In a recent article by Lowell Bryan, a director in McKinsey & Company’s New York office, the author postulates that the “new metric of corporate performance” is profit per employee. He begins “Let’s get right to the point: companies focus far too much on measuring returns on invested capital (ROIC) than on measuring the contributions made by their talented employees.”
True enough, but while I believe he has seen the tree, he has still missed the forest. Profit per employee is based on the assumption that profit is an accurate measure of return on intellectual capital. In a dialogue with Ron Baker via Skype he noted, “I’m dubious. They seem to take GAAP at face value, and the problem is GAAP! GAAP doesn’t deal with intellectual capital. Intellectual capital is a theory, GAAP isn’t. So dividing profit by employees doesn’t tell much. [It would be] like using a ruler to measure the temperature of your oven.” Classic Bakerian wisdom that.
I, however, humbly posit the following:
Revenue (not profit) per employee (RPE) is meaningful especially when the change in RPE is measured over a consistent time period and when compared to other companies in the same industry.
Here is my argument. Revenue, per Peter Drucker, is the captured value that an organization provides to its customers. Number of employees is the number of human brains (usually) at the company. So, dividing captured value by number of brains is a measure to at least some degree of the usage of intellectual capital. It is not predictive, nor does the customer care about it, so it has two strikes against it from a Measure What Matters point of view.
It does, however, have meaning to the employees of the company. I believe it could be used to gauge how smart we are as a group, especially when compared to others. The two ways of affecting it would be to either a) capture more value while not increasing braincount or b) capturing similar value while decreasing braincount. Either way a Professional Knowledge Firm would have to see value pricing as a way to deliver on this.
This is not to say that we should ignore profitability. Doing so would be foolish. But looking at Profit per employee does not make much sense to me.
Fellows, readers, your comments please.