Strategic Planning Analogy #248: People Investment

THE STORY
Imagine a conversation between Bob, the VP of Operations, and Kal, his boss.

Bob: “I’m building a new factory in St. Louis.”

Kal: “Why?”

Bob: “Well, we’ve always had a factory in St. Louis in the past, so I suppose it must be necessary.”

Kal: “Have you done the math to determine if the factory provides a good return on investment?”

Bob: “No, but I checked and we have enough money in the capital budget to build it.”

Kal: “What will the factory be used for?”

Bob: “I’ve got this old piece of paper in the files describing what the old factory used to do many years ago. I know it’s a bit out of date, but we’ll update it as we go along after the new factory is built.”

Remind me not to invest my money in this company.

THE ANALOGY
Factories are important investments. The decision to build a new factory should go through the rigor of strategic and financial planning. Is the factory needed to meet our strategy? Can we justify the financial investment? How do we optimize the factory to support the strategy?

In the story above, Bob did not seem to have a clue about how the factory tied in to any strategy. He didn’t even know how the factory tied into profits. His rationale was that we always had such a factory, and we could afford to build it, so we should build it. That’s not very good justification. Kal should not put up with such behavior.

A lot of firms claim that their most important asset is their people—more important than factories. Yet, many companies put a lot more strategic effort into factories than they do into their people. What if we took that same conversation above and applied it to people?

Bob: “I’m hiring a new person in Accounting.”

Kal: “Why?”

Bob: “Well, we’ve always had a person in this position in accounting in the past, so I suppose it must be necessary.”

Kal: “Have you done the math to determine if hiring this person provides a good return on investment?”

Bob: “No, but I checked and we have enough money in the accounting payroll budget to cover it.”

Kal: “What will this new person do?”

Bob: “I’ve got this old job description in the files describing what the position used to do many years ago. I know it’s a bit out of date, but we’ll update it as we go along after the new person is hired.”

As strange as that conversation sounded when it was about a factory, it sadly seems a bit more common when it involves people.

THE PRINCIPLE
The principle here has to do with investment. Human resources are an investment, just like factories and R&D. Given the movement to a knowledge-based economy, human resources may be your most important investment. The problem is that it is not always treated like an investment.

For most other major investments, two major questions are asked before making investment decisions:

1) How does this investment help us achieve our strategy?
2) Will we get an adequate return on that investment?

1) How does this investment help us achieve our strategy?
According to a recent survey by Waston Wyatt WorkUSA, firms in the USA are not doing well on the first question—connecting individual work to the master strategy. The study claims that 51% of employees do not understand the steps their companies are taking to reach new business goals. In addition, 65% are unclear about the connection between what they do and what they earn. In other words, the link between individual work and company strategy is often missing. How can we expect this “most important resource” to help us achieve our strategy if they cannot identify any understanding of it or connection to it?

This study concludes that “three-year total returns to shareholders are three times higher at companies where employees understand corporate objectives and the ways in which jobs contribute to achieving them.” You wouldn’t build a factory without first knowing how it links to corporate objectives. Why should we treat human investments differently? It is obvious from this study that keeping our human resources in the dark hurts shareholder returns.

My experience has shown me that the collective knowledge of the team is far more valuable than just the knowledge of the leader. There have been many times when I have had an idea about how to achieve a corporate goal. I could have just ordered the team to do what I thought up (leaving them in the dark about why we are doing it). Instead, I have told the group what the ultimate goal is and asked for suggestions as to how we could achieve that goal. The suggestions from the group are often far better than my own idea.

Not only do I gain their ideas, I gain their enthusiasm. Once people understand the goal, there is greater reason and purpose to the work. As a result, there is effort placed behind the work, and a greater likelihood that the goal is achieved.

It’s hard to know if you have won a race if you do not know where the finish line is (and it takes some of the fun out of the running, too). Let the people know about what the finish line is. Then reward people based on their ability to successfully reach the finish line.

2) Will we get an adequate return on that investment?
Now, let’s move onto the second question: are you getting an appropriate return on investment for your hires? In these tough economic times, there is a lot of pressure to reduce headcount. Not all headcount has the same value. If you had a product line portfolio of 100 products that needed trimming, you wouldn’t randomly cut every fourth product from the mix. Instead, you would carefully study the financial and strategic contributions of each product and make calculated decisions. Shouldn’t people receive the same consideration?

The same principle also applies when adding employees. I’ve seen managers with the attitude that employees are a necessary evil to the business and that headcount should always be kept as low as possible. Would we say that about other investments? If you know that you can get a great return on investment by building stores or factories or whatever, you would build them. Why not do the same with people? As long as they are a positive return on investment, why not keep adding them?

When trying to get a return on investment from something like a factory, we typically do not expect to get all of the return in the first year. In addition, we expect to put in additional money over time for maintenance and upkeep—to keep the investment productive. Do we treat people the same way? Do we look at optimizing the multi-year returns? Do we invest in training to keep people at peak productivity?

SUMMARY
If you look at your human capital the same as how you look at other capital, you will probably get a higher return from that human capital. Part of this is because there will be a closer link between human activity and strategic goals. Secondly, there will be a closer link between people investment and financial returns.

FINAL THOUGHTS
At first, it may sound cold to treat people like we treat a factory. However, since it often seems like the factories get greater consideration than the people, this is actually a step up. And, as we have seen, if we bring the people into a closer link with strategy, we are actually enhancing job satisfaction—giving people a greater purpose. So, in many cases, this is actually a more compassionate approach.