A Top Senior-Executive Priority for 2019
According to a recent article published by Forbes, one of the top three priorities identified by CEOs is organizational change. The article highlights that:
“Today’s organizations must adapt to a fast-paced business environment and rapid technological change. So it is not surprising that … organizational change is a top priority for senior professionals over the next few years. What’s more, more than a fifth of those questioned said that organizational change would be a challenge in the coming three years.”
The Pain of Organizational Change
Perhaps the most painful process an organization can face is change – change in the business model, technology, marketing, sales approach, and philosophy – is all difficult, but perhaps the most daunting of all change is changing the human capital strategy and programs of the organization as these changes impact each and every person in the company. Organizational change presents the greatest risk to the organization in the following ways:
- Change is not embraced by the employees and it impacts their level of productivity which can have a deleterious effect on EBITDA by up to 30%
- Change generates higher levels of attrition and the organization loses not only a portion of their workforce, but institutional knowledge
- Change is viewed as a negative event for employees which weakens the organization’s employer brand and consequently, financial performance.
Don’t Accept Change for the Sake of Change
Most important however, is not the debate on the advantages and disadvantages of change – because change is a natural event in today’s business – but the identification of what change needs to occur to drive financial performance. For example, as a senior executive, you shouldn’t just accept HR change for change’s sake.
For the last two centuries, changes in Human Capital strategies and programs have been informed by someone’s “gut” assessment on what needs to be done or even more scary, what’s in the popular business literature – the fad of the day. Not all change is good or right. There are detrimental consequences of changing the wrong thing. Or of changing the right thing in the wrong way.
Analytical Approaches for Decision-Making
For at least the last 50 years, analytical approaches have been used to inform decisions about investments in physical property, cash/investments, sales effectiveness, IT efficiencies and even more recently, on marketing strategy effectiveness. The one area where analytics have not been applied is in the area of human capital. I believe this is for 2 reasons:
- Humans are “messy” and unpredictable and even if we tried to understand and predict human behavior, people are not “rational decision makers” so there’s no certainty that they will behave as we predict; and
- Traditional Human Resource Management is not trained in the analytic disciplines – in fact we hire HR people because of their “people skills” not their math skills!
Times have changed and our ability to model and predict human behavior at the aggregate level is far more sophisticated that it has been in the past, and these types of analytics are slowly making their way in to the human resources function. Relying on someone’s “intuition” for which HR programs need to be introduced or redesigned is not only unprofessional, it is irresponsible.
Quantitative Approaches for Human Capital Analytics
Quantitative approaches that pinpoint the element of human capital management having a substantive and statistically significant relationship to financial performance exist and having to compromise with someone’s “gut” assessment is inadequate as a business process.
You Won’t Be the First
Don’t be afraid of relying on human capital analytics. There are an abundance of organizations that employ this approach and have dedicated resources – the trend of applying analytics in the human capital area is on the rise. A search of open “human capital analyst” position on Indeed.com for the US returned over 1,100 open positions (as of January 2019)!
If You Don’t Measure It, You Can’t Improve It.
A generally accepted adage in the business world is that you can’t improve what you don’t measure. It’s time to start measuring the effectiveness of your human capital.
This information is critical for Executive decision-making efficacy for several reasons:
- HC expense often represents more than 40% of gross profit. When one single variable accounts for so much of a company’s spend, then it merits a rigorous examination of return.
- Labor is one of three critical inputs to the business model – the other two are physical property and capital. There are well-developed protocols and heuristics developed to understand the return on property and capital but woefully few heuristics developed to understand the return on human capital, until now.
- Effective decision-making requires reliable and valid information. Most of the time, information about labor is either excluded or when provided is biased because it is usually anecdotal information.
Some Fundamental Metrics
At a minimum, CEOs, CFOs and others in the C-Suite responsible for financial analysis should be monitoring several human capital metrics including: HRROI, Human Capital Value Add, Productivity, Attrition rates, Tenure rates, Mobility, Diversity, and other efficiency ratios.
Without quality information about human capital effectiveness, CEO decisions are potentially flawed or biased. Perhaps the reason that there are so many surprises or unmet expectations around the business model performance has to do with the absence of good data about the labor input.
It’s time for all Senior Executives to demand and integrate Human Capital metrics in support of their decision-making process.
Solange Charas is a senior-level human resources expert with 30+ years of experience as a consultant, practice leader, top corporate executive, and board director across all industry sectors. She was the Chief Human Resources officer at Havas Worldwide, Benfield and Praetorian Financial Services Group and held senior-level positions at Ernst & Young and Arthur Andersen. She serves of the boards of 2 public companies, a non-profit organization and a higher-education institution. She is the Founder and CEO of HCMoneyball – a SaaS company founded to provide support for enhanced decision making about spend on people in any organization.
Solange earned a PhD in Management from Case Western Reserve University’s Weatherhead School of Management, an MBA in Accounting and Finance from Cornell University’s Johnson Graduate School of Management, and a BA in International Economics from the University of California, Berkeley. She has authored numerous articles, including “The Art and Science of Valuing People” in HR Director, “6 Ways to Coach Your Company’s Teams to Be Champions” in Entrepreneur Magazine and “Why Men Have More Help Getting to the C-Suite” in Harvard Business Review.