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Why Smart Companies Put People First

2015 February 1
by Greg Satell

In the go-go eighties, “Chainsaw” Al Dunlap’s enthusiasm for aggressive cost cutting and massive layoffs made him a corporate superhero.  His subsequent indictment and conviction on fraud charges led business people to question his character, but not necessarily his methods.

Poor Al would never survive as a CEO today.  Social media would eat him for breakfast.  Today’s corporate executives need to mind their P’s and Q’s, because any stray word can instantly go viral, damage the stock price and diminish shareholder value.

These days, most corporate executives pay lip service to the idea that people come first, but beyond nice sounding platitudes, relatively little has changed. Boardroom discussions mostly focus on financial data and the need to be “practical” about people decisions  Yet smart firms value their people not out of altruism or fear of a backlash, but because it’s good business.

People Create Value

In How Google Works, Eric Schmidt and Jonathan Rosenberg argue that people are essential for creating value.  More specifically, they focus on hiring, developing and empowering “smart creatives”—professionals with the technical skills to solve problems as well as the imagination to dream up new ideas.

Many hard nosed, profit seeking executives would say, “Sure, Google has a search engine that prints money, they can afford to be nice,” but that’s not how Schmidt and Rosenberg see it. They point out that while senior executives strategize and plan, those plans always fall short.  “Since the plan is wrong, the people have to be right,” they write.

The truth is that there are only two ways for a business to consistently earn profits above its cost of capital: Innovating to create new value and rent seeking.  To create new value, you need people to invent new products and processes.  To do effective rent seeking, you need a powerful lobbyist and those are people too (well… sort of).

People Create Efficiency

Notwithstanding Google’s success, many would point out that Schmidt and Rosenberg have the luxury of working in a growing industry, while many firms have to compete in stagnant or even shrinking markets.  Managers in those industries, so the story goes, need to optimize for efficiency and that means watching costs.

Yet MIT’s Zeynep Ton, author of The Good Jobs Strategyhas found in her research that well-trained employees are not a cost driver, but a sales driver.  A higher paid workforce results in less turnover, better customer service and greater efficiency.  A higher paid workforce results in less turnover, better customer service and greater efficiency.  So even in declining industries, investing in people can lead to greater profitability.

Anecdotal evidence supports her point.  Southwest, which competes in the brutal airline industry, regularly tops lists of best companies to work for and has maintained healthy profits for decades.  A study comparing Costco and Sam’s Club found that by investing more in front line personnel, Costco was able to gain an edge in productivity.

Consumers Are People Too

A focus on people also tends to spill over into how a company treats its customers.  It’s no accident that Google, Southwest and Costco are not only great places to work, but also rank high in Net Promoter Score, which is probably the best measure of customer satisfaction. Employees that feel cared about tend to care about others.

On the other hand, firms that show a lack of caring pay a social tax.  Scandals such as Dell Hell and Apple’s Foxconn issues created a fury and forced major corporations to change their policies.   Even innovative young startups like Uber are finding that public sentiment can seriously affect their business.

So not only does a focus on people produce more innovation and efficiency, consumers tend to penalize firms who they see as cynical and calculating.  Clearly, spreadsheets and strict financial analysis don’t tell the whole story.  Some of the biggest risks that firms face are social in nature.

The Profit Paradox

Many managers say that they take a “practical approach” to business by focusing like a laser on profits.  Yet, as we have seen, a mindless pursuit of profits actually tends to reduce profitability.  Others who are aware of the profit paradox say they pursue “enlightened self interest.”  Yet that begs the question, “enlightened by what?”

The truth is that for any business to prosper it must continually innovate how it creates, delivers and captures value.  For that you need people.  Not just people who come to work to perform tasks, but people who come to work inspired by the mission of the enterprise.

They also need to be healthy, have adequate vacation time, a strong family and social life and be active in their community.  Many top firms, such as General Electric, actively encourage participation in civic organizations, because they understand the value of having a committed workforce.

The best companies see people as more than a mere means to an end, but an end in themselves.

– Greg

2 Responses
  1. February 1, 2015

    Good stuff Greg. People are always the most valuable asset. They are what gets it done, imagines what’s next, finds what to be improved, etc. And, they are the only customers, consumers, friends or supporters as well. When we see companies like McDonalds now suffering from the image of how they treat their workers it is clear they are out over their skis. Yes, for profits. Yes, for efficiencies, but also yes we live in a human world.

    Greg Reply:

    Thanks Robert. Although I think McDonalds current troubles have more to do with their labor policies (many of their competitors have similar policies), I do think the fast food industry is instructive.

    I did some research awhile ago and found that labor costs for the industry run about 15%-20%. So even if the minimum wage was increased by 40% (which is being proposed) and we assume that other salaries are increased by the same rate (it would probably be a bit less), that total costs would increase only about 6%-8%. So productivity wouldn’t need to increase much to make up for the added costs. Further, because an increased minimum wage would raise lower incomes, demand for their products would both increase and become more elastic.

    So when you take into account lower turnover, etc. (and the fact that there would be no competitive disadvantage because it would be a universal increase), the impact of the legislation would be minimal. Still, they’re fighting it tooth and nail.

    It makes you wonder how much of the opposition is truly business based and how much is ideological.

    – Greg

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