Human Capital Is Their No. 1 Challenge, So CEOs Must Demand More From HR!

A recent survey of global CEOs and board chairmen was conducted by the prestigious Conference Board, and it concluded once again that human capital is the top challenge that they face. While some in talent management and HR might feel honored to be at the top of the CEO’s watch list, they should instead view this listing as a failure, because they have been at the top of the challenges list two years in a row.

This means to me that we in HR haven’t done enough to eliminate the uncertainty and the lack of confidence that comes with being labeled “a challenge.” The other top five issues including customer service, operational excellence, and innovation all require well-managed talent in order to be successful.

In my experience, if human capital is to move from the “challenge list” to the “problem-solved list,” we need to move away from our soft, longstanding reliance on building relationships and instead begin the transition to a high-business impact function. A high business-impact HR is where we focus on directly impacting corporate strategic goals like revenue, innovation, and customer service. And yes, I acknowledge that the soft, relationship-building approach of talent leaders might have been okay in the past. However, it’s now simply not possible for any strategic function to continually improve and innovate without shifting to a businesslike hard data-based management approach. Executives have in the past been satisfied with what HR has historically provided, but that was mostly because executives were simply not aware that there was a second, more businesslike approach to talent management.

Unfortunately I don’t see HR making that transition as long as we get away with these low expectations from CEOs. So my suggestion is that we challenge our CEOs to demand much more from HR.

HR Is a High Impact Function 

You shouldn’t need a survey to realize the importance of talent to a business. Even Jack Welch has stated that HR should be “the most important department of a company.”

We have a high impact for a variety of reasons. The first is cost, because employee and HR costs are often the largest single corporate variable cost item (as much as 60 percent of all corporate variable costs). Second, the talent function has a further major impact because all ideas and innovations come from well-managed employees. And obviously you can’t have great customer service and smooth operations and production without an excellent workforce.

8 Action Steps for Shifting to the High Business Impact Model of HR

Once you decide to make the change to this higher business-impact approach, the next step is to identify the specific strategic areas within HR that must become more businesslike. Those areas are highlighted below:

Accept accountability for improving people-management results — talent leaders frequently complain that they shouldn’t be held accountable for people-management results because so many people decisions are made by managers. I find that argument to be spurious because most other business functions like finance, planning, and IT also share responsibilities and decisions with numerous managers. The critical thing to remember is that talent management designs and manages all talent processes, so they are in my view “the default owner.”

We also know that individual operating managers routinely refuse to take accountability for talent decisions, so that leaves talent leaders to accept the “captain of the ship” role. Executives should demand that talent leaders accept accountability for such critical areas as hiring and retaining top talent, for increasing productivity and innovation, for developing and moving talent internally, and for providing rewards in such a manner that they stimulate employee productivity. It’s time to stop shifting the blame and to accept accountability for excellence in talent management, even when we don’t have total control over it.

Demand a shift to data-based decision-making — strategic decision-makers need to demand that talent management shift from its traditional “gut” decision-making to the widely accepted business practice of making all important people-management decisions based on data. That includes using data to identify the most effective hiring criteria, to identify the factors that cause employee turnover, and using data to identify the barriers that decrease productivity and innovation. An example of database decision-making might focus on performance management. In this area, it is quite common for talent leaders to assume that progressive discipline, coupled with additional training and counseling, will turn a subpar “D level” performing employee into an above-average performer. If you shifted to a metric-driven approach, you would begin to require your performance management person to begin tracking metrics like how long it takes to improve, how much money it costs to improve, and what percentage of these “D players” ever become “A” players.

One final metric area that you should expect your talent leaders to begin developing is predictive metrics. Rather than relying exclusively on historical metrics which tell you what happened last year, these predictive metrics will instead alert you about talent problems and opportunities that will likely occur in the immediate future, so that you have sufficient time to act. And add to your predictive metrics your recommended prescriptive actions, so that managers will know what to do to solve their problems. 

Measure and increase workforce productivity — even though measuring and reporting on the productivity of the workforce seems like a basic task, few talent management teams actually calculate or report it. In fact, when you ask talent-management professionals who is responsible for measuring and increasing workforce productivity, typically no one will say it’s their role. The most widely accepted measure of talent management effectiveness is known as “workforce productivity,” which is revealed by the average revenue per employee number. The two key components required for this calculation, revenue and the number of employees, are usually easily obtained from public data or alternatively, the metric is already calculated on websites like MarketWatch and Hoover’s.

Another more powerful but harder to calculate indication of workforce productivity is revenue per labor dollar spent. This is calculated by dividing your total labor costs into the company’s revenue. 

Make managers accountable for great people management — less than 40 percent of talent leaders make excellent people management part of the promotion criteria and bonus formula for managers. But since “whatever you measure and reward gets done,” strategic decision-makers must insist that the people management metrics and rewards are large enough to get managers to change their behavior. Incidentally, only hire managers who are clearly A players. This is because B-level managers have a tendency to protect their job security by hiring C-level employees who won’t challenge their methods or threaten their job security.

Build a competitive advantage — almost every product, business unit, or process views itself as operating in a competitive environment. Unfortunately, talent management all too often considers itself exempt from taking an external perspective, under which it would conduct a competitive analysis and adopt talent-management approaches that would provide the firm with an external competitive advantage. Under the new approach, talent management would be required to monitor the talent results and the approaches of major talent competitors, in order to ensure that “what we do” in talent is better in every important area than “what they do.” Check with your talent leaders and don’t be surprised to find that they do not conduct side-by-side comparisons between our company and its talent competitors. In a similar light, talent management often fails to capture enough competitive intelligence information on the talent practices of competitor firms.

Expect reporting on continuous improvement — every business function monitors its programs and consequently reports the percentage that they improve each quarter and year. Unfortunately, talent management has frequently failed to measure and report its percentage of annual improvement. At the very least, talent leaders should expect continuous improvement in the quality of hire, workforce productivity, the turnover rate of top performers, the rate of innovation, and the learning and operational speed of the organization. 

Measure quality and error rates in people management programs — talent professionals generally focus on volume and cost, but they’ve routinely under measure and underreport metrics that reveal quality. You should insist that talent leaders implement at least a limited version of Six Sigma quality in the areas of hiring, retention, training, and performance management. Also demand that they conduct a “failure analysis” every time there is a major talent management program or process failure. Some data suggest that hiring has as much is a 46 percent failure rate, so an error rate that is potentially that high needs to be measured and reported. 

Calculate your ROI — almost every department and program is expected to produce a positive ROI. However, talent leaders routinely make no attempt to calculate or report the talent function’s overall ROI. And in the rare cases when talent leaders do attempt to calculate ROI, they only focus on the cost side, completely ignoring the other side of the equation that covers the business impacts of your investment in talent. When operated correctly, HR should have a higher ROI than finance, operations, and even production.

Final Thoughts 

Once you begin making this transition to a data-driven high business impact HR, you shouldn’t be surprised when you find that members of your own HR team are not capable or even interested in making this shift to this model. If you don’t have the courage to release them, you should at least put these resistors in administrative roles within HR. I also suggest working with supply chain and the CFO’s office to better understand how to increase and quantify the business impacts of HR.

If you found this article helpful, please connect with me on LinkedIn Facebook and Twitter

As seen on ERE Media.

About Dr John Sullivan

Dr John Sullivan is an internationally known HR thought-leader from the Silicon Valley who specializes in providing bold and high business impact; strategic Talent Management solutions to large corporations.

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