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The rise of the human capital industry

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Peter Cappelli discusses the size of the HR industry and its marketing efforts, which now drive the agenda for the field of HR.

Image courtesy of interviewee. September 25, 2024

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This video discusses the evolution and complexity of the human resource (HR) industry, highlighting its massive economic scale, estimated at $1.9 trillion, which makes it comparable to the sixth largest economy in the world. The speaker reflects on how HR consulting has transformed from a small field with few players to one that heavily employs outsourcing, particularly in staffing and managed services.

A significant portion of the US workforce is now composed of non-employees working in regular company settings, raising questions about how companies account for human resources and manage personnel. Traditional financial accounting practices do not recognize employees as assets, which complicates how businesses perceive the value of their workforce and their associated costs, such as hiring and employee turnover.

The speaker critiques the pervasive influence of consultants who often perpetuate myths, such as generational differences in the workforce, which lack empirical evidence. There is a tendency for businesses to prioritize short-term cost-cutting measures over long-term organizational effectiveness, leading to poor management practices and high employee turnover.

Despite companies investing in outsourcing their HR tasks, they often neglect measuring the effectiveness of their hiring practices or employee satisfaction. This video encourages companies to focus on their internal accounting systems to better understand and manage their human capital, rather than solely relying on financial accounting that serves investors. Ultimately, the discussion underscores a need for a shift in perspective about employees and their value within organizations.

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Here are five key points derived from the video:

1. **Evolution of Staffing and Outsourcing**: The human resources consulting industry has drastically evolved, expanding from a small number of firms offering basic staffing services to a vast market that includes various forms of outsourcing. Currently, a significant portion of the workforce in many companies consists of people who are not direct employees, reflecting a shift in operational practices.

2. **Economic Impact and Size of the Industry**: The overall human capital industry is valued at $1.9 trillion, making it one of the largest economies in the world, roughly comparable to the gross national product of Italy. This substantial size raises important questions about financial accounting and the evaluation of companies.

3. **Financial Accounting and Human Assets**: Traditional financial accounting has limitations in recognizing human resources as valuable assets because it is largely based on ownership. This creates a disconnect between companies' service-oriented nature and the accounting practices that inadequately account for human capital as assets.

4. **Outsourcing and Employee Relations**: Organizations increasingly outsource various HR functions, including hiring and workforce management, leading to complex relationships between employers and employees. Outsourcing affects company culture and employee engagement, as firms may not directly oversee or influence the employment terms and conditions of their workforce.

5. **Misguided Focus on Cost Reductions**: Many organizations prioritize reducing costs over improving employee retention and engagement. This penny-wise, pound-foolish mentality can lead to negative consequences, such as increased turnover and reduced productivity, which ultimately undermines long-term profitability and effectiveness. The emphasis on cost per hire rather than the quality of hires indicates a lack of understanding regarding the true costs associated with poor management and high attrition rates.

These points encapsulate the major themes of the discussion, highlighting shifts in human resource management, economic implications, and the challenges presented by existing accounting practices and organizational strategies.

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Here are some key quotes from the video that capture its main themes and ideas:

1. **On the Evolution of Human Resources**:
- "When I began my career, there were... maybe four big human resource consulting companies, and that was kind of it."

2. **On the Scale of Workforce Outsourcing**:
- "A large proportion of our workforce... are not the employees of that workforce."
- "By some measures, 30% of employees in the US are not employees of the location where they're working."

3. **On the Size of the Human Capital Industry**:
- "If you total up all the aspects of the human capital industry, it is $1.9 trillion... the sixth biggest economy in the world."

4. **On the Perspective of Financial Accounting**:
- "Financial accounting establishes the rules of the game for the benefit of investors... their goal is not economic efficiency... they’re interested in longer-term shareholder value."

5. **On the Value of Employees**:
- "Humans cannot be assets... you have to own something for it to be an asset."

6. **On Outsourcing and Employee Relations**:
- "You’re not setting the terms of conditions of employment for them. You’re not dealing with their problems."

7. **On Employee Retention and Costs**:
- "What does it cost us if our employees hate us and they quit? If you think it’s a hundred thousand dollars, you’re going to think quite differently about that than if you think it’s $4,000."

8. **On Consulting Industry Influence**:
- "The reports... are not really interested in just informing you. They're interested ultimately in selling you stuff."

9. **On Perceptions of Generational Differences**:
- "There's no evidence for any generational differences... it's entirely cooked up by consultants."

10. **On the Impact of Management Decisions**:
- "Companies lay off all the time... simply to improve the investor's view of how they are performing."

These quotes reflect the themes of outsourcing, the value of human capital, the disconnect between financial accounting and workforce management, and the influence of the consulting industry on business practices.

X-TIMESTAMP-MAP:LOCAL=00:00:00.000,MPEGTS=900000

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I just put it in perspective.

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When I began my career, there were, you know,

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maybe four big human resource consulting

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companies, and that was kind of it.

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There were a few staffing companies, and they mainly

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provided temporary, services if somebody was out

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for vacation and that sort of stuff.

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It was pretty small industry,

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didn't have very much influence.

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Uh, now it, we outsource so much to,

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vendors of various kinds,

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and a lot of it about the fundamental ways the company

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operates, the organizations operate.

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And the biggest aspect of that is staffing.

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So, you know, in most companies now,

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we have a large proportion of our workforce, our people

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who are not the employees of that workforce.

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And I'm not talking about just outsourcing work,

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we're talking about work that is done in our building.

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And by some measures, 30%

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of employees in the US are not employees

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of the location where they're working.

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So it's not outsourcing the work,

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it is outsourcing the people,

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but keeping them in your organization.

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And, you know, a an example of outsourcing a function,

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but keeping it in your building is managed

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service providers.

