largely leased buildings and people (e.g., software, media, consulting .... Consulting firms. 3 ... the world's best big
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Managing Human Capital Like Financial Capital: The Roadmap BY BRADLEY W. HALL, Ph.D.
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eople are our company’s most important asset.” We’ve all heard it; and many of us believe it. But what does it really mean? Do you know of a single CEO who knows whether his/her organization’s human assets are more valuable this year than last; or even what “more valuable” means? Our most important asset seems largely unmanaged. In the 1950s and 60s when manufacturing capabilities were arguably the world economy’s most important asset, Edward Deming re-conceptualized manufacturing as a system—an engine of sorts that reliably produces an output. Deming defined the engine, the subsystems, and finally the parts. He then created a system for managing and continually improving outputs from each part to drive year-over-year system improvements. In today’s economy where many companies are largely leased buildings and people (e.g., software, media, consulting, dot-coms), strengthening human assets is often the only real source for productivity gains. It’s time for a Deming-like approach to human capital: one that begins with a clear picture of the “engine, subsystems, and parts” and a disciplined system for systematically measuring and managing for year-over-year improvements. The New Human Capital Strategy does just that as it turns today’s model of disjointed HR programs on its head, and it’s about time; we keep doing things that don’t work. For example:
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Designing performance appraisals that don’t improve performance
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Paying annual bonuses that don’t improve productivity
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Investing in leadership development programs that don’t measurably improve leadership
Why don’t they work? Because these programs are independent parts and business results require a working system. In today’s HR, success is measured by programs, generated from the bottom up. “Nice program, but in service to what?” Just as an engine with non-integrated, world-class parts will never produce power, world-class HR programs without a defined end-state will never improve business performance. Some program developers might say, “We always get buy-off from peers.” But defining the endstate, subsystems and parts is very different from a bottoms-up approach where “parts manufacturers” (e.g., compensation, staffing, training) create programs and then seek buy-in from peers. Without a defined end-state, how can peers assess program value? Others might say, “In our model, Centers of Excellence create programs and strategic business partners assemble these to business unit needs.” Sounds great on paper, but how is that working in your organization? A 2006 study conducted by the University of Southern California’s Center for Effective Organization summarizes ten-year organizational changes in the HR profession: “There is a significant decrease to which HR practices vary across business units. This finding suggests that while there may be dedicated HR leaders supporting businesses, their role is not to tailor HR practices to those businesses, but rather to work with centers of excellence and HR services teams
MANAGING HUMAN CAPITAL LIKE FINANCIAL CAPITAL: THE ROADMAP
to deliver common services to their parts of the organization.” HR professionals’ opinions on these issues might vary, but one fact is indisputable—the current model has failed. Economist’s CEO Briefing found that HR is perceived by CEOs around the world as the least important and worst performing of all corporate functions. And CEOs are not the only critics. The 2006 USC study found that fewer than 1 out of 10 HR leaders felt their organization’s HR practices effectively or very effectively connect with organization performance. After thirty years of aspiring to add business value, the USC study concludes: “…the amount of change is surprisingly small. Given the tremendous amount of attention that has been given to the importance of HR being more of a value-added function, becoming a business and strategic partner, and adding value in a number of new ways, we frankly expected much more change.” No amount of continuous improvement can improve a flawed model. It’s time to blow up today’s model. It’s time for a new paradigm.
THE NEW HUMAN CAPITAL STRATEGY Businesses create and maintain competitive advantage over time when their core competencies, or the activities that customers value most, are superior to their competitors in the eyes of their current and potential customers. The Human Capital Strategy is a system for improving the performance of people in critical roles—those with the biggest impact on corporate core competencies. Not all roles are equally important for customer and shareholder satisfaction. In most industries top sales reps create more value than top administrative assistants. In this new paradigm, the question, “Are our people better than our competitors’ people,” may be more accurately stated, “Is the performance of those in key positions superior to peers in competitor organizations?” For many critical roles, that is knowable. So, what does success look like? Success is when “our people outperform competitors’ people in positions that add the most value to customers
and shareholders.” Performance improvements can come from training, access to information, a new IT tool, replacing low performers with high performers, or by using one or more of many other methods. What is critically important is a clear definition of success.
Executing the Human Capital Strategy: The System How will it look when we are done? The Human Capital Strategy uses four components (i.e., subsystems) to drive year-over-year performance improvements: ■
Effective Executive Teams
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Leaders Who Deliver Results
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Key Position Excellence
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Workforce Performance
If performance on each strategic component is excellent, the organization will have sustained competitive advantage through people. Here is a quick preview of each. HCS Component 1: Effective Executive Teams. Are your executive teams better this year than last year? What does “better” mean? Notice the difference between these questions and today’s approach to executive teaming. Today’s approach is program-centric and bottom-up. Consulting firms
The Human Capital Strategy is a system for improving the performance of people in critical roles—those with the biggest impact on corporate core competencies.
