Is your headcount growing at a slower rate than revenues? Are your employee costs increasing at lower rate than your revenues?
People Value Creation: We call the art of growing revenues faster than employee costs as people value creation. Efficient organizations grow with the fundamental principle of 1+1>2, meaning the next hire will only increase the overall productivity of the organization. This is no rocket science, as even the most classical organizational concepts were built over this foundation.
There are two major questions pertaining to people value creation:
- What drives this phenomenon of 1+1>2, or, what do PVCs do differently?
- How much should be the real productivity growth such that an organization is actually a people value creator?
Let us talk about the first one first. People value creation is essentially driven by two forces a) individual productivity and b) productivity through working in teams. As organizations grow, so do role descriptions improve, talent and skill develops, systems / processes are put in place and the organization becomes more and more productive. There are three drivers of individual productivity:
i) Motivation – this drives effort and throughput. The spheres compensation, performance management, incentives, culture, mentorship, encouragement etc. all majorly drive motivation and hence throughput.
ii) Skill & training – this drives efficiency.
iii) Role allocation – this is the most classical driver of productivity, preached as “division of labor” even by the likes of Adam Smith. Role allocation improves uptime and efficiency of employees. Note that by no means it means silo roles – as employees can have multiple roles to learn and grow but have defined time-frames where they do a single activity.
There are two drivers of teamwork productivity:
i) Processes & systems – organizations are made to work in unison, seamlessly interacting with each other. In today’s age, it is paramount to ensure there are ample systems and communication tools that enable information availability and sharing.
ii) Decision making – finally, the right direction, governance, and decision making process reduce yield loss and provide focus to organizations. This is a fundamentally strong driver for people value creation.
Now let us come to the second question – how much productivity growth actually leads to people value creation? At Praxis, we looked at >1,000 top companies in India and evaluated their revenue, employee, stock and profit growth. Some of the findings were incredibly interesting:
- In India, >25% of the companies demonstrated growth of >17.5% in net productivity (revenue per employee growth net of inflation) in the period FY12-16. We refer to these companies as “People Value Creators – PVCs”
- PVCs demonstrated stellar performance overall – 12% higher revenue growth, 10% higher EBITDA growth, 4% higher stock price growth in the same period, as compared to non PVCs
If we look at sector cuts, the same information becomes even more interesting:
- Healthcare: 31% of companies demonstrated >17.5% net productivity growth and these companies had 12% higher revenue growth
- Telecom: The companies that have declined in revenues have been pushed to drive productivity improvement for survival – also a demonstration of the fact that revenue growth is not necessarily driven by productivity growth
- Information Technology: 8% higher revenue growth by PVCs, which are 45% in volume. Given the level of automation and technology innovation in the sector, we expect to see PVCs driving even more disproportionate value creation.
Praxis has a deep IP in people value creation, assessing how companies can drive business performance from their organization. We put “business performance” at the center of our organizational philosophy, as we believe high performing organizations automatically improve employee happiness and reward.