Today’s executives spend a lot of time managing the balance sheet, despite the fact that
it doesn’t represent their company’s scarcest resource. Financial capital is relatively
abundant and cheap. According to Bain’s Macro Trends Group, the global supply of
capital stands at nearly 10 times global GDP. As a result of capital superabundancy,
global quantitative easing and relatively low demand for investments in R&D and capital
projects, the after-tax cost of borrowing for many companies is at or near inflation,
making the real cost of borrowing close to zero.
In contrast, today’s scarcest resource is your human capital, as measured by the time,
talent and energy of your workforce. Time, whether measured by hours in a day or days
in a career, is finite. Difference-making talent is also scarce. The average company
considers only about 15% of its employees to be difference makers. Finding, developing,
and retaining this talent is hard — so much so that the business press refers to a “war”
for talent. Energy, too, is difficult to come by. Though intangible, it can be measured by
the number of inspired employees in your workforce. Based on our research, inspired
employees are three times more productive than dissatisfied employees, but they are
rare. For most organizations, only one out of eight employees is inspired.
There you have it. Financial capital is abundant but carefully managed; human capital is
scarce but not carefully managed. Why? In part, it’s because we value and reward good
management of financial capital. And we measure it. Great CEOs are held in high regard
for their clever management and allocation of financial capital. But today’s great CEOs
need to be equally great at managing human capital.
How can we manage human capital better?
Measure it. As the adage goes, you can’t manage what you can’t measure. A veritable
alphabet soup (ROA, RONA, ROIC, ROCE, IRR, MVA, APV, and the like) exists to measure
our financial capital. To measure human capital, you can deploy metrics such as our
productive power index, which looks at the cost of organizational drag and the benefits
of effective talent and energy management on your overall productive power. You can
measure the amount and value of the time that you put against projects or initiatives,
and you can measure the return on that time. You can actively measure the amount of
difference-making talent that you have in your organization. When Caesars
Entertainment, a gaming company, reorganized operations in 2011, the senior team not
only developed a database on the performance and the potential of the company’s top
2,000 managers but also analyzed the ability of the top 150 to take on new and different
jobs.
Invest human capital just like you invest financial capital. For financial capital, the
business world has developed concepts such as the opportunity cost of capital, which is
reflected in a company’s weighted average cost of capital. We measure the lifetime
value of investments, and we establish hurdle rates before deploying a single dollar of
capital. We run Monte Carlo simulations to evaluate various returns under uncertainty.
For human capital, we need to start thinking about the opportunity cost of a lost hour.
One way to do this is to measure the cost of meetings. My colleagues at Bain discovered
that a weekly executive committee meeting at one company consumed 300,000 hours a
year in support time from departments across the company. When Woodside, an
Australian oil and gas company, took a hard look at meetings, it discovered that they
were consuming 25%–50% of staff’s time. A series of pilots reduced meeting time by an
average of 14% among the pilot groups — a time savings equal to 7% of those groups’
full-time equivalent capacity. We should think about projects in terms of hours and
dollars as well, and before taking on a new meeting or new initiative, include the
opportunity cost of time and talent in the hurdle rate.
Monitor it. Teams of financial planning and analysis professionals measure actual and
expected results for financial capital. Investment management committees evaluate
new investments. Capital expenditure plans are subjected to detailed board reviews. We
all must submit capital approval requests to release funds. Similarly, for human capital
we should do periodic reviews of how much controllable organizational drag we have in
our organization and what actions we are taking to compress it. Many big data tools,
such as Microsoft Workplace Analytics, can provide detailed reviews of how we use
time. For talent, we need to know who our difference makers are and whether they are
deployed in mission-critical roles and initiatives.
Consider the case of one B2B supplier that wanted to figure out what made some
salespeople top performers. A statistical analysis of metrics from Workplace Analytics
and other factors revealed that top performers and average performers spent their time
differently. Some of the differences were obvious: spending an average of four more
hours per week than other reps communicating with customers, or being 25% more
likely to cross-sell. But some behavior was surprising. For example, top performers were
three times more likely to interact with multiple groups inside the company. In other
words, they connected with people who could help them with customer issues, such as
staff in finance, legal, pricing, or marketing.
Recognize and reward good management of time, talent, and energy. Historically,
successful investment of financial capital can make someone’s career. Variable
compensation is often tied to some measure of economic value added. Even though
most companies no longer offer lifetime employment, they should still find a way to
create a lifetime of assignments for their difference-making talent and work hard every
day to re-recruit them by creating a working environment that is inspiring and results
oriented. When Reid Hoffman founded LinkedIn, he promised that the company would
help advance the careers of talented employees who signed on for two to four years
and made an important contribution, either offering them another tour of duty at
LinkedIn or supporting their efforts if they moved on. This tour-of-duty approach helped
attract and retain entrepreneurial employees.
Leaders should be measured and rewarded on their inspiration quotient. They should
also be measured and rewarded for building a talent balance sheet: how many highpotential individuals they have recruited, developed, and retained, and what is the trade
balance of talent — that is, the net imports of high-potential talent into their group
minus exports. A company’s actual values, reads Netflix’s famous HR playbook, “are
shown by who gets rewarded, promoted, or let go.”
These are only some of the ways that we might begin to bring greater discipline to
human capital management. There are likely many more creative solutions out there.
Time is finite. Talent is scarce and worth fighting for. Energy can be created and
destroyed. The sooner we act on these beliefs, the sooner we will get the return on
human capital that we deserve.