By Britton Manasco
Smart companies will treat the economic downturn as an opportunity to focus on attracting and keeping highly skilled people.
Leading edge companies are actively seeking ways of leveraging their "human capital" to develop a strategic advantage. Indeed, they are moving from a departmental focus on human resources to a far more strategic and expansive focus on human capital management (HCM). Roles and responsibilities are in flux as companies explore new ways of building and leveraging talent.
But HCM is not limited to the enterprise itself. This new perspective also draws on the networks of talent that lie beyond immediate corporate boundaries. It is a key element of the ongoing drive toward "collaborative commerce" or "enterprise relationship management."
The growing interest in HCM is coming from many quarters. In some cases, talent development efforts are being driven from the highest levels of the enterprise. In other cases, HR leaders are seeking ways of expanding the strategic sphere of their own activities. In still other cases, leadership is coming from line-of-business managers. Whether in manufacturing, customer management or supplier management, managers of all kinds are independently trying to optimize their own activities by more effectively managing their people.
The payoff promises to be quite powerful. Watson Wyatt, a management consulting firm that has developed a Human Capital Index based on 30 key indices of effective human capital management, has observed that a significant improvement among the 400 publicly traded companies it studied was associated with a 30 percent increase in market value. Watson Wyatt monitored five key dimensions of effective HCM: recruiting excellence; clear rewards and accountability; a collegial and flexible workplace; communications integrity; and prudent use of resources. Companies that demonstrated the highest ratings on the index generated returns of 103 percent over five years.
So HCM is certainly important. But who is responsible for it? Clearly, this is a complex challenge that cannot be delegated to any particular individual or department. In fact, HCM must become everyone's responsibility -- much as "quality" management became an element of every manager's role in the past.
Managers throughout an enterprise are responsible for the quality of their talent and, therefore, will always be the ones who are immediately accountable for HCM. However, it remains an open question whether the top HR executive or some other "C-level" officer will in fact provide strategic leadership as companies move in this direction. In many companies, HR is treated as a mere "cost center" -- divorced from the value-creating elements of the business. But this criticism is largely unfair. While HR has taken its share of criticism for not being business-focused, it's reasonable to assume that HR professionals generally have not been incentivized or encouraged by top leadership to play the strategic role that is now being sought. It's a matter of organizational design.
However, some companies have given significant leadership capabilities to top HCM strategists. At many well-respected companies, HR leaders -- or other corporate strategists that focus on HCM challenges -- are playing a powerful role by helping to set standards of development, performance, measurement and reward. They are helping companies assess opportunities, weigh risks and determine what types of HCM technologies, services and solutions are worthy of investment.
But that is not always the case -- and may not be the direction that many companies take in the coming years. If central leadership does not arise, it's likely that line-of-business managers will make these investment decisions on their own -- a scenario that Jenni Lehman, an analyst who covers human capital management for Gartner, the influential Stamford, CT-based research firm, refers to as "HR disintermediation." One way or another, companies must invest in innovative solutions to address their human capital challenges.
Of course, the "levers of change" that are available to them tend to be fragmented and disaggregated. There are no off-the-shelf, all-encompassing HCM solutions to invest in -- though there are some extensive and integrated HCM platforms on the market. That said, companies will have to go to multiple sources if they seek HCM capabilities that encompass everything from search and recruiting to learning and development to benefits administration to performance management to strategy consulting and systems integration. It's a messy and fragmented market at this point. Many of the vendors of these solutions don't even recognize that they are part of a larger movement to manage and optimize talent. The HCM solutions marketplace, however, is moving inexorably toward aggregation and integration.
The corporate world has invested heavily in IT infrastructure over the past decade. In recent years, the growth of technology spending has climbed 20-25 percent annually. These investments have encompassed not only the underlying infrastructure, but also the enterprise software necessary to capitalize on it. At the same time, companies have invested in a series of corresponding management initiatives -- from reengineering to supply chain management to customer relationship management to e-business.
We at the Knowledge Capital Group contend that one of the next important waves of investment will revolve around managing and leveraging corporate investments in human capital. Indeed, we think human capital management is a vast, unexplored opportunity that promises to generate extraordinary returns for companies that effectively invest in it.
University of Chicago economist Gary Becker, who won a Nobel Prize for his pioneering work in this field, contends that the chief source of wealth for most people is their own human capital. "Human capital is the most important type of wealth in the U.S. and other modern nations," writes Becker in Business Week.
