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How Defining Your Human Capital Strategy Will Affect Your Profits


human capital strategy

I didn’t really understand how powerful a human capital strategy was until I started GrowthForce, my third company. I was trying to build this one with less turnover than I had in my earlier two companies.

At my previous company, there was an HR director who would come in and want to talk about things like culture and core values. I thought, "I don't have time for that. How will that help us increase sales, build our product, or raise the next round of inter-capital funding," which were the three main things that I was focused on. I never considered the importance of Human Capital. We never made it a priority because it seemed more like a luxury. I did not understand the real value of it.

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I didn't realize how much of an economic impact a human capital strategy has either. At the time, we had a 21% turnover. The overall industry turnover rate average is about 15 to 20 percent. That's because there's just not enough people. There's a shortage of accountants.

When we first got started, we would hire people at low wages because we were just a startup. We didn't have the revenue. Then, an oil and gas company, or a CPA firm that was serving oil and gas companies, would pay them $10,000 more and give them health insurance. So I would train them, and then they would leave.

The Cost of Turnover

When an employee departs, the absorbed costs involved to recruit, hire, train and bring the replacement up to speed are often overlooked. Turnover is a big expense of doing business. According to the U.S. Small Business Administration, the cost to replace an employee goes up with the employee’s rank in the company.

“The Best Corporate Strategy can fail at implementation without a human capital strategy supporting it. Today’s business challenges demand a new business-focused human capital model.”

Joanne Flynn, Founder of Phoenix Strategic Performance

In a service business, your employees are knowledge workers. The longer they stay with the company, the more productive they are because they gain more knowledge over time. But when they leave, that knowledge leaves too. Then, the replacement you hire starts from scratch and you're behind at least six months by the time they start to catch up. If you hire the wrong person as a replacement, which is always a risk, there is a chance for an even greater setback.

When people don't quit, your company has greater knowledge and expertise, which means that you make more money and you can charge for that knowledge and expertise.

When I started GrowthForce, I hired Insperity® and sat down with their human capital specialists. The first thing they asked is “What are your goals?" I realized that I wanted to create a company that is fun. They said, "Okay. Well, it starts with your business strategy."

By implementing a human capital strategy for GrowthForce, we were able to lower our turnover ratio to 3.4% last year and 3.1% the year before that.

How did we do that? The first thing we did was, we refined our business strategy and defined a human capital strategy. I learned this from Insperity. They taught me to answer this question: Why do you exist? For me, it was to reinvent the world of small business accounting. I don't want to just do what everybody else is doing. I want to innovate. I want to change the world. I want a billion dollar business that is going to transform the lives of nonprofits and the communities they serve, and the lives in small businesses, their employees, and the communities they live in. I want to help businesses get access to the kinds of financial management, business management expertise, that you typically only get at a Fortune 100 company.

Once you have a solid business strategy, you need to define a culture, or one will get defined for you. If you don't take the time to actually define your core values and your belief system, then, as a company, it's going to get created without you. I never really understood that. When you have a small company, as the CEO and the founder, your behaviors naturally rub off on everybody around you. You end up creating your culture and your core values because of the power of your personality.

People join companies, but they quit managers

It’s important to consider that you are institutionalizing your core values and what you want the company's core values to be. It's about institutionalizing them with supervisors and managers because if every supervisor and manager understands how to implement those values every single day, people will join companies because of what the company believes in. People quit managers if the manager isn't actually doing what they believe in.

As a New Yorker, I tend to have the mindset of living to work, so when Insperity asked me, "What are  your core values?" I said, "I want to work to live! I want to fit work into my lifestyle. I want to put my family first. I started this business so I could coach soccer, and basketball, and baseball. I want to attract people who live close to our office who will see a lot of value in being able to go see their kid's 3rd grade play at 2:00 in the afternoon.”

Once we went through the exercise of creating core values - which by the way, took about three years to really get through it - I accepted the idea to follow a principle called "Raging Incrementalism." Every day we want to make progress on all the things that are important, but there's no Big Bang Theory. Things will constantly be incrementally getting better. It's learning. It's getting smarter, and moving the ball forward on all of your goals.

The same thing was true with our core values. When we were meeting as a management team, and we had difficult decisions, we would discuss what this meant to the development of core values. Were the core values that we put on the table the right ones? Do we need to change? We didn't do this every meeting, but we did when we really had to make a big decision.

A quick story: We had an accountant here, we’ll call him David. David was a good accountant. He was a good accounting manager from a technical standpoint. The CPA's that worked with us loved his work papers. The outsourced CFO's that worked with us loved his schedules. He managed his team on time. He came in on budget, so we gave him more, and more, and more work. He volunteered for the biggest clients. It got to the point where he had the biggest book of business. He was managing a team that was almost double the next largest team. His profits were fantastic. So, he had the biggest clients and the biggest gross profits, most dollars and percents.

But….he was a jerk. He was a bully. He got his way through intimidation. He made everyone’s life miserable at the office. I knew he did not fit our culture. It's difficult when your best performer causes you to have to make a decision about whether or not you need to let someone go. I watched his outbursts - He would storm out of meetings because he didn’t want to do something. His staff lived in fear.

The unfortunate consequence was that his negative behavior and poor attitude was contagious. What happens, then, is people start to question management. "Why are they letting this guy do this?" They were wondering why we were not firing him and office tension was at a high point. I knew I had to do it.

Once I finally fired him, the next day, the celebration and the joy in the office was palatable. People asked me, "What took you so long?"

That's when people say, "Okay. This is a company that I believe in." You want to be part of a company that has a moral compass. That is, you want to be part of something that is bigger than just yourself, than just a job. Ever since then, our turnover dropped, our productivity improved because we really were abiding by our core values of teamwork, and our profits increased as a result.

Culture Eats Strategy For Lunch

If you have a great culture, you will have high-performing teams. They will figure things out on their own. Your turnover will be lower. Your people will be happy and motivated. Once you start recruiting for behaviors, not skills to pay the bills, your culture congeals and your profits will soar as a direct result.

Success of a business starts with success of your people so you must attract great people - recruit and retain the right people.

If your a strategic CEO, you understand that you should always think about making a great environment, a good culture, and focus on the people.

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