RIP OFR. Does it matter?

Dec 22 2005 by Philip Whiteley Print This Article

There was much wailing, and much rejoicing, as Gordon Brown announced he is to ditch the requirement for listed companies to include Operating & Financial Reviews in their company accounts. Information that lobby groups regard as essential social and environmental information is condemned as unnecessary red tape by employers' groups.

The OFR's demise is explained by politics. It is not a sacred cow to the trade unions, so it was politically easy to drop as the Chancellor tried to recover some pro-business credentials.

There is something wrong with the debate, however. It is the context.

Taking the human capital reporting considerations, the underlying assumption that seems to be that profit-hungry corporations must be forced by law to report more fully on the skills, experience and welfare of their staff. The executives are irritated at having to lay out cash on this superfluous exercise rather than go for growth, market share, world conquest, and so on.

This framing of the debate sits uncomfortably with the fact that nearly all company collapses, failed mergers and botched reorganisations stem precisely from the fact that senior executives know little or nothing about the teams and individuals that make up their company.

A report by KPMG on mergers, for example, in 2001, found that over 70 per cent failed, and that those few that succeeded were characterised by a close integration of business and human resources strategic planning. The stuff misleadingly called 'soft' is the key – in practice, the only key – to making it work.

So if corporations are in ignorance of what exactly their organisations are made up of – information that an intelligently drafted OFR would provide for them – they are relying on guesswork and luck to make their strategies succeed.

The fact is, companies consist of people. At the Performance & Reward Centre, our members are those who take people management seriously. It is no coincidence that they are also the more commercially successful. From this inside view, it is easy to see what makes the enterprising organisation tick.

Now, there is a question as to how much human capital information can or should be made public, as opposed to being used for internal purposes. If this was the issue, one could be more relaxed about reservations from some corporate quarters.

Depressingly, however, it is more likely that too many executives regard people management as something to be thought of as junior and somehow almost a separate activity to strategic planning. This is an illogical separation, and it never works in practice – as the KPMG survey and others demonstrate.

It is often said that 'what gets measured, gets managed'. This is an accurate description of management, but a poor prescription. All too often, the things that are managed are the things that are easy to measure, rather than the things that drive value.

It is difficult (but not, actually, impossible) to measure employee engagement, customer satisfaction and make the links with structure and strategy. This is what human capital is – or ought to be – about.

One example of the lack of logic to corporate planning is management of call centres. These are typically referred to as transactional operations, rather than a core competence; and they are outsourced on the basis of cost. The fact that such centres handle the service delivery between organisation and customer is apparently overlooked – on yet more millions of occasions customer calls go unanswered, queries are not dealt with, Christmas presents are not delivered on time. One waits to hear the football manager describe his midfield players as not a 'core competence'.

Well run companies, like Smile Bank, will either not outsource customer service, or make sure they have very thorough information on the customer service staff of the outsource provider.

Badly run companies, like MFI, which outsourced delivery to companies on the basis of cost, have no information to hand on the root causes of customer complaints.

You don't have to call it human capital reporting, but without information on skill levels, product knowledge, staff turnover, engagement and motivation, you cannot manage. And you don't have to be able to measure everything before making an intelligent start.

About The Author

Philip Whiteley
Philip Whiteley

Philip Whiteley, co-author of the Radical Shift blog, is a journalist specialising in management, particularly the areas of leadership, motivation and strategic human resources. He is also the Chairman of the Human Capital Forum.