Friday, December 5, 2008

Do Layoffs Make Sense?

The lead story in today’s Wall Street Journal is about companies accelerating layoffs in response to the recession. According to the story, companies have laid off about 600,000 workers since October 1. The list of companies shedding workers includes AT&T (which recently reported a 5.5% increase in 3rd quarter profit), Adobe Systems (which actually projected an 18%-21% increase in 4th quarter profit), Viacom, DuPont, Avis, Whirlpool, Motorola, GE, and many other high-profile businesses. Spokespersons for these companies blame falling revenues as the reason for the layoffs.

Looking at this situation from a macro perspective, it appears that companies are setting themselves up for a self-fulfilling prophecy by implementing layoffs. When people lose their jobs, they generally cut spending and only buy absolute necessities. They don’t buy cars, appliances, electronics, or apparel, and stop spending on services that are unnecessary or they can do themselves. When this happens, revenues for companies that produce cars, appliances, electronics, apparel, and offer services fall. These companies respond by laying off more workers, thereby increasing the number of people who reduce spending, and the cycle continues. This cycle actually worsens as it continues because people who remain employed start cutting back on spending because they are worried about eventually losing their jobs.

The problem is, by laying off workers, companies are actually adding to the problems they face. Until an executive (or board) at a major company makes a statement by not laying off workers in response to falling revenues, the situation will continue to get worse. In short, until consumers feel comfortable enough to begin buying again, the economy will continue to decline.

Our government is in the process of giving away our unprecedented amounts of money to companies in order to help them survive. Looking at the companies that have received bailout money (and those who are hoping to get some), it appears that one of the stipulations for receiving government money is to lay off workers. From this perspective, it looks like our officials are rewarding companies for firing workers (i.e., adding to the unemployment rate).

Bailout money should only go to companies that make a commitment to keep their workers employed. If a significant number of companies make this type of commitment, consumer confidence would slowly increase and buying would return, thereby increasing company revenues and preventing the need to lay off workers.

During the Great Depression, SC Johnson (makers of Johnson Wax®, Pledge®, and other household products) did not lay off a single worker. Instead of producing products though, workers washed windows, improved landscaping, and painted factories to keep busy. The courage and commitment shown by SC Johnson management by keeping their workforce intact during this rough economic time resulted in an immeasurable amount of loyalty and gratitude from their employees. Imagine how you would feel today if your company was to show you the same level of commitment.

CEOs today are like captains faced with guiding their ships through a dangerous storm. When a ship captain faces this type of situation, though, he uses the crewmembers to help guide the ship safely and does not throw them overboard in order to save the ship.

Since corporate executives are obviously not going to take on the responsibility of getting us out of the recession, it is up to the government to focus actions and bailout money on activities that will get consumers buying. Without this type of focus, the economic death spiral that we are currently in will continue well into t

Monday, December 1, 2008

Auto Industry Bailout a Good Idea?

I have very mixed feelings about the bailout of the U.S. automakers. Besides knowing many Detroiters and automotive professionals personally, I have a lot of sympathy for the thousands of people who will lose their jobs if some sort of bailout does not occur (not to mention the retirees who will lose their pensions and benefits). Many people who work for the Detroit 3 (and its suppliers) really love the auto industry, and they (along with their parents and grandparents) have worked in the industry for so long that they can’t imagine doing anything else. Also, automobiles have been such a vital part of Detroit’s culture for so many years that losing the automotive industry could result in the city losing its identity – the effects could be devastating.

On the other hand, using government money to bail out companies that have suffered from bad management does not make me a happy taxpayer. We are already bailing out banks and investment firms for bad management practices and now homebuilders and automakers want to be bailed out as well. It’s been awhile since my college days, but I really don’t remember learning in any of my economics classes that a free market economy includes bailing out companies that have been mismanaged by their executives and boards of directors.

A bailout of the Detroit 3 should not even be considered without several stipulations, including a change at the executive and board levels, and a clear and concise plan for a fundamental change in their cultures to enable focus on continual improvements in product offering, quality, productivity, and costs. Without these types of changes, there is no guarantee that these companies won’t waste the billions given to them just as they have wasted billions of their own cash reserves over the last 10 years. And the last thing we need is to be debate this issue again 1-3 years from now . . . most likely for a whole lot more than $25 billion.

Are Legacy Costs the Problem?

All three of Detroit’s automakers are affected by the legacy costs to their retirees, and GM’s Rick Wagoner never misses an opportunity to note this as a major competitive disadvantage for the company. One thing that Wagoner never mentions, though, is the more than $1.4 billion in contractual pension obligations that GM has for its executives. I’ll have a little more sympathy for Mr. Wagoner as soon as I hear him complain about these obligations as well.

Although Toyota and Honda have the advantages of operating nonunionized plants, and having much lower legacy costs, these are not the reasons for their success. They produce great cars that people want to buy; and they do it quicker, better and at a lower cost than anyone else. Also, the people at Toyota and Honda love their jobs and their companies, and directly contribute to improving the work that they do.

Anyone who has studied business – and especially manufacturing – knows that there are huge differences in how Toyota approaches business as compared to Ford or GM. One of the most glowing differences is that they take care of their people and do not fire them whenever revenues fall. They have also been continually working to perfect their system of production for the last 60 years.

