A Thought Experiment

In the last issue of Viewpoints, I suggested we think about the enterprise without a Human Resources Department, but we didn't really go into what that might look like. Let's do that now.

Without a Human Resources Department, each of the organizations in the typical manufacturing company will need to figure out how it will recruit, develop, compensate and reward, engage, assess, promote, train, and educate its employees, independent of the other organizations. Let's say such an enterprise—at the top level—is divided into the following: Engineering, Legal, Finance & Accounting, Information Technology, Corporate Development, Strategy, Business Development and Sales, Manufacturing, Sourcing, and the different Business Area Program Management and Product Management functions.

Each of these organizations is responsible for sorting out its own concept of leadership and how it will promote this, and it will need to work out its own way of assessing performance of its leaders and employees. But of course, some employees do want to move across organizational boundaries, as they advance in their careers, and they will find the adjustments difficult when they move from Engineering to Manufacturing and to Program Management, let's say, because each of these organizations will have a different way of assessing performance and a different way of rewarding that performance. Such employees will typically get confused by the different approaches, and employee adjustment to the differences will be stressful, resulting in poor employee engagement and employee attrition among the group of the more mobile and experienced employees.

Recruitment will also be difficult and confusing. Several departments will compete for the same business management bachelors and masters candidates at the regional universities and for the same experienced business people from other employers in the region, causing animosity between the competing departments. This competition will result in the company paying more for talent than it needs to because it, in effect, will compete against itself for its talent. Over time, this will tend to make the company less competitive.

Performance improvement plans and termination policies will be different from organization to organization, with some areas handling these issues in suboptimal ways. The result will be that some organizations will under perform because of a tolerance for poor performers and the absence of a human resources department to hold the leaders there accountable.
In this enterprise there is no common employment agreement, committing the employee to abide by the enterprise's policies and requiring the employee to assign his or her intellectual capital to the company. The result will be employees acting as independent agents, deciding quasi-independently whether or not to patent their inventions and possibly taking their intellectual capital with them when they leave the company. The company will often find itself in the position of having to take a license to its employees' intellectual capital (developed at the company's expense). All of this will happen until each relevant department decides to require its own employees to sign its own relevant employment agreement. But of course, each department's agreement will be different.

Because compensation is not governed by a common compensation structure, some departments will develop compensation approaches that are above market and some below market, since there is no dedicated staff keeping track of market rates for various functions. The result will be poor engagement and poor morale in some departments, with employees migrating out of such departments and perhaps out of the company. Employee retention and engagement will suffer.

There will be no global employee surveys, and there will be therefore no way of assessing—statistically—progress on employee engagement and comparing department to department on leadership performance in this important area.

To the extent that the traditional human resource management functions are duplicated from department to department, there will be increased overhead, duplication of function, and possibly waste.

There will be no common dashboard used across the enterprise to assess employee performance and the risk associated with employee disengagement. There will be no common set of metrics to assess how the enterprise is doing in the area of human resource management and to determine how to improve in this critical area.

Without a centralized human resource management department, the function will be somewhat ad hoc, haphazard, and uncoordinated. Because there is no career progression to speak of in the function—because of its fragmentation—top notch talent in human resource management will not be drawn to work at such a company or stay there. There will be little sense of human resource management as a profession at such a company, and there will be little interest in building professional competence and expertise in human resource management because of the lack of budget to support professional education and professional society involvement and because of the lack of career progression.

Enterprises today suffer from a similar set of issues in the area of intellectual capital management, since intellectual capital management is not conceived of as a profession, and since there is no central intellectual capital management function in most enterprises.

Oh, as I say, there's a legal function, but most of what intellectual capital management actually is takes place outside of the legal department. Here are some of the disciplines within intellectual capital management that might beneficially be led out of a central business function:

• Business process requirements concerning the provision of intellectual capital and intellectual capital rights to suppliers, customers, and co-development partners and the requirements for enterprise intellectual capital custodianship by others.
  
• Custodianship of business partner intellectual capital.
  
• Transaction of intellectual capital rights, including the valuation, relationship strategy, and negotiation of those transactions, in complex, intellectual-capital-intensive strategic business relationships, including joint ventures.
  
• Support of purchase price allocation to intellectual capital assets in M&A transactions.
  
• Analysis of synergistic intellectual capital opportunities in M&A transactions.
  
• Analysis of synergistic intellectual capital opportunities across business units.
  
• Valuation of intellectual capital rights in intra-company, arms-length transactions.
  
• Leadership in valuation of intellectual capital across the enterprise.
  
• Auditing of other enterprises' custodianship and use of own-enterprise intellectual capital.
  
• Analytical assessment of optimal deployment strategies for the enterprise's intellectual capital in products and services.
  
• Intellectual capital protection strategies based on business processes and technical approaches.
  
• Facilitation and sometimes leadership in an on-going assessment of the relative ability of various intellectual capital clusters to create and sustain value for the enterprise.
  
• Development and maintenance of a value creation and risk management dashboard regarding intellectual capital for the enterprise.
  
• Business processes and analytical tools for stimulating, assessing, and managing innovation and intellectual capital commercialization.
  
• Implementation of, and certification to, intellectual capital management standards developed by LES.
  
• Education of key discipline areas of the enterprise as to how to do intellectual capital management well.
  
• Change management around learning to spot intellectual capital and manage it well.
  
• Support of business model analysis and new business model strategies when considering offering licensed information, software, and access products and services.
  
• Coordination and statusing of intellectual capital risk mitigation strategies across the enterprise.
  
• Brand management, brand strategy, brand licensing, and brand licensee quality control.
  
• Patent strategy and patent licensing.
  
• Licensing intellectual capital outside the enterprise's served markets.
  
• Policy, procedure, and instructions concerning intellectual capital management across the enterprise.

What if all or most of these activities were led systematically out of a central enterprise function? Maybe the enterprise that is early to implement such a conceptual change would perform better? Intellectual capital is a huge percentage of most companies' equity value. Would the current largely ad hoc approach in most enterprises stand up to the scrutiny of activist investors, if activist investors knew what best practices in intellectual capital management should look like?

Please let me know your thoughts.

Thanks for your help.

William Elkington
President & Chair of the Board, LES (U.S.A and Canada)