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Financial capital is relatively abundant and cheap. According to Bain & Company’s Macro Trends Group, the global supply of capital stands at nearly 10 times global GDP.
As a result of capital superabundancy, global quantitative easing and relatively low demand for investments in research and development and capital projects, the after-tax cost of borrowing for many companies is at or near inflation, making the real cost of borrowing close to zero.
In contrast, today’s scarcest resource is human capital, as measured by the time, talent and energy of your workforce. Time is finite. Difference-making talent is also scarce.
The average company considers only about 15% of its employees to be difference makers. Finding, developing, and retaining this talent is hard — so much so that the business press refers to a “war” for talent.
Energy, too, is difficult to come by. Though intangible, it can be measured by the number of inspired employees in your workforce. Based on our research, inspired employees are three times more productive than dissatisfied employees, but they are rare. For most organisations, only one out of eight employees is inspired.
So: financial capital is abundant but carefully managed; human capital is scarce but not carefully managed. Why?
In part, it’s because we value and reward good management of financial capital. And we measure it. Great CEOs are held in high regard for their clever management and allocation of financial capital. But today’s great CEOs need to be equally great at managing human capital.
How can we manage human capital better?
- Measure it. As the adage goes, you can’t manage what you can’t measure. A veritable alphabet soup, such as ROA and RONA, exists to measure our financial capital.
To measure human capital, you can deploy metrics such as a productive power index, which looks at the cost of organisational drag and the benefits of effective talent and energy management on your overall productive power.
You can measure the amount and value of the time that you put against projects or initiatives, and you can measure the return on that time. You can actively measure the amount of difference-making talent that you have in your organisation.
- Invest human capital just like you invest financial capital. For financial capital, the business world has developed concepts such as the opportunity cost of capital, which is reflected in a company’s weighted average cost of capital. We measure the lifetime value of investments, and establish hurdle rates before deploying a single dollar of capital.
For human capital, we need to start thinking about the opportunity cost of a lost hour. One way is to measure the cost of meetings. Our colleagues at Bain discovered that a weekly executive committee meeting at one company consumed 300 000 hours a year in support time from departments across the company.
We should think about projects in terms of hours and rands as well, and before taking on a new meeting or new initiative, include the opportunity cost of time and talent in the hurdle rate.
- Monitor it. Teams of financial planning and analysis professionals measure actual and expected results for financial capital. Investment management committees evaluate new investments. Capital expenditure plans are subjected to detailed board reviews.
Similarly, for human capital we should do periodic reviews of how much controllable organisational drag we have in our organisation and what actions we are taking to compress it. Many big data tools, such as Microsoft Workplace Analytics, can provide detailed reviews of how we use time.
For talent, we need to know who our difference makers are and whether they are deployed in mission-critical roles and initiatives.
- Recognise and reward good management of time, talent and energy. Historically, successful investment of financial capital can make someone’s career. Variable compensation is often tied to some measure of economic value added. Even though most companies no longer offer lifetime employment, they should still find a way to create a lifetime of assignments for their difference-making talent and work hard every day to re-recruit them by creating a working environment that is inspiring and results-orientated.
Leaders should be measured and rewarded on their inspiration quotient.
They should also be measured and rewarded for building a talent balance sheet: how many high-potential individuals have they recruited, developed, and retained, and what is the trade balance of talent – that is, the net imports of high-potential talent into their group minus exports. A company’s actual values, reads Netflix’s famous HR playbook, “are shown by who gets rewarded, promoted, or let go”.
Tiaan Moolman is a partner in Bain & Company’s Johannesburg office where he leads the local Organisation Practice. Eric Garton is a partner in Bain & Company’s Chicago office and leader of the firm’s global Organisation Practice.
This article originally appeared in the 29 June edition of finweek. Buy and download the magazine here.
