How to Increase Enterprise Value Through Human Capital Management

Human Capital Management (HCM) aims to create the most competitive workforce for a business. Your approach to HCM can help your clients enhance their enterprise value.

When working with mid-sized businesses, you will almost certainly find they need to make significant changes to their people strategies to achieve the desired level of value creation.

Enhanced competitiveness comes from providing excellent products and services at optimal cost. The company’s leadership cannot achieve this without a team of talented people who are motivated, understand the mission, and have the skill and ability to execute.

The typical HCM strategy will require some hard decisions, such as changes in the senior leadership team, organization structure, or compensation programs of your client’s company. Where should you start?

An effective HCM strategy is built to support the larger value creation strategy. The value creation strategy will dictate the HCM strategy. There are four steps to successfully creating the most competitive workforce and using HCM to drive value creation success.

Related: What You Should Include in Your Value Creation Strategy. 

4 Steps to Create a Competitive Workforce and Use HCM to Drive Value

1. Be clear on the strategy to realize enterprise value creation.

Suppose the business owner or CEO says, “I need my business to be worth 30 percent more than what it is today.” You have some choices about how you can make that happen – geographic expansion, product line expansion, etc. Once you decide on the value creation strategy, the next step is to determine how you organize the company to execute that plan.

2. Diagnose the organization’s capability to execute the plan.

When the client decides upon specific tasks required to propel the company to the next level, work backward from that outcome to determine what skill sets are missing.

For example, suppose the client decides that the key to value creation is accelerated digital marketing. In that case, the first step is to assess the marketing department to determine if they possess the required expertise. If they do, great! If they don’t, then you have to make some changes in the marketing organization. But it doesn’t stop there. If you’re going to focus on digital marketing, you have to also look at your sales team. Digital marketing tends to drive inside sales, not field sales. Does the sales team have the right mix? Then look at the IT organization – do they have the expertise and ability to deploy the required digital marketing tools?

This is just an example. Any value creation strategy that seeks to enhance the enterprise value by 20% or more will need this level of diagnosis.

3. Design the HCM initiatives to close the gaps.

There will probably be 2-4 initiatives you’ll have to undertake to close the gaps. These could be restaffing some senior leaders, hiring missing skill sets or capacity, reworking the compensation and reward systems, etc. If you’ve correctly diagnosed the gaps in step 2, the initiatives to close those gaps will not be challenging to identify and design.

4. Implement those initiatives.

Once you are done with the gap analysis and have identified the path forward, it’s time to implement those planned initiatives. This needs to be done with a communication plan that spells out the value enhancement strategy, the HCM changes required to execute that strategy, and what those changes will be. Don’t keep people in the dark; their ability to successfully execute the strategy depends on understanding it.

Succeeding with an HCM strategy comes down to developing a complete answer to the question: Do you have the right people in the right jobs doing the right things?

The Right People

Thinking about the right people starts with senior leadership because that’s where the most leverage is. Senior leaders are the people who drive the organization. If you have a good senior leader, you’re in great shape. A senior leader who’s weak or in the wrong job impedes progress.

What does a good leader look like? They are knowledgeable about their area of responsibility; is a good team player; know how to staff and motivate a team, and consistently deliver good results. How do you know if the current leadership team has good leaders? Look at their resumes. Interview them. If they interact with customers, speak to those customers. Use assessment tools.

What if you need to go outside and find a new leader? A commonly cited article by Dr. John Sullivan states that most new hires at every level fail within 18 months, not including the three months (average) needed to find, interview, and hire that person. Reasons for these bad hires include failure to measure the cost of a bad hire, an unscientific hiring process, decision-making based on intuition instead of data, uncoordinated process updates, failure to measure or report process failure rates, and failure of HR departments to shift to data-driven processes and approaches. There’s a critical point here: the high failure rate for outside hires is due to poor management processes. The success rate can be dramatically improved with good hiring processes.

Another important point: many managers believe the solution to good hiring is to find an excellent external recruiter who will only bring in good talent. Not true! You cannot depend on an exceptional recruiter to save you from making bad hires. The responsibility for good hiring lies with the hiring organization, not the recruiter. The way to avoid making bad hires is to have a disciplined, structured hiring process.

In the Right Jobs

Organize to implement the strategy. Once you have the senior leadership team set, there is a process where the senior leaders look at the people in their organization and decide whether they have the right people in the right jobs to execute the strategy. The result of this process is not complicated: some people are already competent and properly situated; some are properly situated but will require training, and some will have to leave their position and maybe leave the company. And you may find you’ll need to create jobs that don’t exist today.

You need to get the span of control right, too. The generally accepted, optimal level of direct control seems to peak at a ratio of one manager to eight or nine direct reports.

Companies sometimes use one strategy to identify their strongest performers, regardless of their current assignment, and place them in jobs that will have the most significant impact on executing the plan. If you are reasonably confident they can perform well in a new job, take the risk. Put your most vital talent in the positions where they can contribute the most.

Doing the Right Things

There are more competitive cultures and less competitive cultures. Enforced expectations determine culture – leaders are clear about the expected behaviors and are consistent in enforcing those expectations. With constructive feedback, the celebration of success, and retrospective on failures, you can create a highly competitive culture where people can execute the strategy.

Optimizing employee motivation and performance requires effort. People need clarity on how well they perform and what they can do to enhance their performance further. It is the job of the manager to provide this feedback. Be purposeful about it.

People respond to incentives, so get the compensation plan right. Establish a base pay, plus bonuses for people performing well. You must reward the people who are driving value creation. They need to see financial rewards as they work toward achieving the company’s goals.

Sales compensation is a specialized area deserving focus. Salespeople will do what you pay them to do; they will not do what you don’t pay them to do. Be clear about what you’re delivering them to do and ensure that it aligns with its strategy. If the current sales compensation plan was instituted without analysis and design work, it is likely to be sub-optimal.

HCM as Part of the Value Creation Strategy

When crafted to support the larger value enhancement strategy, HCM has the most significant impact of any set of activities implemented to enhance value. As an advisor, you need to help your clients focus on having the right people in the right jobs doing the right things for their organization if they hope to achieve their value creation targets.

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Author Summary:
Mike Lutz

Mike Lutz

After spending 4 decades in Human Capital Management, the last three assignments as Chief HR Officer reporting to CEOs of 3 different companies, I’ve decided to form Madabex and focus on helping owners of mid-sized companies increase the value of their businesses, normally as part of an exit plan.

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