I have to admit I found that particular metaphor very catchy when I encountered in Nilofer Merchant’s June 2 blog post on the Harvard Business Review site. Her blog post titled People Aren’t Cogs discussed some of the same issues that have perplexed me for decades- why don’t more organizations get the fact that investing in the talents and abilities is not only a critical strategy, but it is good for business?

I think the following two quotes sum up the conventional wisdom that continues to be proliferated in most organizations-

"Companies have a hard time distinguishing between the cost of paying people and the value of investing in them."
- Thomas A Stewart

Michael Porter - HBR

"How else could companies overlook the well-being of their customers, the depletion of natural resources vital to their businesses, the viability of key suppliers, or the economic distress of the communities in which they produce and sell? How else could companies think that simply shifting activities to locations with ever lower wages was a sustainable ’solution’ to competitive challenges? Government and civil society have often exacerbated the problem by attempting to address social weaknesses at the expense of business. The presumed trade-offs between economic efficiency and social progress have been institutionalized in decades of policy choices.”

December 2010

You will note I hope that these sentiments were expressing essentially the same idea over 50 years apart!

I have used a similar metaphor to Nilofer in expressing my opinion that most of us have been trained to believe that if I want more- more market share, more profit, more productivity, the strategy is to extract it from someone else.

I described in terms of pie- if I want more pie the conventional thought is I take yours. My model is more akin to build a bigger pie.

I was discussing with someone as recently as this morning the concept of personal competency, the idea embedded in our Constitution that each individual has the right and responsibility to plan and implement their own destiny. As you might suspect that concept is essentially contrary to the philosophy that fueled the Industrial Revolution.

Personally competent people could negotiate with you as a peer. They possess skills and attributes that you do not and they can bargain with you over the value of those services. That kind of a model doesn’t fit well when you are looking for armies of people who can perform the same tasks over and over again without really knowing the why or how.

Largely because of the intervention of government through labor laws including the National Labor Relations Act, Taft Hartley, and others employees gained back some level of leverage through the legalization of collective bargaining- the right to form and join unions. They didn’t realize it then, but the “founding fathers” of the collective bargaining movement left some of what I believe to be the most important rights on the table.

Employees were granted the right to collectively bargain over wages, hours, and working conditions; but the means of production remain exclusively with management. Management is required to negotiate the effects of changing a method or location of production, but not the method itself. We gave up an important seat at the table.

In return for security in the form of health, retirement, and related benefits we agreed to truly become human capital. For generations that was the model. In return for compliance with company norms, rules, policies, and procedures you got security. Our sense of personal competency diminished especially about things like how the products were produced, how our wages and benefits were determined and bluntly blissful ignorance about what they cost.

To a large extent I would submit we remain in that place today. The average employee is remarkably uninformed about the thinking and methodology about how decisions are made around compensation in their organization and probably find the information about their health and retirement benefits downright byzantine. I still hear more mature workers complain bitterly about employers taking away their pensions and replacing them with defined contribution plans like 401ks. Many propose we follow suit with the same model in government sponsored programs like Social Security and there is a push towards consumer directed health care programs as well.

Part of the issue in my mind is that while we were providing security we robbed them of their personal competency around these issues. We still don’t see employees as partner/stakeholders, we see them as cogs.

Ms. Merchant mentions that in conversations with her colleagues she has been chided and warned against discussing too much peopley stuff. The amusing part is that she has a substantial track record for delivering results in business. She isn’t an academic or a social scientist; she is a businessperson as am I.

So let’s examine where we are in 2011. I hear and unfortunately I believe that the outcome of the next Congressional and Presidential election will largely hinge on the economy, that the current administration has had two and a half years to “fix” it and they have failed so they must be punished.

I believe differently. I believe that we have fundamental flaws in some of our essential societal infrastructure that have occurred over a period of years and we still are quite prepared to acknowledge them and execute a definitive change strategy.

  • Unemployment, home foreclosures, and other economic pressures on individuals are at historical highs, as are the profits of many MNCs and the number of millionaires increased in 2010.
  • Health care spending is accounted for 12% of GDP in 2010 and is expected to increase to 16% by 2020 unless changes are made. The current solutions focus almost exclusively on the 40% of health care costs that are attributable to organic causes and ignore the 60% of costs that are attributable to lifestyle and behavior.
  • The U.S. Department of Labor estimates that employee turnover is costing the U.S alone $5 trillion annually in lost opportunity and productivity.
  • The American Mental Health Association indicates we lose another $200 billion annually to presenteeism, the phenomenon where people “show up”, but perform at less than capacity, lose productive time based on personal or family health issues, and accidents and injuries.
  • In the U.S. alone we spend $100 billion annually on “training” that has little or no sustained effect on productivity and performance.

