Chapter 4 Pinpointing Excess Staff An endangered species Who are HQ staff? Popular villans Misunderstood culprits Evaluating staff work 1. Meeting objectives 2. Keeping within budget 3. Improving 4. Zero based evaluation 5. Norms and ratios 6. Benchmarking 7. Consumer ratings 8. Activity costing
Pinpointing Excess Staff
Excerpt from Downsizing: Reshaping the Corporation for the Future
By Robert M. Tomasko
Only weeks after James Renier took charge of Honeywell's computer operations he trimmed more than 1000 middle managers and staff from the payroll. He summed up his downsizing philosophy simply: "There are two ways of managing: One requires a lot of useless staff, and the other lets people do their jobs and tell you what expertise they need. If you've got a staff that is either trying to do the line job or has turned into a large group of scorekeepers, you had better get rid of that staff."
Xerox's corporate staff has in past years been hit hard by criticism such as this - and cutbacks. Some have blamed the second guessing tendencies of its pre-1981 headquarters organization for crippling product development efforts. Xerox was unprepared in the mid-1970s for the strong Japanese invasion of the world copier market. Robert Reiser, the Vice President who initially battled the Japanese, admitted Xerox's organization had been too slow to anticipate and respond to this competitive threat. Why?
A former Xerox manager attributed much of the problem to an elaborate staff-driven system of checks and balances that, while keeping managers from making colossal mistakes, also kept them from marketing technological breakthroughs. The staff, concerned about manufacturing costs, seemed to guide the company toward a more homogeneous product line at the same time as the line managers were working overtime to customize it to fit evolving local markets. At times the intense intramural rivalries generated took managers' attention away from watching the real competition. This ex-Xerox manager complained that product design steps that should have taken two weeks to a month required two years for completion, primarily because of a multitude of headquarters staff "inputs" and "suggestions."
But it was not only bureaucratic slowness and corporate infighting that caused Xerox problems. Companies' historical strengths often turn into strategic weaknesses, especially as their competition changes. Two factors that contributed to Xerox's past success in the copier business were its reliance on a direct sales force and its inclination to lease rather than sell its machines.
Both of these beliefs about the best way to make money in the copier business were well ingrained in Xerox's organization. Major staff units grew in size to manage the leasing business as well as to support the large sales force. Over time their existence, and the natural career interests of those in them, provided a form of strategic inertia that kept Xerox wedded to this philosophy of doing business. The Japanese competitors lacked these constraints and the strategic blind spots they induced. Their market entry into the U.S. was built on outright sale of machines to a large segment of the market that Xerox had overlooked, in part because it did not fit the logic of Xerox's organization. They penetrated this market quickly by selling through already established independent office equipment dealers rather than building a costly sales force from scratch. Their organization was lean, fast and relatively cheap.
Facing significant market share drops and earnings declines, Xerox reorganized. Headquarters level marketing, manufacturing and engineering units were phased out. Pricing policies were established by committees of affected line managers, not marketing experts. General managers of the twenty four strategic business units selected the new products they will develop and the technologies they will build into them. And to keep the remaining staff groups in check, an ongoing system of competitive benchmarks was instituted to monitor their size. Much of Xerox's rebounded performance since the reorganization was due to the success of these changes.
Corporate staff, a new endangered
The W.R. Grace reductions were motivated by earnings declines. Acquisitions and mergers also fuel staff streamlining. When "Hubie" Clark bought Envirotech Corporation for Baker International he also inherited its 154 person corporate staff. Wanting to maintain Baker's lean headquarters philosophy, he only allowed three to remain at headquarters. Twenty others were reassigned to positions in the operating units, and the rest fired.
Headquarters staff such as these have been frequent targets of workforce reductions and reorganizations. At times these cuts have reflected the needs of their company's strategic plan, but increasingly they are finding their jobs at risk because their contributions are hard to quantify or defend.
This chapter and the one that follows suggests some ways to pinpoint downsizing opportunities, assuming a review of the company strategy suggests they are appropriate. Too many companies embark on overhead reduction efforts loosely targeted at "middle management." Directed at what Roger Smith of General Motors calls the "frozen middle" these thawing projects too often fail to distinguish between the problems caused by excess staff professionals and too many management layers. Each requires a different diagnosis and a special form of treatment. This and the next chapter considers the problems related to staff size, the chapter that follows them deals with management layering. Eight alternatives for measuring staff performance are reviewed here and some guidelines for ongoing direction of staff work presented in the next chapter.
But before we look at ways to trim staff it is useful to understand exactly who they are, where they came from, and what they do.
Who are "headquarters
The military is usually credited with creating the distinction between "staff" (thinking) and "line" (doing) work. The headquarters general staff, safely kept away from enemy fire and able to see the "big picture" was to do the thinking and planning. This left the troops, facing the enemy on the "line" of battle, free to do the actual fighting. Perhaps this differentiation began when some astute general realized that there was a scarcity of soldiers rating high on both brains and brawn. More likely it took hold when the general realized he needed help coordinating the logistics and battle plans of widely scattered armies. Legions protecting the far flung Roman Empire were organized in this fashion in the First Century A. D. Kings and Popes relied on councils of closely trusted advisors throughout the middle ages and beyond. The success of the strong Prussian General Staff in the nineteenth century helped insure the popularity of the line/staff distinction in the military; it was quickly imitated by the most advanced part of the contemporary commercial sector, the early railroads.
The building of the railways throughout the U.S. and Europe in the middle of the nineteenth century required a more elaborate form of organization than was provided by the craft guilds and family owned businesses that controlled most of industry then. The unprecedented complexity of constructing and operating the early railroads caused their founders to look toward the military for personnel experienced in operations that spanned a large geographic area and required healthy doses of coordination and communications. They brought with them the style of organization to which they had become accustomed. Geographically based divisions were created to oversee the building and running of the trains and track. Back at the home offices smaller policy and procedure setting groups of more analytically inclined employees planned the timetables and locomotive maintenance programs that were followed in the divisions. Teams of inspectors from headquarters regularly traveled throughout the railroad systems to evaluate compliance with the policies and procedures.
The railroads, in turn, served as an organization role model for the development of many large scale industries. By the time General Motors, DuPont, and Sears adopted their divisional organization structures in the 1920s and 1930s, the concept of a headquarters staff was well established in many U.S. companies.
A common way of distinguishing staff from line in modern corporations defines line functions as those concerned with designing, making, selling and servicing whatever a business has to offer. All other organization units, with the exception of the executive superstructure, are staff. This approach has the virtue of simplicity, but this definition must be applied with some flexibility. Some companies with a relatively stable configuration of products view engineering and product design as primarily staff work. Other firms, such as those in pharmaceutical manufacturing or biotechnology, have their business results and stock price directly determined by the new products in their R&D pipelines. For them it would be difficult to argue that the product design function is a mere support or advisory service to their line operations.
