Is Labor an expense or an asset?

 

Construction workerI am surprised by how different managers view the commodity called “labor.” In most organizations, the perspective is that labor is an expense.

It is handled on the financial statements as an expense. In most cases labor is the highest monthly expense for an operation. It is the payment made in order to secure the resources needed to create the products or services sold by the organization.

As the largest expense for many operations, labor is watched and managed very closely. The profitability of the operation is directly impacted by how many workers there are, so all kinds of techniques are used to keep this variable under tight control.

You want to have exactly the right number of people on the roster, so perhaps you utilize temporary workers during peak times to mitigate overtime. You need to be careful because you still have to train the temporary workers so there are no safety issues or quality lapses.

In most professional settings, the workers are stretched to the elastic limit and beyond. Managers ask individuals to take on responsibilities that were formerly done by two people or even more.

This is done in the pursuit of maximum productivity, which is thought to be the prime governing mechanism for profit.

In the budgeting process, managers at various levels play games trying to pump up the size of the workforce realizing there will be cuts down the road. Alternatively some managers cut the estimated number of people to the bone in order to show positive yearly trends in productivity.

The sequence goes on year after year in the majority of organizations. The game is well known by managers at all levels, and the posturing or tactics sometimes go beyond annoying and are truly outrageous.

In the significant minority are organizations who view employees not as expense items but as assets. Oh sure, most companies have a value on the plaque in the lobby that states, “People are our most important asset,” but the managers’ daily actions reveal the hypocrisy of that platitude.

If people were the most important asset, then during times of low demand, the managers would be selling inventory or buildings and training the employees for future service. Instead, you inevitably see layoffs or at least furloughs to control labor expenses in slack times.

What if we really did think of employees as assets rather than expenses? Would that provide some unique and amazing possibilities for profits? I think so. Here are some benefits you would see…

1. People would feel valued.

In most organizations, people feel like pawns. The investment is always minimal, and the expectation is that employment is a temporary condition at the whim of management and the vicissitudes of the fickle marketplace. Treating people as valued assets would bring out the best in people because they would feel more engaged in the business. The magnitude of this effect can only be estimated, but it is a lot larger than most leaders realize.

For example, several studies have shown that the productivity multiplier between low trust groups and high trust groups is two to five times. When people are engaged in the work, they perform significantly better because they feel valued.

2. Development of people would be emphasized.

The mindset of treating employees as assets would lead to continual training. When you invest in an asset, you take care of it and make sure it is performing at peak levels. This creates a situation where employees truly want to stay with an organization, which reduces the issue of turnover.

Turnover is often the most controllable expense in an organization, yet the true cost is hidden somewhat. World class organizations achieve turnover rates below 5%, while many organizations habitually live with a 30% or higher turnover rate. Which would you rather have?  You do have that choice.

3. The culture would be uplifting.

When employees are learning and growing, they become more valuable not only for what they can do but for how they influence others. The workplace takes on a feeling of freedom and joy rather than of being an oarsman on a Viking ship.

When people are treated like assets, they band together as a strong team or family that is unstoppable. The power of synergy is obvious, and the productivity gained from lack of quarreling is immense.

4. The focus would be on the right stuff.

In most organizations, the daily focus is myopic. People are grumbling about each other and trying to protect their turf and future. The atmosphere is one of scarcity where the resources are not there to do what is needed to survive.

When people are assets, the atmosphere is one of abundance where there is high value internally, so people focus on the customer and on the mission of the unit. Since there is no longer a need to protect your back, you have the ability to move beyond just satisfying the customer or even delighting the customer to actually amazing the customer. That focus becomes a competitive weapon which further entrenches security for the future.

5. Organizations could be made flatter.

The need for numerous hierarchical levels has to do with control. When people are treated as expense items, they need to be kept in line. That means the span of control for any one manager cannot be too great. There is a lot of accounting work that needs to be done in order to assure the expense of labor is optimized.

When people are treated as assets, trust grows naturally. That dynamic means less supervision is required, so over time the hierarchy can become more flat. The overhead cost savings available to most organizations is staggering.

These are just five ways an organization can prosper by considering employees as assets instead of expenses. The operation can be much more profitable with this kind of mindset. Try it in your organization and experience the difference for yourself.

3 Responses to Is Labor an expense or an asset?

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