Why senior management don't often rely on empirical research

In a post below, I asked how much value is added by people-related activity in organizations using this model:

http://img.photobucket.com/albums/v480/maxblumberg/PeopleValue.png

The model can be used to assess how the extent to which people-related activity adds to Total Shareholder Return (TSR). TSR reflects total equity growth and is the ultimate outcome measure chased by senior management in most `commercial organizations*.

I suggest that we have little evidence about the value added by People in many organisations. By People, I mean employees (payroll, workforces, human capital, talent) and people-related investments (cradle-to-grave: attraction, selection, onbboarding, development, succession planning, engagement, retention, exit). The size of People investments vary by industry, but as long ago as 2002, CFO Research Services reported that as a percentage of of revenue, it was 37% in TMT, 25% in Heavy Manufacturing, 45% in Pharmaceuticals, and 43% in Financial Services. I can only suspect that investments have increased since then. Thus a Financial Services company with $5bn turnover would be spending $2.25bn on People.

This is a lot of money and if the statistic is correct, presumably senior management believe that this investment is yielding a better TSR than investment in alternative investments. Again, as suggested in a previous post here, this diagram presents alternative possible investments that senior management could have made to maximise TSR:

http://img.photobucket.com/albums/v480/maxblumberg/Humancapital.jpg

Senior management must therefore decide which mix of investments in tangible assets, intellectual capital, and financial capital is likely maximize TSR (in other words, it is a portfolio management problem). On what do they base this decision? As scientists, we would suggest that the effective method is empirical research. But senior management are nervous of research for the following reasons:

o Robust valid research is often difficult – if not impossible – to achieve in the ‘real world’ because of the reasons cited above (essentially, there are simply too many variables, most of which cannot be controlled to yield robust valid results)

o Research is expensive

o Research takes time and by the time outcomes are known, investment opportunity window may have disappeared or a competitor may have taken the market sooner by making a (admittedly riskier) non-research based decision

o The research may reveal that the asset class (e.g. tangible assets, human capital, etc.) does not in fact yield the greatest returns.

For this reason, instead of relying solely on empirical research, senior management tend to rely on a blend of past experience, intuition - and perhaps some limited research. This outcome may be disappointing to those of us who favour empirically-based decision-making, but that’s the real-world for you.

I would therefore suggest that, with good cause, real-world management is probably less dependent on research for their weighty decisions than one might like to think.


*(It can be argued that Balanced ScoreCard and Corporate Social Responsibility should also be included as ultimate measures, but these are probably better viewed as mediators of people-related activity on TSR - perhaps a discussion for another day).