Towards Performance Excellence

"How to recruit, train and retain the best".

Originally an address to CFO Conference in Hong Kong

What I am trying to do today is give some ideas of how a more collaborative and multi-discipline approach to HR can lead to ‘performance excellence’. I have tried to balance some theoretical readings with 30 plus years of practical experience and kept what I have to say at a common practical sense level.

“…our business is a people business!” how many times have we heard and said that? But I don't think we really mean it. When times are good, we often fail to invest in the capture, development and retention of talent. When times are tough, we normally do not have the metrics to know who to keep and are often over influenced by past relationships in terms of whom we keep. Often it is the talented, subordinate and yet very valuable staff who are retrenched.

In the past we have not had the metrics which are critical for an employee investment program? And, an employee dis-investment program.

Balance sheets, sources and applications of funds and other modern accounting processes do not encourage today’s organization to focus on people - the real drivers of revenue in a corporation. In fact, often, balance sheets only reflect employees when they are a liability; never an asset. The focus appears to be instead on “tangible assets”, mostly buildings, brands, and “hard” assets. These quantitative methods do not value the people asset in the organization.

Training courses, recruitment programs and retention programs are immediately expensed. They do not appear on balance sheets as an asset. There is no reflection in the GAAP accounts that an asset is being built for the future good of the organization.

My hypothesis today is;

1.  If organizations do not have a sound and integrated recruitment, training (but allow me to use the more meaningful expression, “learning and development”) program and retention process, then the group is not moving towards performance excellence, and
2. CFOs must work in concert with human resource professionals to make sound arguments for investing in recruitment of talent, up skilling of talent through an L&D function and retaining the best people.

Since the mid 1950’s when Peter Drucker wrote the “Landmarks of Tomorrow”, the idea of “knowledge worker” has become more central to management’s thinking. People are important not because of the levers they pull on machines but because of the information they possess. And, that is the way to competitive success – the reengineering of how corporations value and use their knowledge workers.

After working in L&D and executive search for 35+ years, I think it is only hard financial metrics which will convince executive management to invest in long term sustainable programs to hire, develop and keep good people. Over the years, I have heard woolly vision statements and platitudes which were generated by public relations departments, which sound great during the good times. However, HR initiatives and people are normally one of the 1st line items to be cut in the bad times. And, that is normally because there is no use of financial metrics to justify programs which add to the value of the intangible knowledge workers who really add value to your business.

Over the last couple of decades there has been criticism of conventional accounting and present-day measurement of the value of knowledge workers. Some of them are critical of the financial practitioners i.e. you people. I have listed one in the bibliography, Thomas A Stewart who wrote;

My first book described some ways in which companies might measure intellectual capital. There has been a lot of progress since 1997. Most important the case against conventional accounting has become – it seems to most observers – open and shut. It’s incontrovertibly true that present financial and management accounting does not give investors, directors, the public, or management the information they need to make informed decisions.

(The wealth of knowledge: intellectual capital and the twenty-first century organization, foreword p. 14)

Some of the concerns of the authors, I read are:

1. Money spent on employees for recruitment and skill development is expensed on an annual basis, not capitalized (appreciate that some R&D is capitalized),
2. There is no method to measure the value of an employee i.e. an intangible asset in contrast to a tangible asset in dollars and cents, and
3. The intellectual capital which is developed and held in the employee base of an organization cannot be measured and is considered never to appreciate, even though that intellectual capital was developed through the L&D programs of the employer. Instead it is expensed in that calendar year.

I appreciate some of the arguments against 1, 2 and 3 above, and realize the difficulty of reflecting what can be a very transient work force. But internal management accounts can measure this value. Financial metrics can be used to plan, and implement targeted and effective recruitment, L&D and retention strategies for your company’s investment in people. And, these metrics can be an integral part of an organization’s internal management accounts.

Now, I keep referring to metrics; let’s quickly talk about ‘Mobilizing Minds: Creating Wealth from Talent in the 21st Century’. The authors, Lowell Bryan and Claudia Joyce deal with the issue of liberating talent and how present structures; silos, matrix systems, poorly defined roles inhibit and cost shareholders. Now a lot of the argument about ineffective structures and barriers to productivity has been said before, what is different is that the authors tie it to a number based on profitability per employee.

The authors comment:

“Clearly, then, a new set of metrics could help companies gauge their performance more effectively. Executives should home in, first, on how much profit per employee a company generates. They should make the number of employees a key factor in strategic thinking. And they should keep a clear eye on ROIC, but more as a way of ensuring that the company earns more than the cost of that capital than as an aspiration in its own right. With these metrics, the company can set its goals for the return on intangibles (that is, profit per employee) and growth (the number of employees), as well as its return on capital, which is largely a sanity check. Together, these three metrics squarely highlight -and drive- market caps.

(“The new metrics of corporate performance: Profit per employee” The McKinsey Quarterly February 2007. p.60)

I am sure there will be other opinions of these calculations’ efficacy. Over the years I have seen; “opportunity value” per employee, “revenue” per employee and some others. None are perfect. And all are flawed. What is clear, however, is that all are less flawed than the qualitative gut feel which most organizations rely on now.