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That means you basically outsourced your IT

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to a company like Accenture or IBM.

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They're in your building, they are the people,

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the employees are there, they just don't work for you.

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And that industry,

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just managed service providers is $250 billion.

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The industry that provides employees, staff rather,

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that is $750 billion.

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So if you total up all the aspects of the human capital

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industry, it is $1.9 trillion.

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And it's about the same size as the Italian

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gross national product, at least the

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official Italian gross national product.

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The real one's probably bigger than that, right?

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Um, but 1.9 trillion is, makes it the sixth,

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the biggest economy in the world.

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And that's an enormous number, right?

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And the fact that it is

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so big raises lots of interesting questions.

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Uh, financial accounting establishes the rules of the game

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for the benefit of investors.

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So, you know, we used to think that CEOs

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and business leaders had competing objectives.

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They had different stakeholders, et cetera.

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But for sure in the last 40 years,

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the most important share stakeholder has been

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the investor community.

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And they are trying to assess how companies do

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perform, who's good or bad.

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Their goal is not economic efficiency.

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Their goal is not current profitability.

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They're interested in longer term shareholder value.

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So, you know, have a company

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Like Amazon or, a lot of the tech companies,

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where they, Tesla were not making any profits,

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but their share price was wildly high, right?

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Uh, so they're interested in future shareholder value,

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and there's a set of rules that govern

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how they decide who is valuable.

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And that comes from financial accounting.

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And these are rules that come down

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indirectly from the government.

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So in the US it's the Security Exchange Commission.

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In the uk you've got the same kind of arrangement.

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Um, there's a board that the Security Exchange Commission

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delegates the creation of the rules

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to in the US it's the Financial Accounting Standards Board.

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They're not a government agency.

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They're not really accountable to anybody except

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to their own board.

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And they create these rules.

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And the rules are like the rules governing a sport, right?

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Uh, and you know,

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you might think if you're thinking about soccer, football,

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you're trying to describe the game to somebody

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and you say, well, the goal, you know, the point is

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to just get the ball in the goal.

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And somebody said, why don't you

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just pick it up and run with it?

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Right? So, well, you can't do that

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because that's not the rule.

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And then things that seem pretty obvious, you know,

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until you know the rules,

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change a lot once you know the rules.

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So financial accounting has a particular problem

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with people, humans, in

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that it doesn't really think they matter.

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Uh, and the reason for

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that is it was developed in an era when capital was

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all physical capital.

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These days, most companies are service companies

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and the assets we know seem to be human except

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for financial accounting.

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Humans cannot be assets.

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And the reason for that is they believe you have

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to own something for it to be an asset.

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Then that simplifies

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and clarifies a lot of things in traditional

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business, but not in services.

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So even if I have employees who are under contract to me,

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the financial accounting would say, well, I'm sorry,

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they're just not any assets.

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You say they're under contract. So what? You don't own them.

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They can't be under contract to you.

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And so you start thinking about things like training.

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We always talk about training being an investment,

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but not if you're financial accountants

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because you can only invest in an asset.

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You don't own employees. They can't be assets.

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Training can't be an investment, right?

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And a, a particularly quirky part of

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financial accounting reporting,

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this isn't in the accounting,

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but in the reporting of it, is

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that we assess performance based on a per employee basis,

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not a per worker basis.

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So if I take my current employees and get rid of them

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and bring in the workers from a staffing firm

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who are not my employees, my headcount

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for financial accounting has dropped enormously, and

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therefore my revenue and profit per employees

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improved just enormously, right?

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Um, and one other point, I mean,

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that's one reason why you might wanna get rid

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of your current employees and use least employees.

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There is a view which is not strictly in accounting,

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but it is widely held in the world of business

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and finance, that employees are a fixed cost.

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Fixed costs are things

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that if business goes down, you're stuck with them.

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If you have a lot of fixed costs,

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you could easily be wiped out, get business turned down.

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So they really, really don't like employment costs.

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You know, it may have been modestly true

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a few generations ago.

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There was hard to get rid of people. It's really not.

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Now, you know, companies lay off all the time

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and lots of time simply to improve the investor's view of

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how they are performing, right?

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So the backdrop of of this, is a lot of the outsourcing

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of this work, has gone

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because we would like to cut our headcount

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because it looks better in the investor community.

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Sorry, thinking about typical HR tasks, there's nothing

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that I can think of that has not been outsourced.

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But here's an example. There's,

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an arrangement in the US called professional

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employment organizations.

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PEOs and PEOs, can literally become

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the legal employer of your own employees.

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So, the people who work for me,

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I can turn over their employment to A PEO.

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Uh, originally the idea behind this was

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the PEO takes on the legal liability.

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Like if you get sued, I'm sorry, you can't sue me.

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I'm not your employer. Even though you're working here,

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you gotta sue the PEO.

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Um, the rules have been tightened up on that.

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It's not quite so much of an issue there,

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with, with respect to that.

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But if you are the employee of A PEO working for me,

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I can become the co-employer.

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But everything about the way, I mean,

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and that is I get the ability to boss you around,

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to supervise you, but everything about the way you're paid,

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about your benefits, any complaints you have, all go

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to the PEO, not to me, right?

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So that's remarkable example, right?

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But when you come to hiring, most aspects

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of hiring can be outsourced now.

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And sometimes a lot of it is, you know, one example

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of this is there's lots of companies

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in the staffing industry

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who will literally hire people for you.

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The biggest hire in the US

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prob close, not, not entirely.

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Now, Walmart, Walmart as a company is certainly bigger,

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but as a company, most people have not heard

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of called People Scout

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and they were hiring about 300,000 people a year.

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They're hiring for their clients.

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Uh, and the clients then become the employer.

