Minding capital of the human kind

Success in the information economy depends on talented employees. Edward Lawler looks at ways of attracting, developing and retaining this sort of human capital—capital that is more important to these organizations than physical or financial capital.

	Title:	Talent: Making People Your Competitive Advantage
	Author:	Edward E. Lawler III
	Pages:	281pages
	Publisher:	Jossey-Bass
	Price:	$29.95

The problem itself is not new, only rigorous consideration of it is. Edward E. Lawler's book distinguishes two major types of organization. The more traditional bureaucratic kind, or what Lawler calls the structure-centric organization, is good at producing mass products or services while controlling relatively passive employees.

A fast-forward now to the present. The more recent type of organization is bent on fostering innovation, and must rely on the knowledge and creativity of its employees. In these human capital-centric organizations (or HC-centric) as Lawler calls them, the focus must be on attracting, motivating and retaining talent.

While the older structure-centric organizations still make economic sense in certain situations, the trend is clearly toward the newer HC-centric way. In sectors where employees add relatively little value (e.g. food processing, transactional retail or labor-intensive manufacturing) structure-centric organizations still can provide the requisite performance. But in sectors that have developed in the last quarter century, where human knowledge provides most of the value, organizations which get the most out of their human capital are the ones that excel.

The structure of HC-centric organizations places less emphasis on hierarchy and control, and more emphasis on self-management and self-coordination. One concrete differentiator between structure-centric and HC-centric organizations is the number of levels of separation of any employee from the customer. It is much lower in the HC-centric format, usually a maximum of three levels, than in the structure-centric organization, where the maximum will be around six.

The book distinguishes two forms of HC-centric organization. Where both rely on their talent to attain competitive advantage, they part ways in the sourcing of their talent. In what Lawler calls a high-involvement organization, there is emphasis on loyalty to the organization and to stability. This mode of organization is built on a widespread sense of community, a long-term commitment to the company. High-involvement performance tends to be evaluated at team level as much as at the individual level.

By contrast, global-competitor organizations focus more on individual resourcefulness than on team spirit. Whether global-involvement or high-involvement, talent is equally important. Yet high-involvement organizations prefer to develop their talent from within, while global competitors are content to buy it outside. Global competitors reward talented employees handsomely yet do not expect from them the same level of long-term commitment to the organization as does the high-involvement approach.

According to Lawler, choice of the HC-centric approach depends largely on the degree of change and the type of customer relationship the company works with. Where the product space is evolutionary rather than revolutionary and where the customer relationships are of a continuous, if evolving, nature, the high-involvement approach makes more sense. Where change is swift, where products and processes rapidly become obsolete, there the global-competitor approach, which reaches out to global talent, makes more sense.

Attracting, developing and retaining

HC-centric organizations excel when they have outstanding talent. To have it they must possess a talent management system that fosters talent attraction, retention and development.

Key to attracting talents to the company, in Lawler’s view, is the lure of the employer brand, the image of the organization in the mind of potential and actual employees. Prospective employees should be provided a realistic preview of life in the organization, realistic enough to attract well-fitted talent as well as to dissuade ill-suited job-seekers. For example, you can cull from company attitude survey results a lifelike presentation of work inside the company.

Perquisites can play a role in building employer brand. The book lists a couple dozen perks, from game rooms to dental care. It notes that while they can be expensive, they can also be cost effective as long as they are aligned with behaviorism that will benefit the organization. He cites Google as an example of a firm that has succeeded in using perks, e.g. its food service, to build an attractive employer brand.

In HC-centric organizations, having different employment relationships for employees with different needs makes sense. Lawler cites as an example Deloitte & Touche which deploys what it calls “mass career customization”. Employees can customize with respect to four variables: pace of promotion, workload, location and role. A global competitor will want to take customization further than a high involvement organization which should not take individual differentiation too far, lest it affect the team spirit.

HC-centric organizations need to be proactive in development of talent. Providing different forms of management experience is one way - GE develops high-talent individuals by giving them management responsibilities in units big enough to tax them but not so large as to risk undue damage to the firm. It's a way for the talents to cut their teeth.

The talent appraisal system also plays an important role here. Appraisal meetings should allow individuals to know what direction the organization is taking and provide data for the internal skills database. That internal database will help managers trying to fill positions internally. With good Web-based systems, push technology, whereby employees with the right skill sets are notified of job openings, can be implemented. Some talent-focused companies such as Hewlett-Packard and Cisco have created career centers which provide counseling and information about the availability of jobs within and outside the company.

HC-centric organizations must take care to retain the talents they have painstakingly attracted and developed. Basic here is to keep an eye on the turnover rate. Turnover is expensive. Lawler estimates that replacement costs amount to 1-2 months of salary in the case of an unskilled worker, 10 to 15 months for a skilled worker. To retain workers, organizations need to know the individual, what he/she values and to customize the relationship with regard to those values. As Lawler puts it, an HC-centric organization must retain by “re-recruiting” its members – to retain is to re-recruit!

Accordingly, senior management in an HC-centric organization must spend a considerable amount of time on attraction, retention and development activities. Seen through Lawler’s eyes, an HC-centric organization focuses on talent for competitive advantage. Business strategy is determined by talent considerations which means that performance management becomes one of the most important activities (see box).  Lawler offers 30-50% as the range of time to be devoted by C-suite executives to talent management.

Information and communication

To perform adequately in talent management, HC-centric executives need adequate HR information systems. Lawler cites a 2006 study showing that senior executives did not feel that their information systems helped them much in linking human-capital and company performance. Only 28% said that their systems were effective or very effective in assessing and improving the human capital strategy of their company. Less than 10% judged them to be effective or very effective in connecting human capital practices to organizational performance

Three years on, and human capital is not yet receiving the attention it requires. Executives know less about their human capital than about their physical and financial capital, less about their in-house talent than about their customers. In an HC-centric organization, according to Lawler, human capital metrics should be equal to those of finance and marketing. With equal metrics, HR will then be empowered to participate in the strategic conversation on an equal footing with marketing and finance (see box).

Some companies have begun to establish human capital key performance indicators (KPIs). Indicators such as revenue and profit per employee, the recruiting success rate, turnover and absenteeism are necessary but far from sufficient. In Lawler’s mind, metrics for talent inventory, individual development plans, satisfaction, understanding of the business strategy need to be developed. Following the adage that what gets measured gets attention, implementing human capital analytics will make for more attentiveness to talent management.

Corporate annual reports provide very little information on human capital. Lawler cites a study which found that only 14% of the companies provide at least one hard indicator of workforce behavior (most commonly the turnover rate). As a counter example, the book mentions a company, Graphic Controls, which gathered quality of work life data and included this information in its annual report (until it was bought out in 1997). Lawler argues that the provision of such data will prove useful to shareholders and stakeholders, help build the employer brand and provide an impetus for the improvement of the human capital information systems.

In  HC-centric organizations, the information systems must be as concerned with talent costs, condition and performance as they are with utilization of physical and financial assets. Lawler’s ideal is for the HR department to become the most important staff group with the best talent and the best IT resources.  Then, senior executives will be able to spend that 30-50% of their time on talent management in the most productive way and HR will be able to participate in the strategic conversation on equal terms with marketing and finance.

Published in August 2009