Incorporate, Fix: Cheap, Simple?

In the first two articles of this series, we focused on why professionals can seldom incorporate existing competencies and why fixing chronic performance problems is not as straightforward as it seems. In this article, we’ll discuss the concept of “cheap.” Cheap is a relative term. To a person accustomed to spending big dollars for software, furnishing an office, or purchasing phone equipment, a six- or seven-figure expenditure could be cheap. Folks who deal with big dollars are usually line managers accustomed to big budgets. HR managers frequently have a different sense of cheap. Their “grimace point” hovers somewhere around three or four figures. This is a problem, though: it causes HR to choose easy solutions that have limited benefits. That is, instead of addressing the root problem, they tend to seek four-figure solutions. Cheap can also have an emotional meaning, such as, “I am not motivated to solve the problem.” In other words, the expense of another department is unimportant, because it does not affect my department. In this sense, cheap is more about a person’s motivation than it is about money. As I said in a previous article, poor organizational performance is like a poorly managed sports team: root problems generally rest at the feet of either incompetent players or an incompetent management team. Good managers can do wonders with talented players and poor managers can quickly squelch talented performance. It’s all about employees and managers having skills for the job. Regardless of the definition of cheap, a close examination shows an investment in solving people problems can provide higher return than any other single financial investment. Let’s take a closer look. Organizations usually calculate employment dollars in terms of the cost to fill a vacant position. This is probably because it is easy to calculate obvious out-of-pocket expenses such as temporary employees, ads, employment fees, and interview hours. This, however, is only the surface; everyone knows that much bigger costs are hidden in absenteeism and low productivity. They just have trouble 1) calculating it, and 2) believing the numbers are so big. Let’s take sales, for example. Sales Example Sales tends to follow Pareto’s 80/20 rule; that is, 80% of sales are usually generated by 20% of the salespeople. Of course, there are always differences from one sales person to another, but a 5:1 differential is just too big to ignore ó especially since sales managers expect EVERY new hire to be a top producer. I firmly believe that any sales manager who continues to ignore production numbers and persists in using the “know ’em when I see ’em” hiring strategy needs to wake up and smell the coffee. It’s not working! The machine is unplugged! There is no water in the pot! When calculating sales costs, it does not take a rocket scientist to show that an 80/20 productivity ratio means that you’re hiring, training, and supporting four low producers for every one high producer. That translates roughly to a 400% increase in sales costs! What is this worth in out-of-pocket dollars? Accountants tell us the average cost of sales should be about 25% of sales. For a $100 million organization, that translates to $25 million. Factored by individual productivity, that translates into spending about $20 million to support the 80% salespeople who are low-performing, versus $5 million to support the 20% who are high-performing. What would the return on investment be if the ratio was 60/40, or even 50/50? What’s “cheap” about flushing money after low-producing salespeople? Since the dollars are so obvious, why isn’t anyone seizing the opportunity? General Employee Example White collar, or “knowledge,” workers are much harder to quantify. Their productivity is often elusive and intangible. Nevertheless, we can see differences in productivity from one person to another in terms of absenteeism, mistakes, volume of work, the ability to generate new ideas or reduce costs, and so forth. Regardless of whether they are formally quantified or not, these are expense items. Most academic research shows that the difference in productivity between poor workers (who only work hard enough not to get fired) and good workers (highly skilled people willing to work hard) ranges from about 2:1 to 4:1. That is, good workers produce at least 200% more work than poor ones. Let’s assume, for example, that the salary for a given position was $40,000. It would take two poor producers, at a total cost of $80,000, to equal the productivity of one good producer at a cost of $40,000. In other words, at least $40,000 annually would be wasted on each additional low performer. Since the 2:1 ratio makes our point, we won’t even use the 4:1 figure in our calculations. What’s “cheap” about flushing money after low-producing employees? Just because no one has put pencil to paper, that does not mean there is no recoverable expense attributable to poor productivity. It should not take too much effort to calculate the dollars associated with low performance. Even in its most basic sense, someone ought to show management where the money is flowing. Think about it, higher gross revenue with the same or lower employee cost. What is that worth?

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2 Comments on “Incorporate, Fix: Cheap, Simple?

  1. Another excellent article by Dr. Williams.

    Here is an example of what can be done when we stop hiring people who are like our bottom 80% and start hiring people who are like our top 20%.

    The Company:
    ===========
    – National and international offices
    – Insurance and financial services
    – 15,000+ employees worldwide
    – 8 Divisions in the US
    – Company-wide turnover was 34% the preceding year
    – Company-wide sales averaged 101% of sales quota
    – An average US Division was selected for a pilot study

    After 6 months:
    ==============
    – Turnover reduced to 19% from 34%
    – New salespeople who had a Benchmark Suitability of…
    85% or above averaged 916% of sales quota
    84% or below averaged 187% of sales quota

    As we can see, hiring salespeople who are like the top 20% yields excellent results. Yes, the figures are 916% and 187% of sales quota.

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