Managers are hard-headed by professional necessity. They are also great creators of myths and believers in those fictions - also for professional reasons. The pursuit of fixed objectives in an uncertain environment calls for trust in tactics and strategies that promise to produce the desired outcomes, even though the promises are unproven. True, academic research points to significant chains of cause-and-effect, and consultants have their own abundant case studies of success. But trusting either the researchers or the consultancies itself perpetuates myths.
The first myth is that all organisations are sufficiently alike for what transforms one, or even several, to apply generally. The second is that one powerful principle can be identified as the true and single explanation of success. The third is that lumping the experience of many companies together produces a general formula. The fourth myth is that adoption of any particular nostrum will produce the best possible results. How would you know? Unless you can compare the impact of Policy A with that of Policy B, over the same time, in the same company, you cannot declare that either is the very best policy. Without that impossible comparison, you don't even know which is better.
Take a simple research result. In a survey of 60 companies, the most successful, as compared to the least, spent twice as much on information and had half the number of management layers. The two generalisations that this conclusion supports are sound enough. Companies that are spending relatively little on information should spend more, and the fewer the number of layers, the better. Try turning the generalisations into practice, though, and the difficulties start. How much more spending? What information technology should you buy, and how should it be used? How many layers? Can you just remove layers without considering what their inhabitants are doing?
STRIPPING OUT LAYERS
In practice, many companies have found that stripping out layers without restructuring work flows and responsibilities leaves you dangerously short of capabilities. Hence the common practice of hiring back as 'consultants' the very people that have been shed, but who now perform the very same duties off the payroll. James Champy is quite right: in theory, organisations do only need three layers - top management, middle managers and the 'self-managers' who carry out the decisions orchestrated by the first layer and made effective by the second. In practice, though, that theory provides no guidance to managers. It may actually enshrine another myth: that of self-management.
Writing in the Harvard Business Review (May-June 1998), Chris Argyris argues that 'Managers love empowerment in theory, but the command-and-control model is what they trust and know best. For their part, employees are often ambivalent about empowerment - it is great as long as they are not held personally accountable'. If neither those empowering nor those being empowered are truly trying to make self-management work, it won't. Yet the myth holds that the following procedure is the modern path to self-management and thus better performance:
1. Define a vision.
2. Define a competitive strategy consistent with the vision.
3. Define organisational work processes that, when executed, will implement the strategy.
4. Define individual job requirements so that employees can carry out the processes effectively.
As Argyris observes, the four steps make sense and are perfectly rational. The only trouble is that 'the process is so riddled with inner contradictions that change programmes that follow it will only end up creating confusion...'. Somebody other than the self-manager is managing the supposed self-managers by telling them what to do and, very probably, how to do it. In no sense can this be called empowerment. That only follows if you can answer Yes to the following four questions:
1. Do individuals define their own tasks?
2. Do individuals define the behaviour that is required to perform their tasks?
3. Do managers and the managed jointly define performance goals that are challenging for the individual?
4. Do individuals define the importance of the goal?
There can be very few Four-Yes organisations. In fact, the Nos virtually describe the management task as currently practised. Managers define tasks and requisite behaviours, set performance goals and determine their importance. The Four-Yes operation is unlikely to exist even within a discrete entity - say, one of the displaced managers now acting as a consultancy. Fail in the task as defined by the client and behave in a way that the client finds unacceptable, and you're out of business. The same is true if you miss the important goals as defined, not by you, but by them.
SEEKING COMMITMENT
If empowerment and self-management are myths, what's left? According to Argyris, what you are really seeking is commitment. He advises managers to concentrate on getting performance, to recognise that this will sometimes best be achieved by people's own commitment, but sometimes not, and to stop believing in change programmes that are as mythical as the unicorn. The points are valid, but they don't answer one question. Isn't commitment an extraordinarily valuable asset in all employees - whether or not they are empowered?
