Why You Should Value a Human Capital Strategy

Peter Drucker’s comments about business structure and management emphases tickle me. They tickle me because his statements run absolutely counter to the widely held beliefs of today's business management “experts."  His statements point to staggering differences.

In his book, Managing in the Next Society (Drucker, Peter F. 2002. St. Martin’s Press, New York, NY), Drucker discusses the problem "financial people" have with managing business:

"There's an enormous challenge ahead to educate the owners of business, many of whom, as I've noted, are financial people. I once was a securities analyst, so that gives me license to say that it is virtually impossible to make a financial person understand business. I am not being facetious. Financial people don't deal with the issue of balance between often conflicting elements - short versus long term, continuity versus change, improving today versus creating tomorrow. Corporate leaders who wrestle with these issues every day know the amount of struggle involved, but it's difficult for financial people to understand this."

These fundamental differences ought to shake you to your core.  Let’s take a look at why you should value a human capital strategy.

Why emphasize managing a business solely by its financials? It happened simply and innocently enough. We confused the financial statements with the business itself.

For more than 50 years the relative stability of technology and demographics paved the way for repetitive, mechanical hierarchical business models to succeed. These models had predictable structure, and outcomes were based on repetition of mechanical practices.

These practices yielded predictable financial results, creating a false association. Good financials were erroneously equated with good business. The two patterned so closely that the difference would be difficult to discern.

A human capital strategy was either non-existent or considered of little real value.

Financials are defied by hyper-dynamic markets. Today's technological landscape makes for a less stable and predictable business environment. The demographics are also nothing like those characteristic of the last 50 years. The entire landscape is in constant and accelerating change. In this new world of emphasizing a human capital strategy, financial statements are merely the report card for how the business is working.

A business is not a machine—it is more like a life. A business is a complex web of human conversations and social relationships. From this continuous ebb and flow, a menagerie of products and services are developed, created, communicated, delivered and serviced by providers to customers. In this hyper-dynamic marketplace, it is far less important what a business thinks it does. It is more important that a business understand:

• the why,
• for whom; and
• for what betterment of the customer and the world.

Conversations and relationships are dynamic characteristics far different than those of machines. These dynamic characteristics serve living beings and social purposes. They are organic in nature, and they require organic processes and organizations to endure. People are the very soul of business. Therefore, a human capital strategy produces and sustains the value of all other capital.

I heard the CEO of an energy-related firm make this interesting statement:

"When we consider the human relationships as critical in my enterprise, we have a struggle as our material "assets" as shown on our financials represent $BB, while our people "assets," even as costs, represent only $MM. It seems that the larger assets are the most important. We are coming to recognize that the real value of the material "asset" is totally dependent on the performance of the people, and this is leading us to realize that the people "asset" is of greater significance to the company performance, rendering the material asset as valuable, or potentially, value-less."

What do you value most—assets or capital? I guarantee, if you think like a financial person, you'll answer incorrectly. If you think like a traditional business person, you'll risk the same error.

Consider thinking more like Peter Drucker. Then you can begin to place more of your energy and investment into the things that produce your greatest ROI. These, of course, are your people, your Human Capital.  If you are like most of today's managers, you are well under-equipped to do much to make improvements.

It is time to get some help for your organization. I wouldn't wait. I might even call a professional employer organization (PEO).