Chapter 4: Defining Human Capital Strategy

Overview

The first three chapters described the principles on which an effective human capital strategy must be based: systems thinking, decisions based on relevant facts, and a focus on the workforce characteristics and management practices that create value. The next step is to integrate those principles in the form of practical tools that every executive can use to understand his or her organization’s current workforce and determine the type of human capital needed to support the business. This chapter defines human capital strategy more concretely and presents an overview of the process that can be used to develop such a strategy. The next two chapters describe in some detail two critical tools—Internal Labor Market (ILM) Analysis^SM and Business Impact Modeling^SM—that support the process by providing the factual foundation for decision making. But first a true story.

A national consumer services chain had made a dramatic change in its business strategy. That company operated in a very old-line business. Tradition drove customer and employee behavior, and the services the company offered were essentially no different from those of its competitors. Competition in the industry consisted of a handful of other national chains and thousands of small proprietorships with long-standing ties to their communities.

Management was concerned that the company’s declining financial performance was in large part the product of a secular decline in the demand for its core services and a shift toward lower-end, low-cost offerings. And it was right. Exhaustive research confirmed that demand for traditional services was declining. However, the same research detected latent demand for highly customized services in which customers would play the lead role in service design, with the service provider acting as an adviser. The latent demand appeared to be so powerful that the company decided to recast its business in a bold gamble to satisfy it.

Redesigning the business required many large and costly changes. For instance, the company’s facilities could not accommodate the new delivery model without significant alterations. Further, putting customers in the driver’s seat would require educating them about many alternative services and options and the related costs. Like architects experimenting with different design features and different materials, customers would want to know how the pieces would fit together. An information technology consultant was engaged to develop a customer-friendly computerized approach to the problem. Since technology played virtually no role in the old business design, major investments were required. Perhaps the biggest challenge involved brand identity. Success would require a “rebranding” of the company; it had to shed its image of tradition and reliability and project a more modern and dynamic vision that emphasized creativity and customer involvement. This transformation would require changes in the design of their facilities, but also would require a major marketing initiative. Potential customers had to know that the service and the company were new and different.

With coordinated initiatives involving physical plant, technology, and marketing in place—and with financing to support them—management felt that its transformation plan was complete. But was it really ready? What about the human capital implications of the new service model? Wasn’t it likely, if not certain, that the new business design would require changes in human capital as well?

Important questions had to be addressed. Did the current workforce have the right skills and experience to deliver the new services? Could employees switch from selling standard products to acting as advisers? Would they—could they—work collaboratively with customers? What combination of training and rewards would effect the necessary changes? Should the company change its hiring profile? Should it change its reward systems to attract a different type of employee and encourage new behaviors among current ones?

These were just a few of the human capital questions that management had to ponder in revamping the business design. Yet this company, like most others, neither asked nor answered those questions. It had a blind spot for human capital and assumed that human resources (HR) would magically align the company’s people assets and practices with the new business requirements. That wishful thinking imperiled the company’s ability to execute the new business design. What the company needed was a human capital strategy that matched the job.

People Are Not Things

Describing human capital as an asset, as one would describe equipment or the cash in a bank account, may sound manipulative and cold-blooded, and it would be if one failed to recognize the qualities of human capital that other intangible and physical assets do not have.

For starters, human capabilities can and do change. In effect, the human capital asset is altered as it is employed. People grow through on-the-job learning and experience. More important, they have volition—that is, a will to make choices and pursue their own interests, an ability to improve if they choose to, and spirit. Also, human capital is never separable from its owner, as are other assets; the company does not own the asset.

These qualities set human capital apart but do not negate the fact that a workforce is a manageable asset that can and must be integrated with the strategy of the organization. Further, research has demonstrated sufficient regularity in the links between human capital and business outcomes that executives would do well to bring a disciplined, investment return–oriented approach to the management of this asset.