Any manager who takes an honest look at individual performance knows that all employees are not created equally. About 20% of employees rise to the top of the heap; 20% drop to the bottom; and the rest hang around in the middle doing only enough to avoid attracting attention.
Employee productivity differences, however, have attracted their share of attention from researchers. Most agree that folks in the top-half of workers out-produce the bottom half by about 2:1 (it makes no difference if people are shuffling papers or making widgets). And when managers and knowledge workers are examined separately, the productivity ratio rises to 3:1, 4:1, or higher (more responsible jobs have bigger ratios).
Productivity is more than a mental exercise. It shows up as absenteeism, errors, reduced throughput, turnover, low morale, rework, and so forth. Productivity losses are also sneaky because they are not easily seen, yet they translate into hard cash: between 20% of base annual payroll is “leaked” for unskilled workers, and up to 50% for skilled and managerial employees – enough to separate a successful organization from a bankruptcy statistic.
Converting payroll leakage into gross sales can be an even bigger eye-opener. Twenty percent leakage, for an organization that pays out 1/5 of its gross sales revenue in salaries and benefits, would require a five hundred percent sales increase to balance the books. Want to do more scary math? Calculate the incremental sales necessary to offset a 50% leak in management and professional salaries!
Enter Financial Chaos and Uncertainty
This would be bad enough in a normal economy. But these are serious financial times. Opinions vary, but experts estimate our financial stress will last throughout 2009 and perhaps into 2010. The prosperity party is over. Like after the dot-com bust, the world has changed virtually overnight.
We cannot do much about external economic factors except dig in and wait, but we can do something about employee productivity – especially when it comes to intelligent downsizing.
Ah’ll be Baack!
There are two ways to downsize. Most managers are accustomed to the Terminator model: plunge into the organization armed with rocket launchers, machine guns and grenades terminating anyone in the line of sight. At the end of the rampage, the gross payroll body count is reduced, but since both high and low producers are massacred without regard to skills, the organization continues to live with its 20% to 50% cash hemorrhage. Terminator-izing is unfortunately the norm.
What about examining employee performance before pulling the proverbial trigger? Because everyone knows that performance recommendations are part fact and part fiction. Promotions and performance ratings are almost always based on personality and popularity, not specific skills. Just examine organizations that Terminated their work force in the past. What effect did it have other than forcing fewer people to spend more time at work? Downsizing decisions done without future planning are like blood-letting to rid the body of bad humours. They are more likely to kill than cure.
If management takes the time, and HR is able to competently manage the solution, downsizing can actually help the organization get healthy and stay that way. It’s more like a sophisticated, benign computer than a killer robot: it is rationally based. It begins by clearly defining the skills the company wants leave in the past and acquire in the future. Following is an example.
We’reAllThatMatters is a legend unto itself. Employees generally want to work there because they can brag about the big name and enjoy the great benefits. Unfortunately, people (read “customers”) outside the organization have a different opinion. Employees often treat customers rudely and without respect. For example, if We’reAllThatMatters’ buggy bookkeeping system overcharges a customer 400%, employees treat anyone who complains as if it was his or her fault.
Now the organization must cut back the workforce due to economic conditions. Should it Terminate its employees? Should it ask managers for their subjective opinions about who stays and who goes? Should it amputate whole divisions? Since We’reAllThatMatters has been around some time, a majority of laid-of employees may be over 40, raising the possibility of a nasty class-action suit. What to do?
The Terminator approach would be a serious long-term mistake. Both skilled and unskilled employees would suffer the same fate. Customer-sensitive as well as customer-insensitive employees would be eliminated indiscriminately. We’reAllThatMatters’ payroll would shrink, but payroll hemorrhage would continue unabated.
Smart-sizing would be different. We’reAllThatMatters would a take hard look at itself and honestly calculate the financial impact of poor customer service on future business. They would then develop some key job profiles containing both technical competencies to do the job and customer service competencies they want to build and retain. When this is complete, they would move on to the next step.
Individual employees would have their performance objectively evaluated using the list of necessary competencies as a target. For example, customer-centric skills might be evaluated by gathering past examples of service (similar to behavioral event interviewing), reviewing performance appraisals (to the extent they might include relevant information), giving tests, administering surveys, and so forth.
The secret to success would be to evaluate the skill set of every employee using an objective standard based on the organization’s tactical plan. Results for each employee would be anonymized and independently reviewed by a few highly competent managers. Employees who matched the profile would be retained and those who did not would be reassigned or laid off.
Depending on the organization’s long-term direction, smart-sizing could also be done based on competencies such as analytical skills to develop better problem solvers, initiative to encourage operational improvements, teamwork to develop better internal working relationships, creativity to foster new ideas and designs…the list goes on.
However, there is a price to pay. HR has to develop the skills to help managers analyze and clarify the skills needed, they have to become proficient in accurately measuring competencies (real ones…not garden variety stuff), and they have to professionally manage the process. Managers have a price to pay too. They must have the patience to work through the details of smart-sizing, dedicate the energy and commitment to making sure the process is followed, and be able to clearly define the future at the employee level.
The outcome of this initiative is a smart-sized operation. In other words, the skills of the employees are intelligently aligned with the objectives of the organization. Overall, this should result in fewer employees doing more work (because each employee will be more skilled), less turnover (because employees will be more satisfied), fewer mistakes, better quality, and so forth.
The final question faced by everyone in the operation: is saving 20% to 50% of base payroll worth abandoning Terminating for smart-sizing?