Author: Jac Fitz-enz

To paraphrase Jeff Pfeffer (Competitive Advantage Through People), if people are our most important asset, then why are we going to a predominantly contingent workforce?

Management is in a perennial expense-reduction battle. The battle will always start with cutbacks in the employee base so long as management believes that people are an expense. I read and hear the “people are our most important asset” platitudes mouthed by CEOs at human resource conferences days before they launch another “rightsizing.” After ten years and a series of these, one would think they should have gotten it “right” a long time ago. But the inescapable fact is that they will never get it right so long as they believe in their hearts that human capital, unlike other assets, cannot be managed for value.

The irony in this is that while with one hand the executive is signing off on a mega-million capital investment in information technology—which he/she admittedly doesn’t understand – on the unsubstantiated promise of the CIG (Chief Information Geek); with the other hand he/she is signing the death warrant of a couple hundred or thousand more employees. Who the h— does he think is going to make the technology work and who the h— does he think is going to leverage the data that comes out of it?

Okay, I feel better now. So, let’s look at this logically and dispassionately.

No one hires an employee primarily because they want to spend money, right!? They expect that for every dollar they spend on pay and benefits they are getting back more than a dollar in profit. If this does not happen the result is called: BANKRUPTCY. So, since most companies are not bankrupt, it must follow that people are actually returning more than a dollar for each dollar invested in them. That is the only explanation. The bloody buildings, machines and materials don’t make products or serve customers … people do! The biggest-fastest-shiniest computers do not add value until a trained human being applies them to a business task. In fact, the b-f-st computers are nothing more than depreciating assets until the poor schmuck, who is labeled “expense” by management, turns them on and makes them work.

If you are still with me, here is the solution. Learn how to monitor the output of a business unit or process and show that it is adding value as expressed in dollars. The combination of people, facilities and material unite to create something. The unifying force is the person, because those facilities and material ain’t movin’ until the person moves them. The following are a couple of simple formulas that even us math-phobics can use to show human value.

If you don’t have a copy of your corporate annual report, Get One! I’ll wait. Now, flip towards the back to the page called Income Statement. Write down the total sales and service revenue of the company. It’s usually on the top line and labeled Sales or Revenue. Subtract from it all Operating Expense except Interest and Depreciation. Talk to a friend in accounting to get payroll and benefits costs. Subtract that from Operating Expense as well. Now we have a figure representing all non-employee operating expense. When you subtract that from Revenue the resulting number is what we call Adjusted Profit. Now, divide that figure by the number of full time equivalent employees in your company (include contingent workers if you can). This gives you the amount of profit generated per FTE. Below is a picture of it:

In Saratoga Institute’s 1999 Human Resource Financial Report, the average for 891 companies in 25 industries was $110,429 per person. This varied from under $50,000 to a high of over $500,000. Who says people don’t make a difference?

If you are feeling frisky, you can also divide Adjusted Profit by Payroll and Benefits to get what we call Human Capital Return on Investment. For every dollar spent on pay and benefits you got more than a dollar back (I hope). The average in the 1999 Report was $1.82 for every $1.00 invested.

Economists will tell you that expenditures for machinery are leveraged through production to something more than what the equipment cost. This, they claim, is how companies make money. I agree with them so long as they acknowledge that the bloody machine didn’t do anything until a human being turned it on and used it the way it was supposed to be used. And the better trained he or she was the better the machine performed; that’s human leverage, and that’s where profit comes from.

How do we convince management to spend money to retrain people rather than lay them off? Show return on the training investment. If you teach people to do something you must be able to see them do it when the training is put into play. What can the people do better now than before the training, and what is that worth? Start with clerical and production skills. Make your case there. Then, you can move up to professional and managerial training where there is more judgment and less routine.

You’ve been patient and persevered to this point, so I would like to offer this thought in closing. You might feel that you are so busy you don’t have time to show value added. If that is the case, get your resume ready because soon management will see you as an expense too.

