What Macro Economics Reveals About HR and Economic Growth: HR Owns at Least Half!

What Macro Economics Reveals About HR and Economic Growth: HR Owns at Least Half!

Part 1 ~ Human Capital Input is the FIRST determinant of Economic Growth

An effective way to innovate HR, or any profession, is to deconstruct it and rebuild it with the building blocks of another profession.

Macroeconomists understand the drivers of economic growth and its three main determinants, (1) labor inputs, (2) financial inputs and (3) productivity. Furthermore, productivity is a function of ability and motivation.

  1. Do employees have the tools to increase labor output? (technology)
  2. Do employees have the motivation to increase labor output? (incentives)

Leveraging tools to increase labor output is a function of technological advancements through IT departments. Leveraging the incentive plans, organizational and job designs, and a company’s culture to increase labor output is a function of advancements in the science of human capital through the HR department.

Employees

In today’s knowledge economy, HR is the last person standing as a competitive differentiator.

This macroeconomic equation can be found in most economic courses and reveals that HR owns at least half of all economic growth. HR is accountable for one hundred percent of the first multiplier, labor input, none of the second multiple, financial input, and conservatively, we are accountable for at least half of productivity.

Economic Growth Equation

Macroeconomics confirms HR drives at least half of a firm’s economic growth.

Technology brought into a firm is either externally acquired or internally developed, the former via analysis and judgement of people, and the later, through the KSA’s (knowledge, skills & abilities) of people. Consequently, we can make the aggressive argument that HR is accountable for both human capital stock and productivity. However, this is not a contest and we are merely qualifying our argument using macroeconomics as a vehicle to alter the HR mindset. Consequently, we prefer to say that half of productivity is due to an IT department’s responsibility for in-house technology while HR owns the other portion of productivity through its (1) job design, (2) organizational effectiveness, (3) how it leverages culture, and most importantly, (4) how it uses choice architecture in its compensation plans. (Choice architecture is the second HR Truth in our series.)

HR Avant-Garde Salary Quote

When HR realizes they are accountable for half of its firm’s financial growth, defined not self-referentially through HR, but via the economic growth equation, the mindset of our profession is radically altered.

Part 2 ~ Financial input is the SECOND determinant of Economic Growth

Occupational sociologists tell us that many professions use techniques to maintain a heightened view of their profession comparative to other occupations. Using occupational specific jargon instead of laymen terminology to obscure meaning otherwise accessible to outsiders is one technique. Requiring licensing and certifications, both increasing barriers to entry, are another. The more exclusive a profession becomes in regulating their supply, the higher the intersection point on price against demand for that profession. Professionals cannot always increase their price points by manipulating external demands for their skills, occupational sociologists say, but they can far easier influence supply.

Finance HR

CEOs keep score using Net Income. HR needs to do the same.

HR, though, is unique in that instead of taking an inflated view of itself, it is one of the few professions that deflates its importance by failing to see its overall part in the value chain. The economic growth equation is just one example. Jack Welch spent years leading the HR revolution inside of his company. Welch believes that HR, even above finance, is the most important function in a company. It is both poignant and fundamental that instead of HR making the business case to convince Jack Welch of HR’s importance, it was the CEO of General Electric himself making the argument. It is poignant because when HR becomes too self-referential, defining its own success within HR metrics, it misses just how big the profession really is and leaves it to others to define it. It is fundamental because only a businessperson, like a CEO and not an HR person,, could grasp that HR is the most important function inside a company.

We have always maintained the undisputed premise that being an HR professional and being a business professional with subject matter expertise in HR are fundamentally different things requiring different core competencies. This distinction is perhaps worthy of distinct job titles; it’s undeniably worthy of different price points in the market.

In our asset-light knowledge economy, with all the tools we use commoditized — your competitors downloading the same software on the same hardware as you are — what else are companies competing on other than people? That is why we contend that HR is the last field of competitive advantage. HR understands labor input or human capital stock as the first determinant in the economic growth question. HR, though, is not accountable for the second determinant, financial input, also referred to as capital stock. Notwithstanding, the businessperson with HR expertise will measure human capital against financial capital. We advocate that although HR is not accountable for the second determinant of economic growth, we should express the first determinant (human capital inputs) within the context of the second determinant (financial inputs).

knowledge economy

Human Capital will never be commoditized like the hardware and software so ubiquitously in use today.

