The labor market is at the heart of North America’s current economic turmoil. Layoffs in the high-tech sector have become commonplace, and at the same time, wage growth continues and the unemployment rate remains historically low. For every executive team trying to navigate to their year-end financial goals, this is uncharted territory.
Whether we like it or not, the change in the labor market is here to stay. According to research from Lightcast, labor forces will decline in 9 out of 10 developed economies all the way to 2040. There are two key elements to the people challenges faced by organizations today. One relates to questions of volume; are there enough people, in the right place, to meet a business's needs? The second speaks to knowledge and capabilities, as the rapid digitization of business has led to a quantum shift in the skills required to stay competitive.
Data Access for Better Decisions
This all speaks to the growing demand for those in the C-suite to better understand their people — and how they contribute to business results — at the same level of depth as they understand their financial position. And yet, according to research by Deloitte, only 3% of business leaders believe they have access to the people data they need. This is what the People Intelligence Alliance has identified as the people impact gap.
New research from the People Intelligence Alliance has identified the economic impact of this gap is $1.8 trillion annually. This figure represents the amount of revenue foregone by organizations whose leaders are unable to make data-driven decisions about hiring, retention, productivity, and the cost of their workforce.
The impacts of people on business performance are often hard to quantify and poorly understood. It is very natural for business leaders to be skeptical about such substantial financial claims. So, just as you would with financial performance, this research quantified the lost opportunities organizations are experiencing with their people.
Janet Marler, a professor at the University at Albany, and Lexy Martin, a long-time industry analyst, studied the use of people data in solving business problems. In 2018 and 2021, they gathered results from more than 200 enterprise organizations. They found organizations with a higher level of ability to apply people data to business problems (related to sales, customer service, innovation, etc.) had higher profit margins and a higher return on assets. The best organizations had a return on assets 137% higher than their peers.
They compared the average revenue per employee for the market to the revenue per employee of organizations with a more mature use of people data in decision-making. The difference between the best and the rest was $125,000 per employee per year.
Organizations with a higher level of ability to apply people data to business problems (related to sales, customer service, innovation, etc.) had higher profit margins and a higher return on assets.
In August 2022, People Intelligence Alliance extended this research, aiming to understand the economic scale of the opportunity presented by the people impact gap.
There are approximately 3,700 organizations with over 3,000 employees in North America. Using a series of studies related to the use of people data in business, we determined that approximately 700 (18%) organizations are effectively closing the people impact gap today. This leaves 3,000 organizations with a mean size of 5,000 employees not applying people data to solve important business problems.
Using the revenue per employee differential of $125,000 per employee per year established in Marler and Martin’s research leads to a $625 million opportunity per organization. If 3,000 organizations were able to close their own people impact gap, the annual impact would be $1.8 trillion in North America alone.
Effectively Using People Data
This is not a hypothetical conversation. Organizations like Providence, a U.S. healthcare system with over 100,000 employees, are demonstrating how business leaders can materialize the money that is locked inside the people impact gap. Providence leveraged the data it held about people, the different types of work being done, their work experiences, and retention patterns to generate an annual saving of $6 million from a single project.
This outcome was doubly important as it created an opportunity to increase pay for a group of Providence’s hourly workforce. In the overall analysis of this project, the organization made substantial improvements to its financial position, and its employees took home larger paychecks.
Locked within this employee data is the knowledge that will materially impact the financial performance of your organization.
In its most simple form, a company has two inputs: money and people. The money side of the business has been analyzed for generations. The people side has mostly been left to guesswork, opinion, and intuition. This was understandable when the data about people was not available.
Over the last 10 years, this situation has reversed, and the data footprint of the employee is richer than the data footprint of the customer. Locked within this employee data is the knowledge that will materially impact the financial performance of your organization.
Every business leader needs to close their people impact gap and gain access to people insights that match their financial insight.
Ian Cook is managing director of People Intelligence Alliance.