Summary : in the knowledge economy economy era, investing on human capital development is key but stays marginal because of short term profitability logics. But does this vision actually creates value ? Locally, for the enterprise, it seems so. But globally speaking the question is worth being asked because the related costs does not disappear but are shifted to the society or the future of the enterprise what, in fine, backfires in a long term perspective since it’s becoming harder to pay the debt caused by decisions made in the past. As cycles shorten, it may lead to a dead-end.
A couple of days ago, a started reading again The New Capitalist Manifesto: Building a Disruptively Better Business by Umair Haque.This book was already brilliant when it was issued even if it more comfortable to think that the author was exaggerating too much, that his predictions would never happen. Less than one year after, the least we can say is that he was right.
Many concepts and ideas developed in the book look innovating, disruptive…too much according to some even if the news tell us the contrary. A better explanation would be to say theiy’re thought-provoking. Among these ideas, there’s the one according to which enterprises have been borrowing their benefits while shifting costs to others for decades and that, one day, the debt becomes so big that the whole system jams.
Practically speaking it means that profitability is often overestimated because enterprises don’t assume all their costs that are shifted to the society of the future of the organization. Environmental costs, training costs…many of these things are known under the name of corporate social responsibility. If the whole costs was taken into account we would see that lots of enterprises are not socially profitable. Le system works until the day when shifted costs became so big that society can’t deal with them. And it backfires on the enterprise.
Social Business and triple bottom line experts (not the social business used to rebrand enterprise 2.0, the real Social Business) will find here some concepts they know quite well and that I’ll sum up using the words of Antoine Riboud when he was leading Danone : enterprise responsibility does not stop at the enterprise’s doors and making one’s ecosystem poorer to become oneself richer will cause one’s failure because it kills future markets.
I don’t claim I’m able to have such a deep thinking as Haque but, by thinking about these things again and again to assess how relevant they were, I ended asking myself a couple of questions.
In a previous post I highlighted how accumulation logics were essential. These logics are key to building shared foundations (trust), to self learning (micro, social and Peer 2 peer building), to innovation etc. So the least we can say is they matter a lot in a context where markets move fact, product lifecycles shorten and trades disappear at a speed that’s been never been experienced before.
These logics take time. And this time is seldom allowed, accepted and even acceptable because it harms immediate performance and productivity. What about the future and sustainable performance ? That’s where things become interesting.
When needs in terms of knowledge or trust are less essential because of the economic context (longer cycles), the lack of time for accumulation is only paid a long time later and can, in some ways, be offset by one shot actions. In the worst case, the market will provide “updated” skills to replace people who did not have time to learn. When the need becomes more urgent, people become obsolete very quickly and usual “update” programs (heavy, not happening often, very formal) are not relevant anymore and does not meet people’s needs. So organizations does not improve, reinvent themselves, do not adapt to their market.That’s worrying but does not always lead to failure. Failure comes when for demographic reasons and an irrelevant education system the market can’t provide with up to date resources anymore to replace the obsolete ones.
Some will even say that, once they reach the point where they can’t improve operations on their core business, some businesses tries to improve their results by turning themselves into finance operators…with the success we all know.
In the meanwhile, accumulation costs and time have been shifted to both the society (in charge if education and re-adapting obsolete employees) and the future of the enterprises (focusing on immediate productivity and profitability prevents from being successful in the future). What was a very weak trend years ago because of long cycles that made adaptation bearable becomes more touchy when cycles shorten. Consequences appear a two levels :
– society can’t keep up with the shifted costs. Consequences : backfire on the enterprise under the form of tax, and usability to fund the needed reforms of the education system, research or innovation programs.
– enterprises are not performing quite well on their core business anymore. It may sound surprising when we seen how profitable many are today but it’s not. Let’s remind that their ROA has been dramatically dropping while productivity was increasing. What is not made on one’s core business needs to me made elsewhere….hence the link many experts make with the financialization of economy.
If we push the reasoning to its limits, financial results give a biased vision of reality because they omit shifted costs…while these costs have to be paid by someone, one day. If we consider that there’s no interdependence between economic operators on the market the consequence would be that betting on the best performing businesses is enough. On the other hand, if we consider that economy is networked with lots of interdependence then all the costs have to be taken into account because what will be won somewhere will be lost elswhere…until the day when shifted costs backfire on businesses.
From a strict global value creation point of view, businesses that invest on human capital development are as successful (and even more) than others but their bottom line does not shows it. That’s one more occasion to see the difference between a local maximum and a global optimum.
Some thoughts in a jumble :
– overlooking externalities gives a wrong vision of value creation
– doing so makes businesses adopt logics that will backfire
– shareholders for whom shifting costs is a good thing will pay the price of externalities afterwards (tax, future losses due to lack of innovation etc…)
– globally speaking we are in a biased and counter productive analysis framework for decision making.
– the two meanings of social business (the one for enterprise 2.0 and the one for social entrepreneurship) may, sometimes, be complementary.
I focused on a small part of the question, the one about human capital related investments. Other people would be more relevant to talk about other kinds of shifted costs (environmental etc..).
Using Haque’s analysis leads to many questionings. And the first pieces of answering are sometimes surprising.