[PODCAST] Getting Human Capital Valuation RightAn Interview with Business Valuation Expert Dave Bookbinder
People may be your “company’s most valuable asset” but they don’t appear on a company’s balance sheet. They are, however, captured on the income statement as an expense. How do we close this gap between valuing human capital as an expense and not an asset? Start here with our interview with Dave Bookbinder.
Imagine your phone rings. You answer, and it’s your boss. “I need to see you,” he says. You immediately stop what you’re doing, ending an email in mid-sentence. You walk down the hall and knock on his door. You can feel your heart beating faster. He invites you to take a seat. “What’s so urgent?” you wonder.
“Joe,” he says, “let me get to the point. How would you quantify your value to our company?”
How would you respond? If you were in sales, you could easily share your sales, customer NPS (net promoter score), and profitability. But you work in payroll, for gosh sake. You don’t generate revenue. How would you answer? Where would you start?
Understanding how to quantify value implies you actually have something that is valuable worth quantifying. Valuing sales is easy. For non-revenue producing roles, the math is not as straightforward. Let’s take a step back and consider how companies today create their value and then circle back to the individual.
Historically speaking, a company’s financial value is best defined as the combination of their present and future financial and capital assets less its liabilities. For example, let’s say you want to buy an ice cream shop. The value of the business can be defined by assets like the building, the parking lot, as well as, the equipment used to make, store, and sell those delicious ice cream products. There is also a history of revenues that have been maintained in QuickBooks, showing a profitable business. The combination of these data points along with some X factor known as “brand value” allows you to find a dollar amount you are willing to spend to become the new owner. For the most part, this is exactly how businesses have sold or purchased other companies. On the surface, quantifying the value seems straight forward. However, just like that triple-scoop sundae you just ordered, there’s some “stuff” on the bottom that you wouldn’t know was there until you scooped it up and took that bite for yourself.
According to Dave Bookbinder, the mystery crunch you just experienced is called human capital. Suppose that the ice cream shop’s employees were the reason the sales were so high. What happens if they decide they don’t want to work for a new owner? How does employee turnover impact customer relationships? How do you anticipate the customer relationships’ impact on the short and long term value of the business? Dave’s book, The New ROI- Return On Individual shows how.
Dave’s defining quote is: “The value of a business is a function of how well the financial capital and intellectual capital are managed by human capital. You’d better get the human capital right.”
You better get the human capital right, pretty much sums up the way companies need to start thinking about their people. So let’s retrace our steps and head back to your boss’s office.
The challenge you face is that your boss is thinking about your compensation and benefits – how much you “cost.” You have much less tangible thoughts – employee history, an eagle eye for paycheck outliers, a knack for dealing with software quirks, relationships with benefits vendors, business acumen. How can you quantify these intangibles? How much do you save the company each week or how much would the company lose if it lost you? Blending the value of physical and tangible assets with intangible intellectual and human capital requires a new way of thinking.
“You better get the human capital right.”
Let’s be honest here, this isn’t easy. It’s not the stuff that HR can do easily. Many finance leaders struggle to understand it too. Where management measures value in dollar signs, HR measures value in appreciation, engagement, and satisfaction – what many might call HR fluff. What Joe’s boss is asking is hardly fluff!
That’s where Dave comes in. Dave is not “of HR”, not by a stretch. Dave’s entire career has been spent exclusively in the area of financial valuation. After thousands of valuations, Dave knows all too well there is always a mysterious crunch just waiting to be consumed. Look no further than the plethora of mergers and acquisitions that don’t live up to expectations.
“Think Outside the Conventional The Conventional Balance Sheet”
According to Dave, 80 to 90% of M&A deals do not reach their desired outcome. Dave knows why.
Today’s world requires companies to think outside the conventional balance sheet. They find ways to invest and grow their human capital. The New ROI helps companies understand the world as it is, not how it used to be. Look at Sears. Instead of becoming the first “Amazon,” it decided its real estate was its future, It valued its company based on physical assets and shed employees and customers. Today, it is bankrupt and almost history.
The greatest differentiator for any business is its people. Management has long mouthed the words, “people are our greatest asset.” Perhaps now is the time for them to do something about it. Without a doubt, expressing appreciation for each employee and customer is vital to their growth and success. But understanding how to value the human capital asset is critical too.
This human capital valuation mindset shift is a journey, a long but unavoidable one. It starts here by tuning into the Geeks, Geeks, and Googlization podcast.