In other companies the line/staff distinction is even less clear cut. Most observers slot the legal department firmly in the staff category. But MCI's legal unit in the 1970s was its key competitive weapon against AT&T. Its lawyers, not its sales force, were the key to MCI's ability then to enter future markets. These attorneys also served a product design/R&D function as they helped shape the nature of the deregulated services that MCI would be able to offer customers. This was certainly "line" work.
Likewise, the McDonald's Corporation's famed Hamburger University is not a typical headquarters support service. Its staff, and those that prepare McDonald's detailed instruction manuals, have a significant line role in the successful operations of the company. McDonald's makes money when its franchisees make money. Its market strategy is based on quality and consistency of service and product. Because of the franchise arrangement, headquarters lacks direct reporting control over the people who produce the product and service. But its control of the content of the franchise-mandated training programs allows it, at arms length, to standardize these people's behavior to execute its worldwide market strategy.
At American Airlines, the information services department which runs and updates its SABRE reservations system is a key element of its competitive strategy. It made possible the introduction of the first frequent flyer program; its increasing sophistication and well managed data base allows American to maximize airplane revenue by carefully rationing the number of deep discount seats it offers. It is doubtful that computers would have served as a strategic weapon if American had managed its information function as a traditional back-room support staff.
As corporate strategies change, so can the definition of what is staff work. Throughout much of its history the American Can Company's primary business was container manufacturing. Its MIS unit was appropriately a staff function. By the mid-1980s through a major program of divestitures and acquisitions it had restructured into a major financial services provider. In its turbulent, deregulated new business information management plays a much more critical role to its economic success. MIS now has less of a supporting and more of a line "manufacturing" type of role in American Can's new business constellation.
The staff/line distinction is still useful, especially when trying to determine how many of each are necessary. But it must be made with care. A key consideration is the strategic role of a suspected staff unit. If it adds as much value in the company's competitive arena as some of the traditionally regarded line responsibilities, it may deserve to be considered as an operating function and managed accordingly. One clue to its potential for competitive value added is to ask: "how close to our customers are the operations of this staff group?"
MIT economist Lester Thurow has pointed out that while the total U.S. economic output rose only 15% from 1978 to 1985, the number of accountants on corporate staffs increased by 30%. He found this staff increase even more puzzling because this was a period of heavy investment by many companies in automation of their accounting functions. He concludes than spending money on productivity improvement for some staff functions can have the opposite effect; for the accountants its net result was to increase the frequency and number of the accounting reports they generated.
Jack Reichert, Brunswick's president who has cut his headquarters staff almost in half, criticized accountants more bluntly: "We've been rewarding bookkeepers as if they created wealth. U.S. business has to make more beans rather than count them several times."
Accountants and other staff professionals have become popular villains. It has become obligatory to blame at least part of America's competitive economic decline on "analysis/paralysis" brought on by too large or powerful staff units. The situation at Xerox headquarters illustrated this. Staff groups are also seen as adding extra steps in decision making processes, steps that take time and slow reaction to competition. They are also blamed for overanalyzing some situations - the problem not being the quality of their analysis but the tendency of their executive clients to substitute the analysis for action.
Many decisions executives make, especially those that set a company's future direction, must be made with incomplete information. The consequences of this can provoke feelings of anxiety in even the boldest CEO. The anxiety is compounded by the prevalence of mistrustful win-lose corporate cultures which require correct decisions to be made all the time. A common way to deal with these pressures is postpone the decision. The existence of large, bright and eager analytical staffs has provided more than one executive with an escape valve. Sometimes the extra analysis is helpful. Even if it does not surface new insight it may provide time for a consensus to emerge that makes a decision more implementable. But, as executives in the auto, oil and steel industries have found there are some problems than cannot be "analyzed out of."
At times staffs have been accused of sins much worse than excessive analysis. Their ready access to senior executives has given rise to fears of the Rasputin Syndrome. Grigori Efimovich Rasputin was a Russian monk who used his position as religious advisor to Czar Nicholas II to provide advice on the management of the Russian Empire than far exceeded his staff brief. His ability to captivate and mystify his monarch has been compared to that of some contemporary practitioner of equally esoteric strategic planning techniques. Unfortunately his efforts to prop up a weak CEO led to Rasputin's intense unpopularity with the Czar's group executives and eventually these noblemen arranged his downsizing.
Good operating executives are focused on the needs of their factories, sales forces, suppliers and - most significantly - on their customers. This implies less time to be concerned with headquarters politics and currying favor with the top brass. All well and good, but at times distance from headquarters can lead to suspicion of those who are closer. Some line executives become concerned that staff may too easily abuse their easy contact with top management, others are more concerned about the monopoly position some staff have taken when they are a chief executive's only source of information about a critical issue affecting the company. Often their worse fear is that some well placed staff may form alliances with other line executives: against their capital appropriation requests, against their needs for a bigger sales force, or even against their promotion prospects.
Even staff that have been able to avoid criticism for being overly political have found themselves attacked for what they are not. Arch Patton, a retired consultant and expert on executive compensation, has been critical of American companies that have given too much pay and importance to staff professionals at the expense of line managers. He thinks too many companies have emphasized "thinking" jobs over "doing" jobs, resulting in second class factory management and performance. He quotes a Japanese electronics executive as saying: " The U.S. puts its best minds to work in staff jobs and has for years. Bright people have gotten the message. The avoid line jobs. Japan, on the other hand, wants its brightest men in line jobs." Patton has noted that compensation surveys listing companies' top paid 25 jobs frequently have more staff than line positions in them.
Ironically, some staff jobs have suffered from the opposite criticism. In some companies they are reputed to be dumping grounds for poor performers, safe places to keep them out of harm's way. Personnel departments have especially suffered the reputation of being places to send line managers who have gone "soft." Fortunately the expectations on line managers have changed and the human resource function professionalized to an extent that little room is available for non-contributors. Outside the U.S., though, this holding area for marginal performers is still common. This is graphically illustrated in the headquarters building of a Latin American energy company. Lacking any company provided retirement plans, and not allowed by government decree to fire anyone, the firm has established a special administrative unit that occupies an entire floor of its headquarters. It serves as a home for weak performers, the oil company assuming it is better to keep them concentrated in one place rather than scattered throughout the business where they may get in the way of ongoing operations. This practice seems to work for that company, though it is one of questionable emulation.
One final concern expressed about headquarters staff is potentially more serious. "What has always frustrated me about staff is that the people you want solving problems end up administering," says Charles Knight, Emerson's Chairman. Over time staff work seems to evolve into management work. Some astute companies take this as a signal to rotate the staff member or rethink the unit's responsibilities, but too many just tolerate it. The results are confusing blurred or multiple lines of authority and lowered management morale.
Some chief executives have done more than tolerate this practice, they have consciously built their management systems around it. Most well known of these was Harold Geneen, International Telephone and Telegraph's chief executive for two decades.