What we need is a sharper edge to our arguments and, therefore, an opportunity to address from a financial perspective the functions of recruiting, L&D and retention. And, what might be an interesting idea, the appreciation of the value of an organization’s work force; in contrast to the depreciation of physical assets.

Let’s consider for a moment the importance most organizations place on the functions of;

1.   Recruiting,

2.   L&D, and

3.   Retention.

Now, the “degree of importance” will be judged by;

1.   Senior management access, i.e. what level of the organization deals with this issue? Who does the internal hiring manager (line or HR?), or external consultant report to?

2.   Public attention. To what extent does the organization externally publicize their attention to these functions?

3.   Cost. How much are organizations willing to spend on each function?

My opinion and it is an opinion based on anecdotal observation, so it is not a properly conducted experiment.

1.   Recruiting; highest senior management access, most expensive and often the one which appears on front page of Asia Insurance Review. Impact if not handled well, can be often short term and can bring about discontent among other employees who believe they should have been considered for the role,

2.   Learning and Development; low to middle seniority access, sometimes just lip service, small budgets and I have never seen in the Asian Insurance Review a press release stating that, “ABC Life has had a weeklong intermediate management course”. L&D can, however, build into your organization considerable medium to long term value, and

3.   Retention; normally not contemplated except for very senior executives. We will talk about a couple of examples later. Once again, my opinion is that it can help build into a business long term value.

Pay off?

1. “So how do I get a return on investment for my expenditure?”
2. “How do I ensure that recruitment, L&D and retention strategies work in concert and proscribe a virtuous circle?”

The ROI is from all three. But there is a misallocation away from L&D and retention strategies. These misallocations are opportunities.

So, let’s summarize what I have been saying:

1. People are the real capital of most businesses, but conventional accounting does not normally take into account this intangible asset.
2. We can measure the value of people to a business, even though we do not reflect it in GAAP accounting.
3. Corporations will not invest in long term people strategies e.g. L&D and retention until they can measure the cost/benefit.
4. L&D and retention of employees are the poor cousins of recruitment (human resources).
5. But if L&D, retention strategies and recruitment work in synergy then you move “towards performance excellence”.

So, now let’s move on to the final stages of our discussion and define what I think excellence in these three functions is. But, to put your minds at rest I will not be giving you a long laundry list of boxes to check, more just a macro overview. If you want lists there are heaps on the net.

So, to start with, recruitment, (and I mean recruitment across the organization, not just executive search)

1. Defining the skill/competency sets – what experience does the person have to be good at to do this job?
2. What education? Both “on the job” and tertiary.
3. What is the job? What outcomes/deliverables? And, all too often we should ask ourselves if the job is really do able/achievable. Hark back to the Bryan and Joyce work I mentioned at the beginning of the address, and you will see that they define some jobs as undoable. Too siloed, too remote, too busy for real work to occur.

So, we know all of this. This is pretty generic. But normally what is overlooked is:

1.   Why do we need this job? Especially if someone has left the role, there is an almost reflexive action to hire another one. It is like, “what is wrong with us? We have to get someone into this job fast to prove to the market that we are worthy.”

2.   Can we get along without filling the role? Can we carve it up and give it to a number of other people?

3.   And, before we spend a lot of time and money on attracting a high flyer from one of our competitors, “can we promote someone internally?”

4.   And, if not number 3 above, can we train up an internal candidate? Answer normally is, “there is not enough time.”

Next L&D, what is excellence in learning and development in today’s corporation?

1. Working closely with line management, understanding the path the organization is taking and what skills are necessary to take it there. It is one of the most valuable, in terms of ROI, but sadly overlooked functions in an organization.
2. Supporting divisional leaders to build bench strength at senior levels in their organizations, up skilling individuals through in house or external workshops. 
3. Working with management to accommodate on the job training and university sandwich courses.
4. Being promoted as one of the reasons talented people should join an organization – “join us and we will invest in you.” Used as a recruitment tool.

L&D can also be used in times of crisis to assist an organization cut costs, maintain service delivery and develop managerial expertise.

Allow me to give you a real example from my experience in Australia with a medium sized life insurance company at the time of the last recession. The organization was facing profitability issues, expenses had to be cut.

The distribution structure was five state managers reporting to a general manager of distribution and was seen to be too fat.

Now, using conventional logic the responsibilities of the two smallest states would have been “merged” into the three larger. The state managers of the two smaller states, who would have tended to be younger and less experienced, so would have been retrenched.

The result would have been a loss to the organization of good young talent, some savings of state manager salaries but under servicing of the representatives in those states.

Well, this organization had a new head of HR who had some radical ideas. So, the organization set about thinking of ways to; maximize savings, maintain solid relationships with the representatives, keep up production and hold on to bright and talented younger managers.

What they did was, retrench the head of distribution, keep the state managers, ask the managers to take a pay cut and get good managerial development coaches in beside the state managers as mentors.

The managers formed a group distribution committee composed of the five state managers.

