British government, the devolved Scottish Government was formed. This new administration assumed responsibility for a number of local policy issues including: health, education, local government, justice, rural affairs, and transport. The UK government retained responsibility for employment, economic policy, taxation, benefits and pensions, foreign affairs, and defence. Since its inception, the Scottish Government has invested significantly in the human capital stocks and flows of the public sector through various training and development initiatives, leadership programmes, and increased spending on pay and rewards for doctors and teachers among others (Scottish Executive 2006). However, a recent report by the Auditor General (2007) suggested that a good deal of this investment has been based on the human resource assumption that investing in attracting, motivating, developing and retaining talented individuals pays off directly in terms of more effective organisational performance. As yet, this human resource assumption is unsupported by evidence in the Scottish 2 Government; initiatives have not been systematically evaluated. There is a great deal of uncertainty regarding exactly how much has been spent and whether it has led to tangible or intangible benefits for clients or to public value (Bennington 2006). Subsequently, recent policy discussions among Scottish public sector chief executives have called for an examination of the role of human capital in public sector reform (Government Forum II, Airth Castle, December 7-8th 2006). Much of the existing work on human capital has been carried out in the private sector. The growth of a knowledge economy has led to both practitioner and academic interest in the management and measurement of intangible assets. While there is a strong case for accepting the general hypothesis that investing in human resources will pay dividends in terms of client satisfaction and organisational value (public value in a public services context), much work remains to be done in showing how investment in individual human capital feeds forward into intellectual capital and organisational learning through value creation and value capture in specific contexts (Lepak, Smith and Taylor 2007; Martin, Pate and Beaumont 2001). Moreover, the relationship between human capital and organisational value creation is mediated by an organisation’s stock and flow of intellectual capital, and so is subject to a number of other causal variables, including social and organisational capital (Bontis 2007). Using a systematic process this paper critically reviews 110 academic articles from the existent human capital and public value literatures. It aims to identify the distinct areas and key conceptual models within the field that offer an insight into the complex relationship between investment in human capital and the creation of public value within public sector organisations. Section 2 discusses the methodology used to identify, categorise and select applicable articles. Following this, section 3 identifies the key themes within the human capital literature; critically reviewing the key conceptualisations, while section 4 evaluates the existing measures of human capital. Section 5 then overviews the public value literature, specifically examining the existing management and measurement models. Section 6 concludes by considering the contribution and limitations of this review. In addition, it discusses the implications for future development of the field and proposes that an empirical study that investigates the role of human