Where People Belong on a Company's Balance Sheet
In business, accounting rules govern the investments put on balance sheets. But before investing in property, a plant and equipment, most companies require some justification (a business case) that projects some kind of return on the investment over a period of time.
Many companies have a formal capital expenditure process to collect this information and prioritize where resources should be invested in order to realize the greatest return.
But entrepreneurs don’t at all put on the balance sheet that's often their single largest expenditure: people. I contend that if companies would truly treat people as an investment requiring justification, business cases and a projected return, this would dramatically change how organizations hire, develop and retain talent.
As some projected 15 years ago, finding and retaining talent is becoming one of the biggest challenges for CEOs and that employees are critical for great execution of plans and results.
The University of Pennsylvania’s National Center for the Education Quality of the Workforce did a survey commissioned by the U.S. Census Bureau of some 3,000 companies and found that an investment in people had a greater return than an investment in property, a plant and equipment.
Yet most companies and CEOs consider people to be an expense and therefore that's exactly where they show up on most companies’ income and profit and loss statements.
One process that's utterly revealing about a company is the level of difficulty in creating or adding a new employee position. I am concerned about companies that add people based on anecdotal evidence or the type of thinking that goes “Everyone is so busy and we need another person to keep up with the workload.” Usually these companies don’t have good, solid metrics and a projection of the return from adding a person to the team.
Companies shouldn't take procuring talent lightly and hire someone without a detailed business case that describes the total cost of that person (salary, benefits, hiring costs, ongoing expense) as well as the benefit, either in reduced outlays or increased revenue and profit.
In great companies, it's tough to add a new position.
Approval requires fact-based metrics and projections and a process for tracking the results and taking corrective action if things don't work out. The latter is often called the “fail fast” theorem. If a company makes a mistake, even after all the due diligence, the best solution is to act swiftly: Admit the mistake, make a change and move on.
In companies I led, whenever department leaders at headquarters would request an addition to their staff, I would typically ask how much more revenue and profit would the field organization need to generate to cover the additional costs of that person and which region, area, or division had signed up to generate the income.
A common excuse for not thinking about people as an investment is that it's too hard to obtain data about a particular position. But it's a leadership responsibility to collect this data and project the return on people investments.
As the saying goes, to assume that what can’t be easily measured doesn’t exist is suicide. While it may be hard to gather, the data is available and measuring it is what separates mediocre companies from great ones that realize the investment value of their talent.
Talent is an asset that must be carefully hired, nurtured, developed and measured. If the return on investment is not meeting the projection, then course corrections are required.
What are you doing to obtain a return on investment in your people?