Finance is the lingua franca of business. Finance also comprises the bookends of business, telling us the budget to implement various initiatives on the frontend, while measuring its impact via proforma financial statements on the backend. If HR could express the first determinate of economic growth, labor input, within the context of the second determined, financial input, we radically increase the task significance of the entire HR profession.

Task significance is an HR term that quantifies or, at the very least, qualifies the impact employees have on other employees. Task significance refers to employee perception that their work-product lies on the critical path to the success of their coworkers — that their own work product — is significant to the organization. Task significance is powerful when HR deploys it to individual jobs, so how much more commanding is the concept as a meta-approach applied to our entire profession?  On an individual job level, task significance is contingent upon employees viewing their work product along the value chain of the entire enterprise. It is awareness of the interdependency of specific tasks on each other. Applied as a macro-approach to the entire HR profession, it does the same by viewing HR as the first determinant of the economic growth equation that can be expressed, within the context, of the second determinant, financial input.

Task Significance

Task Significance: Do your employees know where they fit on the value chain and which financial ratios they impact?

To examine the relationship between labor and financial, let’s deconstruct these two determinants:

Labor Input: HR owns one hundred percent of the first multiplier of the economic growth equation. Broken down, the quality of labor input is dependent upon employee KSA’s, meaning, their knowledge, skills & abilities. Those KSA’s can be acquired via (1) external recruitment of talent or (2) internal development of talent.

Financial Input: HR owns none of the second multiplier in the economic growth equation. However, this does not absolve HR from measuring its results within the context of financial input. An HR professional uses HR metrics, but a business professional, proficient in HR, uses the metrics of the language of business – finance! There is a plethora of customized metrics to measure labor input against financial input. We will offer a few standard examples to illustrate the point: (1) Human Capital Return on Investment (2) Human Capital Value Added, and (3) Human Economic Value Added.

Why is expressing HR metrics as financial metrics vital? Because it increases the integrity of CEOs who say people are their most important asset. Assets are recorded on a balance sheet; expenses are recorded on the income statement. When CEOs make the pronouncement that people are their most important asset, they open themselves up to the question as to why then, are their most important assets, people, only measured as expenses on the income statement when they could also be measured as the valuable assets they claim on a proforma balance sheet? Human-capital-financial ratios are prerequisite tools to create pro-forma financial documents. When human capital and financial ratios are expressed as a single metric, the CEO can now say people are our most important asset and back up the claim with her proforma balance sheet.

proforma income statement

HR can only credibly call itself a business discipline when it measures its success against financial metrics.

And let’s look at the word proforma. Do you remember the lesson from occupational sociology about opting out of layman terminology to use specific occupational jargon instead? Well, proforma means hypothetical. That’s right, proforma basically means pretend! But which sounds more impressive? Based on the latest projections, you have update the “pretend balance sheet” or “proforma balance sheet”? Words shape our emotional reactions and because the term proforma balance sheet may conceal just how easy it is to calculate. This unproductive fear can scare off most HR professionals from developing their own proforma financial documents as the most powerful tool in their toolkit.

There are even more effective ways for HR to express labor inputs within the context of financial inputs. Just as we used macroeconomics to deconstruct the HR profession, let’s now turn to financial management itself to deconstruct their own internal financial ratios. Because ratios are constructed of individual metrics, it is a simple matter of reverse engineering to deconstruct them back to their original subcomponents. It is the individual metrics within an overall financial ratio that HR can connect to the Duties & Responsibilities section on all Job Descriptions.

The possibilities are interminable, but we will offer one illustrative example. The traditional Return on Asset Ratio or ROA is defined as net income divided by total assets. But what if we deconstructed the equation to its fundamental building blocks.

ROA HR Avant Garde

Use deconstructed financial ratios to link job performance to leading indicators of shareholder value.

The red numerator and denominator define the ratio. Net income can be broken down to more elementary parts while assets can be deconstructed to more fundamental parts as well. (See the illustration above.) Although beyond the scope of this article, we could further breakdown these individual subcomponents to their respective work-products as required to link them to specific job descriptions. This is what we do when we map out the entire value chain of an organization, tying work-products to metrics, and metrics to their relationships on profitability.

Once we deconstruct enough financial ratios – and there are many to choose from – HR can then link every subcomponent to individual duties & responsibilities on respective job descriptions. Through this approach, HR can quantify – not merely qualify – to individual employees how much their work product contributes to Return On Assets. Because ROA is a leading indicator to the ultimate lagging indicator, net income, HR now has a new profit-centric tool for organizational effectiveness and design.

human capital value added

When CEOs say people are our most important asset, the remark has credibility when HR can measure the first economic determent – capital stock – on a proforma balance sheet.