Geneen's number driven management style was shaped by a relentless search for "unshakeable facts." He used infamous periodic meetings with his management group to probe deeply for difficulties and potential performance problems in ITT's operations. He used staff groups to serve as checks and balances on his line managers. Geneen mistrusted any single source of information. He established a second channel of information by having his divisional controllers report directly to the chief controller at ITT headquarters, not to the general managers of the divisions in which they worked. He also set up a worldwide matrix of "Product Group Managers," staff analysts who tracked product sales and development across division and subsidiary lines. They provided a third data pipeline Geneen could use to verify the correctness of the data he received from his line managers. Overlaid on all of this were special task forces, set up to deal with emerging business problems. They sometimes competed with each other and divisional management to provide solutions.
This system made life for line managers like working in a goldfish bowl constantly monitored by closed circuit TV and underwater sonar. Many staff received individual performance bonuses keyed to how many problems they solved and how many line management mistakes they detected. This created a global adversarial tournament over which Geneen presided. He was happy with the contention the system generated because it put him in the middle of multiple streams of information. It played to his strong ability to master countless details and put him at the center of all major and many less than major decisions.
After Geneen retired in 1979 it was difficult for any successor to maintain the delicate balance of staff and line that he thrived on. They have also found it difficult to maintain the business results the company achieved during his tenure. In recent years ITT has exited from many businesses, including more than half of its worldwide telecommunications business where it once had unquestioned strength. The French purchaser of this business, Compagnie Generale d'Electricite's Pierre Suard, believes its economic performance was retarded by remnants of Geneen's top-heavy management structure. Suard's first step: laying off many of the headquarters staff who came with the acquisition and preparing plans to eliminate several thousand additional staff and managers.
We have covered a broad range of problems that companies have had with headquarters staff. Some of these criticisms are well warranted, although the responsibility for them seems to be most fairly shared by both staff and the managers who use them. They have all contributed to make headquarters staff a popular villain, and in some companies, a logical downsizing target.
A misunderstood culprit
Henry Mintzberg, a management professor at Montreal's McGill University, has developed a useful framework to help distinguish two types of headquarters staff. One type makes up a company's technostructure, the group of analysts, planners and regulators whose primary purpose is to assist management control and standardize the work of other employees. Let's call them the Control Staff.
Control Staff perform functions such as strategic planning, financial management, internal auditing, materials management, industrial engineering, and regulatory compliance monitoring. These are the writers of the policy and procedure manuals. At the plant level these are the industrial engineers, production schedulers and purchasing agents.
The others are Support Staff. They exist to provide services wherever needed in the company. These range from operating the company cafeteria to getting out the payroll. The employee counseling center, the mailroom, the computer center, and some R&D labs are operated by support staff. They also receive visitors, guard the factory gates, and clean the floors.
The labels "Control" and "Support" apply to specific responsibilities, not necessarily to entire departments. Care must be taken in using them. In some companies the primary role of the legal staff is to serve as an early warning watchdog, a control function. Other companies, with less difficult legal and regulatory situations, encourage their legal counsels to take more of a service providing stance toward their internal clients. Public relations units are often charged with establishing rules that line managers must follow when talking to the media and with maintaining company-wide graphic design standards. These are Control Staff jobs. But the same units provide editorial services, publish annual reports, and write the employee newspaper.
The human resources department has a divided existence. It has both control and service responsibilities. It establishes and enforces a wide range of personnel rules and helps ensure compliance with many government regulations. It helps control labor costs through union negotiations and contract monitoring. It is often expected to represent management's wishes to the employees.
But it also is expected to represent employees' concerns to management. Providing this service well is often a key to maintaining a union-free environment. It conducts attitude surveys to keep line managers informed about employee morale. It monitors changes in the labor market to help anticipate future worker shortages. It helps managers attract new recruits. It helps employees deal with alcohol and drug abuse, it advises managers on how to improve performance and productivity, and sometimes it helps executives change the corporation's culture. These are all Support Staff functions.
Human resources is also often responsible for providing training and orientation. Is this a job of Control or Support Staff? In most companies training is operated as a service to line managers and, occasionally, as a way to help employees advance their careers. But some firms, IBM being the most frequently cited, actively manage their training programs to serve a control function. They use orientation and training as a way to socialize new recruits, inculcate the company's values and procedures, and reinforce doing things the way the company wants them done. Training in these companies is mandatory, not an optional bonus. When done regularly and well it can eliminate the need for some Control Staffs (more on this in Chapter Eight).
Each type of staff has different ways of relating to the rest of the company. Control Staffs have clients (usually senior executives). They guard their interests by doing things that affect the work of the staff's "targets of control" throughout the business. Support Staff tend to have managers rather than clients. Their efforts are directed at serving internal customers.
Control Staff units are populated by knowledge workers and professionals. Often these professionals have dual loyalties. They respond to the needs of their employer and the influence of their profession. Later we will consider the importance of managing these two tugs on their attention. Much of the post-World War II growth in staff size has been in these units. Many of the complaints reviewed earlier about headquarters staff have been concerns about Control Staff.
The size of many Support Staff groups has also grown, though possibly at a slower pace. As many of them try to stay on top of the latest developments in their individual fields, they tend to expand the scope of the services they provide. Because many of these functions are centralized at headquarters their budgets are allocated by formula to operating divisions and they receive less scrutiny than do the individual operating budgets. This has allowed their size to escalate as long as overall corporate earnings increased. William Johnson, IC Industries' chief executive and strong believer in a lean headquarters staff, comments: "Unless you watch things closely, they will centralize and grow, slowing communications and creating new errors and inefficiencies."
Why all this attention to labeling staff responsibilities? Because each poses different issues that need to be considered when identifying downsizing opportunities. Without considering these differences, as is common in demassing-style reductions, it is possible to discard the baby with the unneeded bath water. The babies, in this case, are often some critically needed Control Staff.
Some General Downsizing Guidelines for Headquarters Staff
Focus on ways to measure and improve the productivity of those who remain; use computers and telecommunications technology in ways that decrease their size, not expand their scope. And, what is sometimes most important in companies prone to demassing, identify which few Control Staff are going to be most critical to the company's future management. Protect them. You do not want to create the situation the American Productivity Center has warned against when divisional vice presidents become "judge, jury and hangman."
As we have noted, some staff departments include both Control and Support Staff components. Before they are streamlined these functions may need to be separated. For example, when Xerox examined its headquarters marketing unit it found it performed Control Staff responsibilities in setting pricing policies and served as a Support Staff in the corporate advertising and sales promotion areas. The Control Staff work was delegated to a committee of line managers which was still charged with maintaining needed corporate consistency. The advertising and promotion activities remained centralized because they required specialized talent as well as company-wide coordination, but were moved to a new home. The marketing unit itself was abolished.
Pure Support Staffs are often easier to slim down. It is usually much simpler to reduce their size by contracting outside for their services than it is for Control Staffs. Training courses and food management services are easier to contract for than internal audit and purchasing. It is also often easier to live without some staff services than without some control groups. Some Support Staffs are also easier to decentralize to profit centers where their customers can more easily decide what they need and how much they can afford to pay. The rule for many Support Staffs at the Allied Corporation, when its headquarters was slimmed, was that the divisions, called "companies" , were told to absorb or lose their services. Some Support Staffs also need protection from downsizing. These are usually ones closely tied to a line function that helps differentiate a company from its competitors.
