Making Progress on Human Capability Valuation and Performance

By Norm Smallwood, Partner, The RBL Group?([email protected]), Mike Panowyk, Senior Consultant, The RBL Group ([email protected]), Joe Grochowski, Managing Director RBL Institute ([email protected]) & Dave Ulrich, Rensis Likert Professor, Ross School of Business, University of Michigan; Partner, The RBL Group ([email protected])

We recently had the privilege of attending an exceptional Summit on Workforce Valuation and Performance at the Ross School at the University of Michigan. Thought leaders from multiple disciplines (government regulators, attorneys, economists, statisticians, investors, academic researchers and consultants in strategy, information, and HR) gathered to explore the topic:

“To get even basic information about the workforce to enable valuation and to guide investment decision-making. We need better information on the twenty-first century economy to inform capital allocation, policy, research, and management. That is the premise behind this gathering.”?(Thank you to Jerry Davis as sponsor and host.)

To make progress on this important agenda of accessing information to assess and build organizations for the twenty-first century economy, we left pondering three questions.

Question 1: What is organization??

Determining what information to collect starts with a clear definition of what constitutes an organization. This definition of what comprises an organization seems simple: “An organization is a setting where I work, play, learn, live, shop, and worship.” But underneath this definition are five assumptions or views that define “organization,” each with a model and framework so that information can be collected to improve how organizations operate (see figure 1). Figure 2 offers images, exemplar authors, and representative books for each of the five views.?

Without a clear and accepted view of how to define an organization, different people will examine organizations and source information, like the?ancient Buddhist parable of blind people ?touching an elephant and having different interpretations. For example, the statement framing this summit (“information about?the workforce?. . . to inform capital allocation, policy, research, and management”)?is based on a definition of organization as collection of individuals rather than the other four views.?

Each of the five organizational views is a legitimate way of defining and collecting information on organizations. However, creating and agreeing to a standard framework and language of what makes up an organization has profound implications. A classification framework is the basis for scientific inquiry by organizing otherwise complex ideas into actionable categories (see figure 3 for examples in a number of settings).

As noted in the last row of figure 3, we don’t have a generally accepted classification typology for organizations that would:

• Focus attention on what information to collect to improve organization operations.
• Avoid piecemeal (single item) measures of organization.
• Organize innovative initiatives (e.g., skill-based organization, hybrid work, digital efficiencies) into accepted categories for evolving and cumulating insights.

We have proposed?a human capability framework ?that cuts across the five views of organization and classifies a myriad of people and organization initiatives into four pathways:

• Talent: human capital, workforce, employee, labor, and individual competence or skill
• Leadership: individual leaders at all levels and collective leadership reputation
• Organization: capability, workplace, culture, teamwork, and system
• Human Resource: HR practices, department, analytics, and people

Within this human capability framework, new and innovative initiatives will inevitably emerge, while the four pathways can remain relatively stable (much like new diets will emerge but the four food groups remain stable). Figure 4 shows 38 initiatives in the four human capability pathways.

The human capability framework integrates the five views on organizations (see figure 5) and offers a robust definition of organization that can “enable valuation and to guide investment decision-making”?as this summit proposes.?

Question 2: Why does “organization” matter? Who will use the information collected?

With a clear definition of “organization” (as human capability suggested in figure 4), information can be collected “to inform capital allocation, policy, research, and management.”?Often, information is collected based on what is available rather than what has impact. An?old joke ?goes like this:

A policeman sees a drunk man searching for something under a streetlight; he asks the drunk what he has lost. He replies that he lost his keys, and they both look under the streetlight together. After a few minutes, the policeman asks if he is sure he lost them here, and the drunk replies, no, and that he lost them in the park. The policeman asks why he is searching here, and the drunk replies, “This is where the light is.”

Likewise, looking for information in existing databases is easy because they are relatively effortless to access. But this information may not help organization stakeholders make better decisions. This is like adding up and reporting uniform numbers for competing sports teams; the information is accurate and easy to access but not relevant to winning the game.

Relevance comes by identifying organization stakeholders who will use human capability information to make better decisions. Organizations interact with an array of stakeholders who each get unique value from their interaction with the organization. Information about human capability investments should be linked to the value created for each stakeholder (see figure 6).?

Question 3: How do we better access information on “organization”?

Defining what organization means and offering relevant insights to stakeholders shapes what information to collect and why it matters. How to access such information becomes the next challenge. Five different data collection tools come with pros and cons.

The bad news is that each of these information collection methods has limitations. The good news is that they can be combined to help business and HR leaders make more informed human capability decisions. We have worked with numerable clients through interviews and tailored advice to improve their specific human capability agenda. We have done extensive, large-scale surveys to offer norms and guidance for how human capability investments deliver stakeholder outcomes (called the Organization Guidance System:?www.rbl.ai ).

More recently,?working with AWS , we have utilized AI and NLP to scrape data from 7,000 firms reporting their human capital to the SEC in 2021 and 2022 (see figure 8 for high-level summary).

With this large database and AI methodology, we found that the total human capability score explains 44 percent of employee productivity, 26 percent of cash flow, and 25 percent of future investor confidence.?

What does all this mean?

This is a dense post with a lot of information around how to make progress on human capability valuation and performance. As evidenced by this exceptional Summit, talented colleagues are exploring ways to provide “information on the?twenty-first century economy to inform capital allocation, policy, research, and management.”

We believe that the three questions we raise, and at least partially answer, provide progress on this important effort.?

..………

Dave Ulrich?is the Rensis Likert Professor at the Ross School of Business, University of Michigan, and a partner at The RBL Group , a consulting firm focused on helping organizations and leaders deliver value.