Three Critical Questions
These realities—the sheer
size
of the human capital asset, its
enduring
character, and its competitive advantages—are pushing people both inside and outside organizations to try to better measure the value and drivers of workforce performance. From the inside, organizations have long measured productivity in either broad financial terms (revenue per employee, etc.) or on an individual or operational basis (units produced per
hour
, etc.). Such measures are easily made, but they don’t provide much insight into what tactics produce the
outcomes
. The real question is: What does it take for an organization to create more value, more effectively and more predictably with human capital? To respond to that issue, companies must answer a whole set of questions that typically aren’t asked in most organizations:
-
What are we actually spending on human capital (cost), and what is it buying us (value)?
-
Are we sure our human capital strategy is aligned with our business design?
-
What can we change in the way we manage people to generate greater returns by cutting, reallocating, or increasing investments?
The answer to those questions in virtually all companies is that no one really
knows
, but that fact gets clouded by historical storytelling, anecdotes, speculation, or questionable “
correlations
.”
Look inside any company and the worst, least reliable performance metrics are those used for people tactics, practices, and policies. It is difficult to know what’s working and what isn’t because there is no science to it. This is not the case in most critical areas of business. Financial economists in universities and on Wall Street over the
years
have provided CFOs with solid techniques for optimizing the use of financial capital and managing risk. On the operating side, the disciplines of statistical quality control and process engineering have improved product quality and cut cycle times. Thanks to advances like these, the physical and financial assets of today’s organizations are in general much better measured and managed. Thus, most managers can answer these questions when they are focused on financial or physical assets. They know what to measure and have the tools and systems to measure it. They have developed disciplines for tracking and evaluating their activities. The same thing cannot be said for human capital, and this makes comparably good decision making on major outlays practically
impossible
.
Because basic questions on the human capital side seldom are asked, let alone
answered
, companies end up tolerating more variance in the performance of their human capital investments than in the performance of any other asset they manage.
In light of the history of business and protocols of most companies, the
chances
are great that these questions will
remain
unasked until perhaps CEOs or board
members
—maybe even institutional shareholders—start demanding answers. This is the case because there are strong biases against and even structural barriers to such inquiries.
Barriers to Change
There are four fundamental barriers to change. First, although companies may say somewhere in the first couple of pages of the employee handbook that people are their greatest asset, few really live by those words. The heart of the problem, which virtually never is
acknowledged
, is the pervasive sense that
employees
are merely an operating cost, not a source of value creation that can be changed and leveraged. Thus, expenditures on human capital almost always are
considered
as costs to be minimized rather than investments to be optimized. And while from an accounting standpoint the workforce is deemed a fixed expense, in down cycles it is treated as anything but fixed.
A second, more complex
phenomenon
is that no one really “owns” the human capital issue. Organizations are not structured to create accountability for human capital. Think about it. In your company, someone is directly responsible for R&D, production, sales, customer service, finance, facilities, computers,
trucks
, and so on. Who is in charge of human capital? The human resources HR department? Not really—not in the same way someone is in charge of accounts receivable or
buildings
. HR has important administrative
duties
. It helps with recruiting. It usually takes the lead in training and development. It has major responsibilities in
advising
senior management on rewards and other policies. The best HR managers act as
consultants
to business units, but they aren’t responsible in an ultimate sense for the people throughout the enterprise. If anything, at least on their bad days, they tend to blame line managers for mishandling people and people issues.
So what about the line side? Obviously these managers look after people on a day-to-day basis, but their responsibility for people is more limited than most might think. They typically don’t make many people policies or prescribe people practices; they seldom are allowed to “experiment” with people tactics; they are in no position to see or influence strategic decisions about human capital. Most line managers would say, therefore, that they don’t own the people issues. On their bad days they tend to blame HR for their people difficulties.
Of course, no one will ever be fully in charge of people, but that begs the question. Who is going to think strategically about human capital? Who is going to assure that the company’s human capital strategy is aligned properly with its business model? Who is going to measure the impact of people on the firm’s performance? Managing the purse strings is not sufficient. Swings of several percentage points in returns on labor costs are in play. For most large companies, even a 1 percent greater return on the labor bill would represent tens of millions of dollars falling straight to the bottom line.
The subject needs top-of-the-house attention and leadership, which we’ll take up in detail in Chapter 12. In many companies that will require CEOs to wade into this untidy mess with some of the tough questions we have just mentioned. Those who do will launch a new era of creative and effective human capital management.
The third problem is that most practices and policies are made one at a time and are not connected to the others. Therefore, companies sometimes make decisions about leadership selection exclusive of the business model, decisions about benefits independent of pay decisions, decisions about pay in isolation from performance drivers, decisions about
spans
of control decisions decoupled from staffing models, and so on. Finally, all those individual decisions are exclusive of the larger organizational context. As we’ve said, organizations are systems, but most are managed like a set of discrete and unrelated events.
The fourth and most challenging factor that confounds the management of people is the long-standing lack of good internal measures. To fill the void companies resort to all kinds of inputs. Decisions are based on
instincts
, anecdotes, and management myths—legends that have, in the absence of better science, taken on the mantle of “truth.”
In the absence of sophisticated measures, the most commonly used assessment is benchmarking. It is a “natural” process. It’s baked into all people to want to know how they, not to mention their
houses
, dogs, and
cars
, compare with others. One can’t get away from it, and it
certainly
has utility in business. But it also has limitations. Most benchmarking leads to the identification and use of best practices, which can make for terribly wrong decisions. Why, for example, would we expect the benchmarks or best practices at a GE appliance factory to be uniquely meaningful to SAP?
These barriers can be hurdled by measuring what up to now has been largely immeasurable: finding those things in your organization that uniquely contribute to your firm’s performance (or erode it) and managing them aggressively. The requirement for doing that effectively is establishing
causal
evidence with which to make powerful business decisions. All that amounts to a new science for managing people, and that is what this book is all about.