At times Support Staffs build up their own management hierarchies. They become, in effect, miniature production operations. The tactics described in Chapter Six can be applied to lower the cost of managing them.
The difficult job of evaluating
Objectives can be set for Control Staff, but it is often hard to link these with the company's economic performance. And often the most significant feature of good staff work is that it kept something bad from happening to the company. But how can we measure bad things that did not happen?
Many executives rely on their personal judgment and the word they hear from the company grapevine to measure their staff. The performance review sessions they hold with staff managers frequently take on a very different tone than those they have with their line executives. With operating executives these discussions can quickly zero in on last year's economic results and next year's plans. Budget performance and profit contribution numbers are all out on the table. But with staff the economic issues are more overhead control than profit contribution, and while budget performance can be evaluated the real issue is more often how to determine the appropriate size of the budget. And this is where the performance review can get stuck.
These sessions are also difficult because of the dependency, often unadmitted but usually felt, many executives have on their staff experts. In some cases sessions to plan a staff's activities for the upcoming year start with the executive admitting:" You're the expert. Tell me what we should be doing in...." The well meaning answer to "what we should be doing" may be more than the company can afford or can really use. Less frequently does the executive feel comfortable enough about the staff manager's responsibilities to start with: "Here's what we need from you and your group."
In spite of these difficulties downsizing forces executives to make judgments about staff performance. At worst these evaluations are subjective and political, at best they involve an assessment of the current and future value each staff function adds to the company. A variety of methods have been used to plan staff downsizing. Some are more comprehensive than others. Some are based on careful anticipation of the business's future needs and the kind of organization it must shape to be successful. Others are quicker and dirtier, and more oriented to cost cutting than organization building.
In the sections that follow eight of these approaches to staff downsizing are reviewed. All can help pinpoint excess staff. They suggest targets for pruning based on answers to these questions:
- Are they doing what they are supposed to?
- Are they keeping to their budget?
- Are they improving their productivity?
- How much would be spent if their functions had to be restarted from scratch?
- How does their size and cost compare with that of other companies?
- How do the details of their performance compare with other staff groups?
- How do their customers think they are doing?
- How much do their activities really cost?
1. Meeting objectives
The main problem with using MBO performance to select staff to downsize is that the objectives themselves may not necessarily reflect the issues most critical to the company. As suggested earlier, staff performance objectives, lacking a bottom line in common with other units of the business, are frequently very inward looking. It is possible for a staff unit to meet all its objectives and still play only a marginal role in the company's economic future, while at the same time another staff department misses several MBO's but still makes a more solid contribution to the business.
So for this reason objective achievement is usually a weak way to pinpoint cutback targets, but it is a common tool used to help manage the actual reductions. Reduction targets are frequently specified in total dollars saved and we will consider their use in the section that follows. Too often, though, these targets are more narrowly expressed as payroll dollars or head count targets. Both can cause problems.
Asking all managers to cut head count by X% is usually an inefficient way to downsize. It is wide open to game playing such as firing several recent hires or support staff while leaving more tenured, high salaried low performers in place. Usually the most convenient people to let go, go. Focusing on head count puts management's attention on the wrong issue. They select downsizing targets based on the relative ease of terminating one person over another, rather than by first considering in detail what staff work needs to be done and what is adding limited value. One chief executive lamely explained that a 5% reduction of staff in each department was a way to give his managers practice in laying off people because he expected much deeper cutbacks would be needed in the near future.
Setting objectives keyed to payroll ("a company wide reduction of 15%" or "every department will cut its payroll budget by 11%) is a little better. For departments where 80-90% of their costs are salary-related there is not much else to cut, but for other situations these may be too narrow. Like head count measures they put initial attention on people rather than the work they are doing. It is possible to take a big chunk out of a department's payroll without really improving its effectiveness or net contribution to the business. Later we will consider techniques that deal with these issues.
Games can also be played with payroll budgets. Their size can go down while expenses for contractors, consultants, computers and overtime increase to the point of zero net savings. Cuts may be made too deeply and newcomers eventually hired to do the work of those laid off, bringing with them harder to measure but just as real expenses for recruiting, training, and diminished productivity while these new hires come up to speed.
Payroll cutback targets can be supplemented with others that are more performance related. For example an engineering manager can be asked to "reduce the staff involved in new product design so the development cycle is reduced from X years to Y months," or a marketing staff to "cut in half the time it takes to respond to competitors' price changes." Achieving both statements may require staff cutbacks but at least they focus on the ultimate benefits the company wants to achieve.
At times the benefits to be achieved are primarily cost reduction. Then it can make sense to express the objectives in terms of budget dollars saved.
2. Keeping to the budget
Then the annual budget preparation process turns into a form of decentralized downsizing. Rather than expecting senior executives to identify detailed cutback targets, all staff managers are charged with submitting budgets at some level below the current year's. Shortly after General Electric acquired NBC a 5% across-the-board reduction was ordered for all departments. Requests such as this are usually called edicts by the managers charged with implementing them when they explain what is going on to those affected. They are often useful when top management is faced with the need to quickly reduce costs without having the time to analyze operations in detail to find the fat to cut. They are blunt tools, most appropriate in times of financial emergency.
Downsizing by considering ways to reduce a department's budget does offer some advantages over head count or payroll reduction targets. A unit's entire budget is open for examination; jobs may be saved by reducing money spent on travel, rent or equipment. Overtime and part-time help can be cut before regular employees. Computer services may be purchased at less cost than buying the actual machines.
A New Jersey-based pharmaceutical manufacturer used a modified version of this process to cut several hundred thousand dollars out of each of several headquarters staff groups. Faced with an upcoming loss of patent protection on one of their main moneymakers, their top management set cost reduction targets for all non-R&D headquarters units. But rather than specifying how the money was to be saved they encouraged each department head to convene committees that represented a cross-section of workers in each department. They were told of their department's share of the cut and were given several months to plan ways to achieve it. The human resource planning function provided data to the committees and also helped facilitate their meetings. All aspects of each department's operations were examined from the ground up - the first time this had ever happened for most of them and the first time for any that all levels of employees were invited to dissect the budget and spending history. The employees were told the company was firmly committed to budget cutting but not necessarily to doing it by firing people. The committees took this policy as a challenge and eventually developed enough cost cutting recommendations that the reduction goals were met without any terminations. But steps were recommended that lowered a number of employees' compensation.
After the committees considered all the obvious non-salary costs most found that their departmental targets were impossible to achieve without doing something about payroll size. A detailed work flow analysis identified a number of responsibilities that could be done with fewer people. Several jobs were suggested to be combined, some employees chose to work part-time, and restrictions on overtime and hiring to fill vacant positions were imposed. Several employees were downgraded in salary level. Bonuses and salary increases were eliminated for a period of time. Across-the-board pay cuts for all levels were also considered, but did not need to be recommended
The remarkable aspect of this drug company's approach was its reliance on employee involvement. Without it and the strong feelings of team spirit it helped produce, many of the suggestions for work-rearrangement would have been impossible to plan, and worker willingness to take pay cuts to save their jobs and those of others would have been impossible.