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TABLE 1: A Scorecard for Assessing Executive Team Performance Executive Team Result
Phase 1
Phase 2
Phase 3
Formalized strategy development process
Strategy development includes a variety of stakeholders
Strategic goal alignment from top to bottom
Broadly communicated strategies
All managers can state the strategic objectives and CSFs
Ongoing market sensing and feedback
Makes costs budget
Meets key customer, operational and financial objectives most of the time
Reliably meets customer, operational and financial quarterly objectives
Business unit productivity plans set
All managers know unit productivity goal
Productivity improves to plan
Culture
Culture operationalized and accepted by employees
Systematic, measured approach for culture improvement set
Culture improves to plan on defined cultural dimensions
Structure
Plan to reduce unnecessary bureaucracy
Unrelenting fight against bureaucracy
Employees feel bureaucracy is under control
Strategy
Execution
advise executive teams to address team decisionmaking, participate in trust-building programs, etc. The Human Capital Strategy approach is top-down. It begins by defining executive team performance, by identifying the 3-5 most important outputs for the executive team, and then by building a system for improving performance on each output. How can you know if an executive team is “better” than last year? Use a scorecard like the example in Table 1. Then ask your executive team to assess its progress each year. HCS Component 2: Leaders Who Deliver Results. Are your leaders better than last year? Think of all the financial investments that go into building leaders, and yet we cannot answer this most basic question. We cannot answer it because few have defined “better.” We spend large amounts of time and money, but don’t bother to define success. The only true measure of leadership is sustained business results. These results must be achieved in
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a way that strengthens the company’s values and culture. Unfortunately, in many leading companies today, leadership competencies are overtaking business results as the measure of leadership excellence. Leadership competencies can be quite effective when hiring candidates whose past behavior and performance are unclear, but companies should not use competencies to assess leadership performance. The Human Capital Strategy does not use onesize-fits-all leadership models. Rather, certain leadership positions are singled out as critical and measured and managed for year-over-year performance improvements. Table 2 presents a partial example of a country general manager’s expected leadership results. This example comes from a large global technology company. The full model includes five results that are most predictive of profit growth at the country level. It assumes that when a country manager performs well on the five, profits will follow. Measure each country manager once a year and you will know whose
MANAGING HUMAN CAPITAL LIKE FINANCIAL CAPITAL: THE ROADMAP
TABLE 2: Leadership Results for a Country General Manager Leadership Results
Best sales force in the industry
Integrate global business units and offerings
Metric
Dec 2007
Dec 2008
Customer sat with our sales force versus our competitors
+5 pts
+6 pts
Sales productivity vs. competitors
$1.1M/ee
$1.15M/ee
Percent of total sales as solution sales
72%
75%
Customer sat with solutions
73
70
Average number of products sold with solutions
4.56
4.72
leadership capabilities are improving year-overyear. How do you know these five are correct? Run a regression between the five and country profit growth. You will know. HCS Component 3: Key Position Excellence. Key positions are defined here as critical roles that deserve a higher level of investment than other roles. For example, at IBM, big deal makers have no direct reports, but they may sell a $1 billion multi-year outsourcing deal. Fifteen to twenty of the world’s best big deal makers can provide all the revenue IBM needs to grow its business to plan and in so doing support 400,000 colleagues. What’s the right pay for a person who can consistently sell billion-dollar deals? Just about whatever he/she wants. Shouldn’t we care about internal equity with other professions? Nope. If others want to make the same money, tell them to go sell big deals. Some may bristle as this might seem to violate the value of internal equity. But this decision is consistent with the Human Capital Strategy—sustained competitive advantage comes through people in key positions outperforming peers in competitor organizations. Improving performance starts by defining key positions, then by objectively defining success (i.e., if you deliver these measurable results, you will be
successful) for each key position. The next step is to define the 4-5 results (critical things to get right) to achieve that success measure. If you deliver these 4-5 results, you will be successful. Note that major activities define “what to do,” not “whom to be.” Think of a children’s basketball team. One coach says, “Come on Joey, be aggressive!” Joey is not quite sure what that is about, but will try. Another says, “Joey, I want your shoulder 12 inches from your opponent at all times,” and throughout the game says, “Joey, 12 inches!” Tell employees what to do, not whom to be. HCS Component 4: Workforce Performance. Jon and Karen Taylor are the parents of four children ranging from age 15 to 5. The Taylors take their parental duties seriously and strive to do their very best to ensure their children succeed in life. It’s December 30 and time for the children’s annual performance appraisals. Sara, age 15, is the oldest and, as usual, is first. Jon: Sara, I know that you are anxious to know your annual rating, so let’s get right to it. Sara, we ranked you third among your siblings and gave you a two on our family’s five-point scale. Sara: But…I thought you were proud of me.
