The workforce, a company’s “human capital,” is often its largest operating expense and controllable cost. In today’s talent-driven economy it is also the most potent source of corporate value creation. While executives widely, and increasingly, acknowledge these as facts, they continue to search for ways to deploy and develop human capital to increase revenue and operating profit. Doing so requires a new approach. As I described in a previous post, I believe that human capital can only achieve its full potential in creating corporate value if it more fully and directly supports business strategy and identified financial outcomes. This requires a very tight, continuous working relationship between and among the CEO, CFO, and CHRO (the “Talent Triangle”) driven by a coordinated talent strategy and relevant, more illuminating talent analytics.
This challenge is often posed as the need for CHROs to operate with greater business acumen and strategic relevance. To be sure, this is often the case. For most companies, however, the CEO and CFO have a compelling opportunity to fully activate the Talent Triangle to significantly improve short and long-term corporate value.
From the business strategy (CEO) perspective, the process of strategy formulation should directly include human capital as a central consideration, not an afterthought. A well-conceived business strategy is, of course, critical, but business success or failure is largely determined by the rigor and effectiveness of execution through people.
From the finance (CFO) perspective, new measures are required that properly account for human capital’s contribution to value creation (GAAP accounting often obscures workforce value contribution). For example, what is the economic value of incremental improvements in productivity, or of attrition in the most value-creating roles? What is the ROI of an incremental investment in people, by job classification? Calling these “soft” is an excuse. The fact that it is difficult to measure accurately doesn’t obviate the need to address the issue.
All three executives need to understand not only that human capital creates value but, more importantly, which internal capabilities, and the roles responsible for them, most directly and significantly create value. All people matter, but not all roles create value equally. The ability to differentiate the strategic relevance among roles enables a portfolio approach to making investments in talent and enables CHROs to be far more effective in driving corporate value.