Christine Wzorek | Forbes Councils Member
The year 2019 was one of quantitative easing. The Fed’s rate cuts added to an already precarious yet highly desirable problem: an overabundance of cash in the U.S. markets, which meant a hoarding of cash by corporate America. In a sense, the quantitative easing was handed to us and corporate America rode the wave of growth over profit without targeted discipline in management or balance sheets.
One day last December, I heard a fascinating discussion among financial experts about weak management, weak balance sheets and the upcoming “squeezing out” of poorly managed companies in 2020 and 2021 due to economic impact. Fast forward to today. How fast the markets change and catch us when we least expect it.
One of the biggest hurdles inexperienced executive teams face is recognizing the value of strong management, which derails their ability to manage on pace with corporate growth.
There are certain undeniable truths about management that every executive team, private equity firm and venture capitalist could benefit from learning. Management is an ethical, noble and highly experiential profession. Left misunderstood, untrained and unattended, it will erode an organization by way of culture, systems and an unhealthy dependency on HR.
This is best illustrated through a company's financial strategy. Organizations will pursue one of two primary financial strategies: top-line revenue or margins.
Top-line revenue forces scale and growth.
A company in growth mode will generally employ a lower-wage workforce of less-experienced talent to lower payroll expenses. Less-experienced workforces are generally prone to higher ancillary costs due to programs tailored to the workforce:
1. Purposeful manager selection criteria and processes.
2. The greater need for manager training and development programs.
3. A concerted plan and efforts for career pathing and employee progression.
4. An amplified new-hire orientation program and professional development skills training.
When the above programs are not implemented and given top-level support by executive leadership, the impending greater expenses include:
1. High turnover.
2. Low employee productivity.
3. Increased number of worker’s compensation (WC) incidents and claims (driving premium rates and EMOD higher).
4. Poor recruiting.
5. High-risk terminations.
A company going after a top-line revenue financial strategy can create strong management by recognizing the workforce it employs and giving top-level support to tailored workforce programs.
Squeezing margins forces efficiency.
A company targeting margins as its financial strategy will generally go after high-productivity employees — those who can do more with less because the talent are more experienced, have specialized skills and adhere to efficiency protocols. Higher compensation for this type of workforce is arguably better because the company is essentially running at a consolidated employee-to-unit of work ratio model:
A company in growth mode operates at one employee to one unit of work.
A company squeezing margins operates at one employee to three to five units of work.
The ratio for a company squeezing margins means it will pay about 25–50% more in wages to one employee when compared to the low-wage workforce employee, and the output of work will be at a higher quality and completed at a faster rate of output.
In a controlled environment, it offers savings on the P&L. Ancillary costs exist in this scenario as well, considering the differentiation in its workforce:
1. Attracting a more experienced, skilled workforce requires a targeted recruiting process. Attracting talent at this level means engaging a recruiting firm.
2. Skilled, experienced workers mandate a robust benefits package.
3. They also demand well-aligned compensation, and the company must commit to a compensation strategy and enhanced experiences, including sabbaticals and positions abroad as applicable.
Illustrating organizational financial strategies and exploring the unique needs of their distinct workforces provides perspective on how management incubates in the organization. We can see how the growth of management can develop in strength or fall to weakness.
When executive leadership fails to recognize the value concerted management programs provide, they garner debilitating cycles of employee-relations concerns and high turnover, creating a dependent relationship with their HR leader and department.
This dependency begins when untrained and inexperienced or poorly trained managers are promoted or put into a management position lacking critical leadership skills. For example, they may be ill equipped to handle employment-relations concerns and not understand basic employee rights/protections such as Title VII of the Civil Rights Act. Not only do they incorrectly handle a situation, they say or do something that violates the employee's rights, creating massive liability for the company.
Let's run a scenario: We have a new, inexperienced manager responsible for the output, scheduling, staffing and performance of a 12-person team in a call center. The manager, untrained at delivering feedback, tells their only 18-year-old employee that they are too young to do a good job and then explicitly compares this employee to the 22-year-old on the team who is performing better because of their age.
HR not only has to clean up the manger's missteps, but it also has to reactively train the manager on proper performance reviews, employment laws, etc. This reactive approach promotes the beginning of a negative and toxic relationship. The manager feels like HR is bossing them around and/or they are being disciplined and fights against it.
I have unfortunately seen this dependency scenario repeatedly during the course of my career in emerging-growth and growth companies because of executive leadership's disregard for the management profession and its severe lack of planning in creating a selection process, selection criteria and education for managers. Hence, managers of a company that is strategically targeting financial growth through top-line revenue are subject to negative dependency on HR if mangers are not correctly selected, trained, educated and developed. HR’s positive impact on the organization through a preventive and proactive nature deteriorates as it works to catch the pieces of leadership’s lack of awareness of the organizational workforce drivers and tools required to help it succeed.
Correcting, and often circumventing, this dependency is achieved through HR gaining a seat at the highest leadership levels and becoming a liaison for business goals and financial strategy. Steadily, the organization will progress in converting its goals and strategy to being highly proactive and leveraging its management and balance sheets against slower, weaker competition.