In part one of our focus on unleashing your people’s productive power, Eric Garton, co-author of Time, Talent, Energy, explains why the best companies are those that manage their human capital well
Driving productivity growth is something that's very difficult to do over a long period of time. In fact, only about one in 11 companies are sustained value creators.
And guess what, it gets harder as you get bigger. For every 10% increase in the size of your workforce population, typically you suffer about 2% decline in productivity per employee. It's difficult to grow companies, difficult to grow countries, and it gets harder as you get bigger.
When you look at what allows companies to grow on a sustained basis, it's interesting to consider the way economists think about it. They typically describe three factors when they're talking about workforce productivity. The first factor is what they call capital deepening, that's the amount of capital for every dollar of labour. The more capital you put against labour, the more productive your labour is.
The second factor is education, and that's typically a measure that's correlated with the quality of your workforce. The more upskilled they are, the more productive they are. The last factor is something called total factor productivity. This is essentially a residual or a catch-all factor, but it's usually correlated with breakthroughs in innovation and technology.
If you take a snapshot of 125 years of US history the breakout period of growth is between 1920-1970. The top two factors, education and total factor productivity or innovation, were the key drivers of growth during this period of time. What’s interesting about this is that these factors are really all about human capital, not financial capital. It shouldn't be surprising if you think about it. A single idea can propel a company for a very long period of time.
Think about Apple's iPhone, or Amazon's web services, or even about something maybe a little bit less well-known, like Continental Resources who helped create the horizontal drilling technologies that make fracking possible and have changed the nature of the oil and gas industry around the globe. Now, these ideas don't materialise out of thin air, they come from people who have the time and the talent and the energy to think creatively about the work they do every day.
If you look at that concept of capital deepening, it's remarkable how consistent the contribution has been from financial capital over the last 125 years of US history. You get roughly 60 basis points of growth year in year out across this period of time. It would take more than 100 years at 60 basis points for GDP per capita to double an economy. So, unless you can unlock human capital, you have no hope of growing your companies or your countries on a sustained basis.
That leads us to an interesting paradox. We're all taught, either on the job or in business school, that strategy is about the allocation of scarce resources. For most of modern history, the scarcest resource has been financial capital. That's no longer true. Financial capital today is relatively abundant. We estimate that by the year 2010, financial capital will be roughly 10 times global GDP. It's relatively cheap on a historical basis as well. Yet it's still very carefully managed. Boards of management care about it, executives care about it and shareholders care about it.
Let’s contrast that with human capital. Human capital is truly scarce. If you think of time, no amount of money can buy a 25 hour work day. Or think of talent, it's so scarce, sometimes we say we even fight a war for it. Or energy, in spite of decades of investing and trying to drive higher levels of workforce engagement, most companies remain mired in a very stagnant level of engagement inside their workforce. Then think about how we manage human capital, it's typically managed with much less rigour. In part because it doesn't sit on our balance sheet, and in part because it's very difficult to manage.
This is the paradox – financial capital relatively abundant, relatively cheap and very carefully managed. Human capital, always scarce, always finite, and not managed with the same level of discipline as financial capital. We believe the best companies in the future and the best CEOs of those companies are going to be equally good at managing human capital as they have been historically managing financial capital.
Core factors of growth are all about human capital, not financial capital. It shouldn't be surprising if you think about it. A single idea can propel a company for a very long period of time