The future of employment is a vital issue for top management as well as the employees whose personal futures are increasingly at stake. There's a dichotomy. As Thinking Managers has noted, firms are extolling the virtues and efforts of their employees on one hand, while dismissing them, in hundreds of thousands, on the other. The same managements, moreover, will join the general chorus which understands that harnessing and enhancing the power of people is the only way to generate lasting success in the competitive arenas of the modern day.
Insecurity is the enemy of great - even adequate - performance. So managers with hire-and-fire power have a most delicate balancing act to perform. On the one hand, they seek the lowest level of costs, which means the smallest viable payroll: on the other, they want the highest possible contribution from those who remain on that payroll. But in many companies the balance is unequal - in the trade-off between economies and employee well-being, money wins every time. Money can be measured in a precise and bankable way: that's not true of morale, nor of true productivity.
Crude productivity is output per man-hour. That lies because it tells you nothing about the identification of defects, the provision of new ideas, or the gap between existing crude productivity and the potential. None of these looms large in three well-known systems for measuring corporate performance, 'The Performance Pyramid', 'The Balanced Scorecard' and 'Results and Determinants.' The latter only admits two areas of results - competitiveness and financial performance: but all of its determinants - quality of service, flexibility, resource utilisation and innovation - depend in one way or another, and to greater or lesser extent, on the performance of people as individuals and in teams.
FOUR INTERLINKED ELEMENTS
The Performance Pyramid, with its apex in 'corporate vision' and its base of 'performance management systems', rightly adds customer satisfaction to the mix as a 'core business process'. But what about the employee satisfaction without which there's no hope of satisying the customers? The Balanced Scorecard, in the Nolan Norton version, is equally guilty. It consists of a virtuous circle of four interlinked elements - financial, organisational and customer perspectives and business processes - to which four key questions are addressed:
1. How do we look to our shareholders?
2. Are we able to sustain innovation, change and improvement?
3. What business processes are the value drivers?
4. How do we look to our customers?
What about 'How do we look to our employees?' That question is equally vital. Nor can the answer be provided by employee attitude surveys. They have their place in providing an overall view and tracking trends. But they won't tap the deep well of employee knowledge about ways in which the business and its management can be improved. That's true all the way from senior managers to the shopfloor, office, and counter staff. Listen to employees at any level and you will invariably learn ways in which profit can be increased; innovation, change and improvement accelerated and furthered; business processes streamlined; and customer service uplifted.
Reg Revans, the British inventor of 'action learning', is irrefutably correct when he observes that 'When doctors listen to nurses, patients recover more quickly; if mining engineers pay more attention to the men than to the machinery, the pits are more efficient'. Revans is emphatic about the benefits of small, collaborative groups which unearth and solve problems together at the grassroots: 'here-and-now exchanges about the operational job in hand' that truly teach managers .
His difficulty wasn't with the precepts but with the practice. As Stuart Crainer wrote in the Financial Times, 'action learning provided a challenge which most organisations found too big to contemplate. If learning revolves around questioning, there can be no assumption that managers know best because of their status'. The Revans equation still holds, however: L = P + Q, where L is learning, P is programmed knowledge and Q is the ability to ask the right questions.
ALL THE WAY TO THE TOP
The equation applies all the way to the top. If top management doesn't want to learn, to apply new knowledge and to question each and any policy or strategy, failure is likely: and it's certain if competitors actually are applying the equation. One symptom of the failure is loss of jobs. In comparing high-growth and low-growth companies, the better returns to investors are associated with the highest rises in employment and inferior returns with the largest falls in jobs.
New research by Strategic Compensation Associates for the Sunday Times has confirmed my conviction that increasing shareholder value and raising employment and its rewards go hand-in-hand. Engineers GKN, for instance, raised employment by 4%, gave employees average pay rises of over 8%, and rewarded shareholders with total returns of 19% per annum over the period from 1992 to 1995. BAe, in the same engineering sector, gave investors only a 2.7% return - its employment fell by 8.2% annually, and wages rose only 3%.
The survey is too small to be really conclusive (only 16 companies in four industries). But the coincidences are striking enough to support the notion that building employee value creates shareholder value - and jobs.