Since the answer is plainly Yes, the next question is how you get commitment. The standard answer is that you buy it. Other factors are influential, of course, but the individual who sees his or her efforts rewarded in bonus payments and stock ownership will in theory identify with the company, will be committed to its success and will produce the performance that management wishes to see. Without that financial element, companies will be outshone by competitors who possess what I once called 'Magic Ingredient X'.
Over an 18-year period, X companies saw their share prices rise by 682%, earnings per share by 311%, balance sheet net worth per share by 376%, and sales revenue by 258%. These sterling results were respectively double, treble, double and half as much again compared to those of companies lacking Magic Ingredient X. That potion consists of any kind of scheme for extending share ownership to employees. The numbers appear to support the belief that share ownership encourages excellent employee commitment and performance - but the belief and the numbers alike sustain only a myth.
Take the numbers for a start. Has Microsoft grown so fabulously because so many employees have stock options? Or did its fabulous growth encourage Bill Gates to issue options and the employees to welcome them? Which came first, the chicken or the egg? You can neither prove nor disprove your answer. Nor can you demonstrate that Microsoft's employees would have worked with any less commitment or success if not a single option had changed hands.
Indeed, there's a software company, the SAS Institute, which has a far lower rate of labour turnover than Microsoft (just 4%), despite total lack of sales commissions, individual bonuses, stock options and phantom stock. Sales have reached around $750 million, and not a a single sales manager, out of 20 in North America, has left the privately held company in three years. Admittedly, SAS is in North Carolina rather than California - but its experience should lead you to be careful about the following four propositions. Mark them true or false:
1. Wage and allied expenses determine the cost of labour.
2. The cost of labour determines overall competitive prowess.
3. Individual incentives are the best way to motivate people.
4. People work primarily for money .
If you have delivered four resounding Trues, you are following the conventional wisdom. But Jeffrey Pfeffer, writing in the same Harvard Business Review, has no trouble in finding other cases besides SAS to support his demolition of the quartet. For example, Southwest Airlines is the king of the low-cost, no-frills sector. It pays virtually nobody 'on the basis of indivdual merit or performance', but still achieves the excellent efficiency and labour productivity required to lead the pack in this demanding business.
LABOUR PRODUCTIVITY
As Pfeffer stresses, labour productivity holds the real key to labour costs. One set of steel minimills had lower labour costs than another, even though hourly wage rates were respectively $21.52 and $18.07. That's because the winners needed 34% less man-hours per ton of steel and generated 63% less scrap. Their labour costs would consequently have been lower even if pay rates had been raised by 19%. Similarly, lower Japanese pay doesn't explain the labour cost differential over General Motors; GM takes 46 hours to assemble a car, Toyota 29.44.
You have to ask how GM management tolerates a situation where performance is so much worse than Ford's (37.92 hours), let alone the Japanese. This is a failure of management. In fact, the factory which GM and Toyota opened jointly in Fremont, California, covered exceptionally high wages with 50% higher productivity. These comparisons point to another myth: that low wage costs, especially those in Asia, give their possessors an unassailable advantage over competitors in Western Europe and the US. The myth is firmly believed even with industries (like PCs) where labour costs in manufacture are so tiny a part of total costs, let alone the final price to the consumer, that abolishing them entirely would make little competitive difference.
A far better thought inspired Al Martinez at the Sears retail chain, when he directed his attention, not to the traditional target, the payroll, but to a far larger number: the purchasing costs. Even in textiles, where so many Western firms have (literally) thrown in the towel, direct labour costs - at only 15% of manufacturing cost for a pair of jeans, say - cannot explain Eastern success. Compaq discovered the real reason when it planned to produce the low-cost Prolinea range in the Far East. Challenged to let the Houston factory bid for the work, management was shown by the managed that Texans could outbid and outperform Taiwanese.
That took much rethinking and reform of processes and design to bring down the cost, speed up manufacture, and reduce the man-hours required. That's part of good management, just as GM's behaviour is a definition of its opposite. As Pfeffer says, speaking of Cincinnatti Milacron, companies beaten by Asians 'virtually surrendered' their markets - in this case for low-end machine tools. When Cincinnatti came to its senses, revised the assembly process, closed the stockroom and consolidated job categories from seven to one, it cut labour hours by 50% to become more productive (just like Compaq) than the Taiwanese.
