Contrary to the long-held opinion of financial managers, hiring great people should be viewed as an asset, not an expense.
During my trainings for non-financial professionals, when I introduce the concept of Return on Assets (net profit less total assets), I usually find that many of my listeners are already familiar with ‘net profit.’ The concept of what constitutes an asset, however, is much less clear for most people. When I go over a set of typical current and non-current assets, I often have a member of the audience raise their hand and ask, “Aren’t people assets, too?”
In anticipation of such a question, my standard retort is, “People are assets only in motivational talks. In finance and accounting, people are expenses!”
It generally draws a good laugh, particularly from those who have no doubt heard such talks before. But it is not a question so easily dismissed.
I suspect a major reason for the association of ‘people’ and ‘asset’ is because ‘asset’ has multiple meanings to different people. To the non-financial manager who asks the question, ‘asset’ refers to a useful and desirable thing or quality. If their employee is told they are an ‘asset’ to the company, this is a compliment. And if an employee is considered a ‘liability’, it is another story altogether. In accounting, an asset is on the left side of the balance sheet, equally important as the right side of the balance sheet’s liabilities and equity. In finance, an asset is a resource a company invests in to generate future revenue, profit and cash flow. In this context, assets are only as good as their ability to generate appropriate return on a company’s investment.
High return on assets is achieved one of two ways: earn more net profit relative to the investment in assets, or own and use fewer assets to generate whatever net profit possible. The latter is the so-called ‘asset-light’ approach.
The revolution in digital technology has produced numerous asset-light companies with this strategy, and on a recent vacation to Florida I decided to rely on two of them. Through Airbnb, I rented a two-bedroom unit owned and managed by a local company. I also signed up for an account with Uber, figuring that it would cost me less to call Uber than to rent a car, not even counting the hassle and cost of driving and parking.
From a financial perspective, the business model of these two asset-light giants is beautiful. They don’t need to invest in hospitality infrastructure or fleets of vehicles. They also don’t have to carry the added expenses of HR costs, such as benefits and training, for the people who provide the actual service to the customer. The marketing perspective, and how or why these services are made possible, however, gets less attention.
What we customers want from an Uber or an Airbnb are awesome user experiences. During my stay, I used Uber roughly 20 times. Every driver was careful, courteous, and friendly.
The Airbnb experience, however, was less than satisfactory. On several occasions, when I requested help with certain issues pertaining to the apartment, the company’s service team was either slow or unhelpful. I should also add that as a way of compensating for this, I was refunded 15% of the cost of the stay.
My experience with these two asset-light companies demonstrates an important business lesson: regardless of a company’s business model, its people truly are an important asset, in both the financial and non-financial sense. So, it behooves all asset-light companies in particular to remember the non-financial meaning of the term, as well as the financial one.
Phil Young PhD is an MBA professor and corporate education consultant and instructor.
An adapted version of this article appeared on the Dialogue Review website.