Philip Whiteley's Blog

March 28, 2013

Expense is not cost; people are not resources

Filed under: Uncategorized — felipewh @ 11:24 am

One of the many baleful examples of an accountancy-dominated business model is the pretence that the numbers tell the whole story. Commonly heard in management circles is the mantra: if you can’t measure it, you can’t manage it. This is nonsense. At the very least, 50 per cent of management is un-measurable, because you cannot measure the impact of a course of action you decided not to take. Every time a manager takes a decision, there is an unquantifiable opportunity/risk that is passed over. Real management involves forming a judgement on hypothetical matters; it also means being comfortable with paradox. If you only manage what you can measure, you cannot manage at all, you can only add up.

What is worrying is that the ‘financial data tells the whole story’ myth is creeping in to the personnel profession, as my new article in Personnel Today reports. Many employers are pretending that reducing the direct costs of hire always results in lower operating costs, neglecting matters such as morale, skills, communication and so on that have a direct bearing on efficiency and operating costs.

As economist Haig Nalbantian describes in this article, there is a difference between ‘expense’, the direct costs of hiring people; and ‘cost’, which is an economic construct that depends upon collective performance. The measures that he and his team have developed over the past 20 years are far more sophisticated and valuable to a management team, because they analyse the inter-relationships between deployment of people and types of reward and training, and the impact on the business.

Even here, though, a judgement has to be taken; Haig refers to ‘sleuthing’, because data, even sophisticated data, cannot tell the full story. I sometimes liken it to forensic science in a court case: necessary, but not sufficient. You also need to know about motive and relationships.

This is not an argument against measurement; it is an argument both for better measurement and for an understanding of its limits.

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2 Comments »

  1. […] This is not true. A better ideology is precisely what is needed to improve wages. For over 100 years, cynical ideologies (of the left and the right, as it happens) have kept pay very much lower than it could and should have been, especially for skilled workers in effective teams. It is a shared left-right ideological belief that minimizing the wage bill maximizes profits. This is reflected in the astonishing fact that more than half of FTSE100 chief executives have a finance background, according to the Chartered Management Institute and that many companies still prioritize reducing the cost of hire (often relatively unimportant) rather than the operating cost of weak skills or low engagement (often much higher) as this recent blog by Philip demonstrates. […]

    Pingback by A better ideology can improve wages | Radical Shift — July 12, 2013 @ 1:45 pm | Reply

  2. I am not an ideologue, but I lead my company by principals (US, commercial printing, 106 employees)– and here we say, “You get what you pay for.” That’s more true of talent than anything else. I pay well above minimum wage (and well above the UK living wage when compared to cost of living standards) because I know what talent is worth. You are dead on about intangible (unmeasured) benefits. I know that intangible values will always lose out to tangible cost to the short-sighted. That’s why leading an organization will always take a measure of intuition. Now THAT’S not something you can measure!

    Comment by Jess MacCallum — April 25, 2014 @ 3:11 am | Reply


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