Dear Friends,
It seems to me, one fundamentally important thing, the corporate form of business organization often doesn’t understand, is that what makes a company profitable… is quality employees. The theme today is, to squeeze the employees in as many ways as imaginable, to extract as much profit per employee as possible. Like many ideas that catch on… this one is false. This is because, when management squeezes the employees, the best ones leave and the poor ones stay. It is as simple as that. The result is, management has to pressure the remaining people to pick up what the most productive employees, no longer do. That is the way large corporations die so suddenly or become zombies, they squeeze out the best employees, and the more that leave, the more that company needs bailouts, zero interest loans, bankruptcy protection, tax incentives, pension fund raids, wage concessions, cronyism, etc… Every firm out there has one thing in common, whether they sell, fabricate or merchandise, their success or failure depends on getting quality employees… and keeping them.
The square root of the employees will do fifty percent of the work… in any company, group or organization. That is called Price’s Law. This is hard to conceptualize, that such a small portion of the employees do so much of the work, but it has been proven empirically. If we think about it, that is why small businesses are more efficient, because the square root of a small number, is higher as a percentage of the whole. The square of nine is three, which is one third, while the square of one hundred is ten, which is one tenth. The numbers become ever more discouraging of efficiency the larger an organization gets. In a corporation of ten thousand people, only one hundred do fifty percent of the work. So we see clearly, that if we accept Price’s Law as true, then we must also accept that the larger a company gets, the less efficient it will be. Moreover, that the larger a firm, the less percentage of good employees need to be pushed out, before it must become unprofitable.
Even small improvements in Price’s Law, result in huge gains, while small erosion of Price’s Law destroys a company. Since the exact number of employees that make up that square root are unknown, and that number is never exactly the square root, any firm that can push the number of productive employees, even slightly above the actual square, get a huge advantage over their competitors. Likewise, those who push out even a few productive employees, will be at a large disadvantage to the competition. To get only one back can require perhaps dozens of employees hired, depending on the size of the organization, but to lose ten is easy as making their work conditions worse than the competition. The competition always wants your best employees and will often pay head hunters to get them from you. Plus, the drain of good employees puts ideas in the heads of those that remain, maybe they could make more money, get better benefits, better work conditions, etc… somewhere else.
The best managers with the worst employees could not turn a profit in a monopoly, while the worst managers with the best employees could not help but turn a profit, even in perfect competition. Take the joke about the company boat race. Firms A, B and C had a boat race. You work for company A. Each puts four rowers and one steersman, except Firm A, thinking that the managers are the key to success, put two steersmen in their boat. The race was on, The boats of firms B and C pulled ahead of company A’s boat. Row as hard as they might, the three rowers just could not keep up with the four in the other boats, and the two steersmen kept steering the boat in different directions, wasting whatever speed the rowers could generate anyway… So Company A came in last place. Knowing in their hearts that good management is the key, the next year company A wised up, and put three steersmen into their boat…
The dominant paradigm of corporations today, that employees are a liability, needs to be turned upside down because, employees are the principle asset any firm has. Calling an asset a liability is not simply mislabeling a thing, it is misallocating it, and that always leads to the inefficient use of opportunities, strengths and the means at hand. Corporations are especially susceptible to treating employees as liabilities, because the people that run them believe themselves superior due to their credentials and education, and so hold others in contempt. Obviously, companies that allocate their resources efficiently are far more profitable than those who don’t, but before a resource can be allocated however, it must be correctly categorized. Arrogantly holding one’s chief asset as a liability, is the reason so many corporations fail, and take with them their shareholders hard earned savings. For a firm to be profitable then, all it need do is value their employees more than plant, equipment or patents, because the employees are the ones who will implement those things, well or poorly… depending on their quality, and their quality depends on the best ones not being pushed out… especially in a giant corporation.
Sincerely,
John Pepin
