This recent piece in CFO Magazine is extremely informative about what I believe will become a reality for all public companies and investors in the future. TDn2K has approximately 270 restaurant brands in our data sets of People Report, White Box Guest Intelligence and Black Box Intelligence.
We know the truth about how the human capital results impact sales, traffic, guest satisfaction and, ultimately, profitability. As a recovering restaurant chain CEO, now a performance geek researcher of restaurants, CFO Magazine highlights what every business operator knows; you can’t change the performance of the business without addressing human capital dynamics. Here are some reasons why as an investor or an operator knowing the human capital metrics are key to good decisions and performance.
Over the past four years we have been intently focused on what the top financial performers are doing differently than the rest in our “Best versus the Rest” research. We look into the benchmarked Black Box Intelligence data for the top quartile sales and traffic winners. Once that set of companies is identified, we then look into all other metrics including human capital metrics to discover what is materially different for the winners and the rest of the pack.
Our big reveal is that the “Best” companies outperformed the pack in sales and traffic by 4.5 percent and 4.1 percent respectively in the first half of 2019. This competitive advantage has been consistent for the four years we have been conducting this analysis. What else can we reveal? The “Best” companies lead the rest in retention of managers and employees tracked in our People Report data. The “Best” companies’ guest satisfaction scores on service, value and intent to return as measured in White Box Social Intelligence are all substantially stronger. This methodology of evaluating all these metrics through benchmarking versus a company’s own data is a powerful and predictive performance management tool.
Disclosing vital data about a company’s workforce will soon be the norm. Will U.S. businesses fall in line? This is one genie that’s not going to be stuffed back into its bottle.
The Importance of Tracking Human Capital Metrics Cannot be Ignored
The CFO article lays out the pressure companies may feel to do more disclosures for investors around a number of metrics suggested by Human Capital Management Coalition (HCMC), a group of 26 institutional investors with some $2.8 trillion under management and the International Organization for Standardization with their proposal of ISO 30414.
That proposal includes ethics, workforce cost, workforce diversity, leadership trust, organizational safety, health and well-being, productivity, recruitment, mobility, turnover, skills, capabilities and number of employees, full time equivalents. As the CFO or CEO, you might be saying this is crazy and will never happen!
Hopefully, in the United States we will find a more workable approach from the SEC, as evidenced in the August 2019 proposal, “that companies be required to report human capital to the extent that the information would be material to understanding the company’s business.”
However, as we know, the quality of the workforce will dictate the quality of sales and profits, which makes it’s pretty hard to think investors will ignore all of this. We can’t hide from an environment of scarcity as evidenced by national unemployment at 3.7 percent, restaurant employee turnover rates above 100 percent and staffing shortages so severe it is hampering operating hours and new store development for some. The human capital levers may now have the most risk and reward for business performance ever.
We have repeatedly validated the key human capital metrics we have at TDn2K of compensation, turnover, staffing levels, workforce cost and workforce diversity do impact sales and profitability. I’m not advocating for more mandatory disclosures as I believe there are investors that may not understand the important differences in our restaurant workforce compared to other industries utilizing the exhausting list of metrics in the ISO 30414. But they will understand how a restaurant company is performing versus its own segment competition. Additionally, it is not going to impact public companies alone. Once human capital metrics are disclosed publicly, PE investors will expect human capital metrics in their due diligence research and performance evaluations.
I would give this advice for anyone reading.
If you are a restaurant operator, tracking and benchmarking the key human capital metrics will just make you a better performing company in the financial results the investor expects. We repeatedly hear companies implementing human capital strategies to survive and thrive.
If you are a private investor conducting due diligence or trying to evaluate your investments, these key human capital metrics will help explain competitive performance and give you leading indicators that could be impacting the current and future financial performance.
If you are a public restaurant company with great results, you may want to go on the offense by gradually showing why your chosen human capital metrics are your competitive advantage.
Finally, as the CFO magazine article begins, “this is one genie that’s not going to be stuffed back into its bottle!”