Taiichi Ohno, former Toyota executive and father of Lean Manufacturing wrote in his book, The Toyota Production System: Beyond Large-Scale Production, “hiring employees when business is good and production is high, just to lay them off, or recruiting early retirees when recession hits are bad practices.” Ohno wrote this over 30 years ago when few thought that Toyota had any chance of surpassing the Big 3 in sales. Obviously, executives at Ford, GM and Chrysler have chosen to follow a different approach and continue to undervalue the people who design and build their cars.

Funding the Business for the Long-Term

Much has been written about the profits made by Ford and GM from their SUVs and pick-up trucks over the last 10-15 years. Unfortunately, the executives chose to sit back and enjoy their success instead of thinking about the future health of the companies they were supposed to lead. Unlike Toyota and Honda, they did little to develop small, fuel-efficient models and instead chose to continue to focus on gas-guzzling, but highly profitable automobiles, all the while handing out millions in bonuses. Anyone who lived during the initial oil crisis back in the 1970s might be experiencing some very painful déjà vu from this situation.

While Toyota and Honda also did what they could to maximize profits from hot-selling SUVs and pickup trucks, they invested billions into developing hybrids and more fuel-efficient models for the future, as well as continuing to focus on updating and improving their factories.

A further important distinction with Toyota is their philosophy of building cash during the good times in order to help the company withstand the bad times. They use profits as a way to invest in the future and make sure that there is a future. At present, they are one of the few companies that have the ability to finance purchases for their customers. Any company that does not build its cash during the good times to keep it operating during the bad times is doing all of its stakeholders a disservice.

I also wonder why we are considering giving Chrysler money when their strategy seems to be to sell themselves to GM (who, according to all indications, plans to shut them down). The company announced recently that it is cutting back on product development to save money. This does not sound like a company that plans to be around for the long-term and, from my perspective, makes it a bad investment for taxpayer money.

GM is predicting that, without the bailout, a massive number of people will lose their jobs and suppliers will close down. This is a strange concern for a company that has history of massive layoffs and a reputation for apathy towards its suppliers. Why do they now care about putting people out of work and suppliers out of business when they didn’t for so many years?

Remembering When Quality Was Job 1

One of the real shames in this situation is that Ford was actually on the right path back in the 1980s when Donald Peterson was CEO. Peterson was an avid follower of W. Edwards Deming (one of the people credited with teaching Toyota how to compete), and began making progress on shifting the culture at Ford toward quality and continual improvement. Unfortunately Peterson had a very short tenure as CEO and the company quickly changed direction after he retired in 1989. One has to wonder where Ford would be today if the company continued implementing Deming’s teachings.

Maybe the answer to all of this is for the Detroit 3 to reorganize as banks. They would then have access to the $700 billion financial system bailout without the headache of developing and presenting plans to show that they intend to change.

Tuesday, November 11, 2008

Circuit City Unplugged

Circuit City has now officially joined the list of faltering U.S. companies facing severe financial troubles. In a series of announcements over the last few months, the company has disclosed plans to close 20 percent of its stores and layoff thousands of workers. Increased competition from Best Buy, Wal-Mart, and others, along with a deep U.S. recession are being blamed for the company’s troubles. I don’t agree. Like so many companies that have entered a death spiral over the years, it is obvious to me that Circuit City was just another company suffering from bad management.

I truly feel bad for the workers who have lost (or will soon lose) their jobs at the company. What is really sad, though, is like so many other companies that have been in the same situation, the people responsible for the troubles - the executives – get to keep their jobs while thousands of workers lose theirs. It is not the salespeople, accountants, warehouse workers, and cashiers who led the company into decline. In fact, I cannot even think of a situation where a salesperson or cashier can cause company to go out of business.

Back in 2007, the company laid off 3400 of their higher priced salespeople and replaced them with lower-paid workers. In justifying the move, Circuit City spokesman Jim Babb was quoted as saying, “All companies at one time or another need to go through and make sure their cost structure works with market conditions.” Being the employee-focused company they are, Circuit City did allow these workers to reapply for their old jobs at a lower wage (and after a 10-week waiting period), but they were not given the option of staying at a lower wage. Just for comparison, according to the company’s 2008 proxy filed with the SEC, Circuit City CEO Philip Schoonover received in excess of $6 million in compensation for the year (and each member of his executive team received compensation in excess of $1 million). Imagine what these people would receive if the company had actually been successful this year. It is really sad that the Circuit City executive team is accepting this level of compensation while throwing thousands of people out of work – especially in today’s economic climate.

Besides the obvious morale issues caused by this type of action, the company gave up on its customers by firing their trained and experienced salespersons. Circuit City had the reputation of having among the most knowledgeable people in the retail electronics industry. By ridding the company of the high level of expertise that customers had come to expect, Circuit City eliminated the only advantage it had over companies like Best Buy and Wal-Mart. They treated the products they sold like commodities and became just another discount electronics store. The problem with this strategy is that they did not have the cost structure to compete as a discount store.

In their 2006 annual report, the company formally announced its “three parallel areas of work.” These were: UPGRADE the current business through talent, processes and systems; EVOLVE the core business to grow revenues and profits through fundamental change; and INNOVATE to grow new business with new consumer values. Like so many, the parallels comprise another very catchy and creative slogan that lacks substance. In mid-2006, the company’s stock was trading at $30.75 – it closed today (11 November) at $0.13.