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So people scout finds the people, interviews them,

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makes hiring decisions, turns 'em over to you.

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You're then their employer, even on employee relations.

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So these are the legal issues, like complaints or,

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and complaints could be things like,

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I believe there's sexual harassment here.

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Even some of that is being outsourced now to vendors.

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And if you think about companies talking about the

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importance of having our own culture, you know,

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culture's really important,

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but you're not hiring people, you're not setting the terms

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of conditions of employment for them.

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You're not dealing with their problems.

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You're not creating a no,

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you're not creating a culture for them, right?

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You're not responsible for it.

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You've effectively outsourced it probably to five

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or six different vendors.

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So if you have an industry of $1.9 trillion,

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and their marketing budget is typically companies like that,

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20% of their revenue.

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Um, and so 20% of 1.9 trillion, pretty big number.

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Uh, and of that 20%, you know, a lot of it is sales,

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maybe certainly half of it is sales, but it's not all sales.

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A lot of it is marketing more generally,

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and the marketing is pitching to potential clients.

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And that means average human resource departments

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and sometimes their bosses.

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And this pitching comes in the form of a wide range

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of reports, studies, marketing materials,

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and they're driving the entire agenda.

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Inside Human resource department is about

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what we should be doing.

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Virtually everything comes from these reports.

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And the problem is the reports are not really interested

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in just informing you.

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They're interested ultimately in selling you stuff, right?

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And I was once involved in one of these reports,

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and we did the report, which started out quite sensibly,

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surveying clients and asking what they were doing and stuff.

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And we had kind of helped.

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I had helped to draft a report, here's what it finds.

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And then somebody from marketing came in

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and said, no, we're not doing that.

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We're going to market with this other thing here.

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And they just completely rewrote the report in a way

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that had nothing to do with the evidence in the report.

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It was simply to line up with their new marketing pitch.

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Now, having said that, what's, what are examples of this?

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Well, early on 20 years ago, McKinsey came out

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with this notion of the war for talent, very popular phrase,

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which had some, sentiment be sense, sense behind it.

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Basically, the idea that more valuable employees,

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better employees are super more valuable than

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we think, probably true.

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But the beginning of this was a claim,

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which was simply a misreading of the data

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that the US labor force was shrinking.

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And, this was widely distributed

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and lots of other consulting companies pick it up

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and start to disseminate this.

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And I was part of a meeting with one

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of the government agencies in Washington when they were

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drawing up these plans of how are we going to deal

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with the coming labor shortage?

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And I kept asking, what, what are you talking about here?

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What evidence is there for this?

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The Bureau of Labor Statistics, you know, the official

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data gatherer and prognosticator of the

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US labor force was, you know,

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no labor force is not shrinking.

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Um, what was happening was that, that a particular cohort,

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the echo of the baby boom in the US

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was smaller than the cohort behind them.

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And from that, they drew this conclusion

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that the workforce was shrinking.

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Um, they didn't notice that the group behind the echo

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of the baby boom was even bigger than the baby boom.

12:37.715 --> 12:39.325
They weren't paying any attention to that.

12:39.465 --> 12:42.005
And even with that, in that cohort, you know,

12:42.005 --> 12:44.565
it was just the rate of growth was slowing, that's all.

12:45.525 --> 12:49.265
So it kicked off this wild waste of time in lots

12:49.265 --> 12:52.665
of organizations trying to think about how do we deal

12:52.665 --> 12:55.745
with this declining labor shortage.

12:56.525 --> 12:57.905
Um, the biggest one,

12:57.905 --> 13:01.385
which you'll all certainly have heard about, is this notion

13:01.385 --> 13:04.545
of generational differences that was entirely created

13:04.545 --> 13:05.625
by consultants.

13:06.485 --> 13:08.305
Uh, and there's no truth to it.

13:08.645 --> 13:12.425
Uh, the National Academy of Sciences in the US did a,

13:12.675 --> 13:16.305
exhaustive investigation of this a couple of years ago,

13:16.305 --> 13:18.225
published a report in 2021.

13:18.725 --> 13:21.265
Uh, and their conclusion was basically

13:21.265 --> 13:23.465
that there's no evidence for any generational differences.

13:23.465 --> 13:25.945
There's no millennials, there's no Gen X,

13:26.105 --> 13:27.305
there's no Gen Y, there's none.

13:27.725 --> 13:30.025
Gen Q, it's all made up by consultants.

13:30.445 --> 13:32.985
And the consultants were making a simple mistake

13:32.985 --> 13:36.305
that all demographers knew they were confusing.

13:36.525 --> 13:41.305
Age effects the way people behave at different ages in their

13:41.305 --> 13:45.825
life course with the notion of a cohort, a generation.

13:46.245 --> 13:50.265
And that is this cohort has values which are different

13:50.815 --> 13:54.065
than the one born before them and born after them.

13:54.445 --> 13:57.745
So the claim would be 22 year olds today are different than

13:57.745 --> 14:00.225
22 year olds, 10 years ago, basically.

14:00.405 --> 14:01.825
And they're gonna be like that forever,

14:01.935 --> 14:05.185
because you're gonna see this effect, right?

14:05.695 --> 14:07.465
Even when you have a generational difference,

14:07.465 --> 14:08.505
it's only on average.

14:08.725 --> 14:12.425
It only means that in a graduating class of 17 million,

14:12.885 --> 14:15.625
you know, you might see on average people think this,

14:15.625 --> 14:16.825
something like that, right?

14:17.245 --> 14:18.745
But there wasn't even any evidence for that.

14:18.765 --> 14:21.225
So it was entirely cooked up by consultants.

14:21.765 --> 14:24.065
In almost every HR statement,

14:24.065 --> 14:26.025
you're gonna see anywhere refers

14:26.025 --> 14:27.665
to these generational differences.

