The 2nd P&L – What is Making Your Competitors More Successful Than You

By Tony Latter

In an ever more data-driven world, most business owners are well aware of the importance of monitoring their traditional Profit & Loss (P&L) account. However, ask any good leader what their businesses biggest asset is, and they’ll nearly always say it is their people. 

Despite this, recent research published by the Valuing Your Talent Partnership found that one third of the FTSE 100 companies, are continuing to fail to report on critical human resources issues, including all important employee turnover rates to their detriment. There are key opportunities being missed by not adequately measuring an organisations workforce engagement, wellbeing and happiness. 

To an investor, the failure to report potential threats that come from their human capital must also provide reason for concern. These intangible assets, your people and leaders after all are the driving force of your business. And for SMEs this provides a stark warning – start listening to your people from the start. They are the key factor in its success and growth in future. 

In relation to the report, former Business Secretary, Vince Cable commented: “It shows a poor understanding of the significance of people-related data… Having a clearer view of the people in our workforces can only be a good thing; it could lift the lid on our productivity issues and the skills challenges that are preventing so many businesses from reaching their potential.”

Measuring your people means looking at key influencers like engagement, motivation, wellbeing, reward, recognition, culture, leadership and management and their impact on the business and its financial performance. Having a clear view on your team and by measuring sentiment regularly, allows business owners to minimise the impact things like staff turnover, skills gaps, absenteeism and the ever increasing cost to recruit have on their company. 

 

Out-dated one dimensional views are stifling business performance

So why have we still not formally embraced measuring this intangible asset in the same way we do our revenue, profit and other more tangible key business success metrics? Looking only at a financial P&L produces a one dimensional view of the business and its future potential for growth. To generate a truly 360-degree view, business owners should be mindful of keeping track of their ‘2nd P&L’ – measuring the effectiveness, productivity and stability of their people and leaders.

Your staff are the front-line in all aspects of your business, from customer service to innovation.  So when looking at ROI, maybe it would be worth adding ROP (Return on People) to your KPIs? 

Companies need to understand (and appropriately convey to their key stakeholders) a true picture of their complete assets, including the people within the business who are at the epicentre of creating value and growth opportunities. Your people provide all your human capital and their sentiment, happiness and performance at work are most certainly linked to your organisational performance. The way you harness and retain this human capital and expertise is likely to be the core indicator of a business’ long-term growth. 

Your people are unique to you and can, if properly looked after, be your greatest advantage against your competition. A business is only as strong, innovative and successful as the people who run it after all. 

 

Happy employees are most certainly more productive

Despite the reporting gap, companies are definitely becoming savvier to the business benefits associated with happiness in the workplace. While often thought of as a nice, fluffy notion reserved for the HR industry alone, recent research from The University of Warwick shows that happy employees are 12% more productive in their work.

The study demonstrates beautifully that there is indeed a direct link between happy employees and increased business performance and profit. This is a piece of research business owners and leaders cannot afford to ignore. Taking care of your workforce will increase your bottom line so it’s astounding so many people fail to measure it. 

 

Be on the ‘pulse’ or don’t bother

Advances in HR technology make it easier than ever for SMEs to keep their finger on the pulse of their workforce and their sentiment toward the company. While many feel the annual employee engagement survey is enough to satisfy the need to listen to staff feedback – it really doesn’t give you much insight. Companies measuring engagement annually are missing the chance to understand what is happening within the business at various - and possibly crucial - points throughout the year. 

Measurement should be ongoing - able to tell you how any recent organisational changes have impacted your team’s motivation and spotting potential losses in your talent pool early. This is particularly true to small companies who are growing fast. Change management and a team’s inability to adapt as fast as a company may grow is in my experience, a common complaint among dissatisfied staff. 

 

HR recommendations have to be data-driven to interest the board

Beleaguered human resources departments have historically struggled to provide data that can be regularly benchmarked and measured against targets. But today, innovation in HR technology provides an opportunity for businesses to deliver concrete insight to the board, that can be used to create a structured and measurable approach to ensure employee happiness, and the positive impact it has on a business. 

There’s always been ambiguity over the true impact of staff turnover, morale and motivation in the board room, however the rise in instant intelligence, and an advancement in people analytics tools is allowing companies to measure important things that haven’t previously been measured. Including culture, leadership and vision – as well as their definitive impact on the business’ financial performance.

If HR managers measure their 2nd P&L properly they can directly affect the bottom line. An abundance of studies backup this theory. For example:

• Productivity of highly engaged staff is increased by 12%. (University of Warwick).
• Engaged employees in the UK take an average of 2.69 sick days per year; the disengaged take 6.192. (KPMG) and sickness absence costs the UK economy £13.4bn a year. Almost £2bn of which is thought to be not genuine. (CBI).
• Companies with both highly aligned cultures and highly aligned innovation strategies have 17% higher profit growth than companies with low degrees of alignment. (Strategy + Business: The Global Innovation 1000: Why Culture Is Key).
• 70% of engaged employees indicate they have a good understanding of how to meet customer needs; only 17 % of non-engaged employees say the same. (Right Management, Measuring True Employee Engagement, A CIPD Report).
• Highly engaged employees are 2.5 times more likely to stay at work late if something needs to be done after the normal workday ends. (Temkin Group).
• Replacing an employee costs on average around £30,000 and it takes up to 28 weeks to get them up to speed. (Oxford Economics). Furthermore, over half of the employers in the latest CIPD representative survey indicated that hiring difficulties are becoming more commonplace with ‘hard-to-fill’ vacancies on the rise.
• Companies who implement regular employee feedback have turnover rates 14.9% lower than companies who provide no feedback. (Gallup).

These stats are hard to argue with. No business benefits from absenteeism, unexpected resignations and from carrying unmotivated, unproductive individuals. 

With this advancement in HR technology, managers, business owners and HR leaders really do have the power to influence productivity and performance through listening. It can also provide businesses with the ability to benchmark their performance against other companies, allowing an understanding of whether they are performing ahead, or behind their peers when it comes to people and leaders.  The new intelligence held is also uncovering much more defined relationships between People and Profit, and Leadership and Loss.   

 

Use your 2nd P&L as a predictor for your traditional P&L

Only 8% of HR leaders surveyed by CIPD are using any sort of analytics and people measurement tools and it’s a real weakness as measuring your biggest asset – your people, really is an increasingly important topic for businesses owners who are serious about achieving future sustained growth. It’s key for your investors and external stakeholders to see how your work force is generating value and driving forward the overarching vision and mission. 

By developing a more holistic view of profit and loss, which includes the ‘2nd P&L’ businesses are better armed to protect themselves from risk and act faster to resolve issues that will boost performance.  It will allow you to identify where you should spend the most time; focussing firmly on taking advantage of opportunities and identifying threats before they escalate. The board can combine 2nd P&L data with the traditional financial P&L to help them forecast, plan and prioritise the key actions they need to take in order to make a difference to the company.

By harnessing the power of people measurement and analysis, and by turning data into tangible actions and initiatives, businesses are able to be more agile, effective and productive resulting in a noticeable increase in profit.

 

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