Introduction

A Systematic Approach to Growing Your Human Capital

“Innovation in management principles and processes can create long-lasting advantage and produce dramatic shifts in competitive position. Over the past 100 years, management innovation, more than any other kind of innovation, has allowed companies to cross new performance thresholds.”

—GARY HAMEL, 2006¹

We often hear that people are the most important variable for an organization’s success. Yet do you know of a single corporation that can confidently state that its human assets are more valuable this year than last? How would one measure that?

Business leaders are similarly regarded as critical to business success. A quick search on Amazon.com delivers more than 194,000 books on leadership, so it must be important. Yet do you know of an organization that knows whether its leaders are better this year than last? What is “better” anyway?

In your organization, over the past twelve months, which human resources programs and activities (e.g., stock options, employee appraisals) created measurable value to customers or shareholders? Can’t say? Here’s an easier question: Of all those programs and activities, which added customer or shareholder value?

Still struggling? Let’s make the question even easier by removing customers and shareholders from the equation: In the past twelve months, which people improvement activities delivered the expected results? Think of your performance appraisal cycle, sales rep training, or employee satisfaction improvement program and ask: “Did it work?” If the performance appraisal cycle is designed to improve alignment, motivation, and productivity, does that happen? Does sales training improve rep performance in the eyes of their customers? Have employee satisfaction initiatives improved employee satisfaction ratings?

Notice how these questions are tied to business results rather than to activities or program deliverables. However, more often than not in today’s business world, the goal is to deliver world-class programs rather than world-class people. All too frequently, companies wind up with volumes of programs and activities, few of which produce real results for employees, customers, or shareholders. In your company, are people-related programs and activities designed to deliver results to a well-conceived blueprint of a high-performing organization, or are they simply efforts to demonstrate that management cares? It is difficult to imagine plumbers, electricians, and roofers diligently working without a blueprint of the finished product, but we do it all the time with human capital programs.

Think about your company. Perhaps your senior leaders talk about people being the most important variable for business success. If so, do the leaders have a vision of success, how it connects to business results, and how to systematically grow it over time? And who is accountable for delivering that vision? If you don’t have an end-state blueprint of human capital, and there is no owner, you certainly cannot manage it for success.

Perhaps this explains the 2006 finding by the University of Southern California (USC)’s Center for Effective Organizations that only 9 percent of HR leaders report that their company is effective or very effective in connecting human capital practices to organizational performance.² That leaves 91 percent who do not believe that their human capital practices effectively connect with organizational performance—a pretty tough self-assessment.

How is it that a company’s most important variable is so loosely managed? Let’s compare today’s human capital management model to the manufacturing profession. It’s difficult to imagine the head of manufacturing for an industrial company meeting with the CEO at year end and saying: “We’re not really sure whether our manufacturing capabilities improved since last year. In fact, we really don’t know how to define manufacturing excellence. So unfortunately, I cannot report whether last year’s initiatives and investments improved our manufacturing capabilities.”

Of course, this would never happen in manufacturing. Manufacturing leaders have clearly defined outputs; and those outputs matter to customers and shareholders. Manufacturing leaders build a system to deliver the expected outputs and use metrics to understand the contribution of each subsystem. Manufacturing leaders have to manage with discipline because so much financial capital is tied up in plants. Now look at the financial capital invested in salaries. Employee pay is the biggest line-item expense for many companies. For bottom-line financial performance, effective management of human capital should be as important to customers and shareholders as the effective management of manufacturing.

Time for a New Approach

It is time for a new, systemic approach to growing human capital. This is an approach: (1) that clearly describes what successful human capital is and how it connects to business results, (2) that measures and manages human capital with the same discipline as financial capital, and (3) that enables company managers to learn from experience to make progressively better human capital decisions. It is time for Human Capital Management (HCM)—a system designed to create sustained competitive advantage through people.

THE THEORY OF HUMAN CAPITAL MANAGEMENT

Human Capital Management holds that business profits are generated and sustained when a company provides products and services that meet customers’ needs better than competitors do—in other words, when the company has a competitive advantage. Businesses create and maintain that advantage over time when their core competencies, or the activities that customers value most, are superior to those of their competitors in the eyes of their current and potential customers.³ Human Capital Management is a system for improving the performance of those in critical roles—those with the biggest impact on corporate core competencies.

Not all roles in a company are equally important for customer and shareholder satisfaction. Industry-best sales reps, for example, create more customer and shareholder value than industry-best administrative assistants. In the HCM model, the question “Are our people better than our competitors’ people?” may be more accurately stated as: “Is the performance of those in critical roles superior to those of peers in competitor organizations?” The answer is often knowable.

