Looking to buy a new piece of capital equipment in your business? Chances are, your CFO will want to see an NPV analysis.
Looking to build a new product? The money people are, once again, going to come a’knockin’ looking for a business case—complete with a fancy ROI analysis.
In today’s day and age, a critical hat that growth-stage leaders need to wear is that of capital-allocator—a fancy way of saying skilled at using the company’s financial resources effectively. You have an often fixed pool of resources—in this case, money—and are responsible for maximizing the value generated through use of those limited resources.
When you really boil it down in that way, the role of a leader is kind of that simple.
But when we consider our roles as capital allocators, it is important to remember the context: leaders today are operating in a knowledge economy. In an increasing number of businesses, the greatest investment being made (as measured by the P&L) is in people. i.e. Payroll.
In a growth-stage software company, for example, it isn’t uncommon for more than 100%—in some cases, way more than 100%—of a company’s revenue to be spent on payroll.
This investment in people adds up to huuuuge potatoes.
For a long time, leaders near and far have touted that “People are our most important assets.” We recognize, intuitively, that people are critical to our success—especially in knowledge-based businesses.
And yet, too often, leaders give off that “Hmmm, haven’t really thought about that!” look when posed the question: How much are you getting out of your people?
Try asking your leaders and see how they respond.
We’ve gotten really good at determining the ROI we’re getting on investments in capital equipment, for example. Calculate the cost of the equipment. Determine the positive cash-flows associated with what is produced using that equipment. Plug the numbers into the magic number machine. And voila: your ROI or IRR.
But most leaders don’t apply the same mental model to the sizeable investments their companies are making in people.
At some level, this is understandable given that we’re talking real human beings, not equipment. But with our capital allocator hats on, doesn’t it seem prudent and fiscally-responsible to have a clearer sense of how much we’re getting for the massive investments most companies are making in people?
Turns out, neglecting this metric might be causing us to overlook one of the more challenging realities facing many businesses.
A study by Liz Wiseman, author of the awesome leadership book Multipliers, concluded that “on average, managers are utilizing just 66% of their people’s capability. In other words, the managers in our analysis pay a dollar for their resources but only extract 66 cents in capability — a 34% waste.“
(The CFOs reading this post are cringing in horror right now).
So what’s the bottom line? To succeed in the knowledge economy, leaders must refocus their attention on getting the very best out of the talented people who they are investing in.
Or, if you like, leaders need to refocus on “maximizing their Return-on-Talent.”
So… how do we do this?
For starters, let’s confront—head-on—the reality of how much of our peoples’ best stuff we’re actually getting today. What kind of return we’re getting on the dough that we’re investing in human capital right now? If you’re the average leader in Liz Wiseman’s study, you’re getting about $0.66 on the dollar.
How do you do this? I have created this quick ‘n’ free customized “Return-on-Talent” report to help. Click the link, take a quick 2-minute assessment, and get a clearer window into your “Return-on-Talent” today.
(Spoiler Alert: If you’re like most leaders who take this, you’ll find the results to be truly eye-opening.)
Second, recenter yourself and the leaders in your business on arguably the most important part of their job description—tapping into their peoples’ best stuff, and translating it into results.
Many managers have lost sight of this responsibility as they focus on the more “tangible” parts of their job. The fires to fight. The meeting to attend. The TPS reports to fill out.
(Here’s a clue: When you hear “I don’t have enough time to spend with my people,” it is often a tip-off that this responsibility is taking a backseat.)
But there’s real power in the simplicity of the idea that ultimately, a leader’s job is to translate human talent and ability into results.
As a potentially helpful side-note, before I ever give a manager on my team budget approval for an out-of-budget hire, I always make them build the case that they are getting the most out of their existing people before I support adding new ones. Otherwise, an ask of this sort is about as logical as your kid asking for a brand new toy as a whole bin of perfectly-good toys sits idle nearby, collecting dust.
Third, identify a few ways things that you—and the managers in your charge—can commit to doing to get even 10% more out of your people. As you’ll see in your free customized Return-on-Talent report, squeezing an additional 10% out of your team can add up to huge value.
Ready to get way more out of your team?
Grab a copy of my book, The Blue Flame, where I share with leaders like you the simple, but powerful method that can help you to get the best out of your team.
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