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As organizations emerge from the recession, people management issues such as managing talent, leadership development, employee engagement and strategic workforce planning are becoming critical in determining sustainability and profitability.
Organizations, especially those operating in the service industry, recognize the impact effective people management has on their financial health. Employees are now regarded as “human capital”.
“Human Capital is recognition that people in organizations and businesses are important and essential assets who contribute to development and growth, in a similar way to physical assets such as machines and money. The collective attitudes, skills and abilities of people contribute to organizational performance and productivity. Any expenditure in training, development, health and support is an investment, not just an expense. Competition is so fierce and change is so fast, that any competitive edge gained by the introduction of new processes or technology can be short-lived if competitors adopt the same technology. But to implement change, their people must have the same or better skills and abilities.”
Human Resource Trainer
People management contributes directly to the bottom line. Managers who pay insufficient attention to their processes for people management are missing an opportunity to make a substantial difference to their profits.
A ten year study published by Dennis Kravetz in 1996, correlated people management practices with profit performance measures. It revealed that a minimum of 100% improvement in the profit performance measures correlated with high scores of people management practices. The study covered over 200 organizations, 150 of which were Fortune 500 companies and measured five key indicators of profitability and correlated them with companies with high people management practice scores versus low people management practice scores.
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The detailed results of the key indicators were 16.1% versus 7.4% for sales growth; 18.2% versus 4.4% for profit growth; 6.4% versus 3.3% for profit margin; 16.7% versus 4.7% for growth in earnings per share and 19% versus 8.8% for total returns.
In the companies studied, the increase in profits equated to an average of US$67 million. Companies that improved their scores added US$294 million in profits per company, a gain of 60% over three years. Companies which experienced no change added an initial US$78 million, a gain of 16%. For the eight companies which showed a decline in scores there was a reduction in profit by US$16 million, a decline of 3%.
More recently, a survey conducted by Deloitte and Oracle involving 142 of the biggest organizations worldwide, conclusively proved the direct relation with their people management policies and the financial results of the company. According to the survey findings, larger companies have the scale and resources to develop more comprehensive talent management strategies. The most profitable large companies share three practice areas that differentiate them from the least profitable companies:
Defining a clear and explicit people strategy that is linked to the business strategy
Performing formal succession planning across the workforce
Linking employee pay directly with productivity of the company or to the respective manufacturing plant
Any business strategy ultimately depends on people for its successful execution. Yet relatively few employers have developed an explicit and documented people strategy tailored to their business goals. Of the largest companies that participated in the survey, 55% of those with top quartile profitability rated themselves “high” in linking people management strategy to business strategy, while only 30% of bottom quartile profitability companies reported similar performance (figure 1). Among all the survey respondents (regardless of size), the figures stand at 44% for the most profitable companies and 36% among the least profitable.
Back home in India, Subroto Baghchi, co-founder and Chief Operating Officer of Mindtree Consulting, in his book “The High Performance Entrepreneur” stresses the importance of developing People Management Systems in organizations. He says “I can never overstate the importance of five things in managing high performance professionals: setup a performance management system that everyone understands, communicate with people with evangelical regularity, listen to the voice of your people through forums and regular perception surveys that are conducted by an outside agency, focus on development of leadership and finally create a support network for your leaders. If an organization knows how to do these five things right, it can scale without breaking up.”
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Organizations recognize this relation and have shifted their focus from technology to people and process. In today’s business climate, attracting and retaining the best employees is very difficult. The reason is a combination of the change in business practices and the shift in employee attitudes. The business landscape has changed dramatically in the past decade as a result of many factors ranging from boom to recession in the industry. During this same period of time, employee attitudes have changed dramatically. Exposure to haphazard job cuts and corporate scandals has caused employees to become more loyal to their professions rather to their companies. So now companies face the challenge of looking to acquire the best talent and a growing workforce of talented individuals who are no longer attracted by pay packages only but who require better working profiles and job satisfactions.
“The basic resource in any company is the people. The most successful companies and the most successful countries will be those that manage human capital in the most effective and efficient manner”
Gary S. Becker
Nobel Prize-winning economist who coined the phrase “Human Capital”
The bottom line is, in order to achieve professional growth and success in the future organizations are going to have to take a more strategic and supportive approach to people management
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