Measure and benchmark wisely. Chasing down useless information won’t improve your organization’s end goal, whether that’s shareholder value or sustainability.
Ingesting large quantities of business book and journal copy can occasionally uncover a diamond in the rough. On a recent streak of particular luck, I unearthed three: “The Executive’s Guide to High Performance,” by Mark Thomas (Wiley Capstone, May 2006); “Moneyball: The Art of Winning An Unfair Game,” by Michael Lewis (W.W. Norton & Co., 2003); and “Ultimate Performance” (Wiley, due out Spring 2007). Though different in their approaches, all speak to the business success that can be achieved through the long-term investment of human capital. Now, in fewer than 1,000 words, I’ll try to weave them together in hopes that it will spark your interest in reading each title in its entirety.
Since the genesis of commerce, it seems, a debate has waged on the purpose of business. Is its primary purpose to ensure its own long-term survival? Or is it to serve customers? Provide employment? A better society? Do you side with the many managers who believe their job is to build profits or increase the size of the business?
Though debate might be entertaining, it is ultimately rhetorical because each objective is mutually dependent. Businesses must keep a reasonable number of customers reasonably satisfied to realize long-term financial success. Similarly, satisfaction depends (often significantly) on a business providing employment or attracting and retaining a quality workforce, while even basic employment requires a viable business. Even if shareholder value is the endgame, all other stakeholders must be satisfied first.
The point is that the senior executive team needs to pick one, stick with it for the long haul, measure outcomes against it, and hold all managers accountable. One benefit of clarity is enhanced decision-making. Organizations with a long-term, coordinated view of building shareholder value inherently recognize the link between BPO contracts in which non-core assets and processes are divested and shareholder value. The contracts build value by helping organizations realize savings and improvements over the long term. BPO contracts should be viewed as strategic partnerships by both buyers and providers, and the resulting value should be measured and communicated as an example of management’s stewardship.
It takes a focused management team to remain committed when markets’ expectations and analysts’ pressure for a higher quarterly EPS increases.
Short-term numbers can be manipulated, but decisions made to appease quarterly expectations are rarely good for a firm’s long-term health. BPO undertaken with proper due diligence and contracting—and with appropriate metrics in place—will clearly demonstrate management’s commitment to building long-term shareholder wealth.
Metrics are an important factor in defining long-term success in all aspects of an organization. By examining the metrics of outsourcing and applying these principles throughout other functions, the importance of metrics and a long-term perspective can be fully realized.
It’s not always right to outsource; outsourcing doesn’t always work. And sometimes outsourcing may have been the right decision, but the execution was flawed. While modern outsourcing has been developing for some 50 years, problems associated with many outsourced operations remain. It is as common for consultants and advisors to hold on to the most overrated and useless metrics as it is for the buyers. In spite of compelling data, many insist there must be meaning in these metrics because they have been around for so long. The ratio of HR employees to all employees is a good example. Probably the oldest HR metric, it is based on the premise that comparing the number of HR employees to the number of total employees they support is an indication of HR efficiency and, thus, performance. A ratio of 1:100 was considered the “benchmark,” but what if two HR organizations had the same 1:100 ratio but…
• The compensation levels of one firm were 30 percent higher than the other?
• The operating budget of one was two-thirds of the other?
• One supported a professional services firm, the other a mining workforce?
• One supported 35 locations in 10 countries, the other in one location?
These are the problems with any headcount-based metrics. And yet, this ratio is how many organizations manage their HR function—and how HRO providers sell their services.
Segments such as manufacturing and distribution fostered the development of meaningful metrics, but that is not the case for HR and human capital-intensive operations. Good management—both of the outsourcer and the buyer—is needed to ensure the appropriate long-term metrics for HRO are in place.