12. Understand Human Capital
There is a widely held notion among many leaders and managers, and particularly in the domains of CFOs, that “human capital” is “the employees,” the physical presence of those people who companies recruit, hire, and pay. Sorry, but that’s wrong! It couldn’t be more wrong, and the mind-set that breeds that misconception is at the root of what troubles many organizations today. Executives and managers who want to be great leaders, and organizations that want to be great organizations, must understand what human capital is and develop the tools and skills to leverage it.
So then, what is human capital? It is the application of “everything about an employee” to the purposes that contribute to an organization’s success. That’s a little vague, I realize, so let me clarify. When I say “everything about an employee,” I want you to understand my use of that word “everything” by referring to earlier rules discussed in this book, including all we have said about engagement, alignment, the employee’s acculturation, the illusive discretionary effort we so eagerly want to coax forth, and the collaborative (non-toxic!) community workplace spirit that must exist in every organizational setting.
Before I get into specifics and cite examples, let me make another broad comment: Human capital can also be understood as the wealth-generating potential that exists within the people who work for an organization, and it embraces all facets of their knowledge, skills, and intellectual properties; it encompasses the skills, experiences, and effort of your workforce. It is their ability (and their willingness) to do things on behalf of the enterprise.
That said, when I hear people say that human capital is “the people,” it doesn’t exactly boil my blood, but it makes it hot enough to make tea. Calling human capital “the people” puts you into the mind-set that people and their “output” can be expressed and managed solely with numerical terms. It assumes that productivity can be understood only by how much someone produces over a certain period of time. It supports the notion that time-and-motion studies accurately measure effort and productivity.
If you are thinking to yourself that what I just described is “just the way it is,” or maybe “the way it should be” I want you to put the book down. Now! You can’t be saved....
Why? Because that’s Theory X Management all over again.
Remember, Theory X Management assumes people need to be managed, pushed, and supervised. It assumes that they won’t produce unless you threaten to take something away from them or lure them with tangible incentives. From Theory X Management, it’s a surprisingly short and easy leap to managing people punitively. But I can assure you that with a Theory X approach, after you have maybe achieved a few productivity “sugar highs,” over time, your turnover will spike, as will your talent acquisition costs, and your long-term productivity will drop dramatically. Guaranteed.
If you have been following the arguments I have made so far in this book, you will recognize that there is a real risk for organizations that do not understand human capital or that manage and treat people poorly. If the organization thinks that human capital is just employee head counts and per capita output—and doesn’t see that it’s not just employees but what they can do when nurtured and optimized as engaged individuals—then human capital management is taken from the human resources office and ceded to the financial analysts, the cold-hearted numbers guys (and I say that with all due affection). When people become numbers on a spreadsheet, they are no longer “at the table”; they are “on the menu.”
How did financial analytics become the dominant mode of management in many organizations today? It’s probably not a surprise to you that people were seen as output and production machines when the industrial revolution mind-set initially took hold. But how has this concept lingered for so long through supposedly enlightened times? Well, one root cause of the problem is that academia and institutions began looking at workplaces through the use of analytic and empirical terms, especially when measuring productivity. These efforts were aimed at quantifying various aspects of workplace behavior and tying it to metrics-based value appraisals. Fair enough; it brought validity to the work and probably made it easier to publish results in peer-review journals. But the capacity for human output got subsequently confused with the understanding of human assets. They were erroneously perceived as one and the same thing.
Today, progressive, insightful human resources experts (and I like to put myself in that category) have had to work hard to discourage organizations and management from looking at people as nothing more than interchangeable parts. We have made an effort to show that people are just as valuable to organizations as the buildings and the equipment that the organization owns, maintains, and invests in. In short, organizations need to see their people as investments, and each one individually unique.
Today, we are not at a point where organizations—even forward-thinking organizations—put people on their balance sheets as fixed assets. (Of course, that doesn’t mean you shouldn’t treat them that way and invest in them the way you invest in other fixed assets. More on that later in this rule.) So, the problem for organizations of all sizes is that if you continue to wrongly categorize human capital, and you don’t treat it as an asset, then you run the risk of missing the opportunity to maximize and leverage the available human capital to achieve enduring and sustainable success of your organization. You miss the opportunity to have people contribute at the highest level, in part because you can’t appropriately communicate and demonstrate to them that they are valuable and important! Think about it: If you see your people only as numbers on a balance sheet, as interchangeable parts with no particular individual value, how can you possibly communicate to them that they are individual and unique? It is apples and oranges forever. On the other hand, if you recognize each employee’s individual value, you can make the proper investment to better train the individual, to offer better guidance, to offer specific objectives and deliverables. In short, you open yourself to the opportunity to maximize your employees’ ability to be successful and make you successful.
