We tend to measure that which is of value to our business or organization because we inherently know that we can't manage what we can't measure. So what does this say about organizational intangibles, such as leadership, communication, and teamwork?
While the majority of companies agree that these intangibles are worthy of investment, very few actually make the necessary financial commitment to improve them. Is the expense of personnel - traditionally 30 percent or more of an organization's operating expenses - not worth managing? Is it so difficult to arrive at meaningful numbers that we instead take the easier route and feel a sense of accomplishment just counting outputs and logging delivery times? Or are we simply too scared that these measures will get personal?
Not only is accurate measurement of intangibles possible, it's an investment that every business should consider.
Before beginning to make the case in favor of measuring intangibles, we must first acknowledge two key concepts related to the topic of measurement. The first concept is that we only measure what is of value. According to Debra Amidon, chairman and CEO of the global innovation and consulting network ENTOVATION International, "The unmeasured must be measured. If it cannot be measured, it isn't considered to be of value."
The second concept is that we can only manage and improve that which we measure. As Robert Kaplan, professor of management practice at Harvard University, stated, "If you can't measure it you can't manage it, and if you can't manage it you can't change it." By combining these two statements, a new concept emerges: "We only manage and improve that which we value."
We must then reach an agreement on the definition of intangibles. Standard business metrics may be placed into one of three categories: revenue and margin, operational efficiency, and customer satisfaction. Absent from this list is a category that properly encompasses intangibles because they belong in a higher category on which all of the others are based. These intangibles to which we are referring are not goodwill and intellectual property; but rather, focus on maximizing human performance. At their foundation are leadership, communication, and teamwork.
Why don't we measure intangibles?
Business leaders have stated that they value the intangible asset of employees, yet behave otherwise. In their book, Cracking the Value Code, Richard E.S. Boulton, Barry D. Libert, and Steve Samek document that 85 percent of executives reported recognizing the importance of investing in intangible assets such as employees. However, only 35 percent of those same executives acted accordingly. What is the reason for this discrepancy?
1. The belief that intangibles do not impact the bottom line. Despite considerable research, many managers continue to believe that intangibles cannot be directly tied to income. However, studies conducted on the subject, including Towers Perrin's 2008 research, showed that the most engaged workforces collectively increased operating income 19 percent and earnings per share 28 percent year to year. The least engaged workforces collectively decreased operating income 33 percent, and earnings per share 11 percent in the same period.
2. Fear that the results will get personal. If mishandled, intangible measures can lead to finger pointing and accusations that "Fred" is a weak leader or that "Jennifer" cannot work as a team player.
3. It's not part of the business DNA. Because intangibles are not traditionally measured, leaders simply do not take them into account.
4. Results from measurement of intangibles are long term. Businesses can be prone to taking actions that are in line with immediate or short-term results. However, the benefits of using intangible measures as guides tend to be long term in nature. We need to counter our tendency to focus exclusively on short-terms result, particularly during trying financial times, when leaders are primarily concerned with their business's core competencies.
5. Accountability is not always desired. Intrinsic to the measurement of leadership, communication, and teamwork is accountability. The method of data collection used in measurement generally involves examining performance of divisions or departments, for which someone is responsible. Without measurement, it is easier for the managers of these areas to evade accountability and hide behind anecdotal evidence.
Danger of not measuring intangibles
There are many reasons that we do not measure leadership, teamwork, and communication, but are there any consequences that we face if we fail to quantify these drivers?
Unintentional mismanagement. Personnel expenses (as a percentage of operating expenses) range from 25 to 87 percent, with the average being approximately 35 percent. While businesses may think they are effectively managing this asset without the aid of measurement, a study performed in 2009 and 2010 by the Human Performance Institute found that 54 percent of executives consider themselves actively disengaged. Given that this statistic focuses on the top of the hierarchical food chain indicates the high likelihood that personnel assets throughout the United States are being mismanaged.
Opportunity to detect employee disengagement. Low marks in the areas of leadership, communication, and teamwork inevitably are indicative of employee disengagement. Accordingly, if businesses are not in control of these organizational drivers, they will see financial ramifications in areas such as retention and talent acquisition (the average $30,000 employee will cost you $50,000 to rehire). Additionally, businesses must consider the costs of absenteeism and presenteeism (being physically present at work without being at full productivity) that correspond with a disengaged workforce.
According to Mercer's survey on health, productivity, and absence (2008), 9.2 percent of payroll is spent paying for incidental absences and extended leaves. To put this in perspective, out of every $1 million in payroll, $92,000 is spent paying people who aren't working. Mercer goes on to report that unplanned absences caused a 54 percent decrease in productivity and a 39 percent drop in sales and customer service.
Benefits of measuring intangibles
Aside from failing to detect a disengaged workforce by not measuring their intangibles, managers forego the opportunity to reap the benefits of this quantification.
Focuses attention. The amount of information through which businesses must sort and prioritize is frequently overwhelming, forcing some things to fall through the cracks. The use of measurement can help leaders to sort through the clutter and focus attention where it is most needed at a team, departmental, or organizational level. In the event that a trouble spot appears, leaders can now provide assistance or allocate resources when a larger need for training is indicated.
Creates accountability. Interestingly, the creation of accountability is both a reason that measurement is not implemented and an argument in favor of its use. We have all witnessed culture trump strategy. Creating a culture of accountability through the use of measurement will ensure a "want to" attitude from your employees versus a "have to." The difference will manifest itself prominently in the areas of innovation and organizational growth.
Facilitates feedback. It is always easier to have a difficult conversation (or even a confrontation) about how to improve a process than to talk about the individuals whose performance is creating the inefficiency. The use of measurement as an indicator of performance allows everyone to band together against a common enemy - the measure that needs to be improved.
Directs behavior and increases alignment. In the book The Goal, author Eliyahu Goldratt writes, "Tell me how you measure me, and I will tell you how I will behave." In their personal lives, people change behaviors when shown cholesterol levels or when their pant size increases. In business, employees modify their behavior when increased shipping errors or low customer satisfaction rates are revealed. Likewise, it has been demonstrated that by displaying measures related to leadership, communication, and teamwork, business's workforce will endeavor to either strengthen or maintain the status quo.
Furthermore, if the movement of these measures is tied to performance reviews, improvement actively becomes organizational in scope because everyone will defer self-interested behavior in favor of the greater good. Imagine flying on a plane where each crew member controls the plane using her own set of controls, from her own perspective. The problem becomes obvious, as does the importance of the organizational alignment gained through the use of measurements.
Creates your competitive advantage. Too many executives are content using standard industry measures. Yet, how can you ever expect to differentiate yourself by looking at, measuring, and improving exactly the same areas as your competition? Your set of employees and their talents are unique to your business, and quantifying and building on their intangibles will quickly provide you with a unique competitive advantage.
Measurement is an essential aspect of any organization's sustainability strategy. Customary measures are abundant, and while these indicators will help businesses maintain a satisfactory level of organizational health, they will not bring an enterprise to the pinnacle of performance. The apex is only reached through competitive differentiation and human resource optimization.
Performance of your personnel asset is not always easy to grasp, but that makes it no less vital to your organization. Perhaps part of the challenge is HR's relatively recent arrival on the business scene, as compared to accounting or finance.
For the time being, we will patiently continue to measure and improve intangibles such as leadership, communication, and teamwork until the day arrives when these measures are included on a new, improved balance sheet.