Further on in the report, Schoonover writes, “I embrace the opportunity to lead Circuit City as we continue the transformation of our company to better serve our customers, Associates and shareholders.” Looking at the performance of the company since 2006, there is little evidence that Circuit City has served anyone well . . . except Best Buy and Wal-Mart.

Friday, October 24, 2008

Returning to Prosperity Will Require Getting Back to Basics

Back in the 1980s, management experts W. Edwards Deming and Peter Drucker wrote about the importance of an organization understanding its purpose in order to be successful. Unfortunately, we didn’t get it. Although many companies did develop highly professional and well-written mission and vision statements, they tended to be aimed at those outside the organization – investors and customers – instead of the people inside the company, for whom this information is critical.

Now that the American economy is collapsing, it’s time to get back to the basics of running a business – something we have not done for many years – and the first step is to establish and communicate the purpose.

I have been speaking to groups and coaching executives for years about the need for communicating a clear and unchanging purpose to get people to work together and focus on what is important. I’ve also been teaching these same people that the fundamental purpose of an organization is NOT related to profits or share price. Just to be clear, though, let’s go through this one more time . . .

Why Purpose is Important

If we look at the Cambridge Dictionary of American English, we find that an organization is, “a group whose members work together for a shared purpose in a continuing way.” In line with this definition, without a purpose, there is no organization. There is only a group of people who come to work each day, put in eight or nine hours, and go home.

Without a clear purpose, those inside the organization will attempt to define it in their own terms and conflict between people and departments will result. The most basic premise of teamwork is that those on the team understand why they are there and what they are trying to accomplish. We see examples in sports virtually everyday where a superstar is more concerned about his or her own statistics instead of the team winning. This is why dream teams are rarely successful in winning championships.

The purpose statement does not need to be framed and posted throughout the organization to be effective. It just needs to be understood through indoctrination when a person is hired and continually exhibited through the decisions and actions of management.

It’s Not About Profits

An organization is established in order to serve a need in society. Either the need is not being served well or not at all by existing organizations. Although it is absolutely necessary for a business to be profitable to survive, profits are not the reason for the company’s existence. As human beings, we need air, food and water to survive, but (assuming that we have enough of each) they are not the purpose of our existence and the focus of our lives.

The need that the organization was originally created to satisfy is the purpose. Henry Ford wanted to build a car for the masses; Google wants to organize the world’s information and make it easily accessible; and the M.D. Anderson Cancer Center wants to eliminate cancer throughout the world. It is statements like these that give people clarity, focus, and inspiration.

Regarding profitability (or any other financial measure), the better an organization serves its purpose, the more profitable it will be. And contrary to popular belief, the mission statement does not need to make reference to shareholders. If the people and activities are aligned with the purpose and the company continually improves the products or services it offers, the shareholders will do just fine.

Why We’re in this Mess

The financial institutions involved in the global collapse did not understand their purpose. The bonus schemes and metrics implemented inspired greed and selfishness instead of teamwork and commitment to the fundamental need these institutions were created to provide. One has to wonder what Charles Merrill, Edmund Lynch, Emanuel and Mayer Lehman, Joseph Bear, and Robert Stearns would think about what the people in charge of the organizations they founded did to destroy these institutions.

The fact is, what happened in the financial markets can (and has) happened to other companies over the years. As long as greed continues to drive the business world, the purpose of organizations will be defined in financial terms, and the judgment of executives and managers regarding what is best for the company will be clouded.

The Basics

The financial institutions that remain must soul search to truly understand why they were created in the first place. The result will be purpose statements that Boards and executive committees can clearly communicate to team members. This is vital in order to get everyone on the same page and focus on what is important for the organization to continue to survive and prosper in the future.

This will be new to many people in these organizations and continual reminders and checks will be necessary to make sure that they stay on track and don’t stray from the purpose. It will be a difficult but highly rewarding process, and is absolutely necessary for America to regain its competitive position in the world.

Friday, October 17, 2008

Another Toyota Advantage

Toyota has announced a $250 million ad campaign to introduce 0% financing on 11 of its models. At first glance, it looks like another attempt by an automaker to generate business during the latest slowdown in U.S. auto sales. After all, Toyota sales have been hit hard during the last several months – last month showing a 32% drop over September 2007. Digging a little deeper into this campaign, however, gives a little more insight into the Toyota way of doing business and how they are able to offer a type of incentive that would be very difficult, if not impossible, for its U.S. rivals to match.

Toyota has approximately $19 billion in cash, while Ford and GM are hemorrhaging. While the growth in Toyota sales over the last several years, as well as sales of high margin cars like the Prius, is part of the reason that the company is sitting on such a large amount of cash, it doesn’t give the whole picture. It wasn’t very long ago that GM and Ford were selling SUVs and pickup trucks at record levels and hauling in huge amounts of profits. The difference is that Toyota holds on to its cash so it can weather a downturn in business while Ford and GM (as well as many other U.S. businesses) give theirs away as bonuses to executives. Toyota executives are paid well, but their compensation does not come close to the amounts received by their counterparts at U.S. companies.

