Valuing Human Capital

During my early articleship days, I and my peer group were often enthralled during the process of finalization of Balance Sheet of big corporates.  We saw with amazing disbelief as to how figures and values were assigned and fine-tuned to various heads of accounts giving those a shape and size which was true state of affairs of business on a given date and at the same time was acceptable to Shareholders, Promoters, Bankers, Revenue Authorities and Employees alike. The process to us, at that point of time was an art, an act of magic, the pinnacle of applied knowledge in our profession and our principle trainer was our Hero. We spoke to ourselves at length if anything more wonderful and artistic was possible in our profession.

Just when we started to soak ourselves into this amazing world of numbers, figures and estimates and started getting hang of it, Infosys zapped us by putting a value to its Human Resources in its Balance Sheet (BHEL and not Infosys was the first company to do so but the latter glamorized this process the way nobody could). Infosys was the first private sector company to do so and by doing so it broke many myths. The most common emotion it generated in profession is that here is an employer, which “really values” its employees.

What Infosys did was revolutionary. It was not about dressing up Balance sheet with big multipliers. It published a ratio termed as “Return on Human Resources Employed” akin to “Return on Capital Employed”. More aggressive disclosure was the indice of “Wealth Created per Employee”. The whole exercise was all about recognizing true assets in the business. It was an act of recognition. It was an effort to bind a set of performers into an integrated team and turning them into business owners. When I look back, I conclude that it was a well thought out strategy by Infosys knowing that theirs was a “Knowledge based Business” and success or failure will only depend upon the level and quality of this knowledge pool.

Whilst Infosys runs a “Knowledge Based Business”, applicability of Infosys belief will not be flawed in any other business. Whatever may be form of the business, people remain the key. The most successful of businesses across the globe chant one mantra day-in and day-out. “Our Employees are our most valuable resources”. So much so that it has now become a cliché.

As we discussed in the previous post, when business is viewed as a stream, people become components in the stream. Once people become components in this stream, the key is to tap full potential of this component and work towards enabling them to be successful will ensure smooth flow in the stream.

However managers view business as a tool to maximize shareholder returns. Most of the times, focus of the business owner/manager is to create a right balance between Customer Satisfaction and quantum of Shareholders Return. This process of finding this right equilibrium is much so engrossing that the process of enabling people to achieve success becomes insipid to business managers/owners.

Quite often, businesses which are under pressure of deliverance/survival emphasize on competitive strategies, quality enhancement and investment in technology. As compared to this, the most important component in business stream, Human Capital, takes a back seat.

However it is at the time of such stress, this component deserves most focus. Because it is at such times attitudes of people becomes the weight which can tilt the scales.

Following are two basic measures of employee attitude in an organization

  1. Job Satisfaction
  2. Organizational Commitment

There is actually a cylindrical cause and effects between above two and employee attitude. However it can be safely said that quantum of job satisfaction predicts subsequent profitability and productivity. This in turn will influence organizational commitment and will create an environment which will greatly affect employee attitude.

During times when “more” has to be performed with “less” it is critical that Human Capital perform at its peak. It is during such times that managers need to go more close to people down the line and communicate more often to align them more closely to organizational goals. During such times Human effort deployed in a wrong direction will be the most critical waste. It is during such times that hiring and retention strategies are to be put to maximum use. It would be a blunder at such times to assume such acts as routine administrative chores.

Another big mistake is to look upon human capital as deployed waste during tough times. I am not a big fan of cost cutting. As any individual spreads his spending to align with his income, business also reaches certain cost level in the process of aligning itself towards an expected revenue stream. All focus now has to be towards protecting this revenue stream rather than cutting cost down. I rather look upon cost optimization and cost rationalization as correct tools during tougher times (more on it in subsequent posts)

During such times, one needs to leverage human capital to squeeze through tough times. It is during such times that investment done earlier in Human Capital starts to give returns. When times are tough, reacting without leveraging human capital will only result in hitting more roadblocks.

