HOW IS IT THAT MANAGEMENT EXPERTS AND CEO’S HAVE MISSED THE OBVIOUS CONNECTION BETWEEN EMPLOYEE ENGAGEMENT AND EARNINGS IMPROVEMENT?
Someone once said " you can't make an omelet without breaking a few eggs". There's an obvious problem with the way companies go about cutting costs and employee engagement. They treat the two as mutually exclusive, when they are actually inseparable, locked together like a weld. The success of initiatives dealing with cost and engagement are inversely successful to the degree they are processed as separate initiatives.
EARNINGS IMPROVEMENT Given the huge gap between revenue and profit, this article deals with improving margin and employee engagement. Revenue will be addressed in a follow on writing. The top Fortune 500 companies produce an average of 6% margin. Than means it takes $17 of revenue to send a dollar to the bottom line, while it only takes a dollar of cost reduction to send a dollar to the bottom line.
There are two types of cost cutting, the first where a target number is given to the officers and they pass it down expecting every manager to hit the number. This approach is often chosen when the CEO doesn’t have a metric that would allow the assignment of different targets to different departments. To avoid mutiny, all receive the same. This approach can actually do a lot of harm. Departments providing high value are punished by losing 10% of their budget, and departments providing low value are rewarded by keeping 90% of their budget.
The other and much worst approach is some form of zero-based budgeting. Imagine how distracting this herculean effort is to a business? Managers are going to spend a horrendous number of hours justifying things, which cannot and will not be cut, ending up with the smallest number imaginable. It’s human nature, they sold it before and now they have to un-sell, and that’s a bit of an emotional challenge. Re-selling becomes the overarching driver with ZBB, real value notwithstanding. The likely exception being when a company is acquired by another and there’s a new management team in place, such as the approach used by 3G Capital, most recently with the merger of Heinz and Kraft Foods.
When a company embarks on a cost reduction initiative, whether zero based or traditional, every budget owner has a personal prejudice that will likely affect their actions. It’s not possible to test whether a manager’s recommendations are best for them verses best for the investors. “Here's the number, hit it”, and that’s what they do.
How many times have you read an announcement where a company states at the beginning of the cost cutting effort, they're going to lay off five hundred, ten thousand or whatever number of employees to reduce their expenses. How is it possible they know the number? They don't and so they just take the salary numbers and weigh them against their target.
This situation is exacerbated when the WARN ACT is used as an excuse for pre-announcing employee lay-offs, a sad and unnecessary action. Companies should ask their lawyers or HR executive to call the Department of Labor and ask a single question. “What will happen if we don't know the number until we do the investigation?” I have asked that questions several times and the answer is always the same, "you can't and don't need to when you don't know the answer". What’s the penalty for not guessing right, there isn’t one? There is no allowance in the law for any punitive action, zip, nothing, except the 60-day pay requirement for each affected employee.
What message does this approach send employees; the target is on their backs! When the layoffs occur, the survivors immediately begin to second-guess every manager's judgment for the people they selected for termination. It’s doesn’t take a genius to imagine what happens to employee engagement moving forward.
EMPLOYEE ENGAGEMENT EE should be an integral part of every earnings improvement process.
Level the playing field by including employee engagement with the cost reduction initiative. Employees know where almost every penny of wasted value is being spent and my experience is, given a risk free environment they’ll tell you exactly where to find every penny. With the current approaches to EE, the initiative is likely sponsored and managed by HR. The employees know they are communicating with other employees who are in no better position to take action than the employees making the recommendations. Not very exciting.
Employee engagement frequently rises only to the Human Resources level, unfortunately not to the CEO’s level. HR’s approach then is to hire a survey company in hopes that asking tons of questions might result in a few gems they can execute without spending too much career capital. Now, armed with thousands of responses, we find HR is rarely positioned to solve the EE problem; most cannot challenge the resistance caused by their peers, well not successfully. It’s like pushing a rope up hill.
The real challenge is, how to neutralize the enterprise wide culture, politics and silos that are the natural barriers to change. One-way to do this is for the CEO to ask all employees for their help with the margin challenge and anything they think needs to change. A single open-ended question, that’s all it takes. Also, and the one thing that will guarantee success, the CEO engages with a third party to act as agents for the employees ideas. The CEO assigns the target, as mentioned above; employees are asked to help management hit their target, anonymously of course. Now management is challenged with hitting their 10% reduction and they also have to execute those justifiable employee recommendations, this activity being facilitated by the third party.
In the end, the enterprise target is always accomplished; the difference is that each department ends up reducing their budget by the right amount rather than by the target amount. Some reduce zero, some end up reducing fifty to one hundred percent. Add to that, throughout the process employees are seeing both their expense recommendations and their engagement related suggestions accepted and acted upon almost daily. The frequency of taking action serves as an additional incentive for their involvement. In other words, more input.
One of the beautiful things about this approach is that employees think in terms of dollars, giving no distinction to operating expense, capital, inventory or any other category, it’s all just dollars. This approach opens all those categories for review; a good idea knows no boundary.
Unlike the usual approaches of assigning all management the same target and the ZBB approach, combining employee engagement with margin improvement eliminates most of the emotional connection people have to their budget. For example, when an employee can completely justify eliminating 60% of his managers department and the manager dismisses the idea, it usually dies. If that same idea is submitted anonymously to the third party, the debate takes on a whole new result. The 60% is going away. You can imagine the smile on that employee’s face, no reward required. Multiply that by the thousands if inputs coming in and thousands of actions being taken and it’s easy to see why engagement improves.
In one case the CEO had received 800 suggestions by the third week of a ten-week initiative. A particular executive perk was a reoccurring issue that outraged employees in light of announced layoffs. The CEO agreed and killed the perk that same day giving employees the credit. Seven days later the CEO had 7400 suggestions. The point, employees watch everything management does and when management takes a surprising turn, so does employee engagement. In this case, they saw a sacred cow shot by the CEO, to employees it’s like a cork popping out of a Champaign bottle, they believe and then nominate additional sacred cows candidates for termination as well.
It’s always helpful to get other’s opinions; this writing is based on twenty years of following this model with many different industries. In one case delivering a $300 million SG&A reduction, a $200 million capital plan change and a $45 million inventory reduction over a period of just ten weeks. Also, WARN ACT announced layoffs were reduced by 60%. Several sacred cows were eliminated and a couple of corporate bullies were sent home. One hundred percent of these results were from a single question asked by the CEO with the third party creating the temporary suspension of their politics, culture and silos.
When executed separately, employee engagement and margin improvement initiatives can take months to complete and usually produce only moderate results. When you combine the two with the CEO’s support and a third party acting as agents for the employees, the results are exponentially higher. Most important, the employees know that they and their peers made all the difference.
Food for thought: What do the following have in common, Officers, VP’s, Directors, Mangers, Supervisors, factory workers, and janitors? They are all employees and each has their own unique view of what needs to change. With the approach described above, the input comes from ALL employees. Officers are people too, something we learned having had so many wanting to discuss their concerns. We too thought officers were different, what a pleasant surprise.
“The most important thing in communication is to hear what isn't being said.”
― Peter F. Drucker