Although reading reports from analysts would make one think otherwise, it is ridiculous for any company to assume that it can achieve growth and profitability every year. Toyota understands this and puts away a portion of its profits every year to provide a cushion for years when business drops off. Fortunately for Toyota, it has been a number of years since they experienced a downturn, so their level of cash reserves has grown to enormous levels.

Keeping cash from the good years enables Toyota to offer 0% financing to its customers now while GMAC and Ford Motor Credit struggle to find the cash to stimulate sales. And this situation has even more far reaching consequences than are visible at first glance. If, for example, GMAC does not have the cash to offer customers financing, its sales will continue to slide, causing a further decline in profits which forces it to use more cash to finance its operations. This results in further declines in the amount of cash available to offer customers and further reduces sales and profits. This type of downward spiral is difficult to escape. This type of situation appears to be driving the move by GM to purchase Chrysler which, at the moment, has several billion in cash reserves.

Another benefit to Toyota’s cash position is its ability to keep paying workers while it temporarily shuts down production in its factories. Workers at the Toyota plants affected by the shutdown are still paid to come into work. Instead of building new cars and increasing inventories, however, they attend training classes in safety, quality, and productivity, and work to improve the processes so when production starts up again, they are even more efficient. This practice also keeps employee morale high and increases the level of commitment people have to the company.

Time will tell if Toyota’s 0% financing offer will work to stimulate sales. It may be that people are not willing to buy a new car when they don’t know if their jobs are secure or their investments will recover. About the only certainty in the foreseeable future, though, is that “The Big Three” will be GM, Toyota, and Honda. By purchasing Chrysler, GM will hold onto the top spot for a little while longer.

Thursday, October 16, 2008

Communicating With Workers - A New Concept?

In an article in the Wall Street Journal earlier this week, Brittany Hite wrote about the differences in giving feedback to younger workers as compared to older workers (Employers Rethink How They Give Feedback). In the article, Ms. Hite presents six points to remember when giving feedback to Gen Y employees:
  • Avoid surprises by giving feedback on a continual basis instead of waiting for the annual performance review;
  • Be clear on expectations, especially when discussing a new task;
  • Listen and make sure the feedback is given through open dialogue;
  • Keep it loose and informal;
  • Discuss what you’ve learned from them;
  • Keep notes to make the feedback sessions more constructive.
While it’s commendable to see the WSJ provide this type of information to managers in the business world, it is a shame that these steps are presented only in the context of dealing with younger workers. We have gotten so far away from understanding the basic responsibilities of management that we think wanting open and constructive communication within the workplace is something new. Do people actually believe that it is acceptable for a manager to not communicate to older workers in this way? If there is a difference between the two generations of workers, it is in the expectations. After years of working for American companies and receiving little or no consistent or constructive feedback, older workers have most likely lowered their expectations in order to survive.

The writer goes on to say, “Increased demand for feedback from younger workers is forcing some employers to rethink how they discuss employee performance review. Often, the annual review just won’t cut it anymore.” Guess what? The annual performance review has never “cut it.” It doesn’t matter which generation the worker is from – people need continual communication and feedback in order to develop and improve. Waiting for the once-per-year meeting to talk with a team member, although a common practice in the U.S., is just bad management.

Too often, people are promoted to management positions because of financial knowledge and/or technical skills instead of leadership abilities. If someone performs well in the position they are in, it is assumed that they are promotable into management. And once a person is put into a management position, developing his or her skills as a leader becomes a low priority. As a result, poor communication becomes the norm and the organization and people who work there, stagnate.

Continual feedback and coaching has always been an essential responsibility of a manager. Success in management comes when the manager makes the people on his or her team successful. It is impossible to do this without continual communication and clarity on expectations. Waiting for the annual performance review to do this is illogical and ineffective.

I had a conversation fairly recently with the CEO of a mid-sized U.S. company. Since he is nearing retirement, he and the Board are looking for someone to replace him. He proceeded to tell me the main characteristics for the type of person he is looking for and not one had anything to do with leadership capability. If leadership competency is not important at the top of the organization, there is little chance that it will exist at any other level.

If the information in the article is the result of younger workers demanding that managers fulfill their responsibilities as leaders by coaching and developing team members, then I encourage these younger workers to keep up the pressure. We desperately need a revolution in management practices in this country and it may take the unrelenting energy of younger workers to make it happen.

And a note to any young professionals who may be reading this . . . please remember all of this when it is your turn to enter the management ranks. Remember how important feedback and coaching was to you and how you didn’t get enough of it when you were new to the workforce. I’m counting on you to save American companies from the death spiral that the traditional western approach to managing organizations has caused.

Tuesday, September 30, 2008

U.S. Financial System in a Death Spiral

Our financial system along with our stock markets are collapsing. There also is currently no plan to get us past this crisis. Why, then do I feel better than I have in years about our future? After years of disappointment about the lack of the Government’s unaccountability to the American people, the failure of the $700 billion bailout actually gave me hope that we can force our representatives to vote against a bill that is not in OUR best interest – even with the pressure from the administration to pass it.

Instead of writing about the details of the $700+ billion bailout, I thought I would just list the 2007 compensation of the executives associated with the companies involved in the collapse. As you look at the table, keep in mind that these people took home millions of dollars while the rest of us are left to clean up the messes they left behind.




