Expenses to Assets: Knowledge Economy Requires a Fresh Approach to Valuing the Workforce
Source: Human Resource Executive Online
Date: August 3, 2006
Section: Studies of Success
While many American businesses don't seem to know it quite yet, the industrial economy has gone the way of the typewriter, the mimeograph and the upright dial phone.
In 2006, the industrial economy is quickly becoming history, a bygone era, just like the agrarian economy that preceded it. Yet, in many ways, a majority of American businesses continue to live in the past. One of the most telling signs? They still view employees as expenses, not assets - a true hangover from industrial days of yore.
In the industrial age, machines, steel mills, factories, vehicles and raw materials were assets. Workers were, from the start, considered an expense, a drag on the P&L statement, and very expendable. If a machine broke down or a factory burned to the ground, you had serious problems bottom line-wise. But if a worker couldn't do the job, the thinking went, you just found someone else. It was that simple.
Today, companies who hang on to that ill-advised philosophy do so at their own peril. The industrial economy is now the knowledge economy. Sadly, and unfortunately, many organizations haven't changed the way they view their people. They certainly don't seem to see the majority of their employees for what they truly are - experts who are the major "asset" of the knowledge economy.
What needs to happen is that these new assets, and ways we try to measure them, must evolve as capital markets have evolved. Today's knowledge worker is completely different from the industrial age worker, and has very different requirements in how organizations should manage and view them. When it comes to the bottom line, reconciling people and the systems that help manage them as ROI isn't necessarily the best strategy. ROI is still important in many ways, but when it comes to people, there is a better strategy.
At Kronos, we've done a lot of work and thinking on this front, and we also constantly communicate with HR clients and prospective clients. On the positive side, we are beginning to see a fundamental change in what's happening within HR, or workforce management, talent management or human capital management - whatever label you want to stick on the HR department these days. Even so, the business community is not where we should be by a long shot.
If companies really want to make that transition, the first step is to learn how to value their newly recognized assets.
Fortunately, assets can be divided into two categories, tangible and intangible. The former is the traditional stuff like machines, factories, etc. Brand equity, an elusive yet measurable quality, best demonstrates an intangible asset.
McDonald's brand equity has been valued at $26.4 billion. That means people will choose McDonald's over a competitor because of the McDonald's name to the tune of $26 billion. It has nothing to do with restaurants, deep fryers or menus. You won't find brand equity on the company balance sheet. But it's there, and it matters.
And that's exactly how employers must view today's knowledge workforce, as an intangible asset whose value must be factored into the equation for real economic success. Today's employees must be treated well and valued on the same level as brand equity, in fact, because the workforce is a major variable in building that brand equity.
Let's be honest, if the work we do has evolved in this knowledge economy, and it certainly has, so have the skills offered by the majority of the workforce. Even the counter attendant who sincerely asks, "Would you like fries with that?" at the McDonald's counter is helping build brand equity, and that simple question, asked properly, cumulatively could boost company revenues. Who knows what the significance is?
Of course, realizing that many employers need to acquire a new way of thinking and actually making it happen is the challenge. We need to create and nurture the concept of what I would call an employee value continuum - basically a method for determining just how we value today's knowledge employees. And we have to move away from ROI to ROA, or return on assets.
How can you account for ROA? We need to start the conversation on how to do this.
Within today's workforce, there are three main types of workers. First, there is the generalized worker (the counter attendant offering fries). These workers maintain brand equity value. Next is the specialized worker. This could be the franchise owner, who offers a higher-level skill set such as knowing how to run the business on the local level. He or she certainly enhances the value of the brand. For example, by keeping store bathrooms clean, customers continue to come back. Finally, there is the unique worker. This could be the real estate professional, the expert who chooses the best spots for franchise locations. These workers create value.
How does an employer account for the value all three of those workers provide? How does each worker maintain, enhance and create value? Is one more valuable than the other? These are the questions employers must answer in determining ROA.
The bad news is that today we have a very diverse, complex workforce, so managing it becomes more and more difficult as well. In fact, most workforce management applications manage at least 15-20 business processes, so the matrix can be cumbersome. But it can be done. And companies who do it better than the competitor are winning the game - even if in some cases, it's by what you could call "unconscious competence." These are companies already valuing employees as assets, not expenses - and treating them accordingly.
No surprise that it's paying off. In fact, when Deloitte Consulting tracked the shareholder returns of the 56 publicly traded firms on FORTUNE's 2005 "Best Companies to Work For" list, not only did list members consistently beat the S&P 500, they crushed it. For example, in the year 2004-2005, the stock performance average annual return for the S&P 500 was around 9 percent, while the 56 list members soared to 16 percent. Those 56 companies certainly understand the value of ROA of the workforce.
For a majority of companies to reach that plateau it is going to take systems that can help employers understand the true value of their people, whether you call it talent management, human capital management or something else. Employers first must realize the talent they have is very important, but they also need complex systems to determine the value their knowledge workers create. Employers need new products, technologies, systems, etc., that can handle and capture that data, extracting the value of their people systematically.
Performance management, which is way undervalued today in the knowledge economy, is one way to get there - not in the industrial age format of an annual review, but in a more fluid, even daily performance measurement paradigm.
In the industrial age, the main question for workers was "How many can you make?" In the knowledge age, the question is "What do you know? How can we help you succeed? And how can you help us succeed?"
Figuring out ROA is not easy, but it's important and incumbent on us to try to do it. Many organizations are unconsciously getting there. They have the sense it's important, but they are not always sure why.
In fact, it's time to move to conscious competence, to start finding ways to properly value the knowledge workforce, and also uncover the ways it adds value to the organization. We currently don't have the "accounting" systems in place to capture that data. But it's going to happen soon, and when it does, there will be an explosion of investment. At that point, ROA will overtake ROI as the most important metric out there. And employers en masse finally will move from the industrial economy to the knowledge economy.
Bill Larkin is vice president, HRM Solutions, at Kronos Incorporated. Kronos Incorporated empowers organizations around the world to effectively manage their workforce. At Kronos, we are experts who are solely focused on delivering software and services that enable organizations to reduce costs, increase productivity, improve employee satisfaction, and ultimately enhance the level of service they provide.
Reprinted by HREOnline.com™ on August 3, 2006.
|