To conclude, it is a gospel truth that “Our Employees are our most valuable resources”. During all times business owners/managers should engage themselves aggressively on acquisition and development of employee skills and constantly should recast job designs to create leaders/winners/performers. Job design should be constantly revamped to tap full potential of individual skills of Human workforce. These practices will ensure a very “progressive” and “high performance” work practices in business. Such progressive practices will ensure enhanced business performance. In times when businesses face fierce competition and are committed to excellence and quality standards, it is well understood that performance can only will be enhanced through creativity and innovation. During such times employee commitment and a positive ‘psychological contract’ between employer and employee are fundamental to success.

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Managing Cash to Cash Cycle – The Pragmatic Way

As a finance professional, whenever I look at a Balance Sheet, my first focus area is Inventory portion of it. To me, apart from operational inefficiency, the biggest sinkhole in any organization is Inventory.

In this entry, I would not address inventory as in a conventional way. To me inventory will encompass, apart from the stockpile of inputs, accounts receivable and accounts payable also. By now, those familiar with financial reporting will understand that I am taking them towards fulcrum of all operational and financial functions – “The Cash to Cash Cycle”.

In my opinion Inventory management has always been and will always be the most critical of all the functional objectives of the business. The importance of same is now more prominent as more and more businesses are attracted towards Lean method of management and are in the process of inculcating lean philosophy into every operational activity of business.

One of the fundamental technique and in almost 100% of instances, the starting point of lean is Value Stream Mapping. It would not be an exaggeration if I say that lean actually views business in entirety as a Value Stream which is undertaken with a sole objective of customer satisfaction. Now if business is viewed as a stream, the operational functions of business are nothing but agents which impel this entire stream.

Once business is viewed from this perspective, this entire stream will only have following components

a)      People,

b)      Operational Equipment and

c)       Inventories (In form of inputs, Cash and payables/receivables)

There is one thing common in each of the above component. They will add value to stream only and only if they are available at the right time. Unavailability at the right time or availability at the wrong time will be perceived as a waste in business stream.

People and Operational Equipment are subjects in itself and I plan to cover same in later entries, herein we will talk about Inventories.

Just to brush up – When I talk about Inventory, I mean the entire gamut of Inputs, Cash and Receivables/Payables.

Any flab in inventory will upset the business stream like nothing else. Any such flab will ensure that when it is needed the most, liquidity will be out of reach in the stream and thus it should remain one of the main focus area of any CEO or COO in today’s scenario.

If we take bird’s eye view of inventory, we can safely assume that each component of this inventory essentially melts out to liquid cash.

Availability of Business cash or the efficacy of Cash to Cash cycle will be influenced by following indices

a)      Uncollected debts from Customers – High volume of accounts payable – This is influenced by Lead to Cash cycle of the business and has a huge value stream within.

b)      Cash locked up in inventories – In any function – Raw Materials, Work In Progress, Finished Goods, Consumables, Spares etc. etc. etc. This is influenced by efficacy of supply chain and production process value stream. The more these are synchronized to customer demands, the more will be pull within the streams and it will result in fairly acceptable level of inventory.

c)       Volume of Payables to Vendors – Effective cash to cash cycles for suppliers who actually are true partners in the business stream. I can safely say that this is a sub-component of Inventory stream.

In a Business to Business scenario, it is imperative that some volume of inventories is maintained. Although a desired state will be to have a Zero Inventory meaning achieving true “Just-in-Time” in the entire business stream, this is seldom possible. However, there should be a constant endeavor to shorten the entire cycle.

THE PARADOX STARTS HERE

If we examine closely, we will find and we will have to admit that out of the three indices mentioned above, first two are influenced by factors which at times may be out of direct control of business head. In zeal to manage cash to cash cycle and bring it down to a healthier level, the most easily controllable indice, namely “Volume of Payable to Vendors” is influenced.

While a shorter cash-to-cash cycle is generally considered a positive indicator lean business, one need to look deeper to be sure. Shorter or desirable cycle times can be achieved by means which can be counterproductive in longer run.

A business can shave off a considerable portion of its cash to cash cycle if the payables are stretched beyond normal terms, thereby elongating the payouts and retaining liquidity in the stream. Pressurizing vendors to accept delayed payments results in upsetting their own streams which in turn disturbs the whole flow within the business.