FNMA (Fannie Mae)

Daniel Mudd

$ 12.2 million

FHLMC (Freddie Mac)

Richard Syron

$ 19.8 million

Lehman Bros

Richard Fuld

$ 22.1 million

Morgan Stanley

John Mack

$ 41.7 million


Martin Sullivan

$ 13.9 million

Goldman Sachs

Lloyd Blankfein

$ 68.5 million

Merrill Lynch

John Thain

$ 83.1 million

Merrill Lynch

Stanley O’Neal

$161 million

Washington Mutual

Kerry Killinger

$ 14.4 million

I think it’s important that these guys (along with the Board members of the institutions they destroyed) go down in history as the group that led to the collapse of the United States financial system (along with the economy, in general). We may never recover from the effects of their greed and self-centered actions. But, as is typical in these types of situations, they will attempt to retire rich and comfortably while millions of Americans struggle to keep or find jobs, make mortgage payments, and watch their investments continue to shrink.

Another Failure of Leadership

The executives listed above failed in their absolute number one priority of leadership: to improve the long-term health of the organizations they lead. I understand that this is not necessarily in line with the traditional American system of management, but it is absolutely necessary for the survival of our businesses and way of life. The greed that has developed in the board rooms and executive offices in U.S. companies has got to be stopped or the economic decline that began 30 years ago – and has grown to become a full-fledged crisis in recent months – will continue to send us into a death spiral. Although I’m actually happy that the people are forcing Congress and the President to develop a plan that will result in a true fix to the financial system – instead of another band-aid on an arterial wound – I am afraid about the fall-out in terms of jobs over the next several weeks. When American companies need to shed large costs quickly, they fire people. I can only hope that we don’t get that that stage in this crisis.

Leaders in U.S. companies need to start paying attention to their fundamental responsibility to the organization and the people they lead. There are top executives who do not display the level of greed exemplified by the gang that destroyed the country. Executives at companies like Toyota, Honda, Nucor Steel, and Hillerich & Bradsby (makers of the Louisville Slugger baseball bats) have shown over the years that a focus on the long-term health of the organization instead of their own bank accounts leads to sustained positive results and financial success for everybody.

Rewarding Greed

I recently got into a discussion with the Chairman of the Board of a $400 million U.S. company on the subject of executive bonuses. He was adamant that executives need to be rewarded on results and nothing else because it removes subjectivity in bonus calculations. Well, this looks like a sensible concept on paper, but as current events have shown, it is not in the best interest of the organization.

I have been saying for years how destructive traditional executive compensation plans are to business and the investment firms involved in the crisis have proved me correct. Rewarding executives on “results” turns them into short-term, greedy tyrants. I have personally witnessed personalities of managers change when they are given targets that are tied to monetary rewards. Remember Maslow, Kohn and Hertzberg? These guys have hundreds of articles and papers that discuss the link between intrinsic and extrinsic rewards and the type of behavior associated with each (possibly a future blog entry, but not enough time to get into it here).

First of all, rewards need to be given based on areas that strengthen the long-term health of the organization. Things like lowering employee turnover, training hours, quality levels, customer satisfaction, and even supplier satisfaction will lead to behavior that strengthens the organization. Secondly, executive bonuses need to be capped – an executive must never receive grossly high compensation while others in the organization are not rewarded (or rewarded at token levels). Bonuses should also not drain the organization of capital that can be used for future downturns or improvements like employee development, new products, new technologies, etc.

The most important thing to remember, though, is to appoint, hire, or promote people who have the proper values and understand that the job of a leader is to serve those he or she leads. This is critical to strengthening the organization and making it able to withstand downturns.

So as we go forward (and I’m assuming we will move forward), I appeal to the U.S. Government to take whatever time is necessary to truly fix the problems that exist today. Do not worry about re-election and today’s stock market and PLEASE do not let Sarbanes or Oxley get involved.

Monday, September 22, 2008

A 360° Savior?

It can help, but if you're expecting 360° feedback to drive improvement, your wait may be long and frustrating

Those who have read W. Edwards Deming’s books [1,2] or experienced one of his 4-day seminars undoubtedly learned about the destructive effects that performance review systems have on people and organizations. Despite the warnings from Deming and others about the detrimental effects of the practice, however, many managers continue to cling to the process because they don’t know of anything with which to replace it (which, it should be noted, is no excuse to continue a practice that, at best, has no value to the organization). Now that we have 360° feedback systems our problems are solved, right? Probably. . . not.

A 360° feedback system is a process that enables an individual to receive feedback from his or her supervisor, subordinates and co-workers (hence the name, 360°). The process has gained considerable attention in recent years as a way to overcome the problems associated with a traditional performance review system. Although in theory the process makes sense, when implemented in an improper culture it can be just as destructive as traditional reviews. Just like many other performance improvement tools, 360° feedback is only effective when implemented in an improvement-focused environment where the leaders understand and support the theory behind the concept.

As with other organizational improvement tools used over the years, 360° feedback has been over-hyped and promised to deliver much more than it actually can. Because of this, expectations are high when an organization embarks on a mission to implement the system. Unfortunately, this often leads to frustration, disappointment and further distrust of improvement initiatives, which is something that we have too much of in organizations already.