14:27.805 --> 14:30.745
And I get one of these every day from some company,

14:30.845 --> 14:33.305
you know, how to hire with Gen Z or Gen X

14:33.305 --> 14:36.185
or Gen Q, whatever, it's entirely thick in complete

14:36.185 --> 14:37.265
waste of time, right?

14:37.855 --> 14:41.665
Just to give you a couple of others, in 2017,

14:41.765 --> 14:44.745
the companies, consulting companies were rolling out these

14:44.745 --> 14:46.465
claims that AI

14:46.845 --> 14:50.345
and driverless trucks, were going to take over.

14:51.105 --> 14:54.685
And by 2019, you know, we're gonna have to find something

14:54.705 --> 14:57.045
to do with all our unemployed truck drivers,

14:57.305 --> 14:58.885
and you better prepare for that.

14:59.225 --> 15:00.365
Of course. Completely wrong.

15:00.425 --> 15:02.845
We don't have effectively any driverless trucks.

15:03.105 --> 15:05.205
We have a massive shortfall,

15:05.465 --> 15:07.845
at least at current wages in the number

15:07.845 --> 15:09.765
of truck drivers we've got.

15:10.185 --> 15:12.765
Um, and one that I was deeply involved in is

15:12.775 --> 15:15.605
after the great recession, terrible job market,

15:16.285 --> 15:18.485
employers could just hint that they were hiring

15:18.545 --> 15:21.805
and they were overloaded with overqualified applicants.

15:22.325 --> 15:24.925
A couple of years into that,

15:25.025 --> 15:26.845
the unemployment rate was still about 6%,

15:27.505 --> 15:29.205
but companies started to complain

15:29.315 --> 15:30.605
that there was no one to hire.

15:31.265 --> 15:34.405
And we had a, they would claim a massive skill shortage,

15:35.395 --> 15:36.485
zero evidence for this.

15:36.865 --> 15:40.205
All that was happening was the labor market had tightened a

15:40.205 --> 15:43.885
little bit, and they could no longer hire machinists at $15

15:43.945 --> 15:45.885
an hour the way they could a few years before.

15:46.785 --> 15:49.005
And they're saying, what's going on?

15:49.125 --> 15:50.885
I I, there's something wrong with the labor market.

15:50.985 --> 15:53.085
It labor market just started to adjust again.

15:53.085 --> 15:56.645
That's all right. So the problem is we waste in public

15:56.705 --> 16:00.245
policy lots of time chasing these

16:00.815 --> 16:03.845
myths which have been created by the industry.

16:04.585 --> 16:07.445
Uh, and the industry, by the way, are creating problems

16:07.555 --> 16:10.605
because they're gonna offer you solutions to them, right?

16:11.065 --> 16:14.485
Uh, and this is sort of like the pharmaceutical industry,

16:15.725 --> 16:17.565
although the pharmaceutical industry is talking about real

16:17.565 --> 16:19.285
illnesses and real cures for it,

16:19.625 --> 16:21.645
but they're trying to get you to pay attention to,

16:21.945 --> 16:23.085
are you sure you don't have this?

16:23.145 --> 16:24.285
Ask your doctor about this.

16:24.825 --> 16:27.885
Uh, but in this case, there's also no real pushback.

16:28.885 --> 16:31.815
It's not like human resources is the accounting industry

16:32.245 --> 16:36.455
that has professional standards, requirements, things

16:36.455 --> 16:38.015
that you have to, as a member

16:38.015 --> 16:41.055
of the accounting profession do and pay attention to there.

16:41.055 --> 16:43.135
There's none of that in human resources, right?

16:43.435 --> 16:46.135
So they're kind of defenseless against this incredible

16:46.365 --> 16:50.495
onslaught daily of claims from the vendors about,

16:50.635 --> 16:52.615
here's a problem, here's what you need to do about it.

16:53.115 --> 16:56.175
One of the reasons is in this effort to get leaner

16:56.175 --> 16:57.695
and more effective and whatever,

16:58.035 --> 17:01.135
and outsource human resource departments are

17:01.175 --> 17:02.295
now sort of shells.

17:03.115 --> 17:06.735
Um, and when they're engaging these vendors,

17:07.525 --> 17:09.735
they no longer are asking for advice.

17:10.955 --> 17:12.575
That's used to be what happened.

17:12.575 --> 17:14.935
There were consulting companies in human resources.

17:14.955 --> 17:16.695
You ask them for advice, they tell you what to do.

17:16.985 --> 17:20.535
Those have shrunk down incredibly, despite the fact

17:20.535 --> 17:22.495
that this industry has exploded overall,

17:23.285 --> 17:26.175
what they need now is someone to do it for us

17:26.175 --> 17:28.535
because we don't have the staff to do it, right?

17:29.115 --> 17:31.135
So they don't have any internal staff

17:31.595 --> 17:33.855
who are really very expert in these things

17:33.875 --> 17:37.415
who can push back on these claims except

17:37.415 --> 17:40.415
for the very biggest multinational companies.

17:40.435 --> 17:41.695
You know, some of them do,

17:42.395 --> 17:44.775
but even there, I think they're subject to these, you go

17:44.775 --> 17:46.695
to a conference, the conferences are all talking

17:46.695 --> 17:47.855
about these things, you know?

17:48.435 --> 17:50.845
Um, and you're getting daily these reports.

17:51.025 --> 17:53.365
And from the big consulting companies,

17:53.365 --> 17:55.725
the strategy consulting companies, the accounting firms,

17:56.225 --> 17:57.245
you know, organizations

17:57.245 --> 17:59.045
that we think are highly credible, right?

17:59.185 --> 18:01.645
So even there, it's difficult to push.

