Dave Ulrich and Norm Smallwood are the authors of Why the Bottom Line Isn't: How to Build Value through People and Organization. It's a book for line managers but with special relevance for HR. David Creelman talked to Dr. Ulrich and Mr. Smallwood.
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DC: There are already many books on leadership. Why did you decide to write one more?
DU: There are a lot of books about what leaders should know and do to succeed. However, those books don´t really connect the quality of leadership to the economic value of the firm. On the other hand, finance people are saying a firm´s market value is not determined exclusively by its earnings anymore, it is also determined by its intangibles. So, they are trying to measure intangibles by focusing on things that are easy to measure, not necessarily the right things to measure.
Our view is that the leadership field needs to be tied to the business value and the intangible field needs to be tied to what leaders can do to make it happen. Our book works at that nexus. We lay out what leadership at every level does that delivers market value to that firm. For the finance community this book lays out what intangibles we should be thinking about. We are not bold enough to say we have them all, but we want to shift the dialogue from, "an intangible has to be measurable" to "the intangible needs to be the right thing."
In some ways the implication for HR is the most dramatic part. HR for years has been organized around activities: staffing, training, development and so on. We are now telling that profession to focus on capabilities or intangibles to build value to shareholders. For example, the focus is on how to build talent as a shareholder value intangible rather than simply looking at the training programs. Or, how do you build a collaborative organization that the shareholders will pay a premium for rather than just going into a team and hugging and chanting.
DC: I've always been interested in bringing finance and HR people together since I worked in both fields. To the extent you do that it will be a real victory.
DU: Both groups will hate us. Finance people will hate us because we are saying finance should pay attention to the soft stuff. The HR group will hate us because we are losing the employee advocacy, the warm fuzzy HR heritage role. So both groups will end up disliking us, which in some ways is a sign that we are making progress.
NS: The dialogue goes both ways. HR needs to learn how to have strategic conversations. At the same time, the finance and accounting people now are really starting to struggle with the implications of these intangibles. Right now the conversation has clearly been around "how do we measure this stuff?" but the conversation has to move to "how do we build it?"
DC: To what extent is your book built on the work of Baruch Lev? (see Lev on Intangibles)
DU: We love Baruch Lev's work. He introduced, in both a conceptual and an empirical way, the concept of intangibles. However, he looks at things that you can easily measure like patents and R&D. Our comment is you have to look at some of these leadership things as possible intangibles. We hope to complement his work by focusing on how leaders actually build intangible value. We see our book as the prototypical HR text of the future.
The old HR text would have chapters on staffing, training, development, compensation, benefits, employee labour law and so on. Our view is the intangibles, such as shared mindset, speed, learning, collaboration, leadership and so on are really the deliverables that HR should be building into the firm.
NS: The message for the general manager, not just the HR person, is that these capabilities are important because half of our market value is correlated to these intangible factors. These HR deliverables are not just nice things to do; they lay out a new agenda for HR professionals.
DC: Let''s talk about one of the intangibles you identified, speed. What makes you think organizations are going at a sub-optimal speed, too slow, instead of just right or too fast?
DU: We talk about smart speed and smart speed means responding internally to the external changes. Stupid speed is when you respond and the external market does not need you to. Smart speed is set by the pace of technology, the changing consumer expectations, and competitor changes. Since those things are all occurring faster, organizations have to have a quicker adaptation cycle.
NS: Your original question was why would organizations move at a sub-optimal speed. If you liken organizations to organisms then there is a notion of entropy. Organizations left alone move towards destruction. If organizations don´t invest in energy to keep up to speed over time, they naturally begin to have entropy take effect and get slower.
DC: What does your view of intangibles mean for HR?
DU: If I am an HR person, I need to be able to have a conversation with the CFO or General Manager that positions HR in their strike zone, a conversation about what matters to them. For example, at Cisco, their HR person is now meeting with the investment community to share what Cisco is doing organizationally. I don´t think that many HR folks are having this kind of conversation yet. What we tried to do is articulate the mission or deliverables or outcomes of HR. When we talk about mindset, accountability, learning. collaboration, leadership, talent and so on those become the outcomes of a good HR plan.
Early this morning I looked at a company plan and it talked in very grandiose terms, "We will manage the process of shaping, diagnosing and analyzing the business and individual needs" - and I thought, you have not told me anything. I would ask which capabilities or intangibles are most critical for your business? If you are trying to manage alliances, it is collaboration. If you are trying to share knowledge across global businesses, it is learning. If you are trying to grow with new industries, you may go for talent. If you are trying to compete on cycle time, it is speed. Whichever one or two of those are most critical become the focus of an HR plan. Whatever the capability or intangible is, the HR professional should be able to run a four hour meeting on that topic that results in a 90-day action plan. Not enough HR professionals can do it. In the book we try to give the framework for having that discussion.
DC: One of my concerns about the focus on market value is that it can lead people to devote their energies to hyping the firm rather than building real capabilities.
DU: If market value is a matter of hype it will fall back down, but if the intangible is built on a series of very specific leadership actions then our view is that it is a sustainable advantage. The data we report on in that first chapter shows Jack Welch built incredible intangible value at GE. If he built this as a sustainable organization set of capabilities the next generation will sustain it. I think the issue of hype versus real capability is a very legitimate question.
NS: Another idea we use is "leadership brand". Arguably GE has not just built great individual leaders but they have built a leadership system. That has created hype around Jeffrey Immelt succeeding Welch, GE´s James McNerney going off to 3M and Robert Nardelli going to lead Home Depot. The markets really value having a GE CEO.
Brand is a product of market awareness and product efficacy. So the question is, "Is the efficacy real?". You are asking if it is just a matter of having really pumped this brand? Cisco is probably a good example of this. John Chambers is on the cover of Fortune Magazine a lot of times and the PE goes way up, then the market collapses. The question for Cisco is, did they have something special besides market awareness? Are they going to come back faster because there is real efficacy in their management.
The same thing with GE. Does Immelt have stuff to work with or is it all some slight of hand with Welch? Is there efficacy in what has been going on? Our perception is that while in some cases it is hype in other companies there really are capabilities. They can do things that their competitors can´t and that is driving better market value.
DC- Is there anything you'd like to say in closing?
DU: I am really an optimist about where HR is heading because the field is continuing to shift away from activities into capabilities and now intangibles. The more that the HR professionals can link their knowledge to the intangibles that investors value, the more the HR professionals will have better conversations with line managers.
NS: There has been a lot of rhetoric around the idea of HR being strategic business partners. However, even in the best companies, HR has fallen short of reaching the goal of being a part of driving market value. So our book is something of a play book for HR professionals on partnering with managers to create value. It will help them lead those four hour meetings on intangibles like innovation. I''ve heard David say many times to HR people you need to be able to do this. He will also tell line managers that if your HR people can´t do this, you have the wrong HR people.
David Ulrich, a professor at the University of Michigan, and Norm Smallwood are co-owners of the consultancy Results-Based Leadership Inc. .(www.rbl.net) Dave Ulrich and his wife Wendy took a 3-year sabbatical from June 2002 through June 2005 to do ministry work for their church in Quebec. Prior to Results-Based Leadership, Norm Smallwood was Managing Director at Novations Group Inc. a strategic change consultancy. Norm and Dave´s previous book together is Results-Based Leadership: How Leaders Build the Business and Improve the Bottom Line.
Their book, Why the Bottom Line Isn't: How to Build Value through People and Organization, is available through amazon.com.