To align expectations and make sure the company’s culture is advanced enough to benefit from a 360° review system, it is important to understand what the system can and cannot do. By itself, a 360° review will do nothing. It will not improve performance, teamwork or communication, and without total confidentiality of results, it also will not lead to employee development.

What the system can do, however, is provide valuable input to a personal development plan. The development plan pulls together the 360° feedback along with other information, including the person’s career objectives, and new skills related to corporate directives (e.g., new safety initiatives, organization-wide training programs, etc.). The plan becomes a commitment to, as well as a roadmap for improvement. It also becomes a basis for dialogue between an employee and his or her supervisor.

If the system does not include some type of personal development plan and relies solely on the person receiving the feedback to act on the results, very little will change. Personal development is unfortunately a low priority in today’s business world because
people are too busy and many lack the knowledge necessary to improve themselves. When emphasized and regularly reviewed, however, the development plan adds credibility to the process and validates the importance of personal growth to the organization.

The 360° review is obviously a key input to the development plan because the
feedback comes from a person’s internal customers and suppliers. Organizations are becoming increasingly complex and success is heavily dependent on the quality of the interactions between people. As these interactions improve, an organization’s performance improves. By receiving and acting on the feedback from those with whom a
person interacts throughout the course of business, the interactions, and hence the
operation can improve.

There are several elements that are necessary to help create an environment in which a 360° system can succeed. Unless these elements are present, the process has little chance of aiding the improvement effort.

Confidentiality of Results The first requirement is to keep the results of the feedback completely confidential. This means that, unless a person decides to share the feedback with others, nobody has access to the information; not even the person’s supervisor. This is a difficult concept for many managers to accept because of a loss of perceived control. Some managers have become so accustomed to judging the people who work for them that they feel entitled to this type of information. Without complete confidentiality, however, the 360° process will experience many of the same problems as a traditional performance evaluation system. People will become defensive about the results and those providing the feedback will be less open and honest if they believe the exercise will result in negative consequences for the person receiving the information.

As with any activity, people will be more likely to willingly participate if the process results in positive action, but shy away from it if it leads to negative consequences. Basically, without complete confidentiality of results, a lot of energy will get directed toward things other than improvement.

A common concern about keeping feedback confidential relates to a lack of documentation for protection against dismissal-related lawsuits. The objective of a 360° system, however, is improvement. It is not a tool to fire people. Documenting a problem with an employee needs to happen when the problem occurs rather than waiting until the next review, which may not occur for several months later. This, along with the high level of subjectivity involved in performance evaluations, and the fact that people often
use evaluations to document general issues rather than specific instances of problems, makes them virtually useless in defending the company against lawsuits anyway. In a survey of labor attorneys reported by Tom Coens and Mary Jenkins[3], it was found that 7 out of 10 attorneys did not find performance appraisals beneficial in defending companies against wrongful discharge suits. It should also be noted that “problem” employees generally result from ineffective hiring practices, poor leadership, or both.

Customer Focus A second element of an effective 360° process is a customer focus throughout the organization. This means that everyone understands their role in serving customers, both inside and outside of the organization. Without a customer focus, people will direct their efforts toward satisfying the needs of the boss rather than those of the customer. This will cause the feedback received from internal customers to be ignored (or reduced in importance), resulting in frustration and an overall lack of interest in the 360° process, and a lack of improvement activity.

Maturity & Teamwork Another vital element of an effective 360° system is a high level of maturity and teamwork throughout the organization. If there is internal competition and frequent conflict between people and teams, the feedback will tend to be more negative and personal than constructive. To be useful for improvement, the feedback needs to be actionable by the person. The more negative and personal the information, the less the person will be able to identify specific steps to be taken to improve.

Careful Selection of Respondents To prevent 360° overload within the organization, the respondent group needs to include a sampling of the subject’s internal customers, rather than everyone with whom the person interacts.

There are many organizations that utilize the process by having the entire management team provide feedback to each other. This practice becomes extremely burdensome for people who are already overloaded and turns people off of the process.

To keep the time drain on people to a minimum, nobody should be selected to provide feedback to more than three other people during a given period of time. The only exception, of course, is a manager who is required to provide feedback to everyone on his or her team, regardless of the number of people involved (the feedback exercises need to be staggered, if necessary, to keep the process from overloading the manager).

Depending on the size of the organization, the HR department may need to get involved to keep anyone from being selected for more than three assessments. If managers are not willing to take the time necessary to plan the selection activity, it is better not to embark on the 360° process at all.

Coaching and Guidance The final element necessary for success in the process is the ability to understand the feedback and provide guidance to people in the development of an improvement plan. Although it sounds basic, there are many companies that focus so heavily on implementing the surveys that they don’t know what to do to help people act on the results. When this happens, the unfortunate result is a lot of money and time spent on a tool that provides no value to the organization.

Taking the time to assess the organization’s readiness for a 360° system before attempting implementation can save the company a lot of time, money and frustration. It
is also important to understand that, like many of the tools used in an organizational development process, a 360° process cannot by itself drive improvement. When
implemented correctly in an environment where improvement is part of the culture and driven by the organization’s leaders, however, the process can help people better understand who their internal customers are, what they want, and what they need to do to better contribute to the organization’s success.

