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Making Smart Investments in Human Capital

December 07, 2011

This article is a summary of Making Smart Investments in Human Capital (12 pages PDF), a report co-authored by James Weinberg, founder and CEO of Commongood Careers, and Dana Hagenbuch that draws on a series of four regional convenings organized by Commongood earlier this year. At those meetings, nonprofit executives, HR practitioners, evaluation experts, and funders sat down to discuss best practices, challenges, and emerging issues related to the subject of hiring and cultivating nonprofit employees. Over two hundred attendees representing a hundred and sixty-two organizations participated in the conversations.

Human_capitalIn the nonprofit sector, the focus on demonstrating and quantifying programmatic impact has never been greater. As grantmakers, foundations, government partners, and other intermediaries emphasize accountability for programmatic outcomes, nonprofits are stepping up to the plate with key performance metrics for assessing the impact of investments. This response to evolving philanthropic decision-making has spurred a culture shift throughout the sector resulting in an increase of data-driven, results-oriented programmatic strategies, particularly among social entrepreneurs and organizations seeking to make a major and measurable difference on the communities they serve.

While organizations have developed sophisticated models, systems, and tools for measuring program impact, little attention has been paid to measuring other types of organizational investments. This failure to invest in holistic organizational development has its roots in the historical reticence of the foundation community to make investments in the key functional areas often categorized as "overhead." Investments in programs are highly visible and have a direct impact on the constituent community, and that's good. But when managed correctly, every dollar invested in a nonprofit plays a role in organizational outcomes. This is especially true when it comes to human capital. Without investments aimed at getting the right people in the right roles, as well as efforts to support employee performance and drive a positive work culture, an organization cannot effectively deliver on the promise of its programs. If this is true (or at least generally accepted), why don't organizations invest more in their people?

In our "Uncommon Conversations" meetings this spring, 95 percent of participating organizations indicated that they had made at least some investments in human capital over the past few years, but mostly in such baseline areas as building organizational culture and hiring staff to manage transactional HR functions. Significantly fewer participants indicated they invested in enhancing management systems, catalyzing leadership development, and hiring senior human capital leaders -- some of the most strategic investments possible.

When asked about the human capital outcomes that are most important to their organizations, respondents overwhelmingly indicated staff performance as the most important, and staff satisfaction and retention among the least important. This mindset is typical of the dynamic that has led to high burnout and turnover expenses in the nonprofit sector; it is shortsighted thinking that has significant long-term consequences for the sector.

Across the convenings, there was tremendous enthusiasm for exploring a range of strategies that impact the ways we recruit, develop, and retain our people, as well as ideas about ways to measure the effectiveness of these investments. Some ideas that received the most enthusiasm included:

Invest in a strategic human capital hire. Sam Cobbs, CEO of First Place for Youth, expressed the value of investing in a senior management hire: "Bringing on a Director of Talent Management met a need we didn't even know we had. This hire has been instrumental in creating and implementing a performance management framework for mapping strategic organizational goals to department and individual work plans. As a result, we've been more effective at closing performance gaps and creating a talent-driven culture. We've seen higher levels of staff engagement, which translates to the frontlines of our programs."

Build integrated systems to drive performance. Today, many organizations rely on limited, disparate systems that are unable to respond to the evolving needs of an organization as it grows. A strong performance management system tracks and evaluates individual performance against larger organizational goals, provides employees with an understanding of what's expected of them, and let's them know how their individual goals fit into the bigger picture.

First "what," then "how." Organizations must first set clear goals about what it is they wish to measure, and then determine how to measure that. There was an overall sense that we are not doing enough today to measure these investments, and attendees recognized the importance of taking a results-oriented approach to their human capital systems and practices.

Taking the Next Steps

Identifying investments in human capital is easy. Taking the next steps is hard. The following are a few suggestions to help leaders determine, implement, and measure the right set of human capital investments for their organization.

1. Human capital mind shifts happen from the top down. When it comes to prioritizing investments in human capital, there is no substitute for a highly engaged CEO. In addition, an engaged committee of an organization's leadership is instrumental in gaining the support of staff, funders, and other influential stakeholders. Some organizations have created a position on their board to play the role of treasurer of human capital, mirroring the treasurer of financial capital that all boards are required to have.

2. Get funders involved. In the pre-event survey, respondents indicated that the key influencers of decisions related to human capital are executive team members (98%) and board members (62%) but not funders (12%). There is an opportunity for grantees to lead funders through an education process that illustrates the costs of turnover, poor performance, and low staff satisfaction, and how these conditions negatively impact program deliverables.

3. Budget for investments. Build line items in the budget that are devoted to human capital investments such as costs associated with consultants, systems, retreats, trainings, and surveys, as well as budgeting for a leadership role like Chief Talent Officer. In addition to creating an expense budget, predict cost savings, such as decreased recruitment and turnover costs, into budgets as well.

4. Build the case for the outcomes you want to achieve. Employee survey data, focus groups and stakeholder interviews are effective ways to determine the greatest needs for investments. Involving both internal and external stakeholders will make it easier to gain support for these initiatives.

5. Build better models for evaluation. The nonprofit sector can borrow much from the work that has been done in the private sector in this area. Some of these models include the Bain RAPID Decision Model, McKinsey Capacity Assessment Grid, Goal Alignment Cascade, and TCC Group's Core Competency Assessment Tools.

Conclusion

Throughout these conversations, organizational leaders readily conceded that human capital was their number one success-determining factor, but not their number one organizational priority. The sector has worked to professionalize other functional areas, most notably finance, fundraising, communications, technology, and strategy. Strategic human capital still lags behind. Nonprofit HR today harkens back to a time of basic, tactical, and transactional personnel management. Only by assessing the investments that will have the greatest impact on our organizations can we hope to make the most progress along these lines and secure the philanthropic support that we need. By prioritizing strategic human capital and making investments accordingly, organizations unlock their potential for growth and social impact.

-- James Weinberg and Dana Hagenbuch

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