Why Investing in People is Good for Business

This week, I am trying something a bit different. I am reviewing and dissecting research from McKinsey's People & Organisational Performance division.

This business unit also has McKinsey Academy, a cutting-edge learning platform for businesses and individuals to learn the skills of the future. It has a 98% recommendation rate, 3k+ organisations and 1M+ participants enrolled.

Want more info on McKinsey Academy? Reach out to me or check out this link.

All credit and IP to the article reviewed below is owned by McKinsey. Check out the research article here and a link to listen to it here.

Prelude:

From my experience with teams from the People realm (HR/Talent/Learning) etc, they are well aware of the value and worth they bring to an organisation. What they also sometimes struggle with is communicating that value in the context of their executives.

In other words, becoming an effective storyteller with data is key. People data is great but your ability to provide causation and subsequently translate this into the language of your execs is vital. If they don't constantly see your value, your influence diminishes.

Want proof? From Chief Learning Officer, 90 percent of CEOs believe that learning is a business solution, but only 8 percent report that training is impacting the business.

Execs need to see the quantified outcome of your People programs. In these current economic times, anything that is not quantified is in danger.

I wanted to arm People leaders with a tool kit to communicate their worth to execs. As part of this, I thought to build something, but came across this excellent research piece from McKinsey that was too good not to write about.

So join me on a ride, where we bridge the gap between People teams and their execs!

Diving into the research:

In this research piece, McKinsey set out with one goal, prove how investing in people is good for business.

They analysed 1,800 large companies across sectors in 15 countries, sorting them based on two factors:

1) How much they focus on developing human capital

2) Whether they financially outperform their sector peers.

From their research, they grouped companies into four categories and described the characteristics of each:

People + Performance Winners (P+P Winners)

• Excel at creating opportunities for their employees to build skills (which they measured by looking at internal mobility, training hours, and organisational health scores) while consistently clearing the highest bar for financial performance.
• P+P Winners distinguish themselves from Performance-Driven Companies in a few important ways: 1) They achieve more consistent results, 2) have greater earnings resilience, and they also 3) have a superior ability to attract and retain talent.

Performance-Driven Companies

• Achieve top-tier financial results but do not put the same kind of emphasis on skills development and the work environment.

People-Focused Companies

• Put resources into developing employees but are unable to translate that into strong financials

Typical Performers

• Majority of forms that do not stand out on neither dimension.

Why Investing in People is Good for Business

1. "When companies emphasise skill development, it pays off for workers. Skills learned on the job contribute 46 percent of the average person’s lifetime earnings, and companies that build human capital are more likely to propel their employees into higher earnings brackets over the course of a career"
2. "Building human capital also pays off for firms in the form of more consistent earnings and greater resilience during crisis. In addition to being more consistent than their sector peers, human capital builders are better at retaining talent, with attrition rates that are about 5 percentage points lower"
3. "Some firms (“People + Performance Winners”) prioritise developing their employees and manage to deliver top-tier profitability at the same time. These companies are more likely to become large-scale superstars. They exist in all sectors and average more than $1 billion in economic profit"
4. "People + Performance Winners have a distinctive organisational signature that challenges and empowers employees while fostering bottom-up innovation. This form of organisational capital contrasts with that of other top-performing firms, which tend to be more top-down and transactional. This management style seems to activate human capital and create a tangible competitive advantage".

People & Performance Winners - what makes them different?

Below is a few facts from the study about P+P Winners

• 4.3x more likely than the average company to maintain top tier financial performance for 9 out of 10 years
• Grew revenues 2x faster than Performance Driven Companies during the pandemic
• 3.6x more likely than the average company to be “superstars"
• Invested 74 hours of annual training per employee provided by P+P Winners on average
• Generate greater payoffs for employees, which helps their talent attraction and retention
• Manage to create opportunities for their employees to build skills while consistently clearing a high bar for financial performance.
• Have a 5 percentage point difference in total attrition between P+P Winners and Performance-Driven Companies before the pandemic.

The exhibits below for more info on P&P Winners and what makes them stand out.

How do you create a People & Performance Winning organisation?

The blueprint and image below shows a pathway for companies to build a P&P winning organisation.

What systems does P&P Winners use to stay ahead?

1. Company-wide systems and policies: Transparent performance expectations and incentives.

They clarify both expectations and incentives and take a more dynamic approach to achieving them. Ongoing coaching and continuous feedback are key for P&P winners to help employees resolve challenges and adapt the way they work as needed.

The best results come from managers staying engaged and giving feedback in the moment, always with an eye toward goals—and encouraging employees to achieve more than they thought possible.

2. Internal talent growth and development.

This is key for P&P Winners and companies that do not emphasise this are at a disadvantage. They develop from within through targeted skill building and internal mobility planning. This makes them more agile and also resilient to change, as they have built their own talent pipeline.

The inverse is also true, not having an effective talent growth & development strategy is costly and will hurt bottom line. You end up hiring to fill a hole or outsourcing, and human capital is seen as an asset that flows in and out of the company. But they are leaving some latent potential untapped by not recognising that the value of each individual’s human capital can be enhanced over time.

Many people who are already within the company have the capabilities to do more and to master different things. Developing people is not always easy, and it may not come naturally to companies that have not historically emphasised training and growth. But creating room for trusted employees who already know the company’s practices to grow and add new skills can have an immense upside.

3. An inclusive work environment.

What sets the P+P Winners apart is not just their commitment to diversity but also their commitment to making their workplaces more inclusive. It is not enough to bring more diverse hires on board; it is important to deliver a positive workplace experience and put measures in place to retain and advance diverse talent over time.

Affinity groups, for example, can help people connect with a supportive community. Offering targeted mentorship, ensuring that project teams are diverse, being thoughtful about workplace accommodations for disabilities, and recognising a wider set of holidays are other ways to make the workplace inclusive.

4. Employee involvement.

P+P Winners ensure that employees feel involved in bringing the specifics of a company’s vision to life—an approach that can give them more of a sense of ownership, increasing the likelihood of creating loyalty and value.

This does not necessarily imply an over-reliance on crowdsourcing or the total absence of top-down decision making. But it is a more engaged style of leadership that makes room for employees to have a voice.

The most effective leaders listen as much as they talk, recognising that good ideas (and the next generation of leadership) often come from those on the front lines. They consciously follow an approach that enables employees to speak up, not only to involve them in establishing the companies’ vision and offer ideas but also to state frankly when things are not working.

5. Autonomy.

P+P Winners insist on efficiency, but they allow some room for trying new things. They take a more expansive approach, aiming to empower a workforce that is trained to think and capable of adapting

Bottom-up innovation and collaboration.

Innovation is one of the key differentiators that sets P+P Winners apart. They promote a culture of “intrapreneurship” that makes it possible for people to collaborate and share expertise and ideas across functions.

This is not a simple matter of putting out a suggestion box. Beyond creating forums for new ideas, leaders allocate resources to pilots and full-fledged execution.

A dedicated innovation unit, for example, with a rotating group of cross-functional experts and an agile, test-and-learn launch model, could bring new products to test markets and commercialisation. All of this should happen within the broader context of the company’s identity and vision for the future.

How do you embark on this transformation journey?

It's a marathon, not a race.

Meaningful organisational change is not about one-and-done pronouncements. It requires energy and commitment over the long term.

This article was a bit different to my previous ones so I am curious to get your take on it,

• Is the research value for you as a people team?
• Was it practical so you can apply these principles in your everyday work?
• Do you see yourself as a P&P Winner? Or do you wish to become one?

As stated, credit to research goes to McKinsey, and I tried to add a bit of colour and flavour to it.