This article, the first in a series, covers some of the dramatic changes human capital management has undergone during this last year. This series of articles is intended to highlight five new principles that need to be understood by anybody working in this field if they wish to act with insightfulness. When times are difficult, the CEO of any company looks at expenses. He or she sits down with the CFO and sees that over 65% of spending is on salaries…so salaries are cut by a huge layoff. We have seen many companies announcing important people reductions, from 15,000 at Deutsche Bank to 30,000 at Boeing. But most of the time that CEOs find themselves situations where they have to reduce staff, they don’t really know who to cut, why they’re making the cuts, or how it will change the future of the enterprise. The new economy and technology have created new principles of human capital that any organization needs to understand and internalize if it is to be a leader either in a downturn or in a growing economy. One of the fundamental new principles of human capital management is the title of this article: A Skilled Workforce is a Cash Multiplier. But what does that mean? The Knowledge Economy The new economy is often called the knowledge economy. Emerging from an industrial age, this new economy distinguishes itself by having a large amount of the value of the company lies in the heads of the employees rather than the tangible assets of the company. This realization was made very clear by a 1999 BusinessWeek article showing that the valuation of Microsoft was greater than the valuation of GM, Ford, Boeing, Lockheed-Martin, Deere, Caterpillar, USX, Weyerhaeuser, Union Pacific, Kodak, Sears, Marriott, Safeway, and Kellogg combined. Yet the only value at Microsoft resides in the heads of its employees! Another way to show the intrinsic value of intangible and human capital is to look at the historical evolution of the ratio of the S&P 500 between the market value and the book value. The ratio of book value to market value was approximately 1 in the early 1980s. In 2000 it had risen to about 6. Among those companies, current employees are now perceived as a key element, as is the ability to attract and retain talent. Faced with this issue, many academics started to review the data more closely and suggest some new models to give a better account of a corporation’s worth. Fortune magazine’s “Best Company To Work For” is also a sign of the times, showing more emphasis on human capital importance. But more than a tool to attract twice as many applicants and make the front page, it has also been shown that those corporations exhibit better financial performance than other companies*. Recruiting Excellence The challenge to any corporation for the recruitment and retention of outstanding talent has never been more profound. High-performing employees are the key for corporate success. At the individual level, a study from McKinsey & Company showed how high performers generate more results than average performers; corporate officers they surveyed believe the difference in impact for sales positions is as high as 67%**. As mentioned on a corporate level, studies from Hewitt, and Watson Wyatt have shown that recruiting excellence brings positive financial results. The Human Capital Index Survey demonstrated that organizations with excellence practices in recruiting have been linked to a greater than 10% return in shareholder value. Human capital management strategies do indeed make a clear impact on the corporate bottom line. On a more anecdotal basis, examples such as 3M creating the Post-it(r) out of a failed project to invent a super glue show that human creativity and fine awareness of business needs can create miracles. In light of those facts we can see why most financial reports start with something like “Our employees are our greatest assets, and they are the key driver of our future success.” It is also the reason why we see a skilled workforce as a cash multiplier. Most venture capital companies have understood this and repeatedly state, “We prefer a B idea with an A team to an A idea with a B team!” The Value of a Quality Workforce Unfortunately, by conducting mass layoffs large corporations forget this basic principle and cut A teams on projects that are not yet profitable, often wasting the potential to redeploy the A team on what they determine as their A project. This is the paradox of executive management today. The key consequence of a true understanding of this principle is an emphasis on a quality workforce. The definition of quality is the ability for an individual to increase the corporate value. Although a discussion of the legitimacy of this definition is beyond the scope of this article series, the strategies to achieve better quality can be understood and applied. To achieve the positive financial results that occur with recruiting excellence, corporations need to place importance on acquiring a quality workforce. * Are the 100 Best Better? An empirical investigation of the relationship between being a best employer and firm performance, Hewitt Associates LLC, March 2000. ** The War for Talent, McKinsey & Company, September 2001.
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