To properly evaluate cash-to-cash cycle performance, business manager should evaluate the same in conjunction with other information namely as follows:

  1. Assignment of  Time value: Trend of cycle time is more critical than its value at a single point. If one does not look at trends, he is evaluating only with a short term view which is not a pragmatic approach.
  2. Measure in against Industry Benchmarks: One needs to look up to the typical cash-to-cash cycle for other businesses in same industry. This needs to be looked upon component by component and only than the scope for improvement in right direction will open up.
  3. Ethical values of the Business:  Shortening of cash-to-cash cycle by squeezing suppliers to accept long payment periods can be counterproductive. Businesses that have size and great buying power as relative to the vendors whose products or services they purchase generally deploy this tactic. The buyer uses its power to control its supplier’s behavior. Such control strategies corrupt the extended value stream of the vendors by pitting components against each other. Such squeezing undermines the viability of vendors and in turn do undermine the supply chain relationships. Threatened and exploited suppliers are provoked to develop a counterbalancing force largely through commercial action that progressively erupts into full blown adversarial relationships.

A more pragmatic approach to improve cash to cash cycle should be to balance the inventory against requirement with an eventual goal to increase Inventory Turnover Ratio. Secondly Kaizans should be applied to improve Lead to Cash Cycles. Rather than squeezing vendors, they should rather be developed as a reliable base to bail the business out in tighter times. This confidence building exercise should be worked upon.

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The Monster of Micromanagement

As a parent and as a concerned parent, I always have a tendency to control activities of my children. At the back of my mind, I always have this feeling that 25 years back, I have already gone through what they are going through now and thus “I know better”.  This feeling then turns into a temptation to be authoritative and commanding parent.

But I kill that tendency, because I know, it is not going to do any good to them. I still exercise control on them but then I sprinkle behavioral and environmental aspects into my experience (of 25 years back) and accordingly influence my control mechanism.

Same applies to every business also. In managing day to day activities of business, apart from experience, managers rely on an important tool called Management Information System (MIS).

Every decision of business is based upon MIS. Control systems, feedback mechanism, operative tools, marketing tools, investment decisions, business practices, strategies all stem out of MIS. There are compelling reasons to assume that MIS actually is life blood of any organization. In today’s competitive scenario, it has assumed all important roles as today’s managers have to deal with an aggressive and dynamic environment where passive management (Often referred to as “Management by Exception”) fails many a time. MIS keeps today’s manager abreast of developments so that managing activities can be tweaked at short intervals to meet the dynamic and ever changing goals of the organization.

But there, at times a paradox is created.

At times the flood of information creates an impression that there is a need for control whereas in actuality there might not be any. This creates a cascading effect and within no time the monster of micro-management raises its ugly head.

A recent research says that Micro Managers – leaders who manage with excessive control or attention to detail are one of the biggest reasons employees divorce their organizations. People don`t quit companies; they quit people namely, their direct supervisors. Leaders who monitor their team member’s every move actually communicates that they don`t trust employees to get the job done and get it done right.

As in personal life, in official life too, trust is the most important factor to sustain the relationship. And trust, to be effective, needs to be demonstrated. The moment a leader starts excessive micromanagement, trust is compromised and cracks in the relationship begins to appear. This mistrust stem from same feeling which I as a parent sometime has. The feeling of “I know better”. If this trust is not rebuilt, people will look outside the current relationship to seek another healthier relationship.

There are many reasons as to why micromanagement comes into play. Businesses today are at a stretch. Efficient delivery of KPIs are the need of the hour. Leaders are under constant pressure to over perform. Demand for results is more aggressive than ever. Competition over resources is intense.

In such a scenario leaders feel that they have no choice but to maintain the tightest level of control possible to ensure that no penny is wasted. They may pressurize frontline managers to meet short-term goals rather than working with a strategy towards a vision. By doing so, these managers create even thicker barriers to protect their turf.

These barriers institutionalize the problem of fear. If leaders  are worried enough, they may feel forced to start controlling resources, projects, and people just to maintain control. They believe this is a solution to a temporary problem, but it rarely is. What starts out as a fear-based reaction can soon become standard operating procedure. Tight control becomes more and more prevalent, and it inevitably affects interdepartmental behavior. The whole scenario creates a low-grade siege mentality.