18:01.735 --> 18:05.365
Think about the, the CEO role in a company

18:05.585 --> 18:08.205
or whoever is the president, the very top person, right?

18:08.475 --> 18:13.045
They, are in charge ultimately of a trying

18:13.045 --> 18:14.085
to balance things.

18:15.065 --> 18:17.525
And even if they think their whole job is

18:18.105 --> 18:21.085
to make the company more profitable, there's nothing about

18:21.625 --> 18:24.045
saying maximize profit that tells you how to do it.

18:25.835 --> 18:29.845
They have been, I think, extremely captive to the

18:30.645 --> 18:32.875
chief financial officer's orientation.

18:33.455 --> 18:35.395
And their job is not to think about

18:35.395 --> 18:38.075
what makes the business most effective.

18:38.075 --> 18:40.955
Their job is to think about how do we look

18:40.955 --> 18:44.235
to investors mainly, and they're focused on costs, right?

18:44.935 --> 18:49.235
So the CEO has to think about overall company effectiveness.

18:49.935 --> 18:53.155
Uh, and I was just reading about an account of one

18:53.155 --> 18:56.315
of the multinational companies that was being attacked now

18:56.375 --> 18:57.475
by investors

18:57.505 --> 18:58.675
because they believed

18:58.945 --> 19:01.155
that the leader had made them incredibly

19:01.825 --> 19:04.075
lean in cost effective, but

19:04.335 --> 19:06.715
but so lean that they were ineffective

19:07.095 --> 19:08.395
as a company now, right?

19:08.395 --> 19:11.275
They just were running so lean quality was suffering.

19:11.525 --> 19:13.715
Innovation was suffering, everything was bad.

19:14.375 --> 19:17.395
So the CEO has to strike that kind of balance.

19:18.135 --> 19:21.115
And I think the problem is they have not understood

19:21.895 --> 19:25.995
the enormity of the costs of managing poorly.

19:27.575 --> 19:30.355
For example, we're managing poorly

19:30.815 --> 19:32.555
and our employees hate us and they quit.

19:32.945 --> 19:34.435
Well, what does that cost us?

19:35.105 --> 19:38.695
Well, if you don't know you're gonna,

19:39.255 --> 19:41.055
you're not gonna think it matters very much.

19:41.755 --> 19:43.335
And in most companies, incredibly,

19:43.365 --> 19:44.935
they don't seem to even know.

19:45.675 --> 19:48.015
And if you think, which you sometimes hear

19:48.015 --> 19:51.815
that the cost is $4,000, that was someone's estimate

19:51.875 --> 19:53.495
of the administrative costs

19:53.515 --> 19:55.895
of bringing a new person into the company.

19:56.245 --> 19:58.375
It's not the cost of lost productivity

19:59.085 --> 20:00.415
when the person is gone.

20:00.475 --> 20:03.415
And the cost of having to bring somebody up to speed

20:03.795 --> 20:07.015
and the costs that one person leaving increases the

20:07.015 --> 20:08.455
probability other people are gonna leave.

20:08.915 --> 20:10.775
If you think it's a hundred thousand dollars,

20:10.835 --> 20:12.655
you're gonna think quite differently about

20:12.655 --> 20:14.975
that than if you think it's $4,000, right?

20:15.475 --> 20:18.175
And right now, companies are not, for example, paying much

20:18.375 --> 20:21.495
of any attention to whether their hiring practices

20:22.035 --> 20:24.015
are giving them better employees.

20:24.015 --> 20:26.295
They're just not measuring that. It's astonishing.

20:26.295 --> 20:28.455
But they're not measuring what are they measuring?

20:28.805 --> 20:32.195
Cost per hire. Can we drive that number down?

20:32.385 --> 20:33.915
Well, you can drive it down pretty easily

20:34.455 --> 20:35.635
and get lousy people,

20:36.375 --> 20:38.995
but that's the kind of stuff that's happening in companies.

20:39.335 --> 20:41.795
So it is basically telling us, look,

20:41.795 --> 20:45.195
could we just pay more attention to the internal accounting,

20:45.695 --> 20:47.810
not the financial accounting, which is the only thing

20:47.810 --> 20:49.485
that investors kind of see.

20:49.865 --> 20:51.845
But inside we should be able to know

20:52.515 --> 20:55.685
whether we're hiring good people, whether our practices

20:55.685 --> 20:58.605
with respect to recruiting are working, whether

20:58.995 --> 21:00.005
what we're doing in terms

21:00.005 --> 21:02.885
of management is pushing good people out the door.

21:03.305 --> 21:06.205
Here's a, a statistic that the folks at a DP,

21:06.205 --> 21:07.725
which is a vendor,

21:07.825 --> 21:10.125
but they have data on 80 million employees

21:10.125 --> 21:12.245
and they're producing some really interesting results.

21:12.865 --> 21:17.365
And one of their findings was that 29% who of employees

21:17.385 --> 21:20.765
who were recently promoted leave within one month.

21:22.375 --> 21:25.275
Now, if you think about it, isn't that like a fire

21:25.545 --> 21:26.875
that you would think, my

21:26.875 --> 21:27.995
god, whatcha gonna do about this?

21:28.535 --> 21:29.635
And why is it happening?

21:29.705 --> 21:31.675
Well, one of the reasons it's happening is

21:31.675 --> 21:34.275
because we have started to promote

21:34.495 --> 21:35.955
and not give them a pay increase.

21:35.955 --> 21:37.915
This is called dry promotions.

21:38.375 --> 21:40.555
And someone in the company probably thinks

21:40.575 --> 21:41.715
you could really save money.

21:42.165 --> 21:43.275
We've just promoted you.

21:43.275 --> 21:44.595
You're probably happy with that

21:44.895 --> 21:46.675
and we'll worry about your pay later on.

