Making Your People Outperform Theirs

NEW YORK (TheStreet) -- "People are our most important asset." Trite for sure; but true for many companies.

Consider Google ( GOOG). Google is really just leased buildings and people. It doesn't have special access to capital, uniquely valuable real estate or state-of-the-art factories. Google wins when its employees consistently outperform their peers at Microsoft ( MSFT) and Apple ( AAPL). Good talent, effectively managed, is Google's only source of sustained competitive advantage.

But Google is not unique. For the vast majority of companies, real estate and salaries are their biggest costs. Isn't it strange that companies know so much about assets such as real estate and manufacturing, but know so little about their human assets?

Imagine a global head of manufacturing telling his CEO, "We really don't know if our manufacturing capabilities are improving year-over-year. In fact, we don't know what 'improving' means." Yet, that's what HR executives routinely tell their CEO. They don't know if the value of their human assets is improving; they don't even know what "improving" means.

It's time to hold HR accountable for human assets. More specifically, for making sure that "their people outperform their competitors' people." This requires rigorous measurement and management in three areas:
  1. Key Position Performance
  2. High Performance Organization
  3. Executive Team Performance

Key Position Performance

Some positions contribute more to business success than others. Policies such as "every employee will get two weeks of training" are unwise. Outperforming competitors requires disproportional investments in key positions. Examples of key positions include:

Sales representatives: "Our sales people must be superior, in the eyes of the customer, to our competitors' sales people."

Product Development: "Our product development people must produce more value than our competitors' product development people."

Executive Leaders: "Our senior leaders must be more effective than our competitors' senior leaders."

Assessing sales representatives is easy. Engage a third party to ask customers to rank the quality of sales reps from your industry. Success is about relative performance. Being "world class" is interesting, but "industry best" matters.

Measuring product development (PD) capabilities is a bit more difficult. Consider metrics such as: profits from new products per PD employee, or product satisfaction, or even number and type of industry awards.

To measure executive quality, ask executive search firm partners to rank-order industry competitors by leadership capabilities. Or, better yet, have the firm conduct a deep assessment of your first- and second-tier executives. Ask them to compare each executive's leadership capabilities to an industry benchmark.

High Performance Organization

There are several ways to assess organization effectiveness. The first is to measure efficiency. This can be done by using available industry measures such as profit per employee or SG&A per employee. Both are reasonably good reporting measures, but they are at too high a level to improve efficiency. Improving efficiency requires that measures, and accountability, be pushed as low as possible -- ideally down to the first-level supervisor.

A second way to assess organization effectiveness is to measure engagement. Engagement evaluates whether a company is getting all it can out of its workforce.

One way to measure engagement is by examining turnover. But be careful, measuring overall turnover is meaningless. The McDonald's system employs over a million people and experiences about 160% turnover. In Japan, that number is much lower. In upscale U.S. locations that number is much higher. Also, the 160% number does not tell us if the turnover is healthy or unhealthy. For low performers, high turnover is better. For high performers, low turnover is better. Turnover data must be used thoughtfully to be a valid measure of engagement.

A second measure of engagement is an engagement survey. There are many engagement surveys. Questions across surveys may vary, but overall results are almost the same. Thus, the choice of survey is not very important. More important is that you choose one and stay with it. Managers like to see how their scores change over time.

Executive Team Performance

As the business world becomes more and more complex, heroic leaders like Henry Ford or Lee Iacocca are growing increasingly rare. Most successful companies today are led by effective executive teams. What is an effective executive team and how might one measure that?

Start by clarifying the expected performance outcomes. These may include: profit, revenue growth, customer satisfaction, share, etc. Then, let team members define the results the team must produce to deliver the performance outcomes.

At IBM Semiconductor, the top executive team decided its key results were:
  • Strategic Clarity and Interlock
  • Leadership Accountability
  • Executive Collaboration
  • Leadership Growth

For each outcome, the team members defined and documented success in Phase 1, Phase 2, and Phase 3. Every six months, the team re-read each success definition and gave their team a rating for each key result, "Looks like we are now in Phase 2 for Executive Collaboration..." The team now knows what success looks like and whether team performance is improving year-over-year.

Jack Welch once said famously, "If you don't have a competitive advantage, don't compete." One source of sustainable competitive advantage available to almost all companies is making human assets more valuable than those of industry competitors. That's easy to say, but difficult to do. The journey begins by building a disciplined system for measuring, managing and improving the value of your organization's human assets.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

More from Investing

Sarepta Shares Keep Climbing and PTC Therapeutics Bounces Back

Sarepta Shares Keep Climbing and PTC Therapeutics Bounces Back

3 Must Reads on the Market From TheStreet's Top Columnists

3 Must Reads on the Market From TheStreet's Top Columnists

What Will GM Do With Cruise -- and Is Its Stock Worth $55?

What Will GM Do With Cruise -- and Is Its Stock Worth $55?

How to Make a Fortune Like Microsoft Billionaire Founder Bill Gates

How to Make a Fortune Like Microsoft Billionaire Founder Bill Gates

SEC Says Bitcoin and Ether Are Not Securities -- but Prices Stay Bearish?

SEC Says Bitcoin and Ether Are Not Securities -- but Prices Stay Bearish?