He goes on to point out that wealth "in the form of human capital consists of present and future earnings because of educations, training, knowledge, skills and health. Since wages and salaries account for over 75 percent of the national incomes of developed countries, it should be no surprise that human capital is estimated to be three to four times the value of stocks, bonds, housing and other assets."
Recognizing the vast wealth associated with human capital, it's clear that there are similarly vast competitive gains and growth opportunities associated with managing it more productively. This certainly sets HCM apart from the far more limited expectations conventionally associated with HR.
However, the shift to HCM is also important for perceptual reasons. The term recognizes the vast value of intangibles that are not recognized through traditional accounting and valuation techniques. Indeed, CEOs and CFOs are certainly more likely to give talent management its due respect when the language of the enterprise recognizes talent as a valuable form of capital -- more valuable (in many respects) than financial capital. But why should these executives support investments in HCM in a slowing economy?
HCM in a Down Market
Having experienced years of dynamic economic growth, it's clear that the economy is in the midst of a downturn. What remains to be seen is how long it will last -- and how it will impact investments in both organizational change and technology initiatives. Some analysts suggest that IT spending growth could fall by as much as half in the coming years, settling in the 10-12 percent growth range.
Nevertheless, the conventional wisdom among tech analysts holds that companies will continue to invest strongly in efforts to strategically align their organizations and maximize the value of their existing technology infrastructures. The same could be said of talent. Even if hiring slows (as it currently seems to be doing), the drive to leverage existing talent will continue to be great -- perhaps more so than in years past. Aggressive companies will continue to focus on attracting and keeping highly skilled people, and may even treat the economic downturn as an opportunity to attract people who would have been harder to recruit during the boom.
Of course, such trends will not be true of all companies. Many companies will merely retrench and cut back if the economy remains soft. They will not only cut back on investments in hardware and software. They will cut back on all efforts designed to create a more productive workforce. We think they will be in poor shape when the economy rebounds -- as it inevitably will within the next year or so.
In McKinsey's report "The War for Talent," the firm surveyed 77 U.S. companies across a variety of industries and levels of financial performance. McKinsey worked with the firms' HR departments to profile the companies' philosophies of talent-building, practices, results and challenges. To obtain the perspective of line managers, McKinsey also surveyed nearly 400 corporate officers and 6,000 executives from the "top 200" ranks in these companies.
Many companies have made managing their physical or financial assets a top priority, while relegating the management of people to the back burner. Here are some startling statistics from the report that drive this point home:
-- Only 33 percent of the 6,000 "top 200" executives surveyed strongly agreed that their companies attract highly talented people.
-- Just 10 percent strongly agreed that they retained their high performers.
-- Only a paltry 3 percent said their companies "actually develop their people quickly and effectively, or move low performers out quickly."
Smart companies, as KCG's MarketView survey of trends and opportunities suggests, will continue to invest in management initiatives and business solutions that enable them to make the most of their existing talent. Despite relative cutbacks on technological infrastructure (such as networking and computing systems), they will continue to invest aggressively in efforts to build and leverage their people.
Many are now investing in HCM solutions -- including software and services -- of all kinds. They are relying on new technology to accelerate recruiting, optimize learning and development activities, measure and appraise performance, and more productively manage an array of administrative tasks associated with their people. They are using these technologies to attract people and develop them in productive new ways. They are using these technologies to more effectively measure their performance and reward them optimally. These organizations are building more powerful, more personal relationships with their people. They are building and leveraging their human capital. One could say they are doing "more with less."
But the next stage of HCM is likely to more actively stretch beyond the enterprise itself. Indeed, leading enterprises will look beyond their own boundaries -- exploring ways to manage and capitalize on the talent of contractors, suppliers and partners. They will apply many of the lessons that have been successfully applied to the "supply chains" of tangible goods and components to seize the opportunities of managing talent across extended networks of supply.
Whereas human resources has always been perceived as a departmental and internal activity, the emerging discipline of human capital management promises to transcend not only departmental boundaries but organizational ones as well. The best companies will satisfy more client needs and concerns by managing and relying on talent beyond their organizational walls. They will do "more with more."
Britton Manasco ([email protected]) is a principal strategist with the Knowledge Capital Group in Austin, Texas. This article is excerpted from KCG's recent report on Human Capital Management. The Knowledge Capital Group is a market strategy firm that helps technology companies strengthen their positioning, raise their visibility and accelerate their sales cycles. It also recognized for its thought leadership and research on technology market dynamics. To obtain a copy of the report's executive summary, go to www.knowledgecap.com.