Knowledge Management and E-business are getting a lot of ink lately. We have to keep in mind that the job of journalists is to find a story. If they can t find one they manufacture one. That s fair we all exaggerate a bit now and then. But what is the story behind the hype?

What is this thing called knowledge management and what relationship, if any, does it have to e-commerce? Furthermore, what effect, if any, might either have on the structure of organizations and management of people?

Starting with knowledge management, let’s recognize that no one really manages knowledge. What the more insightful have done is set up technology and developed cultures that facilitate and promote the sharing of information across their organization.

Within these environments employees are able to access most of the information they need to do their jobs at a very high level of efficiency and effectiveness.

E-biz, on the other hand, is a new channel of advertisement and sale.

It puts buyer and seller in contact and in most cases speeds up the search, purchase and delivery. It closes the traditional dichotomy between richness (variety) vs. reach (accessibility). To take a phrase from Ma Bell, it lets your fingers do the shopping.

What possible connection could there be between those two disparate phenomena? And what difference do they make for managing human capital?

Here it is. The driver is E-biz and the support is KM. E-biz gives us the ability to rapidly search supply sources, make a selection and place an order. The key differentiator between E-biz and traditional shopping methods is speed. We find it, order it and expect to receive it quickly.

For some products it is true that we can get in our car, drive to the local store and pick it up faster. But for most business-to-business (another new acronym: B2B), and many consumer purchases E-biz is faster and gives us the ability to shop several sources quickly. So, if the consumer is expecting availability and speed then the supplier must deliver accordingly. This is where knowledge management comes in.

You’ll win with KM
KM is one of the imperatives underlying a highly competitive E-biz capability. It is possible to run an E-biz without a good KM system, but it won t be competitive. Employees of a top E-biz provider must have nearly instantaneous access to all relevant information. They need a high-speed, on-line order entry, inventory, picking and shipping system to fulfill the customer s expectations.

Customer service, sales & marketing, production, R&D and administrative personnel also need a knowledge exchange (KX) to keep up with what is happening in the market and to quickly search out sources for help in solving problems or taking advantage of opportunities.

An E-biz environment cannot function where it takes days to find help or answers. Without high-speed capability the company cannot compete with others who know sooner what is happening and how to deal with it.

A people issue
That sounds like a technology issue and it is, in part. But just as important is organizational culture and human capital management systems. Computers and databases, like all capital assets, are inert. Unless a human being knows how to leverage value by using them, they are nothing but depreciating assets.

Early attempts at knowledge exchanges poured millions into technology, ignored the human element and failed. Only when management remembered that employees are the only active asset and focused on what people needed to participate in and contribute to KXs did they begin to work.

This understanding closes the loop. Systems and processes drive employee behavior. In turn, systems and processes are driven by the culture. When systems, processes and culture are misaligned inefficiency, confusion and frustration reigns. When they are aligned, everything works.

Culture dictates the aptitudes and skills needed in the workforce. Culture dictates how things work (systems and processes including KXs). Culture dictates rewards and punishments. This is human capital management.

The obvious conclusion is that E-biz rides on a culture that values people and knowledge. If you want a highly competitive E-biz you need to design and manage a culture that supports it.

When the effective leader is finished with his work, the people say it happened naturally.”
—Lao-Tzu,
Chinese philosopher
6th century, B.C.

There have been more articles and books written about leadership than any other topic. Everyone wants to know how to be a leader or what makes a great leader. Models are most commonly drawn from politics, the military, sports and business. The basic argument is whether leadership is an inherent trait or a learned skill. Theories have been built around both approaches. While forests have been devastated for paper on which to print these beliefs, at the end of the day, the question is still unresolved.

It often falls to human resource development departments to deliver a leadership course. The good news is there are a ton of them on the market. They run from esoteric models to outdoor team survival treks. The bad news is it’s difficult to pick the right one. One of the fundamental principles about any learning is that the farther the experience is from the realities in which the learning will have to be applied, the less chance there is for application.