What does HCM success look like? Success is when a company can state that “our people outperform competitors’ people” in roles that add the most value to customers and shareholders. Success is not world-class talent; it is world-class performance.

If performance improvement of those in critical roles is the goal, then all human capital programs, tools, activities, and even meetings must be evaluated by their impact on making “our people better than the competitors’ people.” For example, if there are four things that big deal makers need to do well to sell big deals, then all programs and developmental activities for deal makers should be focused on driving performance improvements on those four things. In addition to a focused development effort, an effective HCM system requires a data-rich, analytic approach to measuring and managing human capital with the same discipline as financial capital. Certainly, behavior is not as easily measured as financial results, but it definitely can be measured. As a graduate student in psychology, I read a study that showed human fetuses prefer music with human voices to instrumental music. “How can they know that?” I wondered. The answer is reached by triangulating galvanic skin response, blood pressure, and heart rate, and comparing that with children and adults. If researchers can figure that out, we certainly ought to be able to measure workplace behavior and performance. Measuring human behavior and performance is possible. It’s just not being effectively done in most corporations today.

Some might say that measuring and managing people devalues the worth of human beings. I disagree. In fact, I believe that for several reasons, it is a disservice to not measure people and performance. The first reason is that people want to know they are successful. Make people successful, and they will be happy. Think about a room with ten sales reps, nine of whom are not making quota. Will free soft drinks or movie nights make the reps happy? Probably not. The way to make them happy is to make them successful. The primary purpose of HCM is to make external customers and shareholders happy—not to make internal customers (such as employees) happy. Employees will be satisfied only when they see that their work makes a meaningful contribution to the business. And that requires a system that measures, develops, and celebrates their contributions.

The second reason it is a disservice not to measure people’s performance is that activity without feedback is no fun. Think about it: How many people would continue to bowl if they had to wear a blindfold? The only reason that throwing a heavy ball is fun is that bowlers get immediate feedback, make adjustments, and try again. Human beings love a good challenge. Human beings like to win.

The third reason is that when performance is not objectively measured, politics fill the gap. Think of yourself as an assistant professor trying to get tenure. In a system with unclear measures, getting tenure requires ingratiating yourself with faculty power brokers. You are at the mercy of the judgments of others, some of whom see you as a threat. A wise strategy is to play conservatively and not rock the boat. A clearly defined set of standards shifts the power from the faculty committee to the assistant professor.

It is rarely beneficial to a company or its people when politics fill a performance measurement gap. Several years ago, when I was helping a Japanese company start up a new training organization, I went back to the United States for a week. I phoned to leave a voicemail message for a team member and was surprised when she picked up the phone at 8:30 P.M. Tokyo time. I said, “Sato san, why are you still at work?” She said, “I am very busy!” I said, “Busy doing what? We haven’t started up yet.” She replied, “Oh, I am very busy.” She was actually busy looking busy. With no objective performance measures, employees were evaluated by their diligence, not by their results—and employees stayed late into the night to demonstrate that diligence. If you truly care about your people, then measure, manage, and celebrate their results.

Today’s Approach to Human Capital Management

Today’s approach for improving workforce performance is failing. There are three reasons:

1. No one is accountable for year-over-year human capital performance.
2. Results require a system, not world-class programs.
3. Today’s HR model is misaligned to deliver business results.

Let’s look at each of these reasons.

No One Is Accountable

The head of manufacturing is accountable for year-over-year improvements in manufacturing productivity. The head of marketing is accountable for year-over-year changes in brand equity. The head of sales is responsible for revenue growth. But who is responsible for year-over-year improvements in the company’s most valuable asset—its people? Nobody. Line managers see HR as accountable, but HR sees itself accountable for programs that must be converted into business results by line managers. No one is in charge of human capital performance.

Systems, Not Programs

The HR profession is very adept at program development. Success is most often defined as creating and/or adopting best-practice programs, and HR is organized and managed accordingly. HR consulting firms align their practices with the way their clients are organized: They deliver products and programs for HR subprofessions (such as training, staffing, and compensation). But the data is indisputable: Decades of new and better programs have not delivered great results. The reason is that “world-class programs” cannot deliver performance results. Only systems deliver results.