Another simple illustration may include HR providing Six-Sigma training to the production team. Whether creating goods in the manufacturing economy or software in the knowledge economy, a probable result of Six-Sigma training is reduced defects resulting in a decrease in the cost of goods sold (COGS). HR can now tell the Chief Operations Officer the extent of Six-Sigma training’s impact on Return on Assets by virtue of increasing the ROA numerator by reducing costs. HR can automate software to measure an individual salesperson’s or production manager’s impact on different financial ratios or even entire departments. The HR function itself, after initiating a new program to increase productivity, may only need to fill 70% of previous vacancies due to increased efficiencies. For this illustration, this productivity initiative increases the ROA numerator by decreasing SGA costs. HR can now measure its reduced comp plan’s impact on return on assets – or any other ratio considered a vital leading indicator to profitability.

Human Capital Return on investment

If HR only measures people as an expense on the income statement, then the slogan people are our most important asset rings hallow.

From a plethora of financial ratios combined with various combinations of deconstruction, there are indeterminate possibilities of how to utilize this new HR tool. All job descriptions should quantify their task significance by linking the work-product described under the duties & responsibilities clause to the individual metrics that make up respective financial ratios.

Human Economic Value Added

When human-capital-financial ratios are routinely used by every HR manager, HR finally becomes the business discipline CEOs have always needed it to be.

It is an easy thing to merely say that HR person should create shareholder value. This article demonstrates that it is straightforward to quantify this value by linking financial ratios to job descriptions. Going back to the macroeconomic growth equation, this is how HR can articulate the equation’s first determinant (human capital input) within the language of the second determent (financial input). Is there a possible argument why HR should not express its accomplishments in the lingua franca of business?

Part 3 ~ Productivity is the THIRD determinant of Economic Growth

The third determinant of the economic growth equation is productivity. The first question HR asks when an employee is failing is if it is a matter of (1) ability, requiring training and development, or a matter of (2) motivation, requiring adjustments in the comp plan via incentives presented in its choice architecture. This premise holds true for the third determinant, productivity, as well. Productivity is a measure of efficiency. Help desk call centers often quantity their metrics via different variable outputs per shift. Reducing customer queue time or increasing customer first call resolution by increasing headcount may be an example of scalability but it is certainly not an example of increased productivity. Increasing those same two metrics by maintaining or even decreasing headcount certainly is an example of increased productivity.

productivity

HR is responsible for at least half of a firm’s productivity as defined in the third determinant of the economic growth equation.

So how does productivity, as our third determinant of economic growth, work when applied to companies? Think of technology as a fulcrum, increasing outputs without increasing inputs or, at the very least, increasing outputs disproportionately higher than a corresponding increase in inputs. To increase revenue, for example, without increasing headcount or billable hours, would be the result of increased productivity.

Certainly, at least half of productivity is owned by the Chief Technology Officer. But productivity is just as much a function of the way individual jobs are designed. Broadening our scope to the way all jobs are holistically designed and integrated along the value chain, the whole idea behind organizational effectiveness is to optimize efficiencies in how firms achieve their outcomes.

Choice architecture, to be discussed in the next HR truth, plays the indispensable role in increasing employee motivation to find never-ending ways to improve productivity. The calculus of productivity also includes how HR leverages and sustains company culture to achieve company-wide outcomes. Consequently, respecting the contributions of both technological advancements and the role HR plays in (1) job design, (2) organizational effectiveness, (3) incentive pay plans and (4) leveraging culture, we posit that while IT is accountable for half of productivity, our beloved profession is accountable for the other half.

Our Conclusion:

HR, as a profession, becomes bigger than itself when it is both viewed through the mind of a macroeconomist and measured through the eyes of a financial manager.

When we view HR through the economic growth equation, workforce multiplied by financial capital multiplied by productivity – when we view our profession through an equation that might be found in any macroeconomic textbook – we articulate, via a business argument, why HR is vital to economic growth — not defined by ourselves — but by macroeconomics.

Pre-IPO startup companies usually do not have an independent functioning HR department. Although company founders may not view their choices as human capital decisions, even their success depends upon the most important function in their firm — HR!

To be a businessperson with expertise in HR, instead of merely an HR person, is to raise the task significance of our entire profession.

