InCo Looks Before It Leaps

Occasionally a company will examine its human capital capabilities before it sits down to create a new strategy. One case of this occurred in 2000, when the executives of a large financial services company asked us to apply our methodologies to their operation.

The impetus in this case was senior management’s concern that the business environment was changing and the company would have to alter its strategic approach to creating value for customers and shareholders if it hoped to maintain its leadership position. The managers wanted an answer to two questions, “Are we vulnerable to technology-driven changes in the market? ”and “If the facts dictate that we change our strategy, do we have the right kinds of people and practices to make that strategy work?” The second is a question that all executives should ask before making a commitment to a new direction.

During the late 1990s InCo’s senior management observed the growth of e-commerce in the financial services segment with concern. On-line agent-free sales to both consumers and businesses were increasing rapidly, but InCo was not structured for that type of distribution. Thus, on-line distribution represented a significant risk to growth and profitability.

The company had long operated with the assumption that it was in a relationship business: Customers purchased and maintained products because of their relationships with trusted brokers. The company’s human capital structure reflected that assumption. At the core of that structure was a large group of highly paid individuals in the senior ranks. Most had been with the company for many years, if not for their entire careers. Personnel policies were aimed at keeping them loyal, since every employee defection risked breaking a profitable bond between InCo and the departing broker’s many customers.

On-line sales challenged that assumption and represented a threat to InCo’s approach to the business. If on-line sales represented the future, as many contended, financial services would become a commoditized business. InCo’s main asset—its small army of brokers—would become a liability. Burdened with personnel costs, InCo would become the high-cost provider in an industry with razor-thin margins.

Company executives took that risk seriously. They wondered whether their human capital policies and practices were preparing them to compete profitably in a world of commoditized transactions. If that world came to pass, they would need people with a different set of skills in order to differentiate the company. In their judgment, the broker of the future would be less of a salesperson and more of a value-adding adviser, someone adept at evaluating a customer’s objectives and risk management requirements and matching them with the appropriate products. These were important qualities that on-line sales could not deliver. This individual would need more than expertise in financial services; he or she would need broad business training and deep analytic skills. Valued information would be the new source of profitability and customer loyalty.

The Problem

InCo’s leaders wanted to know, “Do our policies and practices attract and retain people with the skills and experience they need to act as value-adding advisers?” The best way to answer that question was to analyze the company’s internal labor market and determine what actually was happening and which skills and behaviors were being rewarded. That analysis revealed that the highly paid customer-facing employees demonstrated mastery of their craft but that few had broad business skills. Turnover within that group was very low, supporting the old assumption that brokers provided the profitable relationship link with customers. The human capital asset and practices were well positioned to support InCo’s current business strategy.

What about the potential new strategy? The facts assembled through Internal Labor Market (ILM) analysis revealed substantial risk. New employees with financial training, consulting-advisory experience, business degrees, and general business backgrounds were joining the company, but they were among the employees who were most likely to leave. Worse, high performers in that group were leaving at roughly the same rate as were low performers. Thus, the company was not holding on to the kinds of people management viewed as critical to a future in which value-added analysis and advice would be the source of competitive differentiation.

A second thrust of the analysis was to cast a spotlight on InCo’s assumption about the broker-customer relationship. The company’s human capital strategy was built on that assumption, but did relationships really matter? Would higher turnover among the brokers put profits at risk? Through the use of a simple form of Business Impact Modeling, employment histories of brokers taken from the company’s PeopleSoft system were combined with three years of office-level financial results to determine statistically the causes of account growth and profitability. Through the measurement of the relationship between broker turnover and customer retention, the fundamental assumption behind InCo’s strategy could be tested.

To everyone’s surprise, analysis revealed that customer turnover and broker turnover over time were essentially unrelated. In other words, customers’ decisions to do business with the company seemed to have very little to do with the stability of the sales force. The analysis also revealed that the small number of new individuals with broad business backgrounds who did break into the club were doing a better job of developing client accounts and were keeping those clients for longer periods.

Those findings confirmed that the company had been operating on a false assumption with respect to longevity, an assumption that had never been examined empirically. Although customers may have enjoyed their personal relationships with individual brokers, in fact they were buying the capabilities and resources of the firm. Thus, the high compensation the company lavished on long-term employees appeared to be an unnecessary expense that did not necessarily lead to greater value creation. Further, the findings suggested that the company was unprepared to tackle the future competitive environment it anticipated. Its human capital policies and practices were supporting the status quo and doing little to make the company attractive to the kinds of people it needed to execute the new strategy. In a word, the company had a serious problem of human capital risk that could jeopardize the business.

The Solution

On the basis of empirical findings, we offered management a number of suggestions for creating human capital that could support a new strategy:

• Push more incentive dollars down to the lower ranks to encourage high-performing newcomers to stay.

• Create career ladders that would move people with new skills into higher levels.

• Provide for more differentiation between high performance and average performance in the rewards structure, especially in the upper ranks. That would encourage voluntary turnover among low performers within the “club” and create vacancies for people with new skills.

It is worth noting that our analysis of InCo did not extend to management’s concern that the business environment was changing in response to e-commerce or the notion that consulting-advisory services would be the new source of value. Those things simply were taken as the starting point for inquiry. We were saying in effect, “If these things come to pass, here’s where the company stands and here’s what it should do in terms of human capital.” In the end those people issues became the centerpiece of InCo’s review of the threats and opportunities it faced in the coming years.