by Babak Hafezi

An analysis on why organization need to invest in human capital

In Fortune 500 companies, the key to financial success lies in the consistency of day-to-day operations and communication. The even larger Fortune 100 firms such as Google have succeeded by deploying effective and consistent management skills while offering a compelling product. However, small and medium sized businesses often lack the proper internal management structures that can carry them to success. A key success metric for small to medium businesses is the utilization of effective and consistent managers who understand the core business strategies, employee management and customer demands. Coupling this understanding with proper communication techniques, organizations can enhance their ability to retain employees through the presentation of a cohesive message. By investing, broadening, and harnessing proper communicative techniques, problems that once seemed divisive can be resolved in amicably while retaining employee loyalty.

Problem Area
An owner-operator practice with fifteen employees in the Dallas-Fort Worth area established an annual evaluation process for its employees to monitor progress and compensate accordingly. Every year all employees sat down with the physician to evaluate their work and compensation packages. The first step involved filling out a questionnaire detailing the employee’s achievements. Upon its completion, it would be handed to the physician for review prior to the one-on-one interview.

This is the case of Nancy, a key employee of the practice whose interview process somehow had become derailed. During Nancy’s interview, the conversation was very casual, complementary and placid revolving around her achievements over the past year and the practices overall satisfaction with her. Areas of growth were established and her role as a leader was re-confirmed. Great appreciation was shown for her activities outside the practice that correlated directly to its success. The conversation ended in a very passive and collaborative tone, and Nancy walked away from the interview feeling satisfied.

After the meeting, the physician provided a three page written evaluation of the employee and a response to the financial package. The physician’s response to the questionnaire and financial package was blunt, aggressive, and derogatory with generalized behavioral change mandates which were never mentioned in the interview. The tone and content of the written evaluation criticized Nancy in areas that were not mentioned in the meeting. Nancy had not been employed as support staff, but rather in the capacity of a financial producer. She was a leader and added value beyond her core competency within her field of practice. Other employees often relied on her for advice and guidance, and her leadership skills had a positive effect on the practice. Within the letter, the physician demanded that she take a step back and become less active within the practice to allow others to step up to the plate.

The two mixed messages caused grave confusion to Nancy and sent conflicting messages to the staff. Which message should Nancy respond to: the written criticism or the passive one-on-one conversation? Nancy was being sent two contradictory messages by her employer. Was she a valued member of the practice, or was the employer setting the stage for her dismissal? After a week of confusion, Nancy contacted the physician and requested clarification on this matter. The physician pointed to the letter as the lead reference. Nancy accepted the criticism and moved to change her behavior as requested by her employer. She proceeded to become passive and allowed others to step up to the plate. By her passivity a leadership vacuum formed that lead to other team members resenting her. The lack of guidance and her passivity led others to perceive that she no longer cared about their problems or the practice as a whole. Five weeks after the interview process, Nancy had fully complied with the behavior changes requested by the physician.

After the sixth week, to make things yet more confusing, the physician and other office staff pulled her aside and admonished her for being passive. The physician requested an immediate response and wanted know whether she was on the verge of quitting. Nancy explained that it was mandated by the physician and that she had acted accordingly. The physician was shocked by Nancy’s response and requested that she revert back to her old self. Subsequently, a three hour conversation ensued and apologies were offered by the physician and the miscommunication appeared to be resolved. However, on Monday morning, Nancy was written up for her behavior and a three month assessment period was set. The practice was once more sending two very distinct and contradictory messages to the employee.

Core Principle
Communication is based on the personal experiences that each of us has had with the world around us as well as the perception of such. People act or react on the basis of the way in which they perceive the external world. Perception is a process by which an individual selects, evaluates, and organizes stimuli from the external world. Humans experience the world though the microcosm of perception. Thus, it is imperative to note that humans experience everything not as it is but rather as we filter it through our sensory receptors. These receptors take the stimuli to our brain where the collective glossary of our individual lives is stored and organized.

invest in human capital

Exhibit 1: Based on empirical evidence communication is only 7% based on verbal component of the message. Vocal tonality makes up 38% and facial features make up 55% of communication.