Vincent Suppa works with startups and investors and teaches graduate courses at New York University. His email is suppa@suppa.org.

© Vincent Suppa 2019

The Quick Time-to-Market Business Memo

Don’t work hard. Work smart! Working smart means more productivity in less time.

HR Avant Garde ™ maintains that the key to creating rapid time-to-market successful business strategies is pattern recognition. Why treat each business problem as a unique snowflake when you can discover commonality among business problems to arrive at quicker business analyses?

What is the first step in solving a business problem? It is not to find the root cause, but to have your attack plan ready to go as the tool that will help you discover both root causes and their corresponding solutions more quickly.

Time is the great equalizer – your only resource that is not scalable. Is working long hours really a badge of honor or perhaps an indication that we need to improve our efficacy? As we try to outrun lesser versions of ourselves, I am sharing with you this webinar where you can gain the skill acquisition to work smarter!

  • Learn the commonality among most business problems.
  • Develop your own customize template to use on-the-job for the rest of your career.
  • Scale your new business memo template from 90 second verbal responses to yearlong project management analysis.

Vincent Suppa works with startups and investors and teaches graduate courses at New York University. His email is suppa@suppa.org.

© Vincent Suppa 2017

An Executive Perspective on HR: A Strategic Framework for HR

There are no HR problems. There are only business problems with HR solutions.

Most HR professionals speak with confidence about whether or not they are adding value to the HR function. However, executives no longer think that is good enough. The C-suite is now demanding to know if HR adds shareholder value to the business – not to its own function.

When HR is not adding shareholder value and performs as a hygiene factor, firms accept industry standards and decrease their vertical integration by outsourcing significant portions of the HR function.

CEOs do not want to have HR conversations with HR. They want to have great business conversations with HR. How can HR measure its business success instead of merely its HR success? This is accomplished by discovering the link between HR initiatives and, through pro forma income statements, its impact on net income.

When HR professionals don’t present pro forma income statements as part of their project portfolios, they are bereft of the information that  definitively answers the question, “Did HR add shareholder value?”

In this webinar, discover eight income statement categories that all HR initiatives should impact. If your HR project does not impact at least one of these eight categories, consider not greenlighting the project at all for the benefit of the company.

Vincent Suppa works with startups and investors and teaches graduate courses at New York University. His email is suppa@suppa.org.

© Vincent Suppa 2017

Is Your HR Department Really an Admin Department?

How much of your "HR" work is really admin?

Your company loses its competitive differentiator when HR functions as admin.

Look at any organizational chart. Administration is still necessary, and yet you’d be hard pressed to find an admin department.

Decades ago, companies had admin departments with many administrative employees. Today, firms have fewer administrators against more regulation and increasing bureaucracy!

In our knowledge economy, people remain the differentiating competitive advantage as companies require fewer operating assets, with even those assets – computers and software – now commoditized. Since regulation tends to center on differentiators, government compliance focuses increasingly on employees.

Admin deserves its own department as does HR.

Admin deserves its own department as does HR.

But does filing more electronic forms and enforcing compliance make it less of an admin function because it involves humans? The answer is in the Shakespearean quip, “A rose by any other name…

If administration is being performed by companies bereft of admin departments, then who performs admin? Admin departments, of course. Only they are now called HR departments.

Administrators are vital and even maintain own professional associations. The American Society of Administrate Professionals and International Association of Administrative Professionals are two excellent examples.

When companies misclassify administrative employees as HR, they do so to the detriment of both professions. We recognize administrators’ unique skillsets distinguishing them from HR. Unfortunately,  HR departments now absorb admin to the dilution of HR.

By confusing the two roles but only giving one its own department, we undervalue the importance administrators provide while denying them their own career path.

We also cloud the career paths of HR professionals. Once their jobs get outsourced to vendors efficiently handling payroll, compliance and other benefit administrative work, they realize all too late they actually worked in admin despite their HR title.

We make this claim because companies only outsource functions on which they don’t compete. For those functions, they accept industry standards vendors provide equally to all clients, including competitors.

True HR cannot be executed by vendors since employees are the great differentiator. And firms never outsource what they compete on. (For more on this, watch the video below and read “Why Your Company is an HR Company.“)

Merely giving administrators HR titles offers little security when algorithms are able to perform the same functions more efficiently against newer technologies.

Sadly, administrators with HR titles realize their admin role only after their companies decide to cut checks to vendors instead of them.

What can both administrators and HR professionals do to protect their own unique careers? We have ideas on that too!