[1] Deming, W. Edwards, The New Economics, Massachusetts Institute of Technology—Center for Advanced Engineering Study, Cambridge, MA, 1993.
[2] Deming, W. Edwards, Out of the Crisis, Massachusetts Institute of Technology – Center for Advanced Engineering Study, Cambridge, MA, 1982.
[3] Coens, Tom and Jenkins, Mary, Say Goodbye to the Performance Review: Why Dr. Deming Was Right All Along, The Human Element, Human Development and Leadership Division of the American Society for Quality, Fall 2001.
Stocker, Gregg, Avoiding the Corporate Death Spiral: Recognizing & Eliminating the Signs of Decline, Quality Press, Milwaukee, WI, 2006.

Thursday, September 4, 2008

Practices Leading to a Death Spiral

Keeping up with business news today can be depressing. Layoffs, plant closings, and job moves continue to occur and have become so commonplace that they don’t warrant much more than a mention in the news. It’s also interesting that, not too many years ago, many of the companies in trouble today seemed pretty much invincible. They were large, strong, and very profitable. So what happened?

Many of the reasons blamed for the downfall of companies are somewhat sensible: poor economic conditions, rising energy costs, natural disasters, terrorism, etc. There is no doubt that these external issues affect company performance. If these are the causes of a company’s troubles, why do competitors in the same industry serving the same customers perform much better?

It comes down to the job of managing – which is to continually build the health of an organization. Just like the human body, an organization has an immune system. As long there are no severe external stressors, an organization with a weak immune system can appear successful (just as a person with a weakened immune system can appear healthy). As soon as something external – and completely out of the control of the business – occurs, the weakened immune system becomes evident and performance drops off severely.

By the time external events occur and a company’s profits and/or market share shrink it is too late. Company decline has begun and executives do not feel they have the time to work on issues that don’t have immediate impact. The company enters crisis-mode and begins to make drastic cutbacks – including plant closings, layoffs, and severe budget cuts – in order to return the company to profitability. Although these items are often well-intentioned, these actions cause damage that often cannot be repaired and the company sinks further into the death spiral.

Companies that continually work on improving their health still have problems. In fact, they recognize that the job of improvement is never done. Toyota is a very strong company, but still runs into problems now and then that affect its performance.

Improving Organizational Health

There are six common practices in organizations that gradually break down its immune system and set it up for failure. Even if the organization appears to be successful, the existence of any of these practices is a sign that troubles are ahead. Stopping these practices begins the process of building the company’s health, thereby reducing the effect of external events on its future.

Practice 1: Losing Purpose

The first practice is forgetting the purpose of the organization and focusing on purely financial results. Companies need profits to survive, but they are not the reason for their existence. An organization is created to serve a need in society. It is vital to remember that need in order for the company to stay focused and successful. The more it strays from its fundamental purpose, the more teamwork breaks down as people define purpose within their own area of specialization (e.g., salespeople define it in terms of sales; accountants define it in terms of cost control and financial results; etc.).

Profits result from sticking to the purpose and doing it well.

Practice 2: Number-Obsession

Number-obsession occurs when managers attempt to run the organization from a spreadsheet instead of through people, processes, and purpose. It is not uncommon today for a manager or executive who spends more time with a spreadsheet than his or her team members.

Meetings that consistently start with review of numbers and financial results is a sign that number-obsession exists. Unfortunately this practice, which was initiated during the 1950s has become pervasive throughout American industry to the point that, a person who is not good with numbers little chance of rising to the executive ranks.

Practice 3: Squeezing Suppliers

Supplier squeezing refers to basing the relationship with suppliers on the basis of price and payment terms. Suppliers are a part of a company’s system and it is important to understand that, when a supplier suffers, its customers also suffer. Squeezing suppliers results in lower quality products and services, longer leadtimes, and a breakdown of trust with your suppliers.

To measure suppliers accurately, it is important to include the costs of extra inventory due to quality and delivery problems, longer processing time due to variation in incoming materials, cost of incoming inspection, rejections by the customer, and nonmeasurable costs like design support and expertise that a supplier can provide.

Practice 4: Undervaluing Employees

Balance sheet aside, companies that treat employees as an expense do not value their contributions. On the employee side, there is little pride of association with the company. Employee turnover is high, layoffs are common, and employee morale is low.

On the other hand, companies that treat employees as assets invest heavily in training and development. Employee turnover is low and morale is high. The management team is made up of people who have risen through the ranks and have a great deal of experience with the company’s products, processes, culture, and customers.

Practice 5: Dirt, Clutter and Damage

Workplaces that are dirty, unorganized, and equipment is worn and broken. Productivity and quality is usually low, while accidents rates and costs are high. Companies that do not respect their assets – do not respect their people.

There is an unfortunate preventive maintenance paradox characteristic of American companies: When business is good, there is no time for preventive maintenance – When business is bad, there is no money for preventive maintenance.

Practice 6: Operational Fragmentation

Operational fragmentation occurs when the organization is managed by breaking it down into individual departments and setting separate objectives for each component. All to common, objectives are set for individuals and departments that conflict with each other. People meet their objectives – especially when tied to compensation – which does damage to the organization as-a-whole.