Unfortunately this company's story does not have a completely happy ending. The company's skill in human resource management was not matched by capabilities in managing timely development of new pharmaceuticals. Another, more severe budget crunch arose several years after the first reductions and a number of headquarters staff were let go. Still, the company's earlier termination-free cutback experience helped employees understand better the situation and the need for more drastic action. Morale was maintained because employees did not have lingering resentments that co-workers were losing their jobs while executives still flew first class and were paid sizable bonuses.
This experience does suggest that while extensive employee involvement can help identify opportunities for saving single digit (or mid-teens) percentages of budget costs without layoffs, deeper headquarters staff budget reductions usually imply job losses. Employee involvement is critical to another aspect of belt-tightening though, the achievement of continual productivity improvements.
3. Doing better than before
The productivity of Control Staff is harder to manage, but not always impossible. The first step is to strip away some of the excuses used for "why we are so different." Some will complain their productivity cannot be improved because so much of their work is on "one of a kind " projects. Maybe true, but even on these assignments many staff employ similar techniques that are amenable to being done more efficiently. Few staff, even those constantly at work on "special assignments," need to reinvent better versions of the wheel each time.
Other staff will proclaim they are Professionals who can hardly be expected to be managed along the same lines as mere workers and managers. Perhaps they need to be reminded of the productivity revolution now affecting lawyers and doctors. Faced with increased competition among attorneys and severe health cost containment pressures, both professions are reconsidering their traditional ways of getting work done. They are investing in productivity improving automation, creating new sub-professional jobs to do the high percentages of their workload for which they are overeducated, and starting to stress problem prevention over litigation and surgery. Some of these lessons may well be translatable to headquarters staff.
4. Zero based evaluation
Levi Strauss and several other companies have used this method to plan headquarters cutbacks. President Carter attempted with mixed success to introduce it to help control growth of the federal government. Results there were limited, partially because it was overlaid on top of rather than in place of many of the existing budgeting procedures. It was also susceptible to political manipulation. Bureaucrats would create decision packages that combined impossible to reduce functions with marginal contributors.
Zero based budgeting is difficult. The amount of analysis required to do well makes it a time consuming process that does not reflect the urgency with which many companies are downsizing. But in some situations, especially where a company's future is uncertain and there are no obvious next steps to take regarding staff functions, it can be helpful. The fresh perspective it provides is often superior to the way many companies plan changes in staffing levels: just incremental changes from the status quo. When done well the zero based approach forces a reconsideration of everything. Units are spotted that served a useful purpose in the past but are now presiding over solved problems. It is more likely that creative new staff configurations will be invented using this approach than those more incrementally oriented.
Keys to successfully using zero basing include not attempting to use it on every staff department at once. It is too easy to drown in paper and analyses. Pick one or two functions worthy of careful, fundamental rethinking. Also, do not make this an annual exercise. It disrupts ongoing operations to have to rethink their raison d'etre every twelve months. It is also hard to keep inventing fresh, creative alternatives that frequently.
One aspect of zero based analysis worthy of use by many companies is make-or-buy analysis. As mentioned earlier, it is often possible to find alternatives in the external marketplace to contract for Support Staff work now done in-house. Common targets are building maintenance, cafeteria operation, and security guards. But, as we will consider in Chapters Eight and Nine, work such as industrial engineering, systems analysis, the medical department, and in some cases entire factories can be purchased as needed. Some headquarters functions such as legal and public relations usually have long established ties with outside service providers. Regular reviews of what work needs to be done in house and what can more economically be handled outside should be done. The large internal legal staff that made good economic sense when law firm bills were skyrocketing may not be as cost effective in a time of negotiated fees and heavy competition among many firms. Likewise significant changes in the labor supply in key professions and trades should necessitate reconsideration of how many need to be on your payroll.
Production executives often conduct this kind of analysis of their companies' operating departments, but much less frequently are outside alternatives sought and evaluated for headquarters staff. Often the senior executives to whom they report are preoccupied with other aspects of the business. Given the disincentives most job evaluation systems put in the way of staff managers to reduce the number of people reporting to them, it is not always reasonable to expect them to initiate this kind of study. Regardless, it offers a useful yardstick to evaluate cost effectiveness and an alternative to bloated staff organizations.
With the exception of make or buy studies, the techniques reviewed so far all are inward looks at staff performance and size. They can frustrate executives looking for an external confirmation that they have an appropriately lean staff. Many of them want outside norms or standards to use to help make this judgment.
5. Norms and ratios
"One human resource staff per 100 employees is about right."
"Total headquarters costs should never exceed 1.5% of revenues."
"Computer related expenses should remain below 1% of sales."
Several industry and professional associations build and maintain extensive data bases to help their members know where they stand in relation to similar companies. Frequently the first question a client asks of a consultant is to provide a set of ratios to see if their staffing is appropriate. While these can be helpful indicators, more often than not they can be deceptive. Too much attention to them can cause an executive to ignore the real staffing-related issues.
To illustrate these difficulties lets consider how staffing ratios were used by a corporation in the chemical industry which we will call Company X. This company is relatively large with sales in the billions and employees in the tens of thousands. It has always been profitable with sales revenue growth each year since it began operations. But recently its top management raised concerns about growth in several of its core businesses leveling off and wanted to be prepared by ensuring its overhead expenditures were no larger than absolutely necessary. Because labor costs made up 80% of this overhead the director of its human resources department was charged with conducting a cost analysis. To demonstrate impartiality he started with his own function first. He decided to compare its size with that of several peer companies.
He first calculated the ratio of his human resource staff to the total Company X employment. This was not as straightforward as he thought because Company X owns several recently acquired subsidiaries which account for about a quarter of total employment. Each has its own personnel department which duplicates some functions provided by his central organization. Gradually functions are being transferred to his staff and the subsidiaries' overhead reduced. After calculating the ratio several ways he decided the simplest approach would be to lump all employees and all human resources staff together. He felt reasonably comfortable doing this but he was starting to realize that an initial problem with ratio analysis is that it provides a static picture of a dynamic situation.
He wondered how the other companies he was surveying handled this situation. One of his peers in these companies said he was glad to share data but he had to confess that, because of recent acquisitions and a plethora of unincorporated subsidiaries, he had no real idea of how many human resources staff he really had. The data he was able to provide were for headquarters staff only. While the Company X director thought this was better than nothing, he started to wonder if he was going to be comparing apples to oranges.
The six companies selected for this comparison were carefully chosen. The human resources director started with companies in his industry assuming they would have similar organizations and staffing mixes. He picked three companies that he knew his chief executive regarded as the best managed in the business and included one of Company X's chief competitors. He also selected a company that was frequently cited in the business press as a paragon of excellence in human resources management.
