Do we properly manage our most important Capital, People?

 In Globulus Blog

All CEO’s monitor regularly;

  • Return of Investments, as ROI = (Net Profit / Cost of Investment) x 100.
  • Shareholder’ Equity = Total Assets – Total Liabilities
  • Return on Capital = (Net Operating Profit – Adjusted Taxes)/Invested Capital
  •  Net Free Cash Flow = Operating Cash Flow – Capital Expenses- dividends-current Portion of Long Term Debt – Depreciation
  • Competitive, Market and Regulatory threats  to any of the above elements.

Do CEO’s review, or monitor?

  • Employee Churn
  • ROEI Return of Employee Investment
  • Contractor versus Employee ratios
  • Cultural gaps to vision
  • Resource allocation to strategic initiatives (CAPex, M&A, R&D) versus Maintenance of Existing Core Business

Clearly, the greater concerns are the direct measurements of shareholder value, but does that mean financial KPIs? All too often this places focus upon immediacy and short term planning.   Kathrine Ryder pointed out how these are viewed differently in Eastern cultures in her Fortune article, “How to crack the Asian business culture”.  We all understand that our children want immediate gratification, but are we that different?

I’ve seen major businesses run themselves on a 12 month fiscal cycle for the past 20 years. Utilize your capital budgets by August. Be prepared for your expense budgets to be cut by late July. Prepare for corporate downsizing by late October to allow for vacations and end of year write off of expenses.  The months might be different, but the results are not different. This stimulates a reorganization in January, and a reallocation of human resources all the way thru the next year’s cycle of the same. Corporation’s must break this cycle, as they lose value through they productivity drains.

This month McKinsey touched on some of this topic in “How Nimble resource allocation can double your company’s value”.  In McKinsey’s articles they demonstrate that we must keep our workforce nimble towards reallocation. This speaks about how an organization might manage its workforce into a more flexible model and dynamically shift resources toward strategic initiatives, faster delivery of results, shifts in market changes or value creation.

If a company embraces resource reallocation models, they can dynamically shift the team without suffering the annual cycle mentioned earlier, losing crucial knowledge within the business, large negative shifts in corporate culture, improve employee trust and as McKinsey points out, improve corporate value

In order to initiate dynamic reallocation models, companies must NOT allow chiefdom’s to be created in the process of organizational development. They must also intentionally build stronger bench skills so that teams can shift and employees are properly rewarded in these shifts.  Companies must also make sure they build these teams with employees versus contractors, as these can often develop some of the strongest leaders in the business, since they’ve been exposed to so many areas.  CEO’s must also allow these teams to fail fast and become more aggressive towards success with less risk and greater reward than the core teams, as they recognize the difference in this team’s DNA.

If properly introduced and managed, we might consider looking at our employees as a capital investment, and their salaries/benefits as depreciation expenses to that capital. Capital improvements would be education/training, shifts in job experience and coaching. Capital maintenance might be vacation, sabbaticals and special awards, personal education and recognition.   We should also consider how this might influence the growing millennials within our workforce, and how it might be managed within a job-hopping culture.

I’m not suggesting we look at people as machinery, but I am saying we should look at how we monetarily value our employees and express that to our shareholders. We should also evaluate how we establish them as a strategic assets for reallocation.  I’ve seen businesses place the same value placed on employee performance versus contractor performance. Businesses outsource strategic/differentiating functions such as customer service, which accounting and other back office areas remain in-sourced. What does that do to trust? I’ve seen strong assets written off, while the asset’s still had significant values to be shared. Do we fully acknowledge the asset potential, if properly trained and exposed to the right elements?

As we look at the globalized economy, the departure of baby-boomers from the workforce and we create longer term visions; both CEO’s and the market might want to begin employing some of these principles.

“Time is the friend of the wonderful company, the enemy of the mediocre.

Warren Buffet

As we consider some of these philosophical shifts we might reflect on Warren Buffet’s simple buying criteria

  • A simple business we can understand,
  • Favorable long-term prospects,
  • Operated by honest and competent people, and
  • Available at a very attractive price.

or the opportunities that lay ahead of US businesses in Asia.

If you want to talk about how Globulus might help you with these concepts click here, or share your perspectives in a comment below.

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