2007 TheNewMetricsofCorporatePerform
- (Bryan, 2007) ⇒ Lowell L. Bryan. (2007). “The New Metrics of Corporate Performance: Profit Per Employee.” In: McKinsey Quarterly, 1.
Subject Headings: Profit per Employee.
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Abstract
Most measurements of performance are geared to the needs of 20th-century manufacturing companies. Times have changed. Metrics must change as well.
1. Introduction
Let's get right to the point: companies focus far too much on measuring returns on invested capital (ROIC) rather than on measuring the contributions made by their talented people. The vast majority of companies still gauge their performance using systems that measure internal financial results - systems based on metrics that don't take sufficient notice of the real engines of wealth creation today: the knowledge, relationships, reputations, and other intangibles created by talented people and represented by investments in such activities as R&D, marketing, and training.
Increasingly, companies create wealth by converting these"raw" intangibles into the institutional skills, patents, brands, software, customer bases, intellectual capital, and networks that raise profit per employee and ROIC. These intangibles are true capital, in the sense of delivering cash returns, even though the sources of those returns are intangible. Indeed, the most valuable capital that companies possess today is precisely intangible rather than financial.1 Companies should redesign their financial-performance metrics for this new age.
Consider a simple approximation of intangible capital: the market value of a company less its invested financial capital. Using book capital as a crude proxy for financial capital, in 2005 the intangible capital of the world's largest 150 companies was $7.5 trillion, versus $800 billion in 1985.
Despite the evidence that intangibles are now the true source of corporate wealth, companies tightly control discretionary spending on them. Advertising, R&D, new-product development, training, knowledge creation, software projects, and so forth are almost always expensed on a "What can we afford?" basis. Why ?
One reason is that accounting for intangibles is difficult. In particular, each intangible's specific contribution is hard to assess; how, for example, do you value a brand? Intangibles are embedded in the value chain of production, so it generally isn't clear which intangibles are the sources of profits - or what specific balance of intangible and tangible assets should get the credit (or blame) for results.
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References
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| Author | volume | Date Value | title | type | journal | titleUrl | doi | note | year | |
|---|---|---|---|---|---|---|---|---|---|---|
| 2007 TheNewMetricsofCorporatePerform | Lowell L. Bryan | The New Metrics of Corporate Performance: Profit Per Employee | 2007 |