This is the fallacy of college classroom surveys and outdoor programs. College students’ views of a given case hardly equate with what will happen when they get into the real world. Outdoor programs appeal to the young and fit and are a true pain in the back to others. And when that group gets back to reality, often called the job, there’s no research that supports building a raft or walking a tightrope develops a transferable business skill. It’s one thing to be cooperative in a game, and another when your career or bonus is on the line.

So, how do we develop leadership skills? After the bruises and blisters have healed what shall we look for, what shall we expect? I think there are places to look and ways to develop leadership skills.

The first place to look for leadership is in the mirror. Do you want to be a leader of anything? Are you compelled to grab a group and inspire them to reach great achievements? Or are you content to be a follower? There’s nothing wrong with being a good follower—without one there wouldn’t be a leader.

However, if you choose to let someone else take the lead, then you shouldn’t sit back and criticize the way they do it. If you aren’t involved in helping the leader, then you have no right to criticize. Someone once said, “There are two types of people: those who do something and those who sit on the sidelines and criticize. So join the first group where there’s less competition.”

Let s assume that you seek some degree of leadership. You might only want to lead a small group. That’s usually where it starts. If this is your case, what do you have to do? Where do you want to take the group? What is your goal? It simply could be mobilizing a family group to stop playing around and come to dinner. My wife s niece is a natural leader. At five feet tall and 95 pounds, she can organize 30 kids and adults to do anything in about two nanoseconds. You don t mess with Dina!

If your ambition is to lead a section or a department, you need a compelling idea to sell the group. After the group is moving down the track, you prepare others in the organization for your vision. You have to persuade them to help your group or to support your vision. Leadership is all about grasping the situation and persuading people to deal with it.

I’ve had the great pleasure of working with a number of true leaders during my naval service and my business career. Upon reflection, I found that a half dozen factors made them effective. The first and absolutely most essential characteristic is integrity. Persons who lack integrity often can lead good people for a time, but the end result is always disastrous. Second is the ability to communicate a clear vision of what must be and why. Vision implies risks and the ability to manage risk is essential in an effective leader.

The next two factors are personality traits. One is the insight to see beyond the obvious; to pick out the pitfalls and promises from what they see before them. The other is compassion for people. Truly great leaders know how to balance human and financial considerations. The last factor is the courage to make tough decisions.

Ram Charan and Geoffrey Colvin studied the failure patterns of high profile CEOs and published their findings in “Why CEOs Fail,” an article in the June 21, 1999, issue of Fortune. The key issue was their inability to pick the right people to execute their strategic plan and the related failure to fix people problems in time. When I headed a computer company s HR function, I tracked the reason for failure of top people over a seven-year period. Like Charan and Colvin, in every case I found that people skills were their downfall. Great ideas are fine, but effective leaders know how to manage people.

How about you? Do you have the knowledge, skill and savvy to be a leader? As Lee Iacocca, former CEO of Chrysler said, “Lead, follow, or get out of the way!”

Other columns by Jac Fitz-enz:

• The One Right Way
• Do People Really Add Value?

There’s an old saying, “There are many ways to skin a cat.” I doubt that anyone ever brought the cat into that discussion. Nevertheless, the theme is that there are many ways to solve a problem. That’s flat out wrong, if the operative term is SOLVE.

If the objective is to paper over the problem, delay the consequences of the problem, convince someone that there is no problem, reduce the heat caused by the problem, or shunt the problem aside while attending to other things, then there surely are lots of ways to deal with problems. Every married man knows what I am talking about.

When his beloved points out some deficiency in their abode, his first response is that he will take care of it. A week later when the lack of action compels the spouse to bring it up again, he might suggest that “its not a big deal.” In subsequent reincarnations of the request for action he might say he has something more important to deal with, he needs a special tool to fix it, suggest that it looks good just the way it is, etc. Finally, his wife either demands action, or she gives up and hires a handyman. Nonsolving is a fine art among married men.