21:47.225 --> 21:48.555
It's incredibly dumb, right?

21:48.555 --> 21:51.635
Because you've just, by giving them a pro promotion,

21:51.635 --> 21:54.515
moved them into a higher paid labor markets

21:55.975 --> 21:58.155
and you're not paying them appropriately

21:58.385 --> 22:00.195
with the market wage for their job

22:00.695 --> 22:02.795
and thinking they're somehow gonna be cool with

22:02.795 --> 22:04.195
that and they leave.

22:04.675 --> 22:06.835
I mean, it's unbelievably dumb, right?

22:07.135 --> 22:10.955
And you can see example after example of this, right?

22:11.375 --> 22:12.595
And why is it happening?

22:12.835 --> 22:15.355
Actually, the book I started to write, you know,

22:15.355 --> 22:16.755
it's never quite the book at the end

22:16.755 --> 22:18.155
that you think you're gonna write at the beginning.

22:18.455 --> 22:20.875
The book was basically just to try to describe

22:21.175 --> 22:23.395
how we actually manage as opposed to

22:23.395 --> 22:26.315
what a textbook would tell you you should do, right?

22:26.815 --> 22:29.675
And then when I started to do it, I could see in practice,

22:29.675 --> 22:31.835
after practice, in training, in hiring

22:32.015 --> 22:34.515
and onboarding, in thinking about benefits,

22:34.645 --> 22:35.675
every aspect of it.

22:35.735 --> 22:38.195
You can see this kind of pennywise

22:38.295 --> 22:40.035
and pound foolish approach.

22:40.255 --> 22:44.275
You know, let's squeeze down the costs of doing it,

22:44.295 --> 22:45.635
but we're not paying any attention to

22:45.635 --> 22:46.915
what the effects are afterwards.

22:47.295 --> 22:48.195
So that's the problem.

"Shifting Paradigms in Human Resource Management: The Rise of Outsourcing and Its Economic Impact"

00:00:00 - I just put it in perspective. When I began my career, there were, you know, maybe four big human resource consulting companies, and that was kind of it. There were a few staffing companies, and they mainly provided temporary, services if somebody was out for vacation and that sort of stuff. It was pretty small industry, didn't have very much influence. now it, we outsource so much to, vendors of various kinds, and a lot of it about the fundamental ways the company operates, the organizations operate. And the biggest aspect of that is staffing.
00:00:43 - we have a large proportion of our workforce, our people who are not the employees of that workforce. And I'm not talking about just outsourcing work, we're talking about work that is done in our building. And by some measures, 30% of employees in the US are not employees of the location where they're working. So it's not outsourcing the work, it is outsourcing the people, but keeping them in your organization. And, you know, a an example of outsourcing a function, but keeping it in your building is managed service providers.
00:01:24 - to a company like Accenture or IBM. They're in your building, they are the people, the employees are there, they just don't work for you. And that industry, just managed service providers is $250 billion. The industry that provides employees, staff rather, that is $750 billion. So if you total up all the aspects of the human capital industry, it is $1.9 trillion. And it's about the same size as the Italian gross national product, at least the
00:02:04 - The real one's probably bigger than that, right? but 1.9 trillion is, makes it the sixth, the biggest economy in the world. And that's an enormous number, right? And the fact that it is so big raises lots of interesting questions. financial accounting establishes the rules of the game for the benefit of investors. So, you know, we used to think that CEOs and business leaders had competing objectives. They had different stakeholders, et cetera. But for sure in the last 40 years, the most important share stakeholder has been the investor community.
00:02:46 - perform, who's good or bad. Their goal is not economic efficiency. Their goal is not current profitability. They're interested in longer term shareholder value. So, you know, have a company Like Amazon or, a lot of the tech companies, where they, Tesla were not making any profits, but their share price was wildly high, right? so they're interested in future shareholder value, and there's a set of rules that govern how they decide who is valuable. And that comes from financial accounting. And these are rules that come down
00:03:25 - So in the US it's the Security Exchange Commission. In the uk you've got the same kind of arrangement. there's a board that the Security Exchange Commission delegates the creation of the rules to in the US it's the Financial Accounting Standards Board. They're not a government agency. They're not really accountable to anybody except to their own board. And they create these rules. And the rules are like the rules governing a sport, right? and you know, you might think if you're thinking about soccer, football, you're trying to describe the game to somebody and you say, well, the goal, you know, the point is to just get the ball in the goal.

