Most companies spend an average of 60% of revenues on their employees. Labor costs alone account for two-thirds of U.S. gross domestic product. Yet if you grill most CEOs about what kind of return on investment they're getting from this mother of all line items, they're likely to become uncharacteristically silent. The truth is, companies know the least about what costs them the most.
However, as human resources gives way to the new discipline of human capital management, companies are taking the guesswork out of employee relations. Dave Kieffer is the leader of Mercer Human Resource Consulting's human capital group. Over the past decade, Kieffer and his team -- including an economist and industrial psychologist -- have developed new statistical modeling systems that can analyze every facet of the workforce, controlling for variables in such an extensive way that CEOs can ascertain the ROI of the millions they're spending on their people. Kieffer recently spoke with BusinessWeek's Michelle Conlin. Edited excerpts of their conversation follow:
Q: You've called your human capital work the "discovery that will change all companies." That sounds like some flashback to the dot-com era. Why are you so convinced that his new work will be so revolutionary?
A: No one -- be clear, no one -- has ever done the kind of work we're doing. In the past 10 years, Mercer has studied dozens of global and mega-national firms -- some the best in the world, some average, some struggling. More to the point, we have had complete access to the personnel records of millions of employees. We have analyzed those records -- tens of millions of discreet events -- as people moved in, up, and out of these companies.
These are not surveys or perceptual data. These are measures of how people actually behave, how they respond to the rules and rewards of their companies, and whether they flourish, languish, or leave.
Q: Companies have historically accumulated reams of data about employees. What's new about what you're doing with this information?
A: We ran employees' behavioral patterns against the perspective firms' operational and financial records to establish direct, causal links between those employee behaviors and the business performance of each of the companies.
Q: What was the most compelling insight that this work yielded?
A: That the sources of value-creation have shifted. Access to capital is easier, and technology is more plentiful and cheaper. What's left? The workforce. More importantly, the operational tactics, practices, and policies for managing the workforce.
Q: You talk a lot about determining the return on investment on the workforce. Why has it taken so long for this to happen?
A: Until now, sophisticated measures for establishing the ROI on specific management tactics were not available. Over the past decade, we've developed statistical modeling systems that can actually control for every variable imaginable in the employee population, letting us know exactly what's worth it and what's not.
We look at this data for everything -- average age of employees, whether they have kids, years of service. Anything. So it's no longer about hunches. It's about cause and effect.
Q: What's the mistake most companies are making?
A: The fact is companies know a great deal about specialized things -- how to train new people well or how to select the right people. What they don't grasp is what the big leverage area is. They don't look at all the parts of the system.
They treat pay, benefits, and training as ad hoc, silo systems. How are you going to train employees is useless if you don't also factor in how you are going to pay them. Companies don't know whether 90% of the bang for the buck is [for] this or that. If you look at 99 out of 100 major companies, they'll try their darndest to have things the same for everybody. That means they're probably overspending in some places and underspending in others.
Q: What questions are CFOs not asking that they should be asking?
A: The really astute financial questions that a CFO should be asking the head of HR are: Can we spend a little less and not affect the performance of our folks? Can we spend the same amount but take some medical money and, say, put it into pay to get a bigger bang for our buck? Or can we spend just a bit more and because we're at some tipping point get a surge in productivity?
This what the CFO should be asking -- and what the HR guy is clueless to answer.
Q: You're a basher of benchmarking. What are you so critical of this long-vaunted practice?
A: First of all, benchmarking isn't a good basis for strategic planning. Second, ad hoc changes almost always disregard the "systems" nature of organizations. Third, why would someone think that the best practice of a jet-engine factory would have any pertinence to a software developer? Benchmarking is only a natural consequence of not being able to evaluate these things in any other way.
Q: What usually happens when companies steal practices from others?
A: The change may work. But it offers no competitive advantage because if it's that easily transported, everyone else will soon copy it too. Or it might fail. That's because the organizational context where it worked isn't the same as in the company trying to copy it.
Either way, you're not getting the kind of return on investment you could if you were mining your own internal labor market, seeing exactly what would maximize productivity within your own ranks. Every company -- even competitors in the same industry -- has its differences.
Q: Are most CEOs failing in taking responsibility for what is, essentially, their largest asset?
A: At the very least, they aren't capturing the optimum returns on their workforce investments. At worse, they are putting their organizations at risk.