Unfortunately, his assumption that these companies were similar was only partially correct. Even though all seven were in the chemical industry, several were moving in divergent strategic directions. Two were changing their product mix from commodities to specialty chemicals. Another was exiting from manufacturing and evolving into a distribution and sales company. And one company had started a diversification program of acquiring firms outside the chemical business. All these strategies had implications for the companies' mix of employees and they created differing workloads and priorities for their human resource departments. Company X's human resources director wanted to avoid the problems inherent in comparing his firm with industry averages made up of data from hundreds of companies. But he created other difficulties using a handpicked group of companies because that sample was too small for hard- to- anticipate strategic differences, such as these, to cancel each other out.
Still he felt these were the best quantitative reference points available - which was probably a correct assumption. His real concern began when he considered how Company X compared with its peers. Its staffing ratio, 1.38, seemed on the high side when the average of the six was only a little more than one. He also noted with alarm that three of its peer companies managed their personnel programs with less than one staff member per 100 employees, and that one of these had a ratio three times as "good" as Company X.
Discouraged because he always thought he ran a lean operation, the director started to plan ways to shrink his organization by 25% to bring its size closer to that of its peers. In the face of such "hard" data he felt he had little choice given the cost cutting objectives of his numbers oriented top management.
Was he making accurate judgments? Not completely, for several reasons. Data such as these are useful to help suggest questions to ask about your operation, but it is risky to use as the basis for final decisions about the need for and size of cutbacks. Let's consider in more detail than his quantitative survey provided the situations of the individual companies.
Company A does have the most impressive staffing ratio. But it also has the largest workforce, more than double the size of the next company in the comparison. This allows it to achieve some economies of scale in the personnel function - it often takes as many benefits planners and procedure writers to deal with a workforce of ten thousand as a hundred thousand. This company, through an expensive investment in management training that does not show up in these ratios, has been able to decentralize some routine human resource staff responsibilities to its line managers and thus limited the number of its central staff.
Company B manages its human resource function with half as many staff per 100 employees as does Company X. But a close examination reveals that its scope is much smaller. In Company X the human resources department is responsible for plant security, receiving visitors, staffing the company cafeterias and running the medical department. None of these activities are included in Company B's human resources organization. Its medical department is grouped with plant safety and product toxicology functions into a separate environmental assurance department reporting directly to its CEO. Its cafeteria services are staffed by outside contractors.
Company C also has a below average staffing ratio. But based on the number of equal employment and sex discrimination law suits that have been filed against it, it is not clear that it has enough staff in all areas. This company does little in management training and its lack of a periodic employee attitude survey has its managers unaware of a steady decline in factory worker morale. An industry union has heard of the decline, and is targeting several of their plants for organizing campaigns. It is unclear Company C will have the number of skilled labor relations professionals on board to allow it to fend off the union drive.
Companies D and E with very similar ratios have very different situations. Company D's employees are concentrated in one location, making the personnel administration job simpler than in Company E which has a larger workforce scattered over dozens of facilities around the world. Company E's range of programs is also much more limited and less sophisticated than Company D's which has used automation to considerably reduce the size of its clerical workforce.
Finally, Company F is the one famous for its excellent programs. High quality, unfortunately is frequently expensive.
Considering the details of each company's situation above it is apparent that ratios can hide as much as they reveal. Factors such as investment in automation, decentralization philosophy, and geographic dispersion of plants have a significant impact on a staff function's appropriate size. The missions and objectives of staff units surveyed can vary greatly. Examining corporate human resource functions, some are engaged in major catch-up management development efforts, some in union decertification campaigns, others in expensive culture change programs. Others are run on more of a steady state, do just-what-is-required basis. Some companies have severe EEO or pay equity problems, requiring expensive staff help. Other firms have these issues well under control and are able to spend less on them. While this discussion has used the human resource department as an example, similar issues emerge when you consider staffing ratios and similar norms for other staff areas. The detailed factors to consider will differ but the same general principle holds: simple examination of ratio indicators alone will not give a clue about the factors that produce the numbers.
What good, if any, then are these quantitative norms? They are good starting points for a more detailed analysis. They can establish the ballpark in which you need to be operating. To the extent your company is two, three or more times more staffed than your carefully chosen peers they may be good indicators of excess costs. If your company is significantly understaffed, compared to others, it might be an indication that some needed work is not getting done. Regardless of what these comparisons indicate, their use should always be followed by the question: Why? These norms are blunt tools. More detailed analysis is needed to pinpoint specific targets for reduction.
Xerox, probably more than any other corporation, has made benchmarking a way of life. It is not an activity done by a cloistered group of headquarters analysts, but each divisional and departmental manager is expected to use benchmarking on an ongoing basis. The process has been eye-opening for many managers. It results have frequently forced them to set high efficiency improvement targets, 30 to 50% plus, that they might have resisted had they not been aware of how the other side operated. It provides some staff managers, for the first time, a way to measure their operations against the competition. This instills in the staff side of the business some of the competitive spirit commonly present in line operations.
Xerox has also been creative in gathering information to use as benchmarks. When information about competitors was not easily available, they went to great lengths to identify the best-run companies in noncompeting industries. To develop benchmarks for their logistics and distribution function they examined the details of L.L. Bean, Inc.'s warehouse system. While data about the internal workings of some Japanese competitors was difficult to obtain, they were allowed easier access into the operations of their affiliate, Fuji Xerox.
General Motors and several other companies have found that joint ventures, especially those run by the Japanese, offer good sources of benchmarks. And GM has not had to go all the way to Tokyo for the reference points. Its Fremont, California joint plant with Toyota (run by "New United Motor Manufacturing Inc.") has provided lessons in organization as well as revenues and profits. Many companies have set up partnerships with large overseas firms as well as with lean domestic entrepreneurial high technology businesses. These are usually intended to serve as windows to new technologies or markets, but they can also provide challenging benchmarks to help improve staff performance.
Some companies with large operations scattered widely around the world have been able to develop their benchmarks internally. IBM has been able to take advantage of its size this way through what it calls a Common Staffing Study (CSS). Intended to help monitor and improve the efficiency of IBM's non-manufacturing staff, it characterizes a function's productivity at one point in time and then periodically repeats the measures. The functions include personnel, engineering and finance. It involves four steps:
- First, IBM-wide common descriptions of the generic tasks done by each staff group are prepared. At one point IBM identified 160 such tasks in fourteen common staff departments.
- Then what IBM calls "modifiers" are identified. They are the factors in manufacturing that cause indirect work. Over 100 of these have been cataloged. For example, IBM has found that increases in a plant's workforce usually cause increases in the size of the secretarial workforce. Likewise the size of the personnel department is driven by the number of people it serves.
- Exhaustive annual surveys are conducted at plants and other locations about both the resources needed to do the tasks and the modifiers that may affect them.
