Management’s Dirty Little Secret

December 16, 2009: Wall Street Journal (Gary Hamel's Management 2.0)

by Gary Hamel

How would you feel about a physician who killed more patients than he helped? What about a police detective who committed more murders than he solved? Or a teacher whose students were more likely to get dumber than smarter as the school year progressed? And what if you discovered that these perverse outcomes were more the rule than the exception—that they were characteristic of most doctors, policemen and professors? You’d be more than perplexed. You’d be incensed, outraged. You’d demand that something must be done!

Given this, why are we complacent when confronted with data that suggest most managers are more likely to douse the flames of employee enthusiasm than fan them, and are more likely to frustrate extraordinary accomplishment than to foster it?

Consider the recent “Global Workforce Survey” conducted by Towers Perrin, an HR consultancy. In an attempt to measure the extent of employee engagement around the world, the company polled more than 90,000 workers in 18 countries. The survey covered many of the key factors that determine workplace engagement, including: the ability to participate in decision-making, the encouragement given for innovative thinking, the availability of skill-enhancing job assignments and the interest shown by senior executives in employee well-being.

Here’s what the researchers discovered: barely one-fifth (21%) of employees are truly engaged in their work, in the sense that they would “go the extra mile” for their employer. Nearly four out of ten (38%) are mostly or entirely disengaged, while the rest are in the tepid middle. There’s no way to sugarcoat it—this data represents a stinging indictment of the legacy management practices found in most companies.

So why aren’t we scandalized by this data? I talk to thousands of managers each year and for most of them, employee engagement isn’t Topic A, or B or even C. How do we account for this heedlessness? There are several possible hypotheses:

1. Ignorance: It may be that managers don’t actually realize that most of their employees are emotional zombies—at least while they’re at work. Maybe corporate leaders haven’t seen the many studies that mirror the results of the Towers Perrin survey. Or maybe their allotment of emotional intelligence is so meager that they are unable to distinguish between enthusiasm and ennui.

2. Indifference: Another explanation: managers know that a lot of employees are flatlining at work, but maybe they simply don’t care—either because a callous corporate culture has drained them of empathy, or because they view engagement as financially unimportant—a nice-to-have, but not a business imperative.

3. Impotence: It could be that managers do care, but can’t imagine how they could change things for the better. After all, a lot of jobs are just plain boring. Retail clerks, factory workers, call center staff, administrative assistants—of course these folks are disengaged. Given that, the data’s hardly surprising. After all, prison wardens aren’t surprised that their charges aren’t bubbling with joi d’vivre, and neither are managers.

Let’s evaluate these hypotheses. The first seems to me unlikely. Anybody who has ever read a Dilbert strip knows that cynicism and passivity are endemic in large organizations. Only an ostrich could have missed this.

The second hypothesis has more to recommend it. I believe there are many managers who have yet to grasp the essential connection between engagement and financial success. Companies that score highly on engagement have better earnings growth and fatter margins than those that do not—a fact borne out by another Towers Perrin study, as well as by the work of Professor Raj Sisodia of Bentley College. This correlation between enjoyment and profitability is likely to strengthen in the years ahead. Let me use the example of the Apple iPhone to explain why.

Think about it: how did Apple manage to jump into the mobile phone business so quickly, despite a complete lack of industry experience? The answer: by accessing a lot of commodity knowledge that was available in the form of standardized components from third party suppliers. While this helps to explain how Apple got into the business so speedily, it doesn’t explain why the iPhone has succeeded so spectacularly. Consider this: in the third quarter of 2009, Apple’s iPhone division delivered $1.6 billion in profits, while Nokia earned just $1.1 billion. What make’s these figures eye-popping is that Nokia’s global handset market share hovers around 35% while Apple’s is less than 3%, this according to TechCrunch.

The lesson here: you don’t have to be the biggest to be the most profitable—but you have to be the most highly differentiated. Apple made the iPhone a money machine by injecting it with a lot of non-commodity knowledge. When it debuted in June 2007, the iPhone offered users a unique portfolio of functions: a touch screen display, a built-in music player, a capable web browser, and a suite of useful applications that let users check the weather, track their stocks and watch YouTube videos.

The fact that Apple’s margins are so much better than Nokia’s reflects a simple reality: in making a mobile phone, Apple adds a lot more differentiation to the standard componentry than Nokia does, and Apple adds it in a highly efficient manner. Or to state it another way, among all the various players in the iPhone value chain, Apple has, by far, the highest ratio of differentiation-to-cost, and thus the fattest margins.

