The New Science of Human Capital Management

Unlike in the past, new, sophisticated means are available to get over those long-standing barriers. Thanks to many years of research in microeconomics, organizational psychology, and related fields and to new developments in statistical methods and information systems, a fact-based “science” of human capital management has taken form. This science has its own theory, discipline, and metrics, not unlike the evolution of “modern” finance. Beginning in the late 1950s and running through the 1970s, there was a flurry of research (some of it Nobel Prize–winning) by economists and financial experts in academia that revolutionized thinking about financial markets and instruments. The practical significance of that research was seized by some far-sighted financial institutions, such as Wells Fargo, Merrill Lynch, and Goldman Sachs. By the early 1980s the core concepts and methods were being embraced and transformed into new products and even whole new markets. In the end, those concepts reshaped financial markets in fundamental ways that remain in place today.

Myth Busting

Here are some management myths we’ll blow up in this book.

1. There is one best way.

2. Strong cultures are winning cultures.

3. The past doesn’t matter.

4. It’s always good to “pay for performance.”

5. Employee turnover hurts the bottom line.

6. Major people decisions are best informed by employee surveys.

7. Acquisitions should be integrated as fast as possible.

We believe that we are on the edge of a similar revolution in the way human capital is seen and managed. This new science measures human capital drivers of business performance. More important, it gives decision makers the power to predict the impact of their choices involving human capital on future results with reasonable confidence.

This is quite revolutionary. Executives will have to change the way they think about these issues:

Today’s thinking . . .	The new era . . .
What does the employee survey say we should do?	What do our employees’ behaviors—that is, what they actually do—say we should do?
What works at GE and Microsoft?	What works here?
What does our function or group system?	How does this fit into the overall want?
What do the experts think?	What do the patterns over time in our company tell us?
How much does it cost?	What is the ROI?
What data do we have?	What data do we need?

This new path to better business performance and distinct competitive advantages relies on the discipline to enact three core principles. The first is to “insist on systems thinking.” Business models and human capital strategies must match. Decisions about each one are intertwined and are certain to fail if they are addressed independently. Furthermore, they must be in accord with the marketplace: the customer and the competitive and regulatory spheres in which your company lives.

The second is to “get the right facts.” Go beyond external sources and internal perceptions and tap into the running record of your company—its performance trends and human capital patterns—to get firm-specific insights.

The third is to “focus on value.” There’s a floor to cost reduction but no ceiling to value creation. Find the points of leverage.

We’re going to take up each of those three principles in Part I. Then, in Part II, we’ll explain the core tools and statistical methods, with an emphasis on the concept of internal labor markets and how to measure their dimensions and implications. This is where the real science of our work shows up. It’s not beach reading, but if you get your hands around this material, you’ll be positioned to transform the way you think about and manage your greatest asset.

In Part III we’ll shift to common business challenges and applications ranging from implementing strategy shifts to managing risk. The last section, Part IV, looks to the future: what investors, CEOs, staff executives, and employees need to do to maximize the opportunities of this new science of human capital strategy.