When tonality, word emphasis, and contrast are not present, the transmission of data can change our perception. A good example of contrast-less communication is e-mail where tonalities, word emphasis, and proper framing cannot be conveyed, thus leading to the potential of ineffective contextual communication. Empirical data proves this point given that only seven (7%) percent of communication is composed of the actual verbal content of the messages, thirty-eight (38%) percent vocal content, and the remaining fifty five (55%) percent in facial features during data transmission (Exhibit 1). In light of such empirical evidence, it must be stressed that effective communication is a skill that must be learned from actual practice in a controlled environment. Business owners should not use their day-to-day operations as a testing ground for practicing this craft.

Problem Tree
All companies establishing an annual evaluation system must understand the key goals of the evaluation process and convey that process to the employees. Ensuring that both the employer and the employee are on the same footing is the basis of its success. Employers have the ability to measure employee value in real-terms and compensate accordingly. The process should deepen trust between managers and staff as well as promote employee loyalty. Thus, understanding employee needs and addressing them via a comprehensive compensation package can create a great return on investment.

Failure to do so, as exemplified in Nancy’s case, lies in the contradictory messaging provided to the employee and the lack of proper definition of behavioral change. The physician could have guided the changes in behavior rather than disenfranchising the employee with brutal verbal confrontation. Proper communication and clear definition in behavioral change are vital to operational effectiveness. The content of the data as well as the tone and the manner by which it is conveyed are as important as the actual message. Thus consistency and clarity in all communications as well as establishment of clear evaluation goals are vital to operational effectiveness. It is imperative to note that the cost of ineffective communication not only destroys morale, but can also lead to a direct loss in net revenue.

Employees who produce income within the organization no longer become evangelists for the products or services being sold. This lack of product and service promotion is reciprocated by the end user and thus sales can be adversely affected. Besides the need based product or service purchases, in an open market space clients have a plethora of options from which to purchase from. However, the value proposition that each company provides is a key element of trust in the product, service or company. The human relationships that each one of us have with our service or product provider are a key factor that drives our purchasing behavior. Thus, once the employee stops believing in the organization, the financial losses spread across a larger group. The problem is no longer contained to a single employee, rather it spreads like a virus to other elements of the organization such as customers, suppliers, and co-workers. If said employee leaves, the byproducts of such an emotional roller coaster are deeply engrained in the perceptional glossary of our brains. Thus, the financial losses are no longer contained to employee replacement and retraining, but also in rebuilding employee trust and morale. It is important to note that high employee churn rate can also promote high customer churn rates costing business a lot of income.

Organizations must work hard to ensure effective and consistent communications both in action and words. Managers must educate themselves and actively develop their management skills. Effective managers understand the overall business strategy, vision, and mission enabling them to develop a roadmap that addresses these needs.

With today’s knowledge base and high skill employment structure, the roadmap set by managers must be clear and communicated effectively. If the roadmap lacks clarity, the divergence in employee commitment to the enterprise places the organization at risk of an internal tug-of-war. The enterprise is thus pulled into conflicting quarters, and management can fractionalize. As the above case illustrates, the lack of proper communication and specifying behavioral change that are understood by all employees led to a key employee being disenfranchised. These actions lead to the organization being financially in-effective for more one month. The organizational structure failed and all employees were affected by the behavioral change because it was not framed correctly and no guidance was given on the behavioral changes. Furthermore, the financial losses and the disenfranchisement of the employee will have subsequent ramifications in the future.

In today’s modern enterprise we have a convergence of high knowledge and skill sets. Determining how to maximize employee output, with their vast knowledge base and skill sets within the current business unit, is essential to a coherent and effective organization. This is especially true given that in the modern enterprise structure, risk is undertaken at the lower levels of management.

Although establishing a coherent strategy for employee evaluation is important, the manner in which it is conducted is far more important than the overall strategy. Managers must first understand the requirements of the organization as a whole and what role the employee plays in fulfilling the overarching goals of the organization. Metrics need to be set in place to create a value analysis of the employees return on investment. The metrics allow organizations to understand the value each employee provides to the business and pay accordingly while maintaining the employee overall commitment to the organization.

About the Author
Babak Hafezi is a senior partner in HafeziCapital’s Washington DC area office. He holds a Masters in Business Administration from the Kogod School of Business and a Masters of Arts in Peace and Conflict Resolution from the School of International Service at the American University. He has also obtained a Post-Graduate degree in Strategy Development from the Sloan School of Management at the Massachusetts Institute of Technology.

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