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TABLE 3: Best and Worst Performance Drivers
Top Drivers
Percent Improvement
Bottom Drivers
Percent Improvement
Fairness and accuracy of feedback
+39.1
Forced ranking
-0.1
Risk-taking culture
+38.9
Increasing the number of formal reviews
-1
Emphasis on strengths in appraisal
+36.4
Emphasis in informal feedback on personality weaknesses
-3.2
Understanding performance standards
+36.1
Emphasis in appraisals on personality weaknesses
-5.5
Internal communication
+34.4
Emphasis in informal feedback on performance weaknesses
-10.9
Manager knowledgeable about performance
+30.3
Emphasis in appraisals on performance weaknesses
-26.8
Jon: Sara, as you know, we have high standards in this house—a two is not so bad. If you work hard next year, you might improve your score and rank. Sara: But, what did I do wrong? Karen: Well, for one thing you neglected your chores at least five times this year. Just a minute; I have it documented right here… Sara: But that was last February. I haven’t missed my chores even once since then; I thought you forgave me for that. Karen: That may be true, but you need to remember that this is an annual appraisal— February problems count. How might this appraisal affect Sara? Will it accelerate her growth, performance and confidence? Will it help her be a better big sister to her siblings? Will it strengthen the bond of trust and the free-flow of information with her parents?
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This example may seem absurd for a parent/child interaction. Why then are forced rankings, tough conversations, and the like considered necessary for building a high performance workforce? At what point in the human life cycle do the scientific principles of human behavior do an about-face? The answer: they don’t. In 2003, the Corporate Leadership Council conducted a study of 19,000 employees in 34 organizations from 7 industries and 29 countries to find out which performance improvement activities and programs actually delivered performance improvements. The study began with 106 performance drivers and ranked each on its impact on performance. Table 3 summarizes the results. Look at the right-hand column. Except for the last driver, they look suspiciously like “best practice performance management,” don’t they? Think about these results as best and worst practices for raising children. Look in the left-hand column.
MANAGING HUMAN CAPITAL LIKE FINANCIAL CAPITAL: THE ROADMAP
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Do good parents encourage children to stretch and take risks?
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Do they emphasize strengths when giving feedback?
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Do children benefit from clear standards?
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Is communication important to helping them develop?
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Are good parents knowledgeable about their children’s performance in sports, class, clubs, etc.?
It reads like good parenting in the left-hand column and child abuse in the right-hand column, doesn’t it? Perhaps this is why many excellent managers are often resistant to do annual appraisals and why performance appraisals do not seem to improve motivation, confidence or strengthen the manager-employee relationship. If performance appraisals don’t improve performance why do we do them? And what about annual bonuses? Research clearly shows they do not increase productivity, yet we use them anyway. The biggest fallacy of all, however, may be the mistaken belief that employee satisfaction causes
performance improvements. Decades of research and hundreds of controlled studies conclude this is wrong. In fact, the causal relationship is reversed: “Make people successful and they will be happy.” Think of a failing sales rep. Does she really care about a company-sponsored aerobic class? It’s the same with parenting, isn’t it? A strong focus on child happiness will not result in a happy child.
CONCLUSION Executives often say that people are the only real source of competitive advantage, but few can clearly explain what that means. If people truly are a company’s “most important asset,” shouldn’t executives know whether their assets are more or less valuable each year? The problem is that few companies can; they don’t know what “more valuable” means or how to measure it. It’s time to measure and manage human capital with the same discipline as financial capital. It’s time to blow up today’s model and replace it with a fundamentally new Human Capital Strategy. ■
Adapted from The New Human Capital Strategy: Improving The Value of Your Most Important Investment—Year After Year by Bradley W. Hall, Ph.D. © 2008 Bradley W. Hall, by permission of the publisher, AMACOM Books, a division of American Management Association, New York, NY, www.amacombooks.org
Bradley W. Hall, Ph.D., has worked in some of the world’s top HR organizations. He was formerly Senior Vice President, Talent Management for ABN AMRO Bank in Amsterdam. Previously, he was Executive in Charge of Organizational Effectiveness and Executive Capabilities for IBM’s Asia Pacific region, a $25.5 billion, 60,000-employee organization. He has also been Director of HR and Training for AT&T Global Services. Dr. Hall consults and is the author of The New Human Capital Strategy (AMACOM). He is based in Brookfield, Connecticut.
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