VideoLike most employees at Southwest Airlines, Libby Sartain is not prone to formality. Her title, after all, is vice president of people. The company ditched what it considers the slightly pompous human-resources name a long time ago. What it won't relinquish is its tight grip on its high-spirited, irreverent culture — a customer-focused environment credited with helping grow earnings by almost 10 percent last year, while most airlines experienced declines.
And although Sartain may maintain that Southwest doesn't "use sophisticated metrics" to measure its precious human capital, there is no denying that the company invests heavily in building it. For instance, to fill 4,200 job openings last year, the company interviewed nearly 80,000 people. Candidates undergo a rigorous interview process that can take as long as six weeks before they are hired. About 20 percent of new hires fail to make it through the training period. The payback: low turnover, high customer satisfaction, and, in Sartain's estimation, a self-monitoring culture of self-motivated employees. "We don't keep them if they don't fit into our culture," says Sartain. "A lot of people think we're just relaxed, loosey-goosey, but we have a lot of discipline."
Southwest CFO Gary Kelly believes investing in hiring is vital. "I do get asked on occasion by investors, 'Could you cut your costs in this area?'" he says. "But if you're not going to work hard to get people who are a good fit, it will hurt you. For example, we've never had a strike. What airline is even close to being able to say that? We explicitly believe there's a payback to that kind of investment." Another clear benefit: Southwest's turnover is about 9 percent, considerably lower than the average for its industry.
Success stories like Southwest's — it currently ranks sixth in Fortune magazine's list of most-admired companies — are drawing the envious curiosity of others. With the unemployment rate at an all-time low, high turnover is both costly and a competitive disadvantage.
And Wall Street is catching on. "When we do our quarterly calls, there are often questions about turnover: 'Have you had any turnover in senior management? Any turnover of your founding employees?' " says Ann Brady, CFO of Art Technology Group, an Internet software and service provider based in Cambridge, Massachusetts. "The analysts are smart enough to home in on it. They know that what's really driving revenue is people."
With research linking good human-capital practices to improved shareholder returns, companies are beginning to bring science to their recruiting practices, internal communications, training programs, and work environments. Some, like Southwest, define their core competencies for success and then hire for fit. A.C. Nielsen and Sears, Roebuck and Co. carefully survey their employees and link manager bonuses to employee satisfaction. GTE Corp. leverages technology to track a wide range of human capital measures that help pinpoint concerns, like churn (short-term turnover) within a business unit, before they become major problems.
Choose Your Measure
Traditionally, however, the department responsible for recruiting and communication — the human resources department — hasn't done much to endear itself to finance. Getting HR to track anything more than the most basic measures — its budget, the number of people hired, or the number trained — has often been a struggle. "You frequently see HR making a case for the HR department rather than creating strategic systems that allow the business to determine that it's getting better day by day," says John Boudreau, director of the Center for Advanced Human Resource Studies, at Cornell University.
The discipline is hampered by its legacy as a service provider. HR, says David White, CEO of Cambridge, Massachusetts-based Human Capital Technology, which customizes systems to track such areas as recruiting and performance measurement, is used to saying, " 'Let me please you,' as opposed to 'Let me measure you and act as a consultant to drive the organization forward.' " In addition, says Edward L. Gubman, a global practice leader at Hewitt Associates, HR sometimes hides behind the excuse that the measurement would be inexact and therefore not worth the effort.
Recent research, however, indicates that it is indeed worth the effort. A 1999 study by Watson Wyatt Worldwide, for example, surveyed companies on the quality of their human capital practices, creating a human capital index of 1 to 100. Companies reporting best practices in such areas as communications integrity and creation of a collegial, flexible workplace saw a 28 percent shareholder return in the first six months of 1999, versus a 12 percent return for companies in the two middle quartiles. The biggest driver? A strong recruiting function, says Bruce Pfau, author of Watson Wyatt's study. Companies benefit, he says, from having a "clear model for looking for whom they hire" and a "clear way of creating criteria against which individuals will be judged." Southwest clearly falls into that category with its selection process. Another example is Microsoft Corp., which rigorously trains its recruiters to screen the more than 3,000 résumés the company receives daily at its Internet site against specific job skill sets.
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