Rick Guzzo is a Washington D.C.-based principal of Mercer Human Resource Consulting, the world's largest HR consulting firm

These facts are widely understood. As a consequence, there is a growing belief that the best source of lasting competitive advantage is to be found in something that is inside of, and unique to, each organisation: its human capital - its workforce - and the processes for managing it.

While this belief is widely shared, most organisations have been unable to act on it effectively. They struggle to implement the right human capital strategy, the one that will propel them ahead of the competition. The process of finding the best human capital strategy requires three things:

These principles will enable companies to unearth a sizeable unexploited source of competitive advantage.

Systems And Facts

Building a successful human capital strategy requires company-specific facts about its unique system of managing people and accomplishing work. Strong measurement is essential here. It removes ambiguity. It reveals unanticipated consequences of programmes and practices. And it helps decision makers prioritise actions.

One form of strong measurement vital to human capital strategy is the quantitative analysis of an organisation's 'internal labour market'. Each company operates a unique internal labour market, its own system through which it develops and utilises its human capital. The 'markets' include key events and processes, such as who joins, who stays, who develops, how rewards are distributed, and how careers unfold. Over the past decade, Mercer Human Resource Consulting has developed proprietary methods for analysing internal labour markets. We have had access to data about many companies' internal labour markets, covering over a million employees.

These analyses are based on the records of actual events as they are recorded in HR information systems, payroll records and other databases that store information about employees, their experiences at work, and the management practices that affect them. Indeed, think of each employee as having a magnetic card with all kinds of encoded data such as age, gender, education, previous jobs, training courses taken, performance ratings, pay level, increases and promotions. Whenever there's a career event such as a pay adjustment, promotion or departure, they figuratively swipe their card through a reader, leaving a record of who passed this event and what their characteristics were. The objective record of events can be read from these 'cards' to determine who performs best, advances, stays, or leaves and what the drivers of these important outcomes are. Patterns tell a great deal about a company's values, culture and how well its system of human capital practices is aligned with its business strategy.

Such analyses are thus based on facts and objective records of actions. All too often, there is a gap between what people say and how they act. We call this the "say-do" gap. It can exist with regard to individual employees who might say one thing (e.g., "I intend to work here a long time") but do another (such as quit for a higher-paying job). These gaps can also exist for employers, such as when actual practices do not match what policy manuals say. Surveys which register what people say about their employer can be a source of useful human capital information. However, we believe that modern organisations place too much emphasis on surveys as the only source of important facts. Objective records provide a valuable alternative to surveys. Indeed, surveys are most informative when they are combined with internal labour market analyses.

Measuring The Impact On The Business

A good human capital strategy is rooted in knowing what creates value and what drives business results. Analyses that link the system to human capital practices and important financial and other outcomes give an organisation the edge it seeks.

Consider how such analysis improved decision-making at one major hospital. The organisation had relied on benchmarking to reduce the number of full-time employees in order to save pay and benefits costs. The finance function bragged that the aggressive use of part-timers was saving the company $5 million a year.

Each time the organisation found a rival with a lower ratio of full-time employees, it would order that more part-timers be employed in its hospitals, to the point where one facility was being run by a staff of 80% part-timers and contract workers. Our analysis showed that the use of so many part-timers was actually costing the organisation more than $30 million in reduced productivity, or 3% of annual revenues.

Without rigorously examining the impact on the business of this fundamental and strategic choice to employ more and more part-time employees, the organisation was doomed to pursue a self-defeating strategy. Only by putting it to the test could it self-correct. Indeed, within two months, the company had made substantial shifts back towards a more effective staffing mix.

The hospital organisation's experience is a textbook case of 'what gets measured gets managed'. The company could measure cost to the last penny, but could not measure the attendant destruction of value. Finding such disconnects is a fundamental step in aligning a company's business model and its corresponding human capital strategy.

The First-mover Advantage

Companies that act early in identifying and measuring the salient human capital factors and fine-tuning their human capital strategy will be able to carve out a significant and enduring competitive advantage.

Early adopters can often change their business results in a matter of months. Their moves cannot be copied with the same effects, because competitors don't have the whole set of practices, policies, and people that make the system work at an individual company.

To get started, companies should make sure they're keeping the necessary data. Then they need to change their internal dialogue, asking the same kinds of questions about workforce tactics that they ask other parts of the business. Does the proposed action fit our business context? What is the return on this investment? How long until we get results? The process of answering such questions will quickly change the mindset and ultimately the behaviour of management and employees.

Armed with records of workforce patterns, companies can then begin to determine the effects of different factors on key business results including sales, profit, quality and productivity.

There is a new science of human capital management that is emerging. It is based on principles of systems thinking, getting the right facts, and a focus on value. Decision makers no longer need to guess or copy what others to do. With this new science, decision makers will know what practices are uniquely best for their organisation.

The author can be reached at rick.guzzo@mercer.com.