October 8th, 2017

Buying Human Capital

Don’t under estimate the value of your company’s human capital.

As your company grows larger and you add more employees your payroll and benefits expense rise.  For many companies, this is the largest monthly expense they face.

Some business owners see payroll and benefit expenses as a necessary evil.  Somewhat like “the spouse too expensive to divorce.”  If you are a business owner who feels this way, I suggest you reconsider.

I strongly recommend that skeptical business owners see their employees as an investment in human capital versus functionally necessities.  It’s a safe assumption that your employees want to do the best possible job.  Of course, this presupposes that your recruiting and hiring practices are healthy.  That is, you’ve:

  • Recruited based on an objective job specification
  • Generally avoided nepotistic hiring
  • Set achievable short and long-term goals for each employee
  • Pay a fair wage based on knowledge, experience and resourcefulness
  • Provided at least the minimal training required for the employee to excel at work

Here’s the financial challenge.  In any given year, the cost of employees is generally fixed.  If you have hourly paid staff, it could be variable but still pretty high.  Anything you can do to increase employee productivity goes right to your net income.

But how do you do that?  Do you coddle your employees?  No.  Do you become the “Cheerleader in Chief?” No.  Do you recruit and hire the very best people and pray for good business results?  No.

An image representing Business Process Lifecycle.

Your own business processes is the way to go.  You can get the very best out of your staff by first knowing and owning your business processes.  For argument’s sake, let’s say your company requires 2 types of processes.

  • Acquiring new customers and retaining existing ones
  • Delivering the value to your new and existing customers

Decompose each process to measureable interim success steps.  For new customer acquisition, an example of what that means is:

  1. Employee reaches out to network with prospects directly or lead generators
  2. Employee schedules and attends one to one meetings
  3. Employee qualifies the prospect or lead generator
  4. Employee follows up with emails and/or phone calls
  5. Employee gets a commitment to do business or refer business
  6. Employee renders a formal proposal to a client
  7. Employee tenders and negotiates a sale
  8. Employee closes or loses sale
  9. Employee submit evaluation

I purposely identified a time-based waterfall process.  That is, while there are NO GUARANTEES, one could assume that as you moved down the example list, you’d be getting closer to the financial benefit of closing a sale.  It is also reasonable to assume that measuring each employee’s “process metrics” and knowing that the nature of marketing and sales lends itself to greater success based on the volume of prospects one reaches out to.

Recording process activities, aggregating them, comparing them over subsequent time periods enables objective performance assessment.  Managing process brings the following benefits:

  1. Accurate assessment that employees are doing their jobs in a proven and effective manner.
  2. Enable assessment of the process to determine if it should be improved based on aggregated results.
  3. Reveal performance weakness that can drive teaching moments and the employee’s professional development.
  4. Employees gain confidence that their contributions are being fairly and accurately accounted for clearing the way for straight talk about professional performance.
  5. Enables better management of discovered systemic issues or opportunities.
  6. Managing the process while it’s in progress avoids surprise endings. It buys you the time to make “course corrections” before it’s too late.  Or at least not to repeat poor performance.

There are plenty of additional benefits not listed above but here’s the unvarnished truth.  Most individuals who have founded and run small businesses are not likely to have the awareness, and even less, the formal training, to help them “manage” employees (human capital).

Here’s are the “takeaways.”

Establish process steps for your most important processes.

  • Define and collect process step metrics.
  • Roll-up the process metrics for each employee and across all employees.
  • Use the results to improve employee performance and harvest the financial and company morale benefits.

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