- Statistical analyses are conducted at IBM's Armonk headquarters of all survey data. The key ratio calculated for each activity at each location is people per unit of modifier. While both secretaries and personnel staff may increase as a plant expands, the analysis may show a steady secretarial increase but an irregular, step increase in personnel professionals. This analysis could suggest optimum plant sizes to keep from growing just past the threshold where additional, costly indirect staff must be added.
Comparisons are then made among plants and from current to previous year for each plant. Locations doing especially well in managing a particular activity are given visibility and recognition. Other facilities are challenged to do as well as them. This monitored internal competition helps keep the rolling productivity averages moving upward from year to year. The data also serve as useful inputs to IBM's manpower planning. As mentioned in Chapter Seven, IBM has found techniques such as CSS vital to maintaining its full employment tradition.
As would be expected at IBM the data and analyses are maintained in computerized files. They are accessible by all locations to help conduct "what if" analyses and to help plan staff productivity improvement. This method works well if you have a large geographically scattered operation, with similar functions carried out at several locations. If your company's scope is smaller it is possible to pool data with a group of firms, possibly creating a network that links your suppliers and customers.
7. Consumer ratings
Earlier we discussed the importance of identifying customers and clients for each staff function. Staff are corporate early warning systems and part of their value is the perspective they bring from their professional specialties. But they are often most useful when they keep in mind that their primary purpose is to advise, serve, and support other parts of the business.
An increasing number of companies have built line managers' evaluation of staff performance into their regular management practices. Emerson Electric's division heads have been asked to grade the performance of headquarters staff. Weyerhaeuser Co. has asked its division heads to do a zero based exercise in which they each assume they are running stand alone businesses. The object: to identify what staff they would do without. Acme-Cleveland has held staff "fries" where the managers who pay for staff overhead allocations hear justifications of staff departmental budgets as part of the annual review process.
Many other firms have involved line managers in deciding how well staff are doing through one time "participative" downsizing exercises. Called by various names, including profit improvement planning and administrative, overhead or staff value analysis, these efforts are usually motivated by a need to make significant reductions in overhead costs in relatively short periods of time. Rather than focusing on the overall budgets of staff departments these techniques attempt to pinpoint the costs of the end products they produce. By costing products rather than people they try to depersonalize a process whose outcome, though, is still frequently people losing their jobs.
Let's first consider the steps involved to pinpoint reduction targets, and then look at some difficulties companies have had with these exercises. Done carefully, the study phase of staff value analysis can easily take six months. Unfortunately many companies, concerned about its potential disruptive impact on morale and ongoing work, try to compress it to less than half that time.
First the staff departments to be considered for reduction are identified. It is useful to examine as many as possible simultaneously because their work is often interrelated. For each department a concise statement of its purpose is developed and the six to ten key activities that support this purpose are listed. The activities list should be fairly exhaustive of all that is going on in the department. Then the products or services that each activity generates are specified. These might range from preparing 2000 lunches each day to circulating a monthly budget variance report. Some "products" may be less tangible such as "facilitating six SBU annual planning sessions" or "providing advice about liability risks associated with new products being developed."
These services or products are the heart of staff value analysis so it is important they be precisely specified. The receiver(s) of each product is also identified at this stage of analysis. At times some products will be sent to other staff departments before they go to their end users; other products will require inputs from other staff groups before they are ready to be handled by the department being studied. All these linkages and interconnections need to be specified because the next step of the analysis involves estimating the total costs to the company to produce each product.
This is often the most difficult analytic task. Most accounting systems are set up to provide information by organization unit or expense type; few track the cost of staff work products especially when their "production" crosses departmental lines. Fortunately, usually most of the cost of staff work is salary-related so product cost can be estimated by approximating the time each staff member spends on a product per year. This number is then multiplied by the salary and benefits paid to each employee. To this any expenses directly attributable to individual products, such as travel or equipment, are added. Indirect or hard-to-allocate- by-product costs, such as telephone and secretarial services, are averaged by employee and then added into the product totals. The final result is a complete decomposition of each staff department's annual expenditures by service or product provided.
Developing these estimates is more difficult when inputs from several departments are required. Care needs to be taken to avoid double counting so that the grand total of product costs equals that of the budgets of all departments being studied.
When this information is assembled alternative ways to reduce the cost of each product can be considered. Options to analyze include:
- Completely eliminating the product or service.
- Leaving it alone and looking elsewhere to cut costs.
- Reducing the quality of the product. Sometimes called "de-goldplating" this may involve tolerating more mistakes, using forms letters instead of customized ones, obtaining less data before producing a report, or responding less quickly to internal customer requests.
- Reducing the quantity of the product: providing fewer and shorter reports less frequently,preparing reports that indicate only exceptions to policy, rather than providing exhaustive reviews of everything that happened.
- Making major changes in the way a product or service is provided: use outside contractors, invest in labor saving automation, combine the product with others.
These are only general suggestions, specific plans need to be prepared for each product. The intent is to find creative ways to reduce the demand for each. In some cases, several alternatives may be developed for each product, each offering different potential savings. Of course reducing the demand for some staff services, especially those provided by Control Staffs, may be popular with line managers but unwise for the corporate welfare. So along with reduction suggestions consideration must be given to the potential adverse consequences of eliminating or reducing each product. First priority would go to the easy decisions, those whose implementation brings high dollar savings at minimal risk to the business. High risk alternatives with minimal gains would be ignored or only considered if the company is forced to make severe cutbacks
As an aid to maximizing the number and dollar value of reduction alternatives considered, companies may request they be developed to achieve a high cost savings target, often ranging from 40 to 60%. These "stretch" targets force consideration of major cuts, not only incremental improvements. Targets often must be set this high to produce final, implementable savings of 15-25%.
At times some companies will, to help soften the blow of the potential reductions, allow small expansions or additions of new products or services to be proposed as long as each department achieves a net reduction. These may be useful to help substitute for ones eliminated, but more often than not this is a gratuitous part of the analysis.
Who does the analysis and makes the final decisions? This varies by company, but often task forces are set up to oversee the work. Their membership can include both providers and consumers of staff services. Managers of the staff functions being reviewed may be asked to identify products and costs, and they along with line managers from the major staff service-consuming businesses target products for reduction or elimination.
As might be expected discussion in these task force meetings can become heated and emotional with line managers pushing hard for overhead reductions while staff heads feel forced to defend their operations. For the process to work it usually requires a strong indication of support for cost cutting from the chief executive. A well thought out set of procedures for conducting the analysis and ground rules for the task force discussions are also critical to keep the process moving along. Some companies also find a tight timetable helps keep the study from getting bogged down in analysis and argument.
The result of the meetings is a list of "agreed" products and services to be cut back ranked according to attractiveness (amount of money to be saved). This goes up the chain of command for modification and final decisions. As the number of individual decisions to be made becomes very large, sometimes the opinions of the line managers who participated in the study are given the most weight and decisions oriented at finding the simplest way to achieve the greatest cost reduction tend to be made. Some executives try to short cut the process by asking their line managers to put a list together, from most to least valuable, of the staff products they receive. A composite list is made and as many of the low rated products are slated for cutback as needed to achieve the executive's cost saving target.
