It is difficult to find a business executive who has never proclaimed, “People are our most important asset”. It is an old truism executives are taught early on, but few business executives are operating, and demanding of their teams, that they take action to show that people are a critical asset.
We need only to look at the relative behaviour of executive teams when evaluating investments in people, versus a similarly large investment in a capital expense. When evaluating an acquisition, developing a new mine, opening a new facility, or any other large capital investment the normal action is extensive research, analysis, and evaluation. Teams will be assigned to create proposals, and those teams will be expected to provide reports with rigorous analysis to ensure both financial and operating success of any investment.
By contrast, when you look at the decisions that are made about the workforce very little analysis and strategic planning are used to ensure organisations can use people to create a competitive advantage. Compounding this is the fact that workforce costs can be up to 70 percent of total operating expenses and so they represent the largest investment organisations make.
The True Cost of Your Workforce
With the workforce representing such a large part of the balance sheet, the need for analysis is paramount and often not well understood. While the costs and impacts associated with compensation are generally clear and well known, many other workforce related topics are misunderstood at the executive level which exposes organisations to increased risks and costs.
For example, research into replacement costs has estimated that to replace a mid-level full-time position organisations can expect costs of 100 percent of the annual salary of the lost individual. For senior leaders this can be 200 percent or more of annual salary, and so the impact of just a one percent reduction in the turnover rate can represent millions of dollars a year in savings for a moderately sized company.
When lost productivity, and knock-on effects to sales productivity, customer satisfaction, and other business impacting outcomes are factored in the savings can be substantial. Business leaders often underestimate the direct-line impact to business outcomes that come from a focus on workforce analytics.
According to research from the Aberdeen Group, which looked at business outcomes from workforce analytics, they found “…the Return on Investment (ROI) can be significant, as seen by the decrease in unnecessary overtime by 20 percent, twice the improvement in customer satisfaction, and increased workforce utilisation by 13 percent among organisations making use of analytics”.
Capital Investments Vs Workforce Investments
Why are capital investments treated more rigorously than workforce investments? Many leaders see people related decisions as immune to the types of analysis that are commonly applied to capital investments. When a new plant is considered the costs of land, buildings, equipment, and other hard goods are easily counted and their costs measured in comparison to those of different suppliers or locations. By contrast, people costs such as salaries, benefits and overhead costs are often looked at as largely immune to optimisation.
While these costs may provide some optimisation, even greater impact to the business can come from improving talent, rather than just labour costs, but how can you measure talent? Compounding this issue human resource organisations have traditionally focused on operational tasks and qualitative evaluations of the workforce.
This situation is rapidly changing spurred by several factors: the increased volume and variety of data that is collected about the workforce opens up analysis of talent that was historically prohibitive, advances in technology have made workforce analytics available to more organisations and broader user communities in the organisation, and finally, businesses such as Commonwealth Bank of Australia are leading the charge with investments in analytics on the workforce.
Andrew Culleton who is Executive General Manager of Group People Services at Commonwealth Bank, and led the charge to revolutionise how Australia’s leading provider of financial services is using workforce analytics to bring people insight to leaders across the organisation. “PeopleInsights has been developed to not only increase the speed and improve the quality of people decisions, but also to ensure we know as much about our employees as we do our customers. It was important for the group to find the balance between deep insight and an intuitive and empowering user experience. PeopleInsights has already resulted in significant productivity benefits for the group.
The business market is increasingly global and competitive, which has served to turn resources, which were yesterday’s competitive advantage into today’s commodities. To win in such a market businesses need to ensure that they are focusing on a critical resource that brings them competitive advantage – their workforce. In this environment knowing your employees as deeply as your customers provides real advantage.
As business executives, the charge needs to be placed with the human resources organisation to be a source of strategic advantage, and the expectation set that the same thoughtfulness, rigour and analysis that has dominated capital investments is expected of those being placed in people investments.