Looking Inside

Looking inside is concerned with resource allocation and the alignment of resources with strategy. Let’s consider resource allocation first.

Allocation

If our argument that employees should be approached as capital assets is correct, financial executives should stop viewing employees as an expense and start treating them as an investment. Once they have done that, they should ask the following questions:

• What is the actual size of our investment in human capital? Major components of that investment can be calculated readily, such as wages and benefit costs. Other components of the total investment may not be well known to organizations, such as the cost of leadership development tactics. Determining the level of investment being made in human capital is the first step in optimizing its long-term return.

• How is human capital managed as an asset in this company? What are the facts about how we acquire, develop, motivate, retain, and deploy our people? How well are we serving the needs of our business strategy? Answers to these questions emerge from an analysis of the internal labor market dynamics unique to every enterprise.

• Which attributes of our people and which of our people practices affect business results, and how much? Answering these questions requires formal analysis. The facts that emerge from that analysis are the key to making strategic human capital decisions.

• Are the returns from our people investments satisfactory? How can we best redirect our investments to achieve better returns and thus enhance our business success?

There is no doubt that isolating the returns from human capital investments from those attributable to other investments (technology, for example) is difficult in some circumstances. Nonetheless, the returns from discrete people practices and programs can be measured. Examples include investments in leadership development, retention of key employees, and targeted training programs. Do those programs produce a positive return? How much of a return? CEOs should ask questions like these. This is not a rhetorical exercise. Answers that are based on facts should be demanded.

Alignment

Aligning people practices with business strategy should be a constant concern. Everyone in business understands in principle the purpose and power of alignment. Alignment assures that everyone from the executive suite to the mail room understands the organization’s strategy and the way his or her job contributes to it.

Several cases in this book have demonstrated that people practices also must be aligned with higher organizational goals. Remember the global manufacturing company described in Chapter 1? That company’s goals of profitability and product quality were undermined by a career development practice that deliberately moved managers around rapidly. Those managers were learning general business skills at the cost of technical depth. The case of Digitt was also instructive. Digitt liked to think of itself as a company that honored and rewarded performance, and performance was what it needed to make its strategy work. However, the facts revealed a different picture: Digitt rewarded years of service more than it rewarded performance. Worse, even the poorest-performing employees were rewarded if they had the good luck to be members of teams that did well. As often as not their bonuses matched those of top performers. Those cases underscored the negative effects of misalignment on strategy.

The lessons for a CEO from those cases are clear:

• As you develop a business strategy, make sure you have the people resources capable of supporting it.

• Align people practices with that strategy but never assume that practices are aligned. Get the facts.