COMPETITIVE FAILURE
So there goes another myth: that competitive failure can occur because of circumstances outside management's control. On rare occasions, this may have an element of truth. Most of the time, though, action could and should have been taken to avert failure and achieve success. All of the time, the only safe approach is to throw the myth away and assume that the fault and the remedy indeed lie in your own hands. Otherwise (unlike Compaq and Cincinnatti), you will not take intelligent and responsible - steps that should, of course, have been inspired simply by benchmarking the competition and analysing its true advantages.
But watch out for another myth at this point: that good management means being equal to or better than the best standards of the industry. As one consultant says, there's no great virtue in being the prettiest pig in the sty. The best management sets its own standards by going 'outside the box', finding new ways to manufacture and market, continually changing the rules of competition by taking initiatives that the rest of the industry will follow later, if at all. Characteristically, all competitors in an industry follow much the same strategy in all aspects of management. There's no reason whatsoever to think that this unanimity equates with correctness. Lemmings are in total agreement as they plunge over the cliff.
When companies in several industries follow the same course, the odds on their being right are not good. In the matter of incentive pay, though, the pressures towards consensus are plainly on the rise. Between 1987 and 1993, the proportion of Fortune's top 1,000 companies which offered individual incentives to at least 20% of their workforce rose from 38% to 50%. By 1990 only a minute proportion of US salespeople (7%) were on straight salary, without commission. In Britain, by the same year, half of the UK plants in one study were using merit pay. Yet, as every employer who has tried such systems knows, they are cumbersome and hard to administer. Worse still, they need constant revision and are not liked or found effective by many participants.
Yet on the surface these systems relate well to the following persuasive proposition: 'A company performs best when its people see themselves as partners in the business, rather than as hired hands'. Because merit pay links reward to performance, people should identify their economic gains with those of the business, and their income fluctuates, just like that of partners, with its fortunes. The key words, though, are 'hired hands'.
TREATED LIKE PARTNERS
Are they treated like partners? The quotation, from John Case's The Open-Book Management Experience (Nicholas Brealey),continues with these words: 'they concern themselves not just with doing their jobs, but with the business objectives of the company'. Case gives instance after instance of companies whose performance was transformed by open-book management. You'll know whether you practise the latter by answering three questions as demanding as the Four-Yes catechism on page 6:
1. Does everyone see and understand the real numbers, operational and financial, by which the company is run (meaning everything from units shipped and gross margins to objectives, budgets and actual performance against plan)?
2. Is everybody held responsible for their own part in achieving performance?
3. Does everyone benefit from bonus payments tied to performance targets?
At first sight the third question takes you right back into the myth-laden practices scorned by Pfeffer, while the second runs foul of Argyris's doubts over empowerment. However, the first question is crucial. Open-book managers take employees fully into their confidence, train them carefully to the necessary level of understanding, and show them how their contribution fits into the totality. The bonus payments, moreover, are collective, not individual: and the systems are designed, not by managers, but by the employees themselves. They decide whether the bonus pool should be shared equally, proportionately, disproportionately, or by some other system, depending on what they feel to be fair.
Case is deeply committed to the open-book approach and to its part in the success of myriad individual companies. But he never succumbs to the myth of the universal method, the management panacea. The cases cover a multitude of widely varying practices, which is as it should be. The critical numbers ('that drive... key objectives [and] must move in the right direction if the business is to succeed') must differ from industry to industry, and may vary even between firms in the same industry. What doesn't vary is the importance of making everybody aware of the numbers and how these move, and of their personal role in achieving the right direction; and of acting all the time, with their knowledgeable help, to keep performance on track.
That plainly doesn't happen at GM, even though man-hours per car assembled must be a critical number. Open-book management is another way of saying 'good management'. That is unique to every well-managed company. But most people will commit themselves to a Four-Yes company that commits itself to them: Four Nos threaten negative results. And that's no myth.
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