Why Smart Companies Put People Before Profits
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 Strategy, has 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.
Image attribution: Copyright: ‘http://www.123rf.com/profile_fgnopporn‘ / 123RF Stock Photo