The Paradox of Human Capital in Financial Accounting**

00:04:05 - just pick it up and run with it? Right? So, well, you can't do that because that's not the rule. And then things that seem pretty obvious, you know, until you know the rules, change a lot once you know the rules. So financial accounting has a particular problem with people, humans, in that it doesn't really think they matter. and the reason for that is it was developed in an era when capital was all physical capital. These days, most companies are service companies and the assets we know seem to be human except for financial accounting. Humans cannot be assets. And the reason for that is they believe you have
00:04:48 - Then that simplifies and clarifies a lot of things in traditional business, but not in services. So even if I have employees who are under contract to me, the financial accounting would say, well, I'm sorry, they're just not any assets. You say they're under contract. So what? You don't own them. They can't be under contract to you. And so you start thinking about things like training. We always talk about training being an investment, but not if you're financial accountants because you can only invest in an asset. You don't own employees. They can't be assets. Training can't be an investment, right? And a, a particularly quirky part of
00:05:28 - this isn't in the accounting, but in the reporting of it, is that we assess performance based on a per employee basis, not a per worker basis. So if I take my current employees and get rid of them and bring in the workers from a staffing firm who are not my employees, my headcount for financial accounting has dropped enormously, and therefore my revenue and profit per employees improved just enormously, right? and one other point, I mean, that's one reason why you might wanna get rid of your current employees and use least employees.
00:06:10 - but it is widely held in the world of business and finance, that employees are a fixed cost. Fixed costs are things that if business goes down, you're stuck with them. If you have a lot of fixed costs, you could easily be wiped out, get business turned down. So they really, really don't like employment costs. You know, it may have been modestly true a few generations ago. There was hard to get rid of people. It's really not. Now, you know, companies lay off all the time and lots of time simply to improve the investor's view of how they are performing, right? So the backdrop of of this, is a lot of the outsourcing
00:06:53 - because we would like to cut our headcount because it looks better in the investor community. Sorry, thinking about typical HR tasks, there's nothing that I can think of that has not been outsourced. But here's an example. There's, an arrangement in the US called professional employment organizations. PEOs and PEOs, can literally become the legal employer of your own employees. So, the people who work for me, I can turn over their employment to A PEO. originally the idea behind this was the PEO takes on the legal liability.
00:07:35 - I'm not your employer. Even though you're working here, you gotta sue the PEO. the rules have been tightened up on that. It's not quite so much of an issue there, with, with respect to that. But if you are the employee of A PEO working for me, I can become the co-employer. But everything about the way, I mean, and that is I get the ability to boss you around, to supervise you, but everything about the way you're paid, about your benefits, any complaints you have, all go to the PEO, not to me, right? So that's remarkable example, right? But when you come to hiring, most aspects

"The Complexities of Outsourced Hiring: Navigating Culture and Legal Issues in a $1.9 Trillion Industry"**

00:08:17 - And sometimes a lot of it is, you know, one example of this is there's lots of companies in the staffing industry who will literally hire people for you. The biggest hire in the US prob close, not, not entirely. Now, Walmart, Walmart as a company is certainly bigger, but as a company, most people have not heard of called People Scout and they were hiring about 300,000 people a year. They're hiring for their clients. and the clients then become the employer. So people scout finds the people, interviews them, makes hiring decisions, turns 'em over to you.
00:09:00 - So these are the legal issues, like complaints or, and complaints could be things like, I believe there's sexual harassment here. Even some of that is being outsourced now to vendors. And if you think about companies talking about the importance of having our own culture, you know, culture's really important, but you're not hiring people, you're not setting the terms of conditions of employment for them. You're not dealing with their problems. You're not creating a no, you're not creating a culture for them, right? You're not responsible for it. You've effectively outsourced it probably to five or six different vendors. So if you have an industry of $1.9 trillion,
00:09:44 - 20% of their revenue. and so 20% of 1.9 trillion, pretty big number. and of that 20%, you know, a lot of it is sales, maybe certainly half of it is sales, but it's not all sales. A lot of it is marketing more generally, and the marketing is pitching to potential clients. And that means average human resource departments and sometimes their bosses. And this pitching comes in the form of a wide range of reports, studies, marketing materials, and they're driving the entire agenda.
00:10:26 - what we should be doing. Virtually everything comes from these reports. And the problem is the reports are not really interested in just informing you. They're interested ultimately in selling you stuff, right? And I was once involved in one of these reports, and we did the report, which started out quite sensibly, surveying clients and asking what they were doing and stuff. And we had kind of helped. I had helped to draft a report, here's what it finds. And then somebody from marketing came in and said, no, we're not doing that. We're going to market with this other thing here. And they just completely rewrote the report in a way that had nothing to do with the evidence in the report.
00:11:10 - Now, having said that, what's, what are examples of this? Well, early on 20 years ago, McKinsey came out with this notion of the war for talent, very popular phrase, which had some, sentiment be sense, sense behind it. Basically, the idea that more valuable employees, better employees are super more valuable than we think, probably true. But the beginning of this was a claim, which was simply a misreading of the data that the US labor force was shrinking. And, this was widely distributed and lots of other consulting companies pick it up
00:11:49 - And I was part of a meeting with one of the government agencies in Washington when they were drawing up these plans of how are we going to deal with the coming labor shortage? And I kept asking, what, what are you talking about here? What evidence is there for this? The Bureau of Labor Statistics, you know, the official data gatherer and prognosticator of the US labor force was, you know, no labor force is not shrinking. what was happening was that, that a particular cohort, the echo of the baby boom in the US was smaller than the cohort behind them. And from that, they drew this conclusion

"Debunking Myths: The Fabrication of Generational Differences and Labor Shortages in HR Consulting"