Rationalization
The reason that people would argue with my premise is that, for their own reasons, they don’t want to solve the problem. I’ve always believed that if you truly want to do something, you can do it. Barring physical or mental incapacity, you can accomplish just about anything you set out to do, if you’re willing to pay the price to achieve it. Excuses abound about why we can’t do something. They run the gamut from, “my mother didn’t breast feed me,” to “my boss hates me.” The inescapable fact is that Alibi Al & Alice don’t want to take responsibility for their lives. It is easier to blame their lack of courage or determination on someone else.

It’s the same way in organizations. We ignore what we don’t want to deal with, or make a list of excuses, or try some partial solutions. For the truly creative procrastinator, the alternatives are endless. However, if the objective is to actually solve the problem by changing structures, facilities, processes or people so thoroughly that the problem never comes up again, then there is only one right (effective) way to do it.

Problem Solvers and The Others
Over my 40 years in business, I’ve developed a set of people and organizational categories using a building as a metaphor. In the basement are the real losers. These are the people who can’t keep a job and the companies that go bankrupt.

On the ground floor are the walking dead. These zombies lurch along, barely surviving, never putting two periods of successful performance back to back. The next flight up are the steady but unspectacular performers. These folks and companies are the cogs in the great economic machine. In the middle floors we find the treasures, people and organizations for which we can be proud and thankful. They don’t lead their profession or industry very often, but they do occasionally have their 15 minutes of fame.

At the top, in the penthouse, are the stars. These are the leaders, the benchmarks, the world class performers. Do you want to know what takes them to the top? They practice the one right way to solve problems.

When I tell you the secret, you’re going to be terribly disappointed, if you reside anywhere between the basement and the upper middle floors. The reason is, you don’t want to pay the price to solve the problem. You just want to avoid it, cover it up, or make excuses for it. Nevertheless, here is the secret. . . the lesson learned over four decades of watching the leaders outperform all others:

Comprehension
Stars don’t act until they understand the problem. Yes, truly, fully comprehend what they are facing. You say it must be more than that? It can’t be that simple because you understand your problems, right? Not if you are not among the leaders.

Everyone but the stars see only part of their problem. That is what keeps them from being stars. Most of the time they see only the symptoms. One of the marvelous capabilities of human beings is selective perception. We’re able to isolate from the cacophony that deafens us only those things we want to hear or see. Men are especially good at this. When sent to find something by our wives we often come back and say, “It isn’t there.” At this point the exasperated spouse goes there and points it out. To which we say, “Wow, I didn’t even see it.” We didn’t see it because we weren’t focused and committed to finding it. So it is in business. We don’t see problems that we aren’t motivated to see.

Let me explain what SEEING means. In any situation there are a myriad of factors and forces. In organizations there are people, processes, facilities, structures, and policies all interacting at the visible and invisible level. Unless we are committed to solving the real problem, we sense only the items that are suitable for our purpose. The simple problems are not an issue. I’m talking about the strategic issues that separate the leaders from the pack. At this level there is only one right way, and it has four stages:

1. Context
   The stars begin by stepping outside the problem and asking themselves, “What are we trying to accomplish in this company, division or department? Are we trying to decrease operating expense so as to reduce our breakeven point? Are we seeking competitive advantage through better quality? Are we trying to retain customers by providing exceptional service?” The reason for starting outside is that if there is no clear goal, how can there be a barrier to reaching it? There must be a context within which action can be taken.
   
   
2. Identification
   After they are absolutely clear on what the ultimate enterprise goal is, then they can begin to identify and dissect the barriers. This is done by viewing them from all angles.

   Nature:	what is the apparent problem and is this the symptom or the cause?
   Time:	when does/did it occur?
   Place:	where does it show up
   People:	who is touched by it?
   Motivation:	why is it happening?
   Severity:	how important is it?

   
   

   They catalog the individual and collective actions that seem to underlie the problem. But that is not the end. We’re only halfway there.

   
   
3. Patterns
   The third step is to look for relationships among the factors and forces. This takes practice and experience. This is the sixth sense of the “old-timers” who can feel when something is wrong before the gauges show it. So, what are the patterns of causation? Is it a single cause and effect, or is there a chain that starts somewhere out of sight? The stars trace the interactions back as far as they can to find the source. Finally, they arrive at the point where they can try to solve the problem.
   
