Back at the turn of the 20th century, Austrian writer Marie Von Ebner-Eschenbach wrote, “Even a stopped clock is right twice every day. After some years, it can boast of a long series of successes.” The same might be said of how business measures successful performance.
Although it is talent, not capital, that drives financial performance in the new economy, annual reports have virtually “stopped the clock” on how we report results and evaluate organizations. Today’s annual reports are still full of facts and figures derived from metrics geared to 20th-century industrial management models.
Double-entry accounting is a technique invented by the Italians in the Renaissance, and it has changed surprisingly little since then. So, the principal source of information we use to measure business success today is a backward view based on a technique invented 600 years ago. If that’s not stopping time in its tracks, I don’t know what is.
That approach simply doesn’t work in the context of the 21st-century economy in which intangibles — knowledge, relationships, reputations and services created by talented people — are the true source of corporate wealth. More than 75 percent of the wealth (productivity) created today is service-related, and that includes the manufacturing sector. For example, car manufacturers make more money from providing financial services than from manufacturing cars.
In the February 2007 McKinsey Quarterly, author Lowell L. Bryan attempted to illustrate a simple approximation of intangible capital by subtracting the invested financial capital of companies from market value. Using 2005 book capital as a crude proxy for financial capital, he estimated the intangible capital of the world’s largest 150 companies was much more than $7.5 trillion — up from only $800 billion just a decade ago.
Now we’re talking real money! So, why do companies continue to gauge their performance by measuring returns on invested capital (ROIC) rather than on measuring the contributions made by their talented people? Why do organizations still tightly control discretionary spending on the sources of intangible capital?
Enterprise education, leadership development, knowledge creation, research and development and so forth almost always are expensed on what Bryan calls a “What can we afford?” basis. Maybe it’s because we aren’t measuring (and therefore investing in) what really matters.
As Tom Austin, group vice president at leading research firm Gartner, put it, “Raising productivity by cutting the cost of production time is running out of steam. To increase competitive advantage, organizations need to look for opportunities to increase market impact, including value and agility, by investing in a high-performance workplace.”
I’m a firm believer that what we measure becomes how we measure success. So, it’s time to recognize financial performance increasingly comes from returns on talent, not on capital, and shift organizational focus accordingly.
We need to distinguish intangible human resources, just as industrial models do for tangible physical resources. We need to increase the portion of capital we invest in developing informed, knowledgeable, competent workers because they have the opportunity to make the greatest positive impact on the enterprise’s value-added deliverable.
Most of all, we need to re-evaluate the metrics we apply to the business impact of learning and articulate the results in more strategic terms. The old industrial approach was to measure efficiency of outputs — the more you make in less time, the more money you make. Now we need to focus on effectiveness of outcomes — did we achieve our goal, and was it effective in reaching our strategic objectives?
This shift in perspective could have far-reaching implications for measuring performance, for evaluating learning and development budgets, even for measuring corporate value. External analysts are quickly catching on that the clock has run out for workforce development investment strategies that stopped being effective a long time ago.
If you have the time, drop me a note at Norm@CLOmedia.com and let me know what you, as a learning professional, think about the current state of corporate success measurement.
Editor in Chief