Intangible Assets: Difficult to Show Direct Effect
The Federal Reserve Bank of Philadelphia recently estimated that investment in intangible assets in the United States amounts to a least $1 trillion. The measurement of human behavior and its contribution to organization results has long challenged and frustrated management scientists. Management discipline of the Industrial Era bypassed this problem by concentrating solely on the tangible aspects of human capital. Thus, most financially based management systems in use today treat human capital as an expense and not as an asset.
The world has changed in the past 20 years. Only 15 percent of the value of a contemporary organization can be traced to tangible assets. Human capital has become the dominant asset in modern business strategy. Yet managers are still shackled by Industrial Age management tools that treat human capital as an expense instead of an asset.
Intangible assets are a growing force in the economy, and their valuation poses a challenge to managers and investors. Learning is an important intangible asset in which organizations invest, but it is difficult to quantify the return on the investment. Organizations are now reporting on non-financial measures to communicate the importance of investing in intangibles and to demonstrate their effect on the financials. The Balanced Scorecard enables organizations to express their value-creating strategy and to implement the strategy through measurement and management of the outputs from tangible and intangible assets.
By describing learning investment in a cause-and-effect chain, business leaders can begin to the see the second- and third-order effects learning has on quality, customers and revenue. (See Figure 1.)
Cause-and-Effect Relationships: From Learning to Financial Results
While many business leaders intuitively understand this cause-and-effect chain, they face a challenge in defining and mapping these relationships. This problem is rooted in the fact that most organizations do not have a clear way to communicate strategy. A Fortune magazine study found that up to 95 percent of the workforce does not understand organizations’ strategies, and 90 percent of organizations fail to execute their strategies. This problem exists because organizations do not have strategic planning tools that allow them to articulate their strategy. Most strategic planning documents are stored in large binders that do not get reviewed on a regular basis. Typically, strategic plans are more of a list of initiatives or programs, not the outcomes an organization is trying to achieve. As Michael Porter said, strategy is not only what an organization intends to accomplish, but also what it has decided not to accomplish.
Strategy Map: A Tool to Describe Strategy
Before you can execute strategy, you must be able to describe it, but there is no generally accepted framework for doing this. A strategy map is a one-page picture of an organization’s strategy that articulates the strategic objectives from four perspectives: financial, customer value proposition, internal processes and learning and growth. A strategy map becomes an anchor for creating performance measures with which an organization can manage and motivate its employees.
Linking Learning to Financial Outcomes by Mapping
A strategy map can explain the cause-and-effect relationships between a learning objective and the internal processes that will help an organization focus, and can link learning to the organization’s customer value proposition and to a financial outcome. Barry Richmond of High Performance Systems said, “The true learning organization—one where employees learn efficiently and where their knowledge can be captured and deployed by the organization—is still elusive. While organizations have made great strides in gathering information and making it accessible, they have been less successful in capturing strategic knowledge that can be shared across the enterprise. New tools are now available—tools that can utilize the feedback process of the Balanced Scorecard—and thereby improve companies’ ability to test their strategy and learn from experience.” The strategy map in Figure 2 depicts how learning links all of the key strategic objectives of an organization.
The strategy map provides a proven framework to describe strategy. We have seen HR and learning professionals working jointly with business executives to clarify the enterprise strategy in powerful new ways. A “shared model” of strategy has been the missing link between learning and the enterprise. Once developed, HR professionals have a point of reference for defining the impact of human capital and learning on the strategy and tailoring their developmental and learning programs based on strategic priorities.
In a survey published by the Society for Human Resource Management (SHRM) and Balanced Scorecard Collaborative, it was found that only 34 percent of organizations assign an HR relationship manager for each business unit. The survey also indicated that executives have mixed views of HR, and only 34 percent of respondents viewed HR as a strategic partner.
In order to succeed, we have found that organizations need to set up new structures to put HR and learning at the table. For example, at IBM a “Learning Leader” position was created to establish a relationship manager between the business unit and corporate learning. AT&T has established a partnership where a learning representative is integrated into the strategic planning process.
“A critical factor in our ongoing success is partnering with the leaders of the business and understanding their priorities,” said Ed Timmons, director of AT&T Learning. “Training is a precious resource, and it is imperative that we focus on the learning programs that are going to make the biggest difference.”
Strategic Priorities and Measuring Results
Organizations that use strategy maps or other methods should use this as the anchor for setting their strategic learning agenda. Organizations such as IBM have learning investments as large as $1 billion. One organization that uses the Balanced Scorecard went through an exercise to align all of its learning programs against all strategic objectives that are articulated on its strategy map. Based on its newly defined strategic objectives, this organization found that it could eliminate 20 percent of its learning programs because they were not directly aligned to strategic objectives. Driving focus throughout your organization means eliminating programs that do not give you the biggest return. (See Figure 3.)
Focus Learning Investments and Close Skill Gaps
Many organizations establish learning programs that cover a wide range of jobs. To focus their investments, many organizations are establishing a process to identify strategic job families. Balanced Scorecard Reports introduced this concept, focusing investments on a critical few jobs that have the greatest impact on the strategy. Organizations require many roles. Contributions from all these employees will improve organizational performance, but some jobs have a much greater impact on the strategy than others. John Bronson, vice president of HR at Sonoma Williams, estimates that 80 percent of his strategic priorities are determined by people in only five job families.
Developing a strategy map adds focus to learning programs by helping to identify which roles and skills drive the strategic priorities. Without that discipline, most HR development programs attempt to meet the needs of all employees and under-invest in the jobs that really make a difference. By focusing human capital investments and development programs on the relatively small number (often less than 10 percent) of employees in “strategic” jobs, organizations can achieve breakthrough performance faster and less expensively.
For example, a year ago AT&T Learning began presenting job application and business impact metrics. Initially, members of the senior leadership team were openly surprised that the training organization was using fiscal measures to evaluate training investments. Today, senior executives expect and request job application and business impact analysis on training programs. Using the same financial techniques as those used to evaluate business investments has helped AT&T Learning elevate and align training with the business and its priorities. By linking training to financial outcomes, AT&T Learning is able to demonstrate its impact and its value to the business. “Being able to quantify the impact learning can have on the overall business results is no longer a ‘nice to have,’ it’s a necessity,” said Greg Walters, CLO, AT&T. “At AT&T Learning, we have demonstrated that impact, and it feels great for learning to be part of the total business strategy.”
Successful organizations will embrace the practice of creating a learning agenda that is linked to strategy. The return on investment in learning will become easier to quantify as companies change their culture and perception of learning. CEOs and CLOs will have a direct partnership and a common goal of how to best execute the strategy. Leading organizations are using the strategy map and the Balanced Scorecard to articulate their strategy and to measure strategic performance. Focusing investments will be the key to success, and organizations will be able to explain the cause-and-effect relationships of learning investments to business results.
Cassandra Frangos is the human capital practice leader at Balanced Scorecard Collaborative (www.bscol.com). Cassandra leads research programs on human capital and consults to Fortune 500 organizations in the areas of strategic management, human capital strategy, HR Balanced Scorecard and performance management. For questions, write to firstname.lastname@example.org.
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