Transformation-People & Performance: Building human capital also pays off for firms in the form of more consistent earnings and greater resilience during a crisis. When companies emphasize skill development, it pays off for workers. Some firms prioritize developing their employees and managing to deliver top-tier profitability at the same time. Some firms prioritize developing their employees and managing to deliver top-tier profitability at the same time. People + Performance Winners have a distinctive organizational signature that challenges and empowers employees while fostering bottom-up innovation. This form of organizational capital contrasts with that of other top-performing firms, which tend to be more top-down and transactional. This management style seems to activate human capital and create a tangible competitive advantage. But does investing in people actually benefit companies? Most business leaders agree that it’s the right thing to do. But they are less clear on how those efforts relate to the bottom line and why some organizations are so much more effective than others at turning human capital into a real competitive advantage.
What does matter: Observance from empirical analysis and studies show that while they closely tracked Performance-Driven Companies on profitability and shareholder returns over the pre-pandemic decade, P+P Winners were roughly 1.5 times more likely to remain in the top tier year after year, and they had about half the earnings volatility. People +Performance winners are not only consistent through the normal ups and downs of business cycles; they are also more resilient in times of crisis. When the pandemic struck, they were more likely to weather the crisis and avoid taking major hits. More People +Performance Winners found growth opportunities in the crisis years as well. Organizations that had spent years building reserves of loyalty, goodwill, and innovative capacity by investing in people may have had more internal resources to draw on when the chips were down. Investing in human capital is associated with consistency and resilience for other companies, too. In the two segments that are not top performers financially, People-Focused Companies demonstrated greater stability than Typical Performers. People +Performance Winners are also talent magnets, with attrition rates almost five percentage points lower than those of Performance-Driven Companies. People-Focused Companies have similarly high levels of employee satisfaction and even lower attrition than People +Performance Winners, although not with the same stellar financial performance.
How do People +Performance Winners manage to succeed on both fronts? While investing in people is important, it shows that another ingredient is needed to bring out their best and channel their efforts into results: organizational capital—that is, the management practices, systems, and culture within each company. This concept encompasses everything from training programs to workflows, department and team structures, employee communications, norms, culture, and leadership. When these elements are effective, they can turn a collection of talented individuals into a cohesive team. Organizational capital is the fabric that surrounds employees, and its pattern matters. People +Performance Winners have a distinctive signature characterized by consultative and challenging leadership styles; bottom-up innovation and collaboration; positive and inclusive work environments; and rewards and advancement opportunities for employees. Performance-Driven Companies have similar leadership styles but are more externally oriented to customers and competitors, with less emphasis on engaging their people through company-wide innovation, motivation, work environment, and on-the-job coaching. People-Focused Companies have many practices in common with People +Performance Winners, such as motivating employees and creating positive work environments, but they are less results-oriented, and they do not emphasize bottom-up innovation.
On average, companies spend about one-third of their revenue on human and organizational capital which is measured by using the proxy of compensation for the former and adjusted selling, general and administrative spending for the latter. This is a significant investment, and companies need to make it as productive as possible. People +Performance Winners achieve higher revenue growth than both Performance-Driven and People-Focused Companies for every penny they invest in human and organizational capital. By contrast, Performance-Driven Companies generate higher returns on R&D and sales and marketing investment but they have the potential to boost their overall results even further by making their investments in people and workplace systems more effective.
What should focus on corporate leaders: Corporate leaders need a deeper focus on the nuances of organizational capital. Human capital is not merely a labor input; people are any company’s core asset. The workplace should work for employees, with coaching to help them develop, structures for support, and workflows that remove frustrations. Employees know what works on the front lines, and their voices and viewpoints should inform any redesign. Beyond improving the day-to-day experience for workers at every level, these principles can enhance competitiveness and adaptability in a fast-moving world. In some cases, altering company-wide policies and systems could spur positive change. In others, it will take behavior change from leaders. While C-suite executives can articulate the vision and set the example, frontline and middle managers are key actors since they set the tone for individual teams, have greater visibility into what’s working, and can be the biggest influence on the employee experience.
Not every company will choose to follow the P+P Winner template. Some are singularly driven by financial results; focusing on people may not be in their DNA. Remaking organizational culture is a difficult, ongoing commitment that requires energy, self-reflection, and a willingness to change familiar patterns. But companies that adopt a more people-oriented focus along with a more challenging and empowering organizational culture have a lot to gain. In addition to boosting financial returns, they can improve their consistency, resilience, talent retention, employee loyalty, and reputation and these are the hallmarks of companies that thrive over the long term. A dual focus on developing people and managing them well gives a select group of companies a long-term performance edge.
Equipping people and organizations to unleash sustained performance. Amid today’s workplace and talent revolution, organizations need the ability to transform again and again. Success relies on the most critical resources of people with the backing of the right structures, systems, and skills. People & Organizational Performance Practices help to create an organization and make the best of people so can realize strategy today and sustain performance in the future.
Business leaders are always being told to focus on performance. That’s their job, Up to a point but performance isn’t everything. If it takes the weight of investments toward the things that help reach quarterly targets, it’s easy to neglect the company’s long-term health. We define health as an organization’s ability to align, execute, and renew itself faster than competitors so that it can sustain exceptional performance over time. To achieve and sustain excellence, leaders need to take deliberate steps to manage both the performance and the health of their organizations.
Approach and application: Organizations that have transformed themselves using the approach have achieved remarkable results. Consider two contrasting examples: a turnaround and a great company that got even better. An insurance company saw its position come under threat as sweeping government reforms opened up the market to new entrants. It had lost money for two years running, its market share was eroding fast, and its cost structure was the industry’s highest.
At a large bank, inherited an organization with a strong culture that already led the industry in many products and customer segments. With no burning platform, it is wondered how could define the era of leadership, so commissioned a review of current performance and future trends. This exposed worrying developments on the horizon: opportunities for acquisition were few, regulation was getting tighter, credit quality was deteriorating, and customer preferences were changing. Further analysis revealed that the bank had a healthy execution-edge archetype. It committed itself to pursuing historic growth rates despite the adverse trends and decided to focus on capturing value by “mining the seams” between traditional silos to boost cross-selling and customer loyalty. This would involve shifting to a market-focus archetype, but without losing the strengths and disciplines of the execution-edge archetype.
Concluding remarks: To operate at the peak levels of performance that today’s fast-changing markets demand, companies need reliable methods to make change happen at two levels: transformational step-changes in performance and health, and continuous improvement in the way they do business from day to day. It has revealed that hands-on experience, needs now have a deep understanding of what this involves, and proven tools to make it happen. This approach has been so effective in so many industries and from so many different starting points that we regard successful transformation and sustained excellence as a real possibility for almost any organization. Confront optimizing healthy differences People are different and in order to set a tone for respect, loyalty, and commitment within the organization, people management needs to focus on optimizing these differences.