Organizations need to be led as a system – not as individual components. Objectives should be organization-wide so everyone can work together for the good of the company.

More detail about the practices, including how to identify their existence and eliminate them, is available in my book, Avoiding the Corporate Death Spiral: Recognizing & Eliminating the Signs of Decline (Quality Press, 2006).

Friday, August 1, 2008

Wal-Mart Warns Against Unions

We live in a country where – in spite of what we’d like to think – employees are mistreated. Worker satisfaction among Americans is at an all-time low and is dropping even further with each successive survey. What is really unfortunate about this situation is some executives have gotten so blatant about it that they actually think it is good business practice to mistreat workers.

On page 1 of the August 1 Wall Street Journal is an article about Wal-Mart’s warnings about what will happen if Barack Obama wins the presidential election. According to the article, Wal-Mart human resource managers are holding meetings with store managers to warn them that a Democratic win in November will mean changes in federal law to make it easier for workers to unionize. In a bizarre twist to the message, though, company management is claiming that employees would be forced to join unions and pay dues while getting nothing in return. So they’re not concerned about what unions would do to stop the company from taking advantage of workers – as they’ve been doing for many years - they’re merely looking out for the welfare of their employees.

Whenever there is talk of unionizing within a company, cries of socialism, work stoppages, and higher costs are thrown around. And to be fair, there have been times in this country’s history when unions have taken advantage of their power sending companies – and entire industries – to ruin. What many people don’t understand, though, is that unions only exist because of poor treatment of workers by managers. If workers are satisfied with their jobs, feel fairly compensated, and trust management, they have no need to unionize.

In Wal-Mart’s case, the company has had years of accusations and charges of unfair labor practices – which is just as destructive to the company as union strife (one actually causes the other). Wal-Mart management is not known for respecting workers – and this move is strengthening that perspective even further. According to a person who attended one of the Wal-Mart meetings, the person running the meeting said, “I am not telling you how to vote, but if the Democrats win, this bill will pass and you won’t have a vote on whether you want a union.” It is really amazing how little respect company managers have for the intelligence of their workforce.

Wal-Mart has long followed several practices that lead to destruction, and it is only a matter of time before the company enters the same death spiral that has plagued so many other American institutions. It’s a question of leadership and always acting in a way that is best for all of the company’s stakeholders (which, believe it or not, includes workers). Undervaluing employees, squeezing suppliers, and losing sight of the fundamental purpose of the company are all practices that break down the company’s ability to survive.

As long as the market remains strong, the company can appear to be successful with no sign of breakdown. It’s when something external occurs that the weakened immune system becomes evident.

I led a company in the past that had been unionized for many years. Although I had no intention of eliminating the union, I did want to improve the relationship with workers so they did not feel they needed the union to make things better. By walking around the operation to talk with people and inviting the union representative into our planning meetings, a level of trust between workers and managers began to develop.

As a result, worker morale improved along with productivity, quality, and our financial results. Besides the financial success, the company became a more satisfying place to work.

It’s time we stop wasting our energy on fighting against workers and start realizing the potential value they bring to the company. By allowing workers to take pride in their jobs, there will be no need for workers to unionize or managers to waste money on misinformation campaigns to tell people how to vote. In the end, we will all win.

Thursday, July 24, 2008

The American Auto Industry Does It Again

Here we go again. General Motors announces further plant closings and layoffs. It makes one wonder how much longer this can go on. Eventually, GM executives will run out of plants to close and people to fire and have to look in the mirror at the true cause of the problems they face.

A manager’s ultimate responsibility is to build the health of the organization so that it can withstand the external pressures that cause decline. Just like people, organizations have an immune system. A weakened immune system may go unnoticed as long as there are no external influences or stressors that can cause disease or decline. Organizations and people with compromised immune systems may even feel strong and healthy as long as the environment is friendly. Once exposure to an external event or stressor occurs, however, disease sets in and decline begins. At this point, drastic measures need to be taken (e.g., layoffs/plant closings for an organization or surgery/chemotherapy for a person) to attempt to stop the decline. It is during times like these that people realize how much easier – and enjoyable – it is to work on improving health than fighting disease.

General Motors and Ford claim that legacy costs and an unexpected shift in demand to fuel efficient cars are the causes of their problems. After all, both were fat and happy a few short years ago when they ignored the market signs and raked in huge profits from SUVs and trucks.

Things have gotten to the point where Toyota is also facing declining sales in the U.S. market. A first for Toyota, they are responding by closing down their truck and SUV factories for three months in an effort to reduce the inventory of large, slow-moving vehicles. The difference? Toyota is NOT laying off any of the 4400 employees affected by the closing. Instead, they are keeping workers on the payroll and using the time for productivity, safety, and quality training.

Imagine the loyalty that Toyota is gaining from its workforce by taking this action. This gives the workers the feeling that they are just as much a part of the company as management. Do you think GM and Ford workers that remain after the layoffs and plant closings feel the same way? Do you think that Ford and GM executives care what the workers think?

An executive who continues to layoff workers because of economic problems is like the captain who runs into rough seas and throws crew members off the ship. Isn’t this the type of leadership we used to see in stories about pirates?

It’s no secret why Toyota continues to improve and innovate in its manufacturing process while Ford and GM continue to . . . well, be Ford and GM.