The jobless problems that are especially marked in Europe - with 20 million out of work - can only mean that high-growth companies are not outnumbering and outweighing the low growers.
The necessary process of regeneration is working, but not fast enough. It's well described by T. J. Rodgers, the CEO of Cypress Semiconductor. Writing in the Wall Street Journal, he sprang to the defence of AT&T, which, along with many other major concerns, has been under attack for its 'job-killing' activities. Rodgers noted that his company had already hired some of AT&T's losses. His own firm was short of 230 people - 12% of its workforce. 'Our hiring list grows every year, and we can't find all the people we need to build our company', despite paying an average of $93,000 a year (including benefits) to the workers employed' in California.
All industries aren't like semiconductors, of course. Even in the odd bad years, its growth rates are stunning by most standards. But neither are all managers like Rodgers, who uses the power of electronics to exercise intensive control over his managers and their careers. His company shares profits with all employees (to a total of $5,000 apiece per year) and gives them all stock options. This is dynamic employment - but which comes first, the chicken or the egg?
Does dynamic growth create the conditions for Rodgerism - or does Rodgers-style management create the dynamic growth? In a company whose share price and profits are leaping and bounding ahead, the pressure to share the wealth, and the value of doing so, are well-nigh irresistible. That's far from the position at Novartis, say: the Ciba and Sandoz managements, in forming this colossus, aren't short of needed workers by 12% - they are looking to cut 10% of the workforce.
It will be harder for these people to find work than AT&T's electronic engineers, especially if they want to stay in pharmaceuticals, where merging and manpower losses are the order of the day. It's a day, however, in which chances of staying in the same industry, no matter which, let alone the same company, are diminishing. The chances are not declining as rapidly as the more alarmist commentators suggest - but this is the new reality.
It's made harsher by government economic policies. The drama of industrial restructuring in the West is being played out against the background of slow economic growth, which is itself partly the result of deliberate efforts to restrain national economies. The goal of financial stability long ago won out against the old objective of full employment. There's an analogy at the level of the firm. Cypress is pursuing a full-employment strategy, in which the financial returns (which are huge) flow from its success in the labs and the marketplace.
FINANCIAL GOALS
Much of today's merger activity, however, is directed at financial goals - restructuring increases 'shareholder value' by economies of scale, not by improving the underlying value of the business. Restructuring involves heavy one-off costs in return for continuing economies - but of itself does nothing to develop the business and its future capacity to create wealth - or jobs.
Are financial goals appropriate anyway? Vision and mission statements exclude monetary targets in favour of high-sounding principles. But most 'visionary' companies don't 'live the vision': they still live the bottom line. That follows inevitably when top management's own remuneration is linked to profits and the share price. True, that sounds perfectly logical: if management is personally rewarded for improving financial performance, good results are much more likely to result - but are they?
My suspicion has long been that the grotesque rewards paid to top managers in the US focus their attention, not on the company's real needs, but on their personal wealth. The corporate needs and the executive riches don't necessarily go hand-in-hand. Witness the research led by Peter Wright at Memphis State University. It revealed that, the higher the stake of senior executives and directors, the lower their interest in building the business by taking risks. Wright suggests in the Academy of Management Journal that 'while it's good for top executives to have equity stakes in their company, they may grow excessively cautious if their stakes become too large.'
The magic number appears to be 7.5%. When insider ownership passes this barrier, the degree of risk-taking falls in step with the rise in the equity stake. This phenomenon is confined to hired hands: large proprietorial holdings are neutral in their impact, which will be good news for the descendants of Fritz Hoffman. They have daily cause to bless the year 1896, when he founded Hoffman La Roche - whose voting shares are still majority-controlled under what chairman Fritz Gerber describes as 'the luxury of family ownership'.
Luxury or no luxury, the merger wave between rival giants has pushed Roche down the league table of sheer size: fifth in global market share in 1993-94, it's ninth and falling. The company's financial management is brilliant (£8 billion of cash in the kitty) and its growth in earnings per share (28% per annum over five years) has been outstanding. The returns would have been even larger, though, but for two acquisitions (Syntex for $5.6 billion and 60% of Genentech for $2.1 billion) that are producing respectively inferior yields and no yields at all.