Let me take this a little further. A leader or manager has to understand how human capital works, because only then can she create an effective communication strategy to convey that value to the employee, on an individual basis. Often in this book I have pointed out that people want to be a part of something; they want to contribute. I have also put equal weight on the importance of letting the employee know the role he plays in creating value for the overall organization.
To optimize an employee’s talent and truly engage him, the employee has to see where his daily activity is an asset to the company and a value to himself. Think about this on a human level. If you are great at your job, and you know you are great at your job, it’s nonetheless demoralizing to have your work go unrecognized; it’s disheartening to not be able to see where your superb work contributes on a grand scale, or, worst of all, to have the work dismissed, even out of benign negligence, as a nonasset to the organization. I can tell you story after story about star players—A-list star performers who you would pay a fortune to have on your team—simply walking away from a job because they didn’t see their overall value in the larger picture. Money can’t take the place of this recognition of value. It has to come person to person, with recognition that the “human output machine” is really a valuable individual worthy of respect, investment, and recognition. That’s something a paycheck or a bonus can never do. And it is certainly something a spreadsheet cannot ever do; it’s something only insightful leaders and managers can do.
When you look at human capital and human assets as separate things, it changes the whole game to your competitive advantage. After all, assets are defined as tangible or intangible, and they have been obtained (or are owned by) an organization for any of three general reasons. First, they promise a future benefit or hold the prospect of having a positive impact on revenues. Second, the organization “controls the asset” (maybe “locks up” is a better phrase), because the competition isn’t using the asset to gain a competitive advantage. And third, when you hire someone, you are really obtaining the rights to their human capital, and you don’t have to expend energy to obtain those rights over and over again. You engage in one deal (the act of hiring), and you control that asset until the employee leaves.
With these three asset characteristics in mind, let’s look at how they can change the value proposition for organizations. For instance, instead of looking at human capital as a cost center to be managed for savings (the way you manage and allocate, say, physical inventory), you start to think of human capital as an asset to be developed, maintained, and invested in. And you do this with the same eye toward long-term saving that you bring to investment in other assets, such as buildings, Internet servers, inventory, and infrastructure. Moreover, this shift in mind-set is an opportunity here for a far more profound shift in thinking to take place, as well. Leadership and managers can start to view “outlays of cash” in support of human capital development as worthwhile investments—with a demonstrable ROI—if the money is used to attract, retain, train, and develop the right people.
As for the demonstrable ROI, the financial guys love that, the top execs love that, the corporate boards love that, and ultimately the stockholders love it. If they all saw human capital as an asset to be protected, and they all saw the bottom-line contribution made by a consistent (as opposed to transient) workforce of engaged people, the phrase “human resource expense” might cease to exist and be replaced by the phrase “human resource investment.”
Though it makes it easier on leaders and managers when boards and stockholders see cash outlays as human resource investments, it has a far more profound effect on the employees. They take notice. They get engaged. They start to see that management is demonstrating by its actions (and capital investment) that the individual employee is an important and essential part of the organization. Believe me, if you are transitioning to a progressive company in this respect, just the statement of this understanding of employee value elicits a great, collective sigh of relief from the employees. And you might even hear a few people mutter, “Well it’s about time!” They see that statement as evidence that a tangible step has been taken to bring actions in alignment with the intentions expressed in the C suite.
Dr. Jim Goodnight, the cofounder of SAS Institute, used to say, “If you treat people as though they make a difference, they will make a difference.” He certainly made his bet on the side of the employees at SAS, and he put SAS in the position to generate wealth and competitive advantage by viewing his employees as assets, and putting the capital resources—no small investment, indeed!—toward creating a world-class people-focused infrastructure. And talk about ROI and buy-in across every department! It’s hard to argue with the success, and SAS’s experience of a 3 percent turnover rate in a high-salary sector where 20 percent turnover was the norm. When you are putting up numbers like that, you start to win over even those CFO types who look down their glasses like someone out of a Dickens novel, questioning every penny.