An automobile engine is a system that requires great parts. All parts must be fully integrated and aligned to the purpose of the engine, whether that be high performance or a fuel economy. A well-built engine uses just the right parts and no more. Likewise, succession planning, training, and appraisal can be viewed as parts. Just as throwing pistons and spark plugs into an engine compartment will not deliver a satisfactory engine, neither will “world-class” HR programs deliver acceptable customer results. More and better HR programs will deliver no better performance in the future than they have in the past. Performance results require a system.

A Misaligned Model

There is plentiful data demonstrating that HR is not delivering to expectations. The Economist’s “2006 CEO Briefing” cited HR as tied for the least important corporate function, the worst performing of all corporate functions, and second to last in importance for achieving business results for the next three years.⁴ In addition, the consulting company Accenture’s 2006 High Performance Workforce study found that only 5 percent of CEOs and 4 percent of CFOs are very satisfied with their human resource function.⁵ The same study indicated that

3 percent of CEOs and 4 percent of CFOs are very satisfied with their corporate learning function.⁶ The most important variable for business success is being managed by the least effective corporate function.

HR is not getting better. From 1995 to 2006, USC’s Center for Effective Organizations has monitored changes in the HR profession. Since 1995, each time participants were asked, how much time they spend on strategic activities today versus 5–7 years ago, the participants answered 9 to 10 percent. When the participants were asked how much time they currently spent on these activities, they answered 20 to 23 percent. Each time, participants said they spend twice as much time on strategic activities today than 5–7 years ago—to many, it feels like their job has changed, but it hasn’t. According to the data, they spent 21.9 percent of their time on strategic activities in 1995 and 23.5 percent in 2004—no significant change. The profession has talked about being strategic, trained for it, and outsourced administration to make room for more strategic work., but there has been very little change in the time spent on strategic activities or the perceived business added value of the function. What’s going on?

For decades, HR has claimed to be on a path to a more value-added function and has asked business leaders for time as it builds new capabilities. There is little convincing data to indicate that the profession’s current path is delivering more business value than in the past, and more time will not solve the problem.

Many line executives place the blame on a lack of accountability or substandard people. I disagree on both accounts. Neither more accountability nor different people will fix the problem. The problem is HR’s model—the structure, shared values, systems, and skills. Sure, HR programs are better, administration is being outsourced, and e-learning is replacing classroom learning. But these are all parts that fit the old engine. Today’s model has never changed, and it continues to produce precisely what it was originally designed to produce—good policies, programs, administration—but thatnot what today’s business leaders need. The solution is a new approach—a new Human Capital Strategy (HCS)—that delivers performance improvements that produce a sustained competitive advantage.

Shifting to a New Approach

The modern HR model was created in the 1960s for a personnel department that was responsible for people-related administrative duties and employee relations. It was, and is, based on the premise that the personnel department takes care of administration and employee relations issues so that managers can focus on business results. Today’s model has several barriers that prevent it from adding measurable value for customers and shareholders. (They are summarized in Table I-1.)

• Today’s model does not have a clear aim. It does not define how human capital contributes to business results. C. K. Phahalad of the University of Michigan Business School has often chastised HR for its lack of theory or defined position on how it adds value. Does your organization have an end-state blueprint (i.e., what success looks like) or a strategy for systematically building to that blueprint? HCS defines how human capital will drive business results and delivers a blueprint of what human capital excellence looks like when it’s “done.”

• Today’s model does not define accountability. It is not clear who is accountable for human capital excellence—line managers or HR. Within HR, which unit is accountable for year-over-year improvements in leadership capabilities—staffing, training, compensation, or talent management? Nobody is in charge, and with no one in charge, progress is not possible. HCS defines the organizational capabilities and accountabilities required to deliver the human capital strategy.

• Today’s model is egalitarian. It confuses the important value of all people being of equal worth with the idea that all roles are of equal worth. In fact, all roles are not equally important to customers and shareholders: Some provide significantly more value than others. Focusing investments in roles that are most important to customers and shareholders yields greater returns. In a Hollywood movie, the leading actors are more important to the success of the film than members of the lighting team. That is not to say that lighting is unimportant to the film or that the lighting professionals are not first-class people. They just are not as important to the experience of the moviegoer as the lead actors. HCS provides a system for improving performance of those in critical roles.

• Today’s model is ad hoc and disconnected. It begins with disconnected best practices and world-class programs. Managers continually receive new programs and instructions, but in service to what end-state? Growing human capital requires a top-down approach that begins with a clearly defined theory and a blueprint of success. The system must be built and sustained to deliver component parts for the blueprint that are comprehensive and integrated. As previously mentioned, an automobile engine needs interoperable parts to operate, and having most of the parts will not deliver most of the performance. It might deliver none. HCS programs are sufficiently comprehensive and integrated to deliver the Human Capital Strategy.

