Enterprise social software and profits per employee


24 May 2007

McKinsey writes about Better Strategy Through Organizational Design [PDF] and come out strongly in favor of Enterprise Social Software and collaboration techniques:

[T]he new element that can help 21st-century corporations create more wealth is large-scale collaboration, across the entire enterprise, enabled by digital technology. … Digital technology provides the means not just to promote efficient, effective, and large-scale collaboration but also to measure each person’s “assists” and thus motivate employees to collaborate in ways that were not possible in the past.

Their arguments are closely linked to the profits per employee measure we introduced back in October last year. This is the most important metric for the CEO to manage.

Focusing on this formula (rather than returns on capital and on the amount of capital deployed) offers several advantages. For one, profit per employee, unlike returns on capital, is a good proxy for earnings on intangibles. The reason, in part, is that the total number of employees is easy to obtain, while a company’s capital, surprisingly, is subject to the vagaries of accounting on issues such as goodwill and to corporate-finance decisions such as debt-to-equity ratios, dividend policies, and liquidity preferences. And these days, talent—not capital—is usually a company’s scarcest resource.

Talent is the scarce resource because it is the ultimate generator of the intangibles that drive the creation of wealth in the digital age. Winning companies are those that can increase their profit per employee by mobilizing labor, capital, and mind power into profitable institutional skills, intellectual property, networks, and brands. The returns to companies that can accomplish all this are extremely attractive because intangibles now confer enormous scale and scope advantages. Furthermore, intangibles represent unique assets for the individual companies in possession of them—that is, they are unique in supply—so they can create “natural monopolies,” which are difficult for other companies to replicate.

This is difficult for most executives. Innovation velocity is dependent on collaboration; and collaboration among larger groups and creation networks require different skills and tools than what most executives are used to and is therefore often ignored or placed in the “too hard” category. But it isn’t too hard if the executive team is willing to show leadership and embrace new organizational ideas.