Mike Croxson is the chief operating officer and president of Ascend One, a multifaceted financial services company on the East Coast. He and his executive team have built a model of performance management that gets to the heart of leveraging human capital for the benefit of both employee and company. In a straightforward process, employees are asked to do an analysis of what they are good at doing, what they like to do, and what the company expects them to accomplish. After that, Mike makes no high-minded speeches about what it takes for leaders to leverage human capital. He has a fundamental belief that great leaders are men and women who recognize that it is the people (and what they are willing as well as able to do) that determine whether the enterprise, large or small, is going to accomplish its goal.
He says that good leaders know what needs to happen, can communicate the opportunities and impediments, and can get the people engaged in completing tasks, meeting objectives, and solving problems. The real trick is getting human capital in motion and aimed at the business result. That has nothing to do with being charismatic. The kind of leadership that leverages human capital is the leadership that can articulate a challenge or goal, show the worthiness of the goal, and the win-win possibility of achieving the goal—and then rallying people around the execution of tasks that bring the desired results.
That’s it! From Mike’s perspective, you simply have to understand what the need is and why it is important to have it satisfied. You have to communicate the value of the desired result, and how it brings those business and personal wins with it. You have to show confidence in the skills, aptitudes, and attitudes of those you entrust with executing the tasks. And you must provide appropriate resources. That kind of leadership and that management style gets the human capital engine humming.
Now, Mike does say that sometimes leaders can be successful leveraging human capital by merely setting things in motion toward a goal. He characterizes that as “giving the time of day” without feeling the need to explain “how a watch is built.” But, he notes that in some cases, particularly when working to engage employees truly is a new way of doing things, it is essential for the leader to explain enough about the inner works of the watch to get people believing that you are giving them the correct time. In cases where the trust is shaky or the “people-centric” approach to strategy and tactics is new, the role that leadership plays and the behavior of the leader is critical. As Mike Croxson describes it in his soft drawl, “You’ve got to foster principled leadership to get the best out of people. Not the most—the best!” He defines Ascend One’s “principled leadership” as a pattern of behaving in ways that foster two-way trust and respect, while focusing on results, driving hard for business performance, and developing talent. “You can’t have leaders who go around saluting the flag, while kickin’ the dog,” he says without the hint of a smile.
When making the effort to tap into the human capital of employees, executives and managers sometimes make the error of trying to lift the level of contribution of average or below average performers, instead of creating an environment that unleashes the full human capital of the outstanding contributors. This error is often committed for the best of reasons: Leadership’s obligation is to develop its people. But to spend 60 percent to 80 percent of one’s nurturing time on the 20 percent of people who may have the least human capital to contribute, all the while putting the attention and enthusiasm of high potential employees at risk, is poor management and faulty leadership.
The next question we ask about human capital is this: How do leaders determine the value of human capital? When you walk the halls of many American offices, there are these posters ad nauseam about Teamwork and Loyalty and Effort. These are the posters you see for sale in the in-flight magazines; you know the ones I am talking about. Almost all of them state in some way the belief that “people are our greatest asset.” First of all, saying so doesn’t make it so, and more importantly—at the end of the day—individuals are not assets. They are volunteers. I have said elsewhere in this book that 90 percent of your assets walk out the door everyday, and maybe—if you treat them well, give them meaningful work, and communicate their value—they come back the next day, eager to contribute even more.
Inspiring employees to come back each day, and inspiring them to contribute, is the result of an increasingly sophisticated field of HR called talent management. Talent management recognizes at its core that an asset is worth more than the cost to acquire it, and at the core of talent management is the driving need to develop and nurture your organization’s human assets, to present individuals with interesting career paths, to offer them ways and means to expand their horizons, to avail them of educational and growth opportunities. It’s a method of partnering with your employees so that they grow and actualize, and the organization benefits by the growth.
All of what I have covered in this rule is really in broad recognition that employees deliver when they are engaged, when they are aligned, and when they feel as though they are valued—and contributing something of value in return. When you build corporate engagement structures, all of the employees’ future activity—the expanding talents and abilities of your human assets—becomes integral to a process that creates cash flow. And don’t get me wrong, at the end of the day, it’s that cash that makes all this possible.