CEOs Know: The Soft Stuff Is the Hard Stuff

HR leaders should get ahead of the curve and develop measures to track such metrics as employee commitment, collaboration, team effectiveness, and innovation for the CEO.

A recent study showed a majority of CEOs worry about non-financial issues like employee commitment, customer satisfaction, and innovation. Linda Dunkel writes in Leadership Excellence about the dilemma of defining what's important.

Download this article in pdf format. [6]

A new study highlights what many leaders know first hand: Companies that ignore the so-called “soft stuff” - including important employee engagement metrics - do so at their own peril.

A recent Deloitte Touche Tohmatsu survey, called "In the Dark II," reveals that while CEOs know that financial indicators alone do not reflect the true health of their businesses, they often have few processes in place to measure important so-called "soft" metrics that impact bottom line performance.

In all, 79 percent of CEOs who responded to the survey agreed that financial indicators alone do not fully capture their company's strengths and weaknesses - in part because they reflect only past performance. That figure rises to 85 percent of respondents at companies with over $1billion in revenues. But the executives cite as inadequte their companies’ ability to monitor and report what they describe as key drivers of performance - such as employee commitment, customer satisfaction, and innovation.

At Interaction Associates, we define success across three significant dimensions: Results, Process, and Relationship [7]. All three dimensions are critical, interdependent, and each must be measured.

In fact, the two dimensions often overlooked or undervalued - Process and Relationship - are what we call leading indicators of a company's financial performance. It’s well known that leading indicators are predictive tools that help analysts forecast economic performance or trends. The better known leading indicators for the US economy include housing starts, productivity numbers, and the unemployment rate.

As for Process and Relationship as leading indicators, a company may experience poor reports for the Relationship dimension (flagging employee morale, for example), as well as for the Process dimension (for example, team meetings are disorganized, lack pre-planning, and do not yield desired outcomes). Inevitably, these poor showings often are good predictors of poor financial numbers to come.

For most companies, measuring Results is old hat. But many leaders have less experience or confidence in evaluating Process and Relationship. There are a core set of questions to consider in measuring each. To evaluate a work process, those questions include: "Is the process clear and logical? Is the process efficient? Is it appropriate for the task?"

To evaluate the relationship dimension, leaders might ask, "Do employees feel supported? Do they trust each other? Do they feel valued? Are they offering discretionary effort outside their job descriptions? Are they speaking out with recommendations for improvements?" Measuring attitudes through employee surveys and exit interviews, and tracking retention trends over time, are also good ways to evaluate your success in the relationship area.

There is little doubt that increasing levels of employee engagement also impacts financial performance. A 2005 Towers Perrin study established a clear connection between employee engagement and operating margin . The study equated a 5 percent increase in employee engagement to affecting a .7 percent increase in operating margin. Another study of 360,000 employees in 41 companies worldwide showed correlations between companies' levels of employee engagement and operating margin and net profit margin . What’s more, it's been demonstrated that customer engagement levels correspond closely with employee engagement levels - even in cases where employees have no direct contact with customers. Bottom line: Increasing employee engagement does have a positive impact on customer satisfaction.

The key gap in CEO's metrics identified in the Deloitte survey offers a unique opportunity for HR groups under pressure to define their strategic value, especially as many transactional functions have been outsourced. HR leaders should get ahead of the curve and develop measures to track such metrics as employee commitment, collaboration, team effectiveness, and innovation for the CEO.

We partner with clients to help move the needle on key non-financial metrics. For example, Comcast Cable Corporation's NorthCentral division, a multi-billion business unit with 12,000 employees, carried out an 18-month collaborative effort to boost employee engagement and customer satisfaction. Under the leadership of Carolyn Fischer, Vice President of Learning & Organizational Effectiveness, the group established metrics -such as employee turnover rates, employee satisfaction survey scores, and customer satisfaction survey scores, as well as financial metrics - to gauge their success. Bonus and compensation structures were shifted to reward targeted behaviors. The result? The division significantly improved operating results and earned numerous external awards including "Best Place to Work" in the three primary states in New England states where Comcast operates.

So the "soft stuff" is the hard stuff, as many CEOs know too well. Never doubt that there are ways to make real inroads by putting programs in place to change behaviors that move the needle on key employee metrics - and ultimately the company’s financial performance.

ACTION: Put metrics and rewards in place for three dimensions of success: Results, Process, and Relationship.

This article appeared in the July 2007 edition of Leadership Excellence [8].