   
4. The Solution
   With the data they have accumulated and their growing comprehension, they may be able now to solve the problem. Sometimes they find they need outside expertise to help them isolate special types of factors and trace the relationships. Either way they are able to make the problem go away for good. They know it is gone when the expected performance ratios reappear at the unit and corporate level.

A Recent Example
The company is growing along with the booming economy. The problem is that staffing can’t find enough people to fill jobs. Is the answer as simple as put on more recruiters or double the advertising budget? At this point, answering yes to either of those questions would most likely deliver a temporary solution at a high cost.

The key question is at the corporate level, not in the staffing department. We went back to Stage 1 and applied those questions to the situation. What is the company trying to achieve? To answer that HR had to talk to senior executives in finance, marketing, production, service and maybe other functions. (Don’t be surprised if they can’t give you sharp answers. There are zombies, cogs, treasurers and stars in those groups as well. But if you are persistent and insightful you will eventually learn the company’s goals.)

After learning where the company was going HR looked not only at staffing, but at employee relations and development to find out if they were part of the solution or part of the problem. They looked outside of HR to see how managers and supervisors are aiding or inhibiting the march to the corporate goal.

Here is where the who, what, where, when, why and how questions came in. After you have the factors then you can look at the pattern of forces among them. What is driving what? At last, if you have persevered, you will know how to solve the problem

You may find as we did in this case that the issue was retention. If they were able to improve retention the staffing problem would all but disappear. They would be saving a lot of money and days of everyone’s time. If they had just tried to hire more people all they would have accomplished was a budget overrun and a dissatisfied managerial clientele.

The Choice
I’m not going to tell you what to do, it is your life and your career. But one thing I will tell you with all the strength in my rapidly aging body: If you want to solve the big problems you can, but you have to be willing to commit yourself to the one right way.

Other columns by Jac Fitz-enz:

• Do People Really Add Value?

Can you afford to lose a million dollars? Not many companies can. But did you realize that on average, a company loses about $1,000,000 with every 10 professional and managerial employees who leave their organizations? Assuming your company has a 10 percent after-tax profit, that’s a reduction of $100,000 from the bottom line.

Research at Saratoga Institute has shown that the average internal cost of turnover for exempt personnel is a minimum of one year’s pay and benefits, or a maximum of two years’ pay and benefits. To obtain a true picture of the cost of turnover, you also have to factor in the external effects on customer sales and retention.

The three costs of turnover.
Almost every HR professional knows the turnover rate of his or her company. However, not everyone knows the voluntary and involuntary turnover rates of his or her exempt and nonexempt staff. And, giving an annual report of turnover rates as a percentage of staff to top managers usually fails to elicit any action. It would help if a turnover report focused on the true and full cost of turnover.

The first cost is employee-based. For example: Company A employs 1,000 employees of whom 50 percent are exempt. The firm’s average annual salary and benefits package equals $82,000 and voluntary turnover is 8 percent. Minimal cost of turnover = $3,444,000. (1000 x 0.50 = 500 x 0.08 = 40 x $82,000 = $3,444,000.)

The second cost is customer retention. As consumers, we all experience the annoyance of dealing with new employees at banks, stores, gas stations and other retail and service establishments. When aggravated, we take our business elsewhere. This secondary cost is easily calculated by the sales, marketing or finance departments. To calculate the average value of customers: Divide total annual sales by the average number of active customers or clients. This figure can range from a few hundred dollars to millions of dollars. Turnover in sales and service workers negatively impacts customer retention. In his book “The Loyalty Effect” (Cambridge, Massachusetts, Harvard Business School Press, (c) 1996), Frederick F. Reichheld claims that in some industries, it takes a new sales person two to three years to reach the same level of sales as the worker’s predecessor.

