Understanding the ‘Financials of Organization’
by Baldwin TomMr. Tom is a management consultant, professional speaker, and author of 1+1=7: How Smart Leaders Make 7 Investments to Maximize Value. Baldwin is a Certified Management Consultant and served as the National Board Chair of the Institute of Management Consultants USA. For more information on Baldwin Tom, please visit www.geoddgroup.com.
Every day, businesses lose money by not understanding or leveraging their investments. When one considers the financials of organizations, it is clear that a significant portion of those investments are not captured in financial statements. Why? Because these are the people-side or soft-side intangible investments the accounting industry has yet to document. This may be a reason one views these same intangibles as not of significant value.
But your intangible investments can be just as valuable as those that appear on your quarterly report.
The Magnificent 7
There are seven capital investments available to every organization. Two are strictly on the task or tangible work side and five are focused on people and what they produce. This means that five of the seven, or 71%, of all capital investments are on the people, or the soft (intangible) side of the equation. Not surprisingly, there is hidden wealth and power buried in these people-side investments. When people work together, such as in teams, there is powerful leveraging such that 1+1 is no longer 2, but is more like 1+1=7.
As a simple means to frame the seven investments, all work and efforts can be separated into two components – Task side and People side. The Task side encompasses tangibles such as hard issues and assets, work to be done, things, structures and fixtures. The People side is comprised of the intangibles like soft issues and assets, those who do the work, interactions, teamwork, culture and norms.
Task Side (Tangibles)
1. Financial Investments
Financial capital is the monetary currency used to run the business by purchasing materials/resources and investing in people to facilitate its success. There is little mystery here. Financial capital is one of two currencies of exchange between people who do the work and the work they do. The other currency of exchange on the intangible side is spiritual capital.
2. Physical Investments
Physical capital is represented in fixed materials needed for products and services. This includes tangible machinery, buildings, equipment, computers, together with land and labor. The benefit of timely investments here is so the enterprise remains competitive. Importantly, a commensurate investment on the people side —either in human, relationship, and/or customer capital – is necessary to maximize ROI.
People Side (Intangibles)
3. Human Investments
Investing in human capital is an easy one. Just as with physical capital investments, without upgrades, technology becomes slow and/or obsolete. It is the same with people; you need continuous upgrades. Training, coaching, education, mentoring, and internships are obvious ways to increase people’s value. Importantly, the value of this investment spreads throughout an enterprise—in organizational capital (patents, processes, procedures), physical capital (innovative products and services), spiritual capital (morale, work satisfaction), and relationship capital (teamwork, customer relations).
4. Relationship Investments
One of the most valuable assets in an organization is relationships. Value is derived from this investment daily from leveraging people’s interactions. It’s about power and influence. The network of relationships (people inside and outside the organization) that interact with a business represents a significant resource. Building relationship capital delivers a host of ROI benefits resulting from a higher level of trust in products, sales, customer retention, and even resolving disagreements. The multiplier for ROI may appear small, but secondary impact and synergies of relationships can be huge.
5. Spiritual Investments
Spiritual capital in a business is derived from the values created by an organization’s leadership. With a great deal of spiritual capital, there is ethical decision-making built into a value-based culture where the goal is less shareholder gain and more gain for customers and stakeholders. The culture engendered energizes and enriches the human spirit, fostering social connectedness and personal satisfaction. It spurs people to go the extra mile. It is about ethical leadership and how people are treated. It is about consistency in leadership, i.e., no surprises. Such investments include a conscious effort to build a family culture that honors and supports each other.
6. Customer Investments
Customer capital is the relationship value a business builds with its customers. This goes beyond customer loyalty and includes customer feedback to the business, and partnering with the customer to produce new products and services. Value also manifests in the form of referrals and great press about the business from customers. Every executive recognizes the importance of paying attention to the customer. But just being nice (sending holiday cards or gifts) is only a beginning when it comes to enhancing ROI. Making efforts to partner with the customer is the ideal investment.
7. Organizational Investments
Organizational capital represents the value of an enterprise derived from mostly intangible assets such as processes, procedures, systems, patents, trade secrets, reputation, brand and intellectual property. Organizational investment is a most important investment leaders can make because this is where the memory of the enterprise resides. Building, investing in, and maintaining one’s brand and reputation and protecting intellectual property (trade secrets, patents, processes, and procedures) are critical to sustaining the enterprise. This is where one protects the knowledge, skills, and expertise from being lost when talented people depart from the organization.
Intangibles Control Business Success
As a means to discern which of the Magnificent 7 investments were most critical in a merger or acquisition, the corporate, healthcare, and the accounting industries were studied. In nearly every merger, success or failure was predicated on alignment or misalignment of culture between the merging entities.
Culture in the Magnificent 7 schema is established within the collective investments of Human, Relationship, and Spiritual capitals. These people-side intangible investments reinforce the notion that soft-side investments have significant impact in generating success or failure in a business.
How do you discover and leverage hidden wealth in your organization? Here are the steps:
- 1. Inventory your investments: Identify the investment areas you are focused on.
- 2. Pair investments: Match any task side investment with a people side one. Thus, if you invest in new technology, be sure to invest in training for personnel.
- 3. Set goals for each investment: Determine goals and completion dates for each investment.
- 4. Determine where you are now: Track the success of reaching investment goals.
- 5. Monitor progress toward goals: Evaluate the investments and how you are doing in achieving goals. Make corrections or change course as needed.
- 6. Celebrate success: Reinforce success to encourage new efforts.
- 7. Repeat steps 1-6
There is no doubt that judicious investing on the people side components when paired with task side investments yields significant ROI. Leveraging the intangibles accentuates power, creativity, innovation and thereby new products, services, and thus value generation and wealth in organizations!