In a world of commoditized knowledge, the returns go to the companies who can produce non-standard knowledge. Success here is measured by profit per employee, adjusted for capital intensity. Apple’s profit per head is significantly higher than its major competitors, as is the company’s ratio of profits to net fixed assets.

It doesn’t matter much where your company sits in its industry ecosystem, nor how vertically or horizontally integrated it is—what matters is its relative “share of customer value” in the final product or solution, and its cost of producing that value. The greater the share of differentiation, the greater the bargaining power with business partners. Likewise, the lower the cost to produce that value, the bigger the profits.

Of course, Apple isn’t immune to the forces of commoditization. Within a few months of its launch, many of the iPhone’s original features had been duplicated by its competitors. So Apple had to innovate again. It invited third-party developers to write applications for the iPhone and thereby laid the groundwork for a revolution in portable computing (100,000 apps so far, and still counting). But once again, competitors like Blackberry and Google are in hot pursuit.

So what does all this have to do with engagement? Just this: in a world where customers wake up every morning asking, “what’s new, what’s different and what’s amazing?” success depends on a company’s ability to unleash the initiative, imagination and passion of employees at all levels—and this can only happen if all those folks are connected heart and soul with their work, their company and its mission.

Let me break it down:

– In every industry, there are huge swathes of critical knowledge that have been commoditized—and what hasn’t yet been commoditized soon will be.

– Given that, we have to wave goodbye to the “knowledge economy” and say hello to the “creative economy.”

– What matters today is how fast a company can generate new insights and build new knowledge—of the sort that enhances customer value.

– To escape the curse of commoditization, a company has to be a game-changer, and that requires employees who are proactive, inventive and zealous.

– Problem is, you can’t command people to be enthusiastic, creative and passionate.

– These critical ingredients for success in the creative economy are gifts that people will bring to work each day only if they’re truly engaged. (Eric Raymond made this point way back in 2001 when he argued that in the new economy, “enjoyment predicts productivity.”)

Today, no leader can afford to be indifferent to the challenge of engaging employees in the work of creating the future. Engagement may have been optional in the past, but it’s pretty much the whole game today.

What about the third hypothesis? Sure, (some of you are saying), engagement is important, but let’s not kid ourselves—it’s easy to see how Apple’s super-smart engineers and designers might get excited about creating mind-blowing products, but my company is way more prosaic and a lot of the work around here really is mind-numbing. It’s not that I don’t care about engagement, but I can’t make a silk purse out of a sow’s ear. The reason so few of my people are truly engaged in their work is because so few their jobs are truly inspiring. Isn’t that what the data are telling us?

Uhmm, no. Surprisingly, 86% of the employees in the Towers Perrin study said they loved or liked their job. So what, then, are the culprits? Julie Gebauer, who heads up the Workforce Effectiveness Practice at Towers Perrin, points to three things that are critical to engagement: first, the scope employees have to learn and advance—are there opportunities for them to grow; second, the company’s reputation and its commitment to making a difference in the world—is this a company that deserves the best efforts of its people; and third, the behaviors and values of the organization’s leaders—are they people employees respect and want to follow?

These are all management issues. It is managers who empower individuals and create space for them to excel—or not. It is managers who help to articulate a compelling and socially relevant vision and then passionately pursue it—or not. It is managers who demonstrate praiseworthy values—or not. And more often than not, they don’t. Here, again, the survey data is disturbing.

Only 38% of employees believe that “senior management [is] sincerely interested in employee wellbeing.” Fewer than 4 in 10 agree that “senior management communicates openly and honestly.” A scant 40% of employees believe that “senior management communicates [the] reasons for business decisions,” while just 44% believe that “senior management tries to be visible and accessible.” Perhaps most damning of all, less than half of those polled believe that “senior management’s decisions [are] consistent with our values.”

My conclusion from all of this: first, engagement is essential to the competitiveness of every company and every economy—and we need to be doing a whole lot better than we are. We’ve got to get management’s dirty little secret out of the HR closet and into the boardroom. And second, if we’re going to improve engagement, we have to start by admitting that the real problem isn’t irksome, monotonous work, but stony-hearted, spirit-deflating managers.

If you’d like to DO something about this sorry state of affairs, may I recommend you start by picking up two mind-expanding books? The first, “Closing the Engagement Gap,” is co-authored by Julie Gebauer and contains a wealth of provocative insights and practical recommendations based in part on the findings of the Global Workforce Survey. The second, “Total Engagement,” by Byron Reeves and Leighton Reed, offers a radical prescription for taking the work out work, by making it more like play.