Why People Matter

Thursday, December 30th, 2010

Why People Matter

Just in case you need to be reminded. . .

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by Rick Maurer

These background notes are for the media (and others) interested in the people and productivity issues in times of chaotic change. – Rick Maurer

We are in a new era of work. People matter in ways that are unprecedented. Frederick Taylor’s approach – while still in practice – should have been long dead by now. Similarly, management by objectives (MBO) and other approaches that seek to control workers actually get in the way of good performance.

We live in an age where knowledge and commitment count. People need to be able and willing to turn on a dime. Productivity ideas from all levels of the organization are essential. And yet, many organizations still act as if MBO and Taylor were still the best approaches. These companies have it wrong.

Studies of executives indicate that resistance is the main reason why major changes fail. That soft, touchy-feely resistance is the culprit. Command and control approaches simply foster opposition. In other words, most resistance is deserved. Leaders bring it on themselves.

While people like me have argued this point for a long time, there has been little empirical data to support our thoughts. That has changed thanks to Jeffrey Pfeffer. A professor at Stanford’s Business School, he has pulled together solid studies that show that people matter to the bottom line.

Here is a review I wrote of his book, Review of The Human Equation: Building Profits By Putting People First. Jeffrey Pfeffer, Harvard Business School Press 1998. Cambridge.

The subtitle, Building Profits By Putting People First, is the key to this book. Pfeffer argues convincingly that attending to the human side of management is not soft, feel-good stuff, but can make a significant financial difference.

Pfeffer differs from most writers who promote-people-first thinking, in that he offers sound research results to back up his claims. For example:

One study showed a $41,000 increase in stock market value per employee.

Another showed a decrease in turnover of 7 percent and $27K more in sales per employee.

Productivity gains of 33 percent in auto assembly.

65 percent increase in operating profits in the apparel industry.

A study of IPOs (initial public offerings) showed a significant difference in the survival rates of those using these practices – a 42 percent higher survival rate among those that included all employees in financial rewards.

He offers seven criteria for high performance management systems:

  1. employment security
  2. selective hiring of new personnel
  3. self-managed teams and decentralization of decision making
  4. comparatively high compensation contingent on organizational performance
  5. extensive training
  6. reduced status distinction
  7. extensive sharing of financial and performance information throughout the organization

He describes ways in which organizations put these criteria into action.

(Since he cites research by many others, the studies listed above do not test specifically for his seven criteria. Nevertheless, I don’t believe he is stretching when he links these results to his model.)

Sadly, he finds that organizations are actually moving away from these high performance practices. (A recent article in the Salt Lake City Tribune by Matt Witt included examples that support Pfeffer’s fear. A “team concept” approach to management at UPS was stopped at employees’ insistence. In a recent vote at Saturn, 34 percent voted to end the experiment in union-management cooperation, up from just 13 percent in an earlier vote.)

Pfeffer demonstrates why conventional wisdom on management practices such as downsizing is not all that wise. His arguments are not new. Alan Downs wrote a scathing book, Corporate Executions, (AMACOM 1996) that cited many examples of why downsizing fails. Wayne Cascio wrote a small book for the US Department of Labor, Responsible Restructuring, that makes the same argument. Building on the work of Downs and Cascio, I wrote Alternatives to Downsizing (available from www.beyondresistance.com). But, since none of these previous works seems to have had much influence, I am glad to see someone carrying the torch against downsizing once again.

Most provocative in The Human Equation is his assertion that the common belief among managers about the negative effects of unions is wrong. “Absolutely no evidence exists that unions adversely affect productivity, the rate of technical innovation, the competitiveness of companies or industries on a worldwide basis, or, except under conditions of high economic concentration, firm profitability.” In some industries, unions actually increase productivity. Of course, Pfeffer backs up his statements with the research.

Another balloon he pierces: pay should be as low as possible. He differentiates between labor costs and labor rates. The first measures the balance sheet line item of costs. The other looks at the return on pay. By paying a premium, productivity and customer service rise. Here’s one example: NUMMI pays auto workers a premium of about ten percent, but their productivity is 50 percent above the industry norm.

I highly recommend Pfeffer’s book for anyone who wants to embrace the dilemma of how to increase financial performance while keeping concern for people high. (You can contact Jeffrey Pfeffer directly at: Pfeffer_Jeffrey@gsb.stanford.edu)

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