One of the most over-used but under-realized clichés is to treat employees like assets.  In a paper titled “From Capability to Profitability: Realizing the Value of People Management” the Boston Consulting Group concludes that companies “must regard their human capital as an asset worthy of continual investment.”  It’s a good mantra but one that companies find difficult to heed for two (2) main reasons:  ownership and self-interest.

Unlike Assets, Employees Aren’t Owned

Companies own assets.  The company invests in assets to get future returns.  Companies that invest in new computers do so because (a) they expect better performance from their assets and (b) financial reporting standards make such investments doubly attractive because the value of the computer can be depreciated over the life of the asset.

Neither of these two expectations holds true with employees.  It is true that when companies invest in employee training and development they seek improved ROI but strictly speaking, people aren’t ‘assets’ because they aren’t owned by the company.   As for financial reporting, no notion of depreciation exists for people – the costs to train workers are incurred and reported immediately.  Both expectations are tempered by a risk that if the market values those new skills more than the company does employees may walk away.

While fear that such investments may benefit the competition is real, the following anecdote emphasizes the still greater risk of pursuing the alternative.  In Steven M. R. Covey’s book The Speed of Trust he recounts a story in which someone asked a CEO, “What if you train everyone and they all leave?”  And the CEO answered “What if we don’t train them and they all stay?”  

Like Companies, Employees Seek to Maximize Their ROI

Face it, management is not tasked with, nor is it responsible for, acting in the best interests of employees.  They seek to maximize shareholder value which sometimes means taking actions that are contrary to employee interests.  Take outsourcing for example.   The combined effects of (a) an increasingly service-driven economy, (b) improvements in communication, and (c) low-wage and highly-educated workforces abroad means that companies are financially rewarded for moving jobs from the home economy to lower-cost alternatives.

And while management may delude itself by thinking that employees act in the corporate interest, examples abound in both the private and public sector which prove the opposite.  (e.g. Enron or this recent revelation by the Department of Homeland “Security”)  Employees act in their best interest which is why it is risky to invest in employee development.

The Paradox

So these two reasons, ownership and self-interest, lead to an unusual conclusion.  Since companies don’t own employees as assets, investing in them seems like a way to decrease ROI rather than increase it.

Far from being an ill-advised and expensive act of faith, the pivot point is that investing in employees co-exists harmoniously with improved financial performance.  As the BCG paper makes clear, companies that do invest in leadership development, talent management, and performance management experience “substantially higher revenue growth and profit margins”.

What are you waiting for?

  • http://pivotpointsolutions.net/ andy_mcf

    Here’s a good article on same topic that raises an even darker scenario, that in addition to facing a profitability risk, failing to invest in training also threatens a firm’s very existence. http://bit.ly/U1ykoo

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  • http://pivotpointsolutions.net/ andy_mcf

    A good post from Arie Goldshlager with some insights on how this applies to retail business.

    If investing in employees yields such big dividends, why don’t more retailers do it? | Unconventional Wisdom on Customer Strategy and Innovation http://bit.ly/YYfViu

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