Organizations suffering from overbearing and superfluous micromanagement have following clear traits

  1. Lack of vision and strategy
  2. Short term goals in abundance
  3. Uninspiring and soggy workplace
  4. Hire and Fire approach and policies
  5. Bureaucracy embedded in systems and SOPs
  6. Excessive working hours
  7. Lack of training and soft skill development opportunities
  8. Restricted or tweaked information flow

In my opinion micromanagement is just personality oriented. People who have control and over-reaction as personality traits tend to micro-manage even when there is no need to do so.

The days of command and control organizations are long over. A good leader must recognize that in order to leverage skills and maximize team’s output they need to adopt a flexible approach and ‘lead’ their teams to excellence rather than closely supervise, instruct and control them. The best leaders communicate to their employees a vision and ignite in them the fire, motivation and desire to work towards making this vision a reality. Good leaders, to achieve success go through a step by step process. The process usually is as follows

  1. Communication of Top Level goals and objectives to Team
  2. Suggested blueprint for success
  3. Unleash the team to innovate
  4. Formalize the plan
  5. Ensure the team has right resources in terms of training, funding and work environment
  6. Ensure a system of formal and regular feedback and supervision
  7. Ensure continuous process of rejig, innovation, calibration and realignment is in place

I close this entry with this famous quote by Ronal Reagan. He executed the toughest job in the world “Being the president of United States of America” in the most turbulent of times and he did not micromanaged.

“Surround yourself with the best people you can find, delegate authority, and don’t interfere as long as the policy you have decided upon is being carried out”

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Intrepreneur Vs. Entrepreneur

As an educated and informed professional in his Mid-Forties, I am from the fortunate generation which has witnessed perhaps the most blazing era of development of all times. My children, who are 15 and 11 years old, refuse to believe when I tell them stories about as to how we used to work during the early times of career just about 20-25 years back. My elder daughter was astonished when I narrated her as to how we used to communicate through snail mail and simple messages like “Reached safely to Bangalore” used to take more than 24 hours even through the fastest mode of communication.

This has not happened on its own. This is the sweet result of pushing the boundaries of human imaginations to limits. This is the result of a contentiousness effort of people who refused to remain content and have exerted themselves almost to the limit of madness.

Also is the fact that nothing like above would have been possible if people would have stuck to their normal routines, have done their mundane jobs and have not pushed themselves beyond the obvious things supposed to be done by them day in and day out.

This is where the theory of intrepreneurship comes into play. At the most basic level, intrepereneurship can be defined as internal entrepreneurship.

The basic pitfall (for business) of the technology boom of last 25 years is that now it is a free for all platform. Knowledge sharing has reached unimaginable levels and at that level it has fostered innovation. This innovation in turn has created massive pressure in business environment to be the most competitive amongst the peers. Whether we like or not, every business today is in the race to finish. Only few will survive and those will survive only on the strength of their competitiveness.

This calls for a strategic shift in the way business should be handled in present times. Business which will not foster intrepreneurship will definitely be strangulated and suffocated to death.

As business grows, it definitely becomes more and more complex. This calls for creation of entrepreneurial ethos within the organization. This will give room for small-group collaboration. This will also give birth to new ideas and create new opportunities within the organization. If nurtured properly it will surely bring in

a) Speed and Flexibility

b) Creativity

c) Ownership and last but the most important

d) Innovation.

For an entrepreneur, it is a hard decision to take. Most entrepreneur driven business does not walk that path due to an underlying fear of losing control.

Also is the fact that such entrepreneurs will demand 100% success even if they chose to nurture intrepreneurship within the organization. This is where the problem starts.

More often than not intrepreneurship will be looked upon as an experimental activity. In such an environment, intrepreneurship won’t work.

People need to be assured that it is ok to fail and to commit a mistake as long as it is followed up, worked upon and not repeated. They should be given an environment to develop their own product or processes and share and leverage their ideas.

Many of the attempts to encourage ‘intrepreneurship’ may falter because they contravene the ways entrepreneurs actually do innovate and create value or look upon creating values.

This is the gap which needs to be bridged.

The sooner, The better.

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