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 / Winter 2010 / Issue 61(originally published by Booz & Company)


Best Business Books 2010: Human Capital

In the course of her investigations, Heymann “went from believing that it was possible for companies to improve working conditions while being profitable…to realizing that the majority of the companies we studied had increased their profitability by investing in their employees at the bottom of the ladder.” Her findings call into question the conventional wisdom held by firms, and the analysts they seek to impress. She also debunks the widespread belief that profitability is better served by providing incentives at the top of the ladder than by providing them at the bottom.

The book is organized as an integrated series of case studies. Each case shows how at least one company achieved remarkable financial results while addressing a specific element of frontline working conditions: wages, flexibility, healthcare, training, the establishment of career tracks, profit sharing, etc. The cases help readers better understand the measurable value that well-trained, motivated, engaged, and healthy frontline workers can bring to organizations. Taken together, they provide strong evidence that profitability is dramatically increased when companies improve the quality of life of their bottom-tier workers.

Heymann finds that many executives undervalue the potential of this approach because they have little understanding of what bottom-tier workers actually know and do. They therefore have no way to measure how improving performance in the lower ranks might benefit the larger organization. Conversely, she finds that organizations in which senior managers have bottom-tier experience do a much better job of leveraging the economies of knowledge available on the front lines.

Heymann offers Costco as an example. Because the company promotes from within (a policy it views as a competitive response to a shortage of talent) and because internal data suggests that those who have worked their way up the ladder make better leaders, Costco’s senior managers are intimately aware of the value that skilled and experienced bottom-tier employees can provide. Costco CFO Richard Galanti, for instance, who explicitly condemns the pressure that Wall Street exerts on the company to cut frontline costs, argues that profitability in the big-box sector is highly dependent on volume per square foot, which in turn is affected by the productivity of the front rank of employees. He also notes that costly turnover, frequent absenteeism, community resistance (which has proven expensive for Walmart), employee class action suits, and inventory shrink (some of which is due to employee theft) are routine short-term costs that analysts and most senior managers rarely take into account, and that these measures skyrocket when frontline employees are treated purely as an expense. As another Costco executive observes, “When employees feel aggrieved and shortchanged, you are always going to pay a price.”

Heymann shows that careful planning is required to build the right incentive structure for bottom-tier workers, who are highly sensitive to small spurs that enable them to be more productive. She gives examples of companies that have done a good job of calculating these structures to support goals such as better teamwork, fewer defects, and more effective cross-training. She traces the development of virtuous circles of skill improvement that can occur when companies take the time to understand the nature of bottom-tier work. And she shows how resistance to valuing and supporting these employees can be overcome at the supervisory level.

Heymann and all the other authors of this year’s best business books on human capital are explicit in challenging widespread assumptions about talent, knowledge, and value creation. They describe in detail what leadership in a knowledge economy really requires, adding insights to Drucker’s famous formulation. In doing so, these authors shift the focus on talent from an overemphasis on stars to a richer, broader, and more contextual view of how people add value to organizations.

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