As were catching up with our stack of reading, we took the time to go into the details of the Harvard Business Review (HBR) article The Surprising Economics of a People Business.

What is a people business? Its any division or business with high employee costs, especially when compared to businesses with high capital costs and limited people activities devoted to long term value creation.

Typically all the service related fields such as IT services, advertising, security, facilities, hotel, or hospital management are all good examples. Also, a well emphasized but often forgotten finding is that even airline or car manufacturer employee costs exceed capital expenditures, meaning they spend more on people than anything else.

If you are in these businesses, you must look at the people numbers and ask yourself: Do I manage and report on them efficiently? The performance of a people business is based on previous Boston Consulting Group (BCG) research work on workonomics and is given a formula for economic profit at the employee level.

Economic profit equals employee productivity minus average cost per employee multiplied by the total number of employees.
In short, the rule is: make more than you spend ” while taking into account the cost of capital.

The best lesson probably comes from the insights that line managers and HR can learn from aligning their compensation and performance indicators according to the type of division managed. For instance, use more stock options if you build long term intangible value and use more short term bonuses if you perform services.

But above the details in the article, we think the key message is that for a people business – and I would say for any business – People management needs to be a core operational process and not solely a support function run by the HR department.

Did I mention that you have to look at the people numbers and report on them efficiently? But do not limit yourself by focusing on the numbers. Learn how Talent Management can improve them!