“Our people are our most important asset.” It’s common today for business leaders to at least pay lip service to that sentiment. Yet many if not most leaders have only a vague notion of what that asset is worth, or how it can be deployed for optimal returns.
True, many human-resources departments have scorecards and databases that generate lots of reports on such things as turnover, performance distributions, and engagement. But what’s usually missing is the application of metrics that finance executives hold dear — the HR equivalent of measures like net present value, internal rate of return, and economic value added, says John Boudreau, research director and professor at the University of Southern California’s Marshall School of Business.
Boudreau, who will speak at the upcoming CFO Corporate Performance Management Conference in New York City, to be held January 30-February 1, places much of the blame for the lack of analytic rigor outside of HR, on top organizational leaders. To find out whether a project is worth undertaking, they typically use some variant of NPV. To learn which consumer groups are likely to be the most strategically important, they use some type of customer segmentation or lifetime profitability model. Yet, says Boudreau, “If I ask them what drives their employees’ motivation, I get 15 answers in a room of 15 leaders. And most of them give what would be about a D-minus answer in my class on motivation theory. They’d never get away with that in the world of finance.”
That’s not to say that HR managers are blameless. In running a business, the best managers always seek to optimize a process so that it operates at maximum efficiency given an acceptable level of risk. But in the world of HR, “it’s often more about how do we describe to the business leaders what we do — or how do we prove to them that what we’re doing has value,” says Boudreau.
In the CFO’s world, investment risk is controlled through diversification, with a company’s portfolio typically containing a variety of asset classes, such as stock, bonds, and cash. All are not likely to do well in a given time period, but collectively they should provide the optimal return-to-risk ratio. A similar approach ought to be applied to talent development, contends Boudreau, whose most recent book is Retooling HR: Using Proven Business Tools to Make Better Decisions About Talent (Harvard Business Press, 2010).
In the book, he uses the example of a company trying to decide how to allocate its talent resources in developing versus developed countries. The company may believe there is a 60% chance that business will grow quickly in the former, compared with a 40% likelihood of slower growth. Such a clear differentiation may dictate a decision made with tunnel vision. “Most HR systems tend to build talent for the most-frequent scenario without doing much mathematics,” comments Boudreau.