It’s time to stop treating human capital spending as an administrative expense. It’s an investment in future performance.
The shutdown made it obvious: Without its employees, there is no government. The pro football playoffs reinforce a lesson that has been highlighted repeatedly for more than three decades by research in the business world: The companies (as well as football teams) with the most talented, best managed employees are normally the most successful. For reasons that are not clear, government continues to ignore that lesson.
In the 1990s I attended a Securities and Exchange Commission conference where the topic was the emerging importance of “intellectual capital.” The meeting was prompted by two Scandinavian companies that added information related to their workforce in their annual report. The focus of the discussion was the recognition that the value of emerging dot com companies depended on assets that walked out the door every day. Their value is still not reflected in financial statements.
A year or so later, intellectual capital was the theme of a conference hosted by Wharton’s Center for Human Resources. The keynote speaker noted that it was the first time he had spoken to an HR audience.
Human capital management has since become a frequent topic of business publications. In 2017, a large investor group, the Human Capital Management Coalition, filed a petition with the SEC to adopt rules requiring companies to disclose information related to their human capital management practices.
Last July, Sen. Mark Warner, D-Va., sent a letter to SEC Chairman Jay Clayton, advocating the change in reporting requirements. In his letter he referred to a 2015 study by Harvard Law School that confirmed “human capital policies are material to long-term financial performance and success.” Numerous studies have reached similar conclusions.
The accounting problems are obvious. When a company upgrades its computer system, it’s an investment. When a company invests in employee training, it’s an expense that reduces current profits. The accounting treatment means employers on paper sacrifice profits to increase the value of employees. Investments in human capital management pay off in improved performance and in recruiting and retention.
As Sen. Warner pointed out, spending on research and development is reported on its own expenditure line so investors can consider it. But human capital spending is treated as an administrative expense no different from spending on office supplies.
All of this has emerged in the past two decades or so. When the 1949 Classification Act was enacted, employees were interchangeable “cogs in the wheel” and expected do what they were told. That was still the prevailing management philosophy when the 1978 Civil Service Act was adopted. Throughout this era, strong, centralized control was the dominant approach to management. It was the emergence of knowledge organizations in the 1990s that prompted business leaders to appreciate the importance of talent and talent management.
The Case for Change
Government is at a crossroads. The civil service system is a barrier to building a 21st century workforce. Talent shortages are now a problem affecting employers in virtually every industry. Technology jobs are the tip of an iceberg; organizations are experiencing recruiting and retention problems in fields as diverse as the skilled trades, mathematicians, manufacturing and healthcare. With government’s heavy loss of experienced workers to retirement, job vacancies will only increase. At some point, unfilled jobs will trigger operational problems.
The best human capital practices today are responsive to labor market developments. Rigid civil service policies and practices are an anachronism in the current environment. The lack of flexibility is a primary reason federal contractors now employ more workers than federal agencies. Reform cannot start soon enough.
A necessary but undoubtedly unpopular change is shifting the focus to practices known to be effective in recruiting and retaining young workers. We know from the literature what’s needed: ongoing coaching and feedback, work-life flexibility and balance, informal work environments, advancement opportunities, support for learning and growth, openness to new ideas, respect and trust. Compensation is for many not a top priority, but high levels of student debt coupled with the high cost of living in urban areas where agencies are based makes it important to be in the ballpark of competitive pay levels.
Young workers are known as job hoppers and the variety of work situations in government could be an advantage if agencies invested in career management. Young workers also are known to be looking for purposeful work, and that’s where government jobs should have an edge.
Yes, some of the changes will add to human capital costs (e.g., increased training) but the rationale, supported by a wealth of research and countless anecdotal stories, is that the investment will result in higher productivity that offsets the added costs. That is the central argument behind Gallup’s research on employee engagement. It’s also the conclusion promoted by the organization, Great Place to Work. The institute’s website offers a number of publications discussing practices to improve the work experience as well as those that make an organization “a great place to work.”
Many improvements, however, could be made at no increase in costs. Reducing the time to fill vacancies is an example. Reducing the number and the time to adjudicate employee claims is another.
It would be to government’s advantage to develop and publicize data comparing its human capital management track record with other large employers. That is consistent with Sen. Warner’s recommendation to the SEC. There are important differences between the private and public sectors but there are metrics that can be compared across the two sectors (e.g., absentee rates, accident rates, turnover in the first year).
Healthcare is a sector where direct comparisons would be meaningful. Between the departments of Veterans Affairs, Defense and Health and Human Services, the government operates more than 200 hospitals. They may not be the same as the typical acute care hospital but there are comparative metrics. The website “Hospital Compare” is maintained by the Centers for Medicare and Medicaid Services for that purpose. Patient satisfaction is a universal healthcare metric.
Equally important would be comparing performance on metrics across agencies. Just as the Partnership for Public Service publicizes its annual report on “Best Places to Work in the Federal Government,” similar lists could be developed on other metrics. “Cost per hire” or “time to hire” are two that are central to effective staffing. There is possibly no better way to motivate improved performance than publicizing comparative results.
A core concern is the role of Human Resource offices. Metrics should be used to evaluate their effectiveness. Customer satisfaction is an obvious possibility. At one time, the goal was to minimize the cost of the HR office (using metrics like HR-to-employee ratios) but increasingly companies recognize the value of the function.
Good government will never be achieved without a well-qualified and committed workforce. By all accounts, the shutdown has had a devastating impact on the workforce. The needed changes cannot start too soon. Sen. Warner’s focus on effective human capital management practices is the right strategy for government.