Managing People for Profit

In the hard-nosed world of managing organisations, people management is often seen as the soft side of management. Whilst considered as positively contributing to performance indicators measuring customer and employee satisfaction, people management is not seen as directly improving the bottom line.

People management, however, contributes directly to the bottom line. Managers who pay insufficient attention to their processes for people management are missing an opportunity to make a substantial difference to their profits.

A ten year study published by Dennis Kravetz in 1996, correlated people management practices with profit performance measures. It revealed that a minimum of one hundred percent improvement in the profit performance measures correlated with high scores of people management practices.

The study covered over two hundred organisations, one hundred and fifty of which were Fortune 500 companies and measured five key indicators of profitability and correlated them with companies with high people management practice scores versus low people management practice scores.

The detailed results of the key indicators were 16.1% versus 7.4% for sales growth; 18.2% versus 4.4% for profit growth; 6.4% versus 3.3% for profit margin; 16.7% versus 4.7% for growth in earnings per share and 19% versus 8.8% for total returns.

In the companies studied, the increase in profits equated to an average of US$67 million. Companies that improved their scores added US$294 million in profits per company, a gain of 60% over three years. Companies which experienced no change added an initial US$78 million, a gain of 16%. For the eight companies which showed a decline in scores there was a reduction in profit by US$16 million, a decline of 3%.

The practices which predicted company financial success fell into the categories of management style, company culture and goals, organisation structure, communications practices, quality and customer satisfaction, recognition and reward practices, employee development practices, section/promotion practices and job design.

The learning from this study is obviously immense for any organisation seeking to make profit from the sales of products and services. However, it is also pertinent to public and not for profit organisations.

For those focused on delivering bottom line results, the implications are that developing the means to improve employee competence and change organisational culture is as important as developing new products and services in the quest for increased profits.

For those focused on human resource development, the implications are that their work is as much responsible for driving profitability as are the sales people who sell the products. Unfortunately too many human resource departments treat their role as a cross between a policy think tank and information system administrators.

A risk apparent in many organisations is that human resource departments tend to forget the strategic imperative of developing human resources to meet the goals of the organisation whilst they concentrate on the development and implementation of computer systems.

An example is when human resource department goals include implementing software, developing intranet sites but exclude or diminish the output of a detailed, well thought through training needs analysis.

Training needs analysis should first identify the gap between what exists and what is wanted. Analysis revolves around knowledge skills and behaviour. The analysis should reveal what employees currently know vs. what they need to know, what employees currently do vs. what they need to do and what employees currently believe vs. what they need to believe.

In identifying the gap, organisations need to understand what they are trying to achieve with the development of their people. Organisations need to review whether they have problems or are expecting an impending change or can use their strengths to take advantage of opportunities, any of which might be facilitated by training or other human resource development activities.

The list of activities will include, but not be limited to, training, coaching, placements in external or sister organisations, cross functional project team membership and career development plans. Usually, the list of activities will be too long for the organisation to implement. Thus, prioritisation of the activities against the company's goals is required.

The review process measures the importance of people improving the effectiveness of doing their jobs. If changing the effectiveness of people doing their jobs is unlikely to contribute to the goals, the implication is not to fix what is not broken.

The corollary of course, is that the priority activities are those directly associated with or supporting people to do jobs more effectively consequently assisting the organisation to reach its goals.

Proper training needs analysis is a key deliverable of a human resource department and is directly correlated with profitability. Unfortunately, it is a skill less practised in favour of "big" developments of policies and systems.

In a world of increasing technology use, human resource departments need to remember their strategic role developing people to match the requirements for the organisation to reach its goals.

Kevin Dwyer is Director of Change Factory. Change Factory helps organisations who do do not like their business outcomes to get better outcomes by changing people's behaviour. Businesses we help have greater clarity of purpose and ability to achieve their desired business outcomes. To learn more visit http://www.changefactory.com.au or email kevin.dwyer@changefactory.com.au

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