Jeff Bezos' Lessons on Human Capital

“The truth about what makes us different is this: We are genuinely customer-centred, we are genuinely long-term oriented, and we genuinely like to invent. Most companies are not those things.”

Jeff Bezos

At the time of writing, companies are adopting a wait-and-see approach to their growth plans. Many Executive Boards are on tenterhooks as to whether they should pull the trigger on their investment plans, hold off and wait or actively make cutbacks in anticipation of a downturn. These are not easy times for senior decisionmakers.

It’s a perfect time, though, to attend to a sleeping giant well within their circle of control and which can easily deliver gains in Shareholder Value of $50m or more.

I refer, of course, to each company’s Human Capital.

Don’t make a meal of Human Capital

As I’ve covered before, Human Capital can be made way more complex than it needs to be. Sure, you can follow an approach long in sigmas and heavy on integers, but are you aiming for accuracy or value? My recommendation here is for the latter. As Warren Buffett has oft advised, ‘it’s better to be broadly right than precisely wrong.’

So what does ‘broadly right’ look like? To be broadly right, all we need to do is to look at where the big numbers (low investment, high impact) are within a company. And these are:

- Manager skills and behaviours

- Skills in general (including technical skills)

- Employee Engagement (and more broadly, people systems that support it)

But w-w-wait. Why is it that these highly desirable, low investment, high impact areas are not attended to by companies today?

As I’ve mentioned previously, hardly any companies measure their Human Capital. They are mentally enthralled to century-old dogmas like Performance Management for running their people systems, convinced in their minds that despite over a hundred years of demonstrated failure, this tool (and tools of its like) will suddenly come up trumps. They believe that other tools, such as Competencies, unlock the value of their people without so much as measuring what that value is. And then when these spanners fail they desperately reach into the toolbox for another shiny tool (Employee Experience anyone?) they believe will magically fix the problems all around them.

Bored already. Are we really going to wait another hundred years to finally wake up to the evidence? Or maybe just give up and let AI run the show?

The Amazon Prime Example

So today I’m going to show how desperately simple this Human Capital jaunt is. No fancy equations. No need for convoluted word raviolis from an HR Transformation expert. Instead, just an example Jeff Bezos himself referred to in his Shareholder Letters – namely the enablement of the cashflow machine that is called Amazon Prime.

In this, we will only be talking dollars and cents.

But before we go there, let’s ground ourselves in the present. Earlier we saw how Boards are constantly under pressure to deliver shareholder returns. In a time of uncertainty, an easy way to do that is to cut costs. Thus, this year we’ve seen numerous Tech companies do exactly this by laying off their employees.

So here’s our starting point: employees = costs. Adding value - laying off employees.

But wait. Don’t we sometimes hear our senior leaders say that ‘our employees are our greatest asset’?

What are these employees then, a cost or an asset? Or is this me being overly fussy with language? Maybe I should just listen selectively, and never mind the BS when I hear it.

What we’ll see is that employees really are like an asset or liability even though they are measured (for IFRS purposes) as a cost. And while they are required to do so by global accounting principles – and this is important – these principles do not prohibit companies from measuring their employees as an asset or liability for their own internal purposes, just as they don’t prohibit them from using Performance Management or any other bunkum measure that supposedly captures this value (which as we’ve seen it doesn’t). Not doing Human Capital Accounting is what we can say makes people management so damn complex, preventing companies from adding millions of dollars of low-hanging fruit to their Shareholder Value, and instead slapping clunky one-size-fits-all / one-rule-fits-all systems all over the place.

Amazon Prime – what value human?

So onto Amazon Prime. Here is an easy visualisation of Amazon’s P&L courtesy of App Economy Insights flowchart. As highlighted Employee salaries fall within the Operating Expenses section of the Flowchart as a cost, coming in at nearly $57bn a quarter:

Now, let’s say you are Andy Jassy (Amazon’s current CEO). You’ve had some long discussions with your Finance Director and he’s told you that there’s an easy $1bn on the table, which can be obtained simply by hacking away at the headcount in this number. This translates into Operating Profit expansion of as much as 10%. That’s a pretty nice gain.

This is the playbook most companies use today. It’s sees humans as cost and only cost.

But there’s a problem with this orthodox approach. How can we be sure that we are also not slashing the goose that lays the golden eggs? This is where a Human Capital approach comes in. Time now to move our frame of reference to an item on the income side, Amazon Prime:

You can see that Amazon Prime by itself brings in $12bn a quarter or the best part of $50bn p.a. Looking at your historical income records, you can see that Prime has pulled in over $250bn in revenues since its inception in 2005.

Why do I mention this?

Because, as Jeff Bezos has stated in his shareholder letters, Prime was never an EXCO strategy or initiative. It emerged bottom up. In other words, it was a product (golden egg) of the company’s Human Capital (or goose). That entire income stream would not be there if not for the company’s Human Capital.

The Finance Director conversation

Suddenly, you’re not so sure that the doozy $1bn quarterly saving via mass layoff may not be such a good idea. How do we know, you ask him, that we are not firing people who have returned us a big chunk of our revenues, which are only growing? Your mind races. How do we know that we’re not firing people who could be the source of our next $250bn? How do we know that we are not firing people who could be the source of any other number of ideas, inventions and improvements... and why the hell are we not tracking that value effectively?

You show your Finance Director the annotated Flowchart that depicts how things really are:

Of course, if you’ve read Jeff Bezos’ shareholder letters you’ll know that he was always very aware of this – even if he never mentions ‘Human Capital’. He openly declares that the person who has costed Amazon the most amount of money is himself. His letters show his determination that Amazon employees could experiment, make mistakes and live in a culture of innovation which enables this value to be realised.

Most companies, as Bezos stated in the quote at the top, simply can't do this. And CEOs themselves agree with him:

So here’s the problem with a scarcity-mentality cost-only approach to running a business: you will never know the opportunity cost of doing things on a cost-only basis, because your next Amazon Prime simply won’t show up on your P&L. But to all intents and purposes, you can say that those losses – through an employee as cost-only approach – will be picked up by shareholders.*

Thus the difference between a cost-only approach and a Human Capital approach can be very large in $ terms indeed – 20x or 30x if not more. This is because if we see Human Capital as a potential asset, dollars don’t only flow out of a company's P&L, but also into it. And we know that traditional Performance Management approaches simply do not capture this relationship in any way, shape or form. Thus, the people systems companies use are largely a tool to help Executive Teams delude themselves.

To start with Human Capital, do this

I know there are very few CEOs like Jeff Bezos, as Jeff Bezos knew there are very few companies that could replicate Amazon's approach. This is why CEOs need the help of a system to operationalise the gains that can be made via its Human Capital.

This system is not difficult to implement, and way easier than the dysfunctional people systems almost all companies currently use today. The key components of an effective people system are:

·       Human Capital Accounting

·       Employee Engagement as a system

·       An effective Talent Management System, linked to Engagement

We’ll be looking at the last component in a future post. If you're interested in how to do this in your company, feel free to drop me a line. Also please add any thoughts in the comments below!

* I am not suggesting abandoning cost-based accounting, only that it needs to be put into full perspective with a creative Human Capital approach, in order to coming close to realising a company’s potential value