Vincent Suppa works with startups and investors and teaches graduate courses at New York University. His email is suppa@suppa.org.

© Vincent Suppa 2016

How to Increase Margins After a Disruption

clock-539913_1920

Once disrupted, can your product be repositioned for the luxury market?  (Image: Pixabay)

We recently talked about how the best companies combine talent and technology in the most efficient way to innovate in their field.

Most leaders inside the boiler room pave their way in pure technology plays. But some companies build their new competitive advantage upon the premise that most of us have moved so comfortably into the digital world that it has elevated analogue products to where they can now be monetized as luxury goods.

Replaced by digital music files, vinyl recordings now sell for larger margins to audiophiles.

Disrupted by digital files, vinyl recordings now sell for larger margins to audiophiles.  (Image: Pixabay)

Vinyl recordings, excluding their content value, were commodities as a sound medium. Now they are an expensive, high-margin acquisition for audiophiles.

Think of how traditional analogue watches were gradually replaced with digital timepieces in the 1970s. Once the transition was nearly complete, traditional timepieces regained lost market share by repositioning themselves even further into the luxury market.

A hand-written note is treasured when most messaging is digital.

A hand-written note becomes treasured when most messaging is digital.  (Image: Pixabay)

Fountain pens lost their dominant share of the market in the 1950s with the arrival of the ballpoint pen. Today, a fountain pen is a high-end luxury good with higher margins than their 1950s’ counterpart.

Inside the Boiler Room celebrates disruption. As disruption increases the efficiency and productivity of the market, disrupted industries can reposition themselves from high-revenue, low-cost commodities to high-end, high-margin luxury goods.

As communication is now almost exclusively digital, handwritten letters, especially those showcasing beautiful calligraphy, are even more valued by their recipients .

HR Avant-Garde spent time with Kunal Sheth to see what he had to say about our premise on how, with enough disruption, analogue can sometimes trump digital with higher margins than before.

Vincent Suppa works with startups and investors and teaches graduate courses at New York University. His email is suppa@suppa.org.

© Vincent Suppa 2016

HR Specialties with Bright Futures

The future of HR is business-line specialties replacing conventional HR categories. (Image: Pixabay)

The future of HR is business-line specialties replacing conventional HR categories. (Image: Pixabay)

As technology becomes more powerful, which HR specialties remain relevant in the marketplace? In our previous post, we illustrated why middle level management jobs are being decimated. Because most tactical HR jobs are in middle-level management, we are changing the paradigm of what constitutes an HR specialty to ensure skill security and earning power.

Strategy cannot operate beneath another strategy; the former is tactical by definition. With algorithms automating tactical executions using big data, people become less relevant to the process.

Computers excel at defined routine tasks. They play chess well. Yet even the best algorithms can’t innovate original strategies. We can transition HR from tactical executions beneath strategy by developing HR specialties along business strategies.

HR Avant-Garde has notable success mentoring HR protégées in disciplines as varied as big data and social media. While attending HR career fairs, they find themselves with few rivals. If you specialize in traditional HR functions, how many people are competing with similar skills? How much smaller is the applicant pool for HR experts specializing in pre-IPO startups requiring post Series A funding ramp ups?

An HR specialty in turnaround companies reorganizing under bankruptcy protection is another in-demand niche with few competitors.

How will you future-proof your HR career? (Image: Pixabay)

How will you future-proof your HR career? (Image: Pixabay)

How many of your colleagues have developed expertise in the HR complexities surrounding mergers and acquisitions? US companies are horizontally integrating into Asia and Latin America lacking HR specialists who can integrate and incentivize international teams around a coherent strategy.

This new paradigm of HR disciplines avoids being obviated by technology by centering on strategic business lines instead of HR categories. These neo-HR specialties with their business-line focus are in high demand while remaining in short supply, because they go against the conventional HR approach.

The Least You Need to Know:

Consider being the HR guru in these business specialties to give you a competitive advantage in a market saturated with conventional HR practitioners:

  • Pre-IPO Startups
  • Social Media
  • Big Data
  • Mergers & Acquisitions
  • Turnaround
  • Internal Marketing
  • Innovation
  • Companies horizontally integrating across boarders
  • Companies increasing or decreasing their vertical integration

Vincent Suppa works with startups and investors and teaches graduate courses at New York University. His email is suppa@suppa.org.

© Vincent Suppa 2015

Copyright © 2014-2016 HR Avant-Garde