The effect was that the five state managers did not have a head of distribution to referee issues and give direction and they had to go through a rapid maturation process and learn to solve issues themselves, form sub-committees and be active in collaborative decision making. All of the company’s representatives continued to be serviced and there were few defections to rival underwriters. So, out of a difficult situation the company was able to hold onto its most valuable assets and build for the future.

It takes good creative empowered HR and knowledge of who is really contributing to the profitability of the organization to do something different. And, so L&D strategies can work to build an organization.

Finally, retention.

 In 30+ years of being in human resources I have seen few good examples. Normally this function is carried out badly and retention payments given out on a hierarchical basis, i.e. CEO and C level reports. “Retaining key employees in times of change” by Cosack, Guthridge and Lawson talks about how in times of crisis “Too many companies approach the retention of key employees during disruptive periods of organizational change by throwing financial incentives at senior executives, star performers or other rain makers. The money is rarely well spent.” 

(The McKinsey Quarterly August 2010. p.1)

There is sometimes little attempt to quantify those individuals who are most critical to the group, most at risk of leaving or possess the secrets which drive the company’s profitability. The article talks about finding the “little gems”. And, this can only be done by collaboration of line management and HR. Even outside times of crisis, it is important for senior management to signal that they value their employees, that there is an ethic of corporate fidelity.

What are the drivers of a good retention program?

1. Often it is not just about money. It can be about promotion, new opportunities to practice new skills and greater responsibility/accountability,
2.  Use financial metrics to target the most valuable people, the ones, who generate the revenue, drive the growth of the company and are the leaders of tomorrow, and
3. It is proactive, signalling to employees that the organization cares before a crisis or before the headhunter calls.

I have a real example we can discuss, which highlights the failure to recruit, develop and retain talent. And, I think most of you will have seen similar situations.

We have a client, major global organization, we are working with the Asia Pacific subsidiary, very dialled down HR, little if any direct access to senior executives under resourced and underfunded.

The HR head had confided in us that she was worried about lack of talent at a senior level for succession planning or possible promotion into C level roles. There was a non-existent L&D budget and non-existent retention plan.

So it was an opportunity for the perfect storm.

Well CEO quits. So, we run through the four criteria we discussed before;

1. Do we need job? Yes!
2. Can we split the role out to a variety of others? No!
3. Can we promote internally? No!
4. Can we train up an internal? No! Too big a gap!

So, call the headhunters, three month search, six month gardening leave for chosen candidate, she starts after nine months. The CEO function had been done on a part time basis by another country CEO who sat in on a best efforts secondment basis. Cost to company? Lots.

Now if just some of that lost profit had been invested in better recruitment, L&D and retention policies then there would have been the following in place.

1. Bench strength under the existing CEO,
2. An opportunity for one or more of the C level people to apply for the role,
3. Even if search were undertaken an opportunity for the “most likely” candidate to sit in the role,
4. An L&D function which had been grooming the C level managers to handle the span and demands of a CEO role,
5. And, an L&D function which had been used as a retention tool to make certain that the C level people knew they were being developed, and
6. And lastly, a retention plan which ensured that the CEO did not just leave the organization without a backup plan.

So, how does this happen? Financial practitioners like you work with senior executives in human resources to develop metrics which value your intangible asset- your people. And the human resource professionals apply behavioural checks to ensure that the employees with talent and promise develop the skills necessary to coach, manage and complete role functions.

In summary, we can move forward when two organizational functions which do not normally cooperate come together to assist in charting a way forward. When the human resource professionals embrace financial metrics and the financial reporting professionals embrace human capital development, organizations will take a large step towards performance excellence.

Bibliography

Bennis, Warren G., and Michael Mische. The 21st century organization: reinventing through reengineering. Johannesburg: Pfeiffer, 1995.

Bonadio, Steve. The CEO’s Guide to Top Performer Retention . Burlington: SumTotal, 2010. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1656458

Bryan, Lowell L., and Claudia I. Joyce. Mobilizing minds creating wealth from talent in the 21st century organization. New York: McGraw-Hill, 2007.

Drucker, Peter F.. Landmarks of tomorrow . New York: Harper, 1959.

Guthridge, Matthew, and Asmus B. Komm. "Why Multinationals struggle to manage talent." McKinsey Quarterly May 2008 (2008). https://www.mckinseyquarterly.com/Why_multinationals_struggle_to_manage_talent_2140

Lawson, Emily, Matthew Guthridge, and Cosack Sabine. "Retaining key employees in times of change ." McKinsey Quarterly Aug 2010 (2010). https://www.mckinseyquarterly.com/Retaining_key_employees_in_times_of_change_2654

Lowell L., Bryan . "The new metrics of corporate performance: Profit per employee." McKinsey Quarterly Feb 2007 (2007). https://www.mckinseyquarterly.com/The_new_metrics_of_corporate_performance_Profit_per_employee_1924

Stewart, Thomas A.. "Foreword." In The wealth of knowledge: intellectual capital and the twenty-first century organization. New York: Currency, 2001. xiv.

Wolf, William J., John R. McPherson, and Matthew Guthridge. "Upgrading talent." McKinsey Quarterly Dec 2008 (2008). https://www.mckinseyquarterly.com/Upgrading_talent_2260