Need a Profit Boost? Look to your People

We live in a world where corporate profits need a boost. Most companies need look no further than their employees for answers.

With labor and benefits costs rising, companies need to accomplish increasing outcomes without necessarily increasing their workforce.

In every company there are specific value creators which are offered to customers. As I have written before, these value creators should most definitely be understood and expressed in terms of the realized benefit received by customers.

I refer to these as outcomes. In every company, there are specific activities that the employees in these companies do that clearly impact the delivery of these outcomes to customers. These activities contribute to and create the actual value delivered, the outcomes.

In an environment where there is a decreasing number of available skilled workers necessary to make the appropriate contributions to achieve customer outcomes, there will necessarily be increasing competition for those individuals, thus much greater opportunity of choice for those individuals for employing their strengths in the marketplace.

We have discussed that to find, and to keep good employees in that market, companies will have to offer a whole lot more than money, security, and likeability. They will have to offer an opportunity that brings with it the real potential for self actualization for the employee. The company will have to have a vision to accomplish something deemed by the employee to be significant, at least worthy of his/her investment of his life energy as part of that self actualization.

This vision, in combination with the strengths, aspirations, and passions of individual workers, creates an infinite number of possibilities. It will be dynamic, as the market is dynamic, customers are dynamic, and the workers tasked with its delivery will be dynamic. This provides the foundational strength of the organic model over the mechanical.

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The High Value Capital of Business - It's Not What You Think; It's Human Capital

Peter Drucker's comments about business structure and management emphases tickle me. They tickle me because the very statements he makes run absolutely counter to the widely held beliefs of today's "experts." The difference is staggering.

In his 2002 book, Managing in the Next Society, Drucker makes comment about the problem "financial people" have managing business.

"There's an enormous challenge ahead to educate the owners of business, many of whom, as I've noted, are financial people. I once was a securities analyst, so that gives me license to say that it is virtually impossible to make a financial person understand business. I am not being facetious. Financial people don't deal with the issue of balance between often conflicting elements - short versus long term, continuity versus change, improving today versus creating tomorrow. Corporate leaders who wrestle with these issues every day know the amount of struggle involved, but it's difficult for financial people to understand this."

This ought to shake you to your core.

Why all the emphasis on managing by financials?

It happened simply and innocently enough. We began to confuse the financial statements with the business, itself. Human capital is thought to be either non-existent, or of little real value.

For more than 50 years the relative stability of technology and demographics paved the way for repetitive, mechanical hierarchical business models to succeed. They had predictable structure, and outcome based on repetition of mechanical practices, which then yielded predictability in financial results, creating the false association. Good financials were erroneously equated with good business. The two patterned so closely that the difference would be difficult to discern.

Market Hyper-Dynamics Defies Management by Financials

Today's technological landscape is no longer as stable and predictable. The demographics are also nothing like those characteristic of the last 50 years. The entire landscape is in constant and accelerating change. In this new world, it is now necessary to see a business for what it really is, and to recognize that financial statements are merely the report card for how the business is working. That is their only relationship.

A Business is not a Machine, it is more like a life.

A business is a complex web of conversations and social relationships. Out of these comes the continuous ebb and flow of the menagerie of products and services, which are developed, created, communicated, delivered, and serviced by provider companies to their customers. In this hyper-dynamic marketplace, it is far less important what a company thinks they do as much as why, for whom, and for what betterment of the customer and the world itself.

Conversations and relationships are characteristics of a different dynamic than a machine. They are characteristic of people, humans, living things. They are organic in their very nature, and require organic processes and organizations to endure. People are the very soul of business. Human Capital produces the value of all other capital.

I heard the CEO of an energy related firm make this very interesting statement.

"When we consider the human relationships as critical in my enterprise, we have a struggle as our material "assets" as shown on our financials represent $BB, while our people "assets." even as costs represent only $MM. It seems that the larger assets are the most important. We are coming to recognize that the real value of the material "asset" is totally dependent on the performance of the people, and this is leading us to realize that the people "asset" is of greater significance to the company performance, rendering the material asset as valuable, or potentially, value-less."

Which "assets," which "capital," do you value most?

I guarantee, if you think like a financial person, you'll answer incorrectly.

If you think like a traditional business person, you'll risk the same error.

Consider thinking more like Peter Drucker. Then you can begin to place more of your energy and investment into the things that produce your greatest ROI. These, of course, are your people, your Human Capital, and if you're like most of today's managers, you are well under equipped to do much to make improvements.

It is time to get some help for your organization. I wouldn't wait. I might even call a PEO.

The Most Neglected Secret of Cost Reduction: Duh, It's Your People

Companies always ask me to help them reduce their costs. And I am almost always successful.

The common roadblocks to success may surprise you.

They are really asking the wrong question.

What management thinks it is asking is a different question than the one that will bring the outcome they want. They ask the question from the limited perspective of a financial person, rather than that of a business person. From that limited perspective, they are asking me to reduce a line item on their financial statements, and that is almost always either impossible, or of much less significance than what is really possible.

Limits of a "Financial" Perspective

The financial perspective asks something like, "Can you reduce my health insurance cost?" Or, "Can you cut my Workers Comp cost?" They are thinking that they can get the best outcome by simply "beating a vendor down," as they have historically done in the "mechanical" business model they work with.

However, check the costs associated with health insurance, other insurances, energy, taxation and people (line items on financial statements). These business costs are all rising faster than at any time in our history. The cost reduction gains available, if at all, are tiny, especially when compared to the gains available by making changes in systems and performance, as characterize an "organic" business model.

The right question involves going "Organic."

Here is a great example.

I recently worked with a fairly substantial ISP. They had an industry standard turnover rate a little shy of 50%. They used industry standard protocols for supervision and hiring. They felt that their healthcare costs could be reduced. That reduction saved them 15% in that one area, and they thought that was good. With their 150 employees, they could book $70,000 of savings.

They would have missed the greater opportunity.

With $5.5MM in annual payroll, the health insurance savings only amounted to a reduction of 1.17% off their labor costs. It's a mere tweak.

However, I ask a different question related to cost savings. Asked about the "organic" and intangible things at work in the company, I looked for systems inefficiencies and redundancies. I looked for things that might be done differently to achieve substantially better results. I looked at people practices. In this case, I looked at their recruiting and hiring and supervisory practices.

The way this company worked, with the high, although acceptable turnover, their supervisors were capable of supervising 12 people. They spent an inordinate amount of time on recruiting and training their people. By outsourcing this single piece, they could change the capacity of the staff they could supervise. We moved it from 12 to 16. (a mere 33% increase in supervisory efficiency.) And, the improvement in hiring practices decreased their turnover by more than 1/3 within 6 months, which improved employee production and customer service.

The resultant cost savings exceeded 9% on total their labor cost. That was nearly $520K. Without even accounting for the "soft" benefits associated with enhanced performance, or improved customer retention, this "organic' approach netted them a whole lot more profit than they could have ever gained following their "mechanical" and financial approach.

Why don't more companies look past the limitations of their cost reduction models? The answer is simple. Most companies are looking at pure "financial" solutions. These fit their "mechanical" models, and seem appropriate as they are acceptable to the "boards" to which they report. The "organic" approach means that they focus on "non-financial" areas, (people, leadership, systems, culture) areas that are seen as "soft" and therefore, less valuable.

The truth is different; the proof is in the pudding. The areas of greatest impact lie in the "soft" stuff, the "intangible" stuff.

In the inimitable, simple language of James Carville, "It's your people, stupid."