Is it just me or is this peopley stuff starting to resemble real money and real opportunity.
For the last twenty years or so we have attempted to counter these issues with processes like lean, Six Sigma, and others. We are applying the wrong solutions. 

The industrial model of the 19th and 20th century is no longer relevant or effective.
I heard a couple of brilliant quotes the other day in a webcast featuring social entrepreneur Simon Mainwaring.

The quotes were-

Government and philanthropy cannot by themselves successfully the issues in our society

Companies cannot succeed in societies that fail!

Perhaps one of the most interesting dimensions of these quotes is their author- it wasn’t a social scientist, philanthropist, or religious leader who made them- it was Bill Gates….

A New Economic/Social Model

Over the last few months I encountered descriptions of a couple of models that I found appealing and relevant that incorporate Merchant’s “bigger cupcake” thinking.

Michael Porter and Mark Kramer wrote a piece they called Creating Shared Value for the Harvard Business Review in the first quarter of this year. They explored many of the issues I have discussed here and went on to provide examples of where organizations actually invested in social infrastructure they found it to be to their significant business benefit.

I am not talking about corporate social responsibility here or cause marketing I am talking about investment in societal infrastructure that yielded a significant return to stakeholders.

  • Johnson and Johnson invested in developing and implementing a comprehensive health management strategy for their employees and have enjoyed $250 million in “hard savings” not to mention the savings in reduced “presenteeism” and other ancillary benefits.
  • Wal-Mart and Nestle both found that by investing in local “clusters” they significantly reduced transportation costs of transporting goods to their facilities and improved the economic position of the communities. Wal-Mart enjoyed another $200 million in annual savings by reexamining packaging and routing of shipments to sores to meet sustainability goals.
  • General Electric’s Eco-Imagination product lines represented an $18 billion revenue source in 2009
  • Vodafone’s investment in an electronic banking solution in Kenya in order to assist farmers in marketing their crops resulted in 10 million new customers over three years and the funds under management represent 11% of Kenya’s GDP, similarly an online service providing weather updates and other services to Indian farmers by ThompsonReuters resulted in significant increases in revenues for over 60% of the 2 million farmers using the service; significantly increasing the prosperity of the region.

As Porter and Kramer point out-

Not all profit is equal. Profits involving a social purpose represent a high higher form of capitalism, one that creates a positive cycle of company and community prosperity.

This peaks directly to Gates argument that companies can’t ultimately succeed in societies that fail.

A similar argument exists for cultivating engaged workforces.
Merchant’s blog post reported findings from a consolidated “mega-survey” conducted by Gallup incorporating data from 199 studies including 152 separate organizations, 44 industries, and 26 countries. The results show higher engagement results in-

  • A 16% increase in profitability
  • An 18% increase in productivity
  • A 12% increase in customer retention, and
  • An increase in quality of 60%!

Other “ancillary” benefits demonstrate that increased engagement can reduce turnover by 40%, the fact that 70% of organizations with high engagement exited the downturn with higher morale than entering it, and that 90% of Fortune Magazine’s Most Admired companies list have explicit employee engagement/branding strategies.
Category leaders like Apple and Google who have embraced these models for years can show a direct correlation to their bottom line. 

Apple’s per capita contribution to revenues is over $420k per year, Google’s is at $335K. These are contributions per employee. They also don’t have issues recruiting and retaining the best talent- those candidates seek them out!

As Merchant points out having a model like this doesn’t just allow companies to win, it allows them win repeatedly!

Mainwaring calls this we thinking. The goal is increasing shared value, not just shareholder value. We are building a bigger cupcake.

Businesses and organizations of all sizes are going to have to deal with a couple of “new” realities-

  • The next generations have a very different view of work and the role it plays in their lives from the way that it is organized to who and how they “rent” their talents to
  • The supply of “experienced” talent relative to the supply is going to diminish over the next few years. You will be competing for this next generation not only as employees, but as shareholders and customers.

I also agree with Gate’s that this is a societal issue. There is a role for government, philanthropy, social services, and the business community.

The 60% of health care costs that are attributable to individual behavior are going to require collaboration between payer, provider, and patient. We will need to create infrastructure to bring personal competency into their decision making process.

Social literacy, the ability to understand and comprehend the information people receive is a huge issue. So is motivation. If solutions do not include both incentives and accountability for personal decision making around not only health, but economic security in retirement they will fail.

The industrial codependency we cultivated to create generations of compliant workers isn’t going to be overcome by fiat. Business is just as accountable for the failures of our societal infrastructure as government. We need to participate in crafting the solution as do individuals.

I see this as an opportunity represented by the new millennium. Let’s build a bigger cupcake not squabble over crumbs……..


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