People Power

In a market where financial analysts are focused on earnings, and stock prices react accordingly, employee development is a cost that many companies are all too eager to shed. Diane Therese reports.

The short-term push for profits is not only destructive to employees but also to businesses, shareholders and society generally. This is the view of Dr Laurie Bassi, co-founder and CEO of McBassi & Company, a US-based advisory firm dedicated to overturning current "myopic" practices by proving the long-term financial benefits of investing in employee development and management.

Bassi's long involvement in human capital research includes her time as Vice-President of the American Society for Training and Development, where she developed international standards for measuring and valuing firms' investments in education and training. She recently made a presentation at the Australian Institute of Management in Melbourne on McBassi & Company's human capital measurement and predictive system.

Identifying the drivers

The system involves "thoughtfully constructed" employee surveys to identify the human capital drivers of business results within a company, with the focus increasingly on leadership practices.

For McBassi & Company, the proof is in the sharemarket. In 2002, it established a company to invest in US businesses with high levels of spending on employee development, simply to highlight its longstanding findings. The resulting Bassi Investments portfolio demonstrated "consistent and growing outperformance" of the market, says Bassi.

"We looked at types of training, delivery mechanisms, and the only thing that we could find that was truly predictive of stock prices, was how much businesses were spending.

"Why does this work this way, inside an organisation? First, there is the direct and intended effect of providing education and training to people: they know stuff that they need to know.

"But secondly, there are indirect effects, which I suspect, but cannot prove, are more powerful. When people know stuff, their customers are likely to be happier because they are working with knowledgeable employees. Also employees stay longer. It helps retention, so not only are they more knowledgeable, they develop relationships with customers."

Human capital framework

But investment alone is not enough, it also has to be focused, says Bassi. The difficulty for many companies is identifying where their human resources department should spend its time and effort to achieve business results. McBassi & Company has created a "human capital framework" or classification scheme, which, coupled with employee surveys, helps companies do just that.

The framework identifies 23 key human drivers for organisational - not individual - performance, and groups them into five indices for quick digestion: leadership practices, employee engagement, knowledge accessibility, workforce optimisation and learning capacity.

Through employee surveys, companies identify the human capital drivers that adversely affect their business results. "Most organisations of any decent size do employee surveys, the problem is they're not very thoughtfully constructed," Bassi says.

"You have to have good questions. What's a good question? A good question is something that asks about a best practice, a best practice being something that is known to be an important driver of business results. Do not ask about opinions, beliefs, or attitudes. Here's a good question: 'My manager consistently gives me feedback that I can use to improve my performance?'. Here's a bad question: 'I like the frequency with which my manager gives me feedback?'."

Bassi emphasises the shift here from analysing individuals to business units.

McBassi & Company uses a core set of questions, supplemented with others if necessary, to address specific issues within a company. She warns against focusing exclusively or excessively on employee engagement, and says leadership practices have emerged as an important predictor of business results.

"Essentially, what we're looking for is the natural experimentation that occurs in every workplace," she says. "We're going to quantify that difference and statistically link it to an outcome of interest, which could be the willingness of employees to stay, or sales productivity, or customer satisfaction. It could be any of a wide variety of financial and non-financial outcomes.

"So we're really starting to develop the Six Sigma of human capital management in ways that are good both for the organisation and for the people who work in it.

"From there, it enables you to generate fact-based recommendations for where the human resources department's budget and effort should be focused."

Missionary work

With several trips to Australia on what she laughingly calls her "missionary" work, Bassi also regularly visits the UK, where she says her message is equally well received. But the US it seems, despite successful case studies there, is reluctant to change.

Detailed case studies include the American Bankers Association, American Standard Companies, P&H Mining Equipment, and the Beaufort County School District in South Carolina. The school district project counts among Bassi's favourites. The benchmark result was student achievement based on standardised exams. It showed that human capital management (of teachers, teachers' aides) counted more than socio-economic factors when it came to student achievement.

"Enormously powerful, because it altered the view on the toolset they have available - in a school they have testing and assessment, they have curriculum and instruction, and now they have human capital management," she says.

Despite these pockets of interest, the US generally shows a worrying lack of foresight on human capital investment. However, Europe, particularly the UK, Asia and Australia are more receptive, Bassi says. In fact, she believes Australia's former mandatory training levy was generally a "good thing", with such provisos as advisory support for small business to ensure its money was spent wisely.

"It is my political view that the US is among the most short-sighted of nations at this point, and that's why we have as much interest in our work outside the US as inside," she says. "There's a lot of interest in the UK, where they're purposefully thinking about human capital strategies, what's going to be required for them to compete - because unlike Australia they're not a resource-rich country.

"There's a lot of interest in Europe, and to some extent Asia, where organisations and governments are thinking about how we are going to compete. Whereas the US is still fat, lazy and dumb because what we're doing is still working for us: but if we wait until it's broken, I think it's going to be awfully late."

Les Pickett, Chief Executive of the Pacific Rim Consulting Group, which is working with McBassi & Company to bring the human capital measurement and predictive system to the Asia-Pacific region, estimates the average expenditure by Australian companies on employee development at about 3.5 per cent of payroll. He estimates the leading companies in their fields spend 5-8 per cent. Bassi says she would be hard-pressed to find a US company spending the latter figure.

Bassi Investments looks for companies that are spending at least $US1000 per employee annually. "I imagine it would be roughly comparable in Australia, but we don't really have enough data to know that for sure," she says. "But in certain sectors, like the high-technology sector, they need to be spending much more than that because things are changing so rapidly."

In the meantime, McBassi & Company will continue to make its point on employee investment through making money via Bassi Investments.

"We have to have alternative measures financial analysts can look at, which make the markets more patient," Bassi says.

"Financial markets are currently part of the problem, but they could become part of the solution if they actually rewarded firms for doing the thing that's right in the long run."