The third turnover cost is the expenditure in marketing and sales to win a new customer. Customers must be replaced or your company loses market share. Companies that lose market share eventually fall into the doldrums of the living dead or go out of business. Here again, the marketing department knows the average cost to attract and capture a new customer. When you put the three costs together, you can see the true cost of turnover to your company: 1) Loss and replacement of an exempt employee, 2) Cost of a lost customer’s purchases until a replacement is found and the new customer purchases as much as the old customer and 3) Cost of obtaining a new customer.

This equals the total potential cost. If you showed both the potential and the minimum costs to your senior managers, they might wake up and respond. To be conservative, acknowledge that the separation of every exempt employee doesn’t cause the loss of a customer. To be extremely conservative, take Costs No. 2 and No. 3 out and show only Cost No. 1, the internal cost. By itself, this is still a hair-raising number.

Losing employees and finding new ones costs big time.
There are four internal sources to consider in determining the cost of separation. They are: the cost of termination, the cost of hiring and training a replacement, the vacancy cost until the job is filled and the loss of productivity with a new hire.

Termination. When an employee leaves, there are processing and interviewing costs. Typically, this cost is only a few hundred dollars of staff time and materials. Employee relations, employee records, security, payroll and other staff functions spend some time on out-processing the departing employee. In some cases, senior managers may spend more than a few hours counter-offering and trying to persuade the person to stay. These costs usually aren’t excessive, but they do interfere with someone doing more value-adding work.

Hiring and Training. The average cost of exempt hires according to Saratoga Institute’s 1995 “Human Resource Financial Report” (HRFR) was $8,300. In cases in which reallocations are involved, the cost is much higher. Add to that the average cost of training the new person over the first year. To simplify, you might take what your company spends annually on training as a percent of payroll and apply that. Saratoga’s latest research shows an average of just over 1 percent of payroll is being spent on training. To be even more conservative, say an exempt employee’s training expense is only one percent of payroll. If the person makes $65,000 in salary annually, the training expense would be $650. It’s easy to see that without much effort you can spend nearly $10,000 to hire and train.

Vacancy. How long does it take to fill exempt positions in your company? The 1995 HRFR average is 75 calendar days. Take out 22 days (11 weekends) to get workdays. Divide revenue per employee (total sales divided by number of full-time equivalent employees: HRFR average = $293,000) by the number of workdays in the year. Subtract weekends and holidays to get an average of about 250 . Don’t take out vacation days because they’re paid. So, if your revenue per employee was the same as Company A the calculation would be: $293,000 divided by 250 days for an average of $1,172 per day. Multiply $1,172 by the number of days it takes to fill jobs, i.e., 53 (75 minus 22) for a total vacancy cost of $62,176. (Don’t forget to back out pay and benefits for the 53 days that the job is open and add in any temporary employee pay you might incur.)

Of course the vacant job is covered somehow. Either you hire temporary workers, cover it with overtime pay to employees or just gut it out by working everyone harder and not paying them for the extra effort. There’s always a cost. Just because you don’t see it doesn’t mean it isn’t costing you. Sooner or later, you’ll pay for it.

Productivity Loss. The new hire will take some time to reach a standard level of productivity. Without excessive computation, simply reach a consensus about the amount of time it takes the average exempt person to hit full stride. Assume it takes six months. Let’s be generous and assume further that on average an exempt person is 75 percent productive during the learning period. If revenue per employee (a surrogate measure for productivity) is $293,000 per year, half would be $146,500 for six months. Taking 25 percent of that as nonproductive time, the result is a loss of $36,625.

The bottom line cost of turnover using these assumptions is $108,000 . At an average of $82,000 in pay and benefits, this is approximately the cost of 1 1/3 employees you’re paying for and not getting any return out of. Lose 10 of them, and there goes your million-dollar investment. (The reason this number may seem high is that the average employee in our survey generates almost three times his or her cost.)

It’s a lot to lose. But you can alleviate your vulnerability by designing a retention strategy that puts you in the driver’s seat.

Workforce, August 1997, Vol. 76, No. 8, p. 32.