The world is full of categories that are more harmful than helpful, and business programs have more than their share of them.
Identifying certain business units in a for-profit organization as cost centers (as opposed to profit or investment centers) is helpful in comprehending the flow of resources and activities.
But it is also the kind of dumbing down of reality that has so many dangerous consequences that I wish the categories would disappear.
While not strictly considered cost centers, many business owners treat employees, labour, or human resources as if they were. There is a reason for that: labour costs are very often the biggest item on an expense statement. For a business trying increase profits by controlling fixed costs, that huge number just stares you in the face.
There are two problems with this perspective.
- It is just plain wrong. When you look honestly at the wildly different levels of contribution individual employees make to an organization, you realize you can’t lump your human capital into one lump. And yes, your people are capital, not costs.
- It is insidious in how it limits your perspective. By only seeing the big numbers on the profit & loss statement, you are missing a much richer way of seeing the value of an employee in your organization.
If I said to you, “If you can scrape together $10 and give it to me, I will give you back $12 at the end of the month. But if you can scrape together 100K and give it to me, I’ll give you back 140K at the end of the month.” Which would you do?
That’s how I want small businesses to look at their employees: as investments. Forget starting with how much you will have to pay someone; start with how much someone will return on your investment. When you couple this with an outlook of long-term sustainable growth and profitability, it should transform the way you look at your employees: they are an investment, not a cost.
The question that matters in this framework is not: how much should I pay you? But, how much can I invest in you?
Good employees do one of three things:
- they earn revenue (sales or manufacture);
- they allow others to earn revenue by taking non-revenue generating work off their hands (assistants);
- they reduce expenses/boost revenues in others (management).
It starts with clarity about what is needed and what will be measured.
With the first class, the metrics are easy: in sales or manufacture, I invest a certain amount in you per hour (or piecework/commission) and you sell or make stuff that is worth more than I have invested in you. Very nice.
The second class is a little trickier but still clear: a rainmaker in your organization can earn you thousands of dollars an hour on the road and in meetings, or she can be stuck behind a desk completing her paperwork. You know where you want her to be, so invest in a whip-smart, detail-oriented assistant and forget the salary grid. Invest the money the assistant will be returning to you by taking the training wheels off your rainmaker.
The third class is trickiest of all, but vitally important: a highly functional team is greater than the sum of its parts, both in capacity and return. The challenge is that those kinds of teams generally don’t make themselves. You have to develop and manage them. That’s where great managers are worth investing in. The first place you need to start is by setting a future value for a high-performance team. Know that and you’ll know exactly how much high-performance management is worth.
Seeing employees as investments is not only healthier for the people involved, it forces you to look harder at where the potential in your organization really lies. Those who help realize that potential probably have greater value than you are currently investing in them, and those that don’t have probably been around too long already.
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