00:12:31 - they didn't notice that the group behind the echo of the baby boom was even bigger than the baby boom. They weren't paying any attention to that. And even with that, in that cohort, you know, it was just the rate of growth was slowing, that's all. So it kicked off this wild waste of time in lots of organizations trying to think about how do we deal with this declining labor shortage. the biggest one, which you'll all certainly have heard about, is this notion of generational differences that was entirely created by consultants. and there's no truth to it. the National Academy of Sciences in the US did a,
00:13:16 - published a report in 2021. and their conclusion was basically that there's no evidence for any generational differences. There's no millennials, there's no Gen X, there's no Gen Y, there's none. Gen Q, it's all made up by consultants. And the consultants were making a simple mistake that all demographers knew they were confusing. Age effects the way people behave at different ages in their life course with the notion of a cohort, a generation. And that is this cohort has values which are different than the one born before them and born after them.
00:13:57 - 22 year olds, 10 years ago, basically. And they're gonna be like that forever, because you're gonna see this effect, right? Even when you have a generational difference, it's only on average. It only means that in a graduating class of 17 million, you know, you might see on average people think this, something like that, right? But there wasn't even any evidence for that. So it was entirely cooked up by consultants. In almost every HR statement, you're gonna see anywhere refers to these generational differences. And I get one of these every day from some company, you know, how to hire with Gen Z or Gen X or Gen Q, whatever, it's entirely thick in complete
00:14:37 - Just to give you a couple of others, in 2017, the companies, consulting companies were rolling out these claims that AI and driverless trucks, were going to take over. And by 2019, you know, we're gonna have to find something to do with all our unemployed truck drivers, and you better prepare for that. Of course. Completely wrong. We don't have effectively any driverless trucks. We have a massive shortfall, at least at current wages in the number of truck drivers we've got. and one that I was deeply involved in is after the great recession, terrible job market,
00:15:18 - and they were overloaded with overqualified applicants. A couple of years into that, the unemployment rate was still about 6%, but companies started to complain that there was no one to hire. And we had a, they would claim a massive skill shortage, zero evidence for this. All that was happening was the labor market had tightened a little bit, and they could no longer hire machinists at $15 an hour the way they could a few years before. And they're saying, what's going on? I I, there's something wrong with the labor market. It labor market just started to adjust again. That's all right. So the problem is we waste in public
00:16:00 - myths which have been created by the industry. and the industry, by the way, are creating problems because they're gonna offer you solutions to them, right? and this is sort of like the pharmaceutical industry, although the pharmaceutical industry is talking about real illnesses and real cures for it, but they're trying to get you to pay attention to, are you sure you don't have this? Ask your doctor about this. but in this case, there's also no real pushback. It's not like human resources is the accounting industry that has professional standards, requirements, things that you have to, as a member

"The Deficiencies of Modern Human Resources: Navigating Vendor Claims and the Cost of Poor Management"

00:16:41 - There's none of that in human resources, right? So they're kind of defenseless against this incredible onslaught daily of claims from the vendors about, here's a problem, here's what you need to do about it. One of the reasons is in this effort to get leaner and more effective and whatever, and outsource human resource departments are now sort of shells. and when they're engaging these vendors, they no longer are asking for advice. That's used to be what happened. There were consulting companies in human resources. You ask them for advice, they tell you what to do. Those have shrunk down incredibly, despite the fact
00:17:23 - what they need now is someone to do it for us because we don't have the staff to do it, right? So they don't have any internal staff who are really very expert in these things who can push back on these claims except for the very biggest multinational companies. You know, some of them do, but even there, I think they're subject to these, you go to a conference, the conferences are all talking about these things, you know? and you're getting daily these reports. And from the big consulting companies, the strategy consulting companies, the accounting firms, you know, organizations that we think are highly credible, right? So even there, it's difficult to push.
00:18:05 - or whoever is the president, the very top person, right? They, are in charge ultimately of a trying to balance things. And even if they think their whole job is to make the company more profitable, there's nothing about saying maximize profit that tells you how to do it. They have been, I think, extremely captive to the chief financial officer's orientation. And their job is not to think about what makes the business most effective. Their job is to think about how do we look to investors mainly, and they're focused on costs, right?
00:18:49 - and I was just reading about an account of one of the multinational companies that was being attacked now by investors because they believed that the leader had made them incredibly lean in cost effective, but but so lean that they were ineffective as a company now, right? They just were running so lean quality was suffering. Innovation was suffering, everything was bad. So the CEO has to strike that kind of balance. And I think the problem is they have not understood the enormity of the costs of managing poorly.
00:19:30 - and our employees hate us and they quit. Well, what does that cost us? Well, if you don't know you're gonna, you're not gonna think it matters very much. And in most companies, incredibly, they don't seem to even know. And if you think, which you sometimes hear that the cost is $4,000, that was someone's estimate of the administrative costs of bringing a new person into the company. It's not the cost of lost productivity when the person is gone. And the cost of having to bring somebody up to speed and the costs that one person leaving increases the probability other people are gonna leave.
00:20:10 - you're gonna think quite differently about that than if you think it's $4,000, right? And right now, companies are not, for example, paying much of any attention to whether their hiring practices are giving them better employees. They're just not measuring that. It's astonishing. But they're not measuring what are they measuring? Cost per hire. Can we drive that number down? Well, you can drive it down pretty easily and get lousy people, but that's the kind of stuff that's happening in companies. So it is basically telling us, look, could we just pay more attention to the internal accounting, not the financial accounting, which is the only thing that investors kind of see.

"The Cost of Inadequate Employee Management: Dry Promotions and Their Consequences"**

00:20:52 - whether we're hiring good people, whether our practices with respect to recruiting are working, whether what we're doing in terms of management is pushing good people out the door. Here's a, a statistic that the folks at a DP, which is a vendor, but they have data on 80 million employees and they're producing some really interesting results. And one of their findings was that 29% who of employees who were recently promoted leave within one month. Now, if you think about it, isn't that like a fire that you would think, my god, whatcha gonna do about this? And why is it happening? Well, one of the reasons it's happening is
00:21:34 - and not give them a pay increase. This is called dry promotions. And someone in the company probably thinks you could really save money. We've just promoted you. You're probably happy with that and we'll worry about your pay later on. It's incredibly dumb, right? Because you've just, by giving them a pro promotion, moved them into a higher paid labor markets and you're not paying them appropriately with the market wage for their job and thinking they're somehow gonna be cool with that and they leave. I mean, it's unbelievably dumb, right? And you can see example after example of this, right? And why is it happening?
00:22:47 - it's never quite the book at the end that you think you're gonna write at the beginning. The book was basically just to try to describe how we actually manage as opposed to what a textbook would tell you you should do, right? And then when I started to do it, I could see in practice, after practice, in training, in hiring and onboarding, in thinking about benefits, every aspect of it. You can see this kind of pennywise and pound foolish approach. You know, let's squeeze down the costs of doing it, but we're not paying any attention to what the effects are afterwards. So that's the problem.

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