• Today’s model is undisciplined and unmanaged. It has no ability to measure changes in human capital or to make progressively better decisions about people and organizations. It reliably measures activities such as average days of training per employee, the percent who received a written appraisal, and bonus differentiation between top and bottom performers. What it doesn’t ask is the critical question of whether human capital capabilities and performance are improving over time. HCS measures and manages human capital with the same discipline that one measures and manages financial capital.

• Today’s model is internally focused. It views HR as a supplier and line managers as customers rather than as business partners. HR delivers to the internal customer, even if that is the wrong thing from the perspective of the external customer. HCS views the external customer as the customer whereas HR administrative activities have an internal customer.

• Today’s model is focused on programs rather than results. It defines success as world-class programs rather than world-class people. Look at job ads for talent management roles on any Internet job board or talk to executive search consultants. Companies are searching for professionals who have experience with world-class leadership programs. They are not looking for a track record of building world-class leaders. HCS views programs as a means, not an end.

• Today’s model is reactive. It treats people issues the way a physician treats incoming patients: by reacting to problems and by addressing symptoms. Today’s unfulfilled ideal is HR plans that fully align to annual business plans. However, in addition to reacting to annual business challenges, companies must create the business analogue to a wellness program—a systematic and disciplined ¬ approach for year-over-year human capital growth. HCS is a systematic approach to year-over-year capability and performance improvements.

Why This Book Was Written

Executives often say that people are the only real source of competitive advantage, but few can clearly explain what that means. If people truly are a company’s most important asset, shouldn’t executives know whether their assets are more or less valuable each year? Few companies know this; in fact, they don’t even know what “more valuable” means or how to measure it. These same companies have very sophisticated models for predicting product performance or customer choices. Think of the potential performance improvements if companies used those same analytics for predicting the impact on business performance of decisions around human capital. And what if it was possible for companies to systematically learn through experience to make progressively better human capital decisions each year?

I believe that in most companies, sustained competitive advantage comes from a more productive workforce—better solution sellers, call center reps, store managers, and/or product development engineers. Get the people and organization equation right, and the organization will win. However, after twenty years in HR, I have seen almost no examples of a defined end-state blueprint for success or systems that reliably deliver measurable human capital improvements. The finger of blame points in many directions. Where is the general manager, and why does he/she not insist on managing human capital as a business asset? Where is HR, and why won’t the department accept accountability for results that matter to customers and shareholders? HR is locked into a paradigm where subprofession excellence, world-class programs, and a “seat at the table” are the ultimate measures of success. Until HR breaks out of this paradigm, it will continue its decades-long tradition of speeches and articles about potential value, but never realize it.

Companies will know they have arrived when they can answer two questions:

1. Is your human capital more valuable than your competitors’ human capital?
2. Has your human capital improved year-over-year?

This book will enable both general managers and HR professionals to create a blueprint of human capital success and a strategy and system for achieving it. In so doing, we must “blow up” today’s HR paradigm and question many of its assumptions.

The bottom line is that when it comes to systematically improving our most valuable asset, the model is wrong. Why else would decades of speeches, articles, and training on strategic HR have failed to move the needle? We have often heard that “Insanity is continuing to do the same thing and expecting a different result.” How many more changes will you make in your appraisal program, incentive schemes, management development courses, and HR partnering workshops before you admit that they don’t really work? It’s not the programs—it’s the model.

Let’s blow up today’s model and replace it with a fundamentally new Human Capital Strategy.

Notes

1. G. Hamel, “The What, Why, and How of Management Innovation,” Harvard Business Review (February 2006).
2. E. Lawler, J. Boudreau, and S. Mohrmon, Achieving Strategic Excellence: An Assessment of Human Resource Organizations (Stanford, Calif.: Stanford Business Books, 2006), pp. 21–22.
3. C. K. Phalalad and G. Hamel, “The Core Competence of the Corporation” (HBR OnPoint Enhanced Edition), Harvard Business Review (March 31, 2007).
4. CEO Briefing: Corporate Priorities for 2006 and Beyond, Economist Intelligence Unit, 2006.
5. Accenture, Accenture High Performance Workforce Study, p. 64. Figure II-17 (2006). http://www.accenture.com/NR/rdonlyres/D55AA2A6-850F-4589-AADB-553C10A71 09D/0/Accenture_High_Performance_Workforce_Study_2006_v2.pdf.
6. Ibid., p. 71. Figure II-28.