THE FAMILY LUXURY
Moreover, the growth in earnings was won despite sluggish expansion in sales, up only 22% over the entire five-year period. The earnings per share growth rate is now expected to halve. Here too, cost-cutting and amalgamation have not proved to be the engines of the sustainable growth that creates both profits and jobs. Franz Humer, the head of pharmaceuticals at Roche, says that 'we like to set our own benchmarks'. But these benchmarks can still be wrong - even with 'the luxury of family ownership'.
In fairness to the restructuring giants, all companies face a set of common problems that allow no easy options. They include:
1. The advent of global competition, which sets global standards for basic costs and undermines uncompetitive producers and their employment.
2. The enhanced pace of technological change, which is both altering the nature of jobs and removing some completely.
3. The reduction of bureaucracies and chains of command, partly in response to new IT.
That sets managements an intimidating set of questions:
1. Are we lagging, not leading, global standards?
2. Are we setting the technological pace and keeping to the fore in exploiting the state of the art?
3. Are we exchanging vertical bureaucracy for the new style of horizontal management, which relies on relatively loose associations of managerial groups - many of them transitory?
Very few companies can honestly say yes to all three - or even one. The ability to generate new jobs is hamstrung, for new enterprises, which require the triple strengths, must be the main source of growing employment. For instance, the traditional insurance industry is under intense pressure to cut costs and therefore jobs. But it has constantly missed opportunities to pioneer new job-creators - like the telephone selling of motor insurance or the insurance of pets against veterinary bills.
In the latter case, established UK insurers rejected the idea - until eventually one purchased the now brilliantly successful business for over £30 million. That real-life fable - one repeated many times - illustrates the new reality. The job market has become fluid and insecure because the world has become more fluid and less certain. Fragmenting markets mean fragmenting jobs, to which individuals are being forced to adjust.
Changing roles, changing employers and changing environments, once the enjoyable prerogative of the fortunate few, are becoming the destiny of the many. Once embraced and accepted, this should be a change for the better. But organisations are having to make the same adjustment before they can benefit from the trend. They, too, need to become fluid and highly changeable. The more rigid the organisation, and the more set in its ways, the more painful the transition must be - especially for the employees.
At Servomex, which makes gas analysis equipment in East Sussex, 180 manufacturing, technical and marketing people even had to reapply for jobs: 40 didn't survive the process and left the company. The reapplication procedure was exhaustive: a day and a half was spent in assessment centres, both in one-on-one interviews and in group sessions with rival applicants. The candidates were being assessed not only for their individual skills, but for the ability to work in teams - the new sine qua non.
FOUR KEY REFORMS
The paramount value of teamwork, though, has been known for years, along with the fundamentals of achieving effectiveness. Study what the £26 million Servomex has done, and you get a strong sense of familiarity. The novelty lies not in the principles, but in their application to this firm:
1. Put each development project under a designated leader with a tight time target.
2. Reduce inventory of finished products, components and work in progress.
3. Organise manufacturing into cells of workers who work on a product or sub-assembly from start to finish.
4. Encourage cross-functional cooperation and teamwork.
The four familiar reforms have produced familiar results, starting with a two-thirds cut in the product development cycle to one year: cash savings from reduced inventories total some £2 million a year: added value per employee is up 30% on four years before - but that isn't much of a compound annual gain. The Servomex record reflects previous under-performance rather than any special excellence today. In that under-performance, the worst sin was to ignore the four very obvious points above.
The full-employment company is thus a full-management company. At all times, it checks to ensure that its policies, strategies and tactics are in the vanguard. It continuously evolves to reflect changing conditions and market demands. It develops its employees' careers - for their own individual purposes, as well as the company's. It responds to demanding financial and non-financial targets, continuously revised as feedback animates the business system. These aren't counsels of perfection. They are mandatory requirements for a future that will be more arduous and competitive. It isn't that there's a worse alternative. This is quite simply, the only way ahead.
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