There are often roles for outside advisors or consultants in this process. They can facilitate the task force meetings to help keep the discussions on track and sometimes can serve as disinterested referees. At times they can help with quality control and provide formats to help task force members structure their analysis.
Techniques such as this have a number of advantages. They do solicit the views of the internal customers of staff work about the quality and importance of the work. They are participative to the extent providers and consumers nominate targets for reduction. By concentrating attention on products and services they are less blunt than across-the-board downsizing and more precise than comparing staffing ratios with other companies. Staff value analysis requires less analysis and paperwork than zero based budgeting. And it can, if well managed, provide relatively speedy decisions that lead to significant reductions in staff costs.
But the speed with which the process is carried out can have some disadvantages. It limits analysis, which itself may be forced to be based on only marginally accurate estimates. Insufficient time for building consensus or developing creative options can lead to solutions that become unstuck and feelings that some decisions were "railroaded." Moving very fast usually implies limiting the number of participants in the process, which in turn means that potentially useful ideas from lower levels of the organization are seldom solicited. Time pressures can also lead to the process becoming more political than analytical and can turn some task force meetings into "horse trading" sessions more appropriate in congressional conference committees than corporate meeting rooms.
Processes like these are intended to tradeoff cost reduction benefits against potential mishaps to the company if a critical staff job is eliminated. Unfortunately the benefits can be easily quantified in dollars, while the risk assessments tend to be expressed in mushy words. Tangible hard dollars saved are frequently more likely to sway a decision than unquantified worries.
Some companies have dismissed these criticisms by saying that if cuts are made too deeply "we can always hire them back or restart the shutdown activity." Maybe so, but the whiplash involved could have a negative impact on both employee morale and management credibility.
Techniques such as staff value analysis assume that organizations can be improved by hacking away at less needed activities. This may be true for the short run, but this assumption flies in the face of the work of many modern organization observers who stress that companies are more than lines and boxes on a chart. They maintain that the interactions among information systems, employees' capabilities, management style, rewards and incentives and structure are what leads to good or bad economic performance. These interactions are so complex that it's very hard to change one of them without eventually affecting all the others. So for a downsizing effort to be sustainable, executive attention must go to a broader range of issues than usually appear on a rank ordered value analysis worksheet.
But for companies searching for short run or one shot solutions, these value analysis and profit improvement techniques may have significant benefits.
Other companies, such as Xerox, have found ways to use internal customer ratings of staff to promote continual performance improvement. Xerox uses benchmarking to help maintain efficiency and limit size. It also charges each staff function with the responsibility of constantly tracking the requirements of its customers (other Xerox departments and employees) and its effectiveness in meeting them. As problems are identified, corrective plans are developed.
These surveys may be related to staff managers' annual objectives, achievement of which can determine compensation changes. When outside vendors are hired to provide services such as health care and relocation assistance to Xerox employees their contracts require them to periodically measure the customer satisfaction of these employees. Xerox has put considerable thought into the development of these systems. They realized that the most important constituencies of some staff, such as college relations managers, are outside the company. So they regularly survey the heads of the college placement offices that they visit to get feedback on these managers' performance. These regular evaluations are an internal parallel to the extensive customer service measurement process Xerox has in place to monitor how its outside customers perceive Xerox's products and services. They help break down line-staff barriers by emphasizing to headquarters staff the service-providing nature of what they do.
Use of ongoing internal customer surveys such as these is not limited to multinational, high technology companies. Domino's Pizza Distribution Company insists that all headquarters staff functions act as though they were in business to provide service to others. To provide feedback every user of the accounting department, for example, rates them on a scale of one to ten. Comments must be provided to justify whatever rating is given. All employees at Dominos are eligible to receive a bonus check every month. The overall size of the bonus pool is determined by company performance, an individual's share set in part by his customer service ratings. Company President Donald Vlcek discovered a side benefit from the rating process: it enables him to operate with a lean management structure because the ratings surface problems early and encourage staff and line to work together to quickly solve problems. Fewer "coordinators" and "policemen" need to be hired in this highly self regulating environment.
8. How much does it really
The process begins by assembling information about the reporting relationships of all the managers and supervisors in the units to be studied. As with the value analysis techniques, activity cost studies are often of most use when they cover as many staff groups as possible. Unlike value analysis, data is collected about line as well as staff work. This information also includes the salaries, or sometimes the total compensation, of all workers in positions studied.
While this information is being assembled a directory or dictionary of work activities is compiled. This roster of work done by all organizational units includes names and definitions of the 150-250 most commonly performed activities. One such directory included activity names such as:
- "Analysis of actual sales operating results"
- "Manage/supervise direct reports"
- "Patent litigation"
The directories are customized to include areas of most concern to the management overseeing the study. The activities listed are intended to cover all but the most trivial aspects of a unit's operations. These lists of activities are typically more detailed than the lists of end products or services developed in the value analysis process.
Then each manager or supervisor uses the directory to record the time spent either weekly or monthly on each activity that requires at least 5% of his or her time. At times the manager also records this information for the individual contributors reporting to him or her, though more accurate information is sometimes obtained when staff professionals provide their own data.
Finally an analysis is conducted to match an individual's salary with his or her time distribution. Most easily done by computer this provides the total payroll cost associated with each activity. It also provides an indication of how scattered some staff work has gotten. Companies with large personnel departments are surprised to find managers throughout the organization spending considerable amounts of time on personnel administration tasks that were supposedly assigned to the personnel department. Or they may find that four groups are each spending time gathering data and producing reports for their own use that can be done more quickly by the accounting department using its centralized data base. This duplication of efforts from this misplaced work often is very expensive as this analysis indicates when the aggregate equivalent person days are identified. Sometimes considerable savings can be made by eliminating this duplication without giving up any activities or staff products. This information, it almost goes without saying, can be of considerable use in evaluating a department's annual budget request.
Sometimes staff work is excessively fragmented. Often when a great many people are each spending a small amount of time doing something, the something never gets the concentrated attention it really deserves. Examining activity cost summaries surprises some executives when they see how many authors a capital budget or a corporate plan actually has. Activity cost studies help pinpoint areas where healthy decentralization has turned into expensive fragmentation.
This analysis produces a databank of activities and their costs that can guide downsizing efforts. A listing of the activities that account for 80% of the payroll usually illustrates the 80:20 rule that 20% of the activities in a company frequently account for most of the costs. By having a clear idea which are most expensive it is easier to find high leverage reduction targets. Often just listings of who is doing what are invaluable in considering more economical ways to restructure work. This is information that never accurately appears in position descriptions.
The next step in using this analysis is for senior managers to assess the relative importance of each more expensive activity. Some of these judgments they can make themselves, for others they need inputs from the internal customers of the staff products.
This data also provides a basis for restructuring individual jobs. An analysis of the activities done by, for example, a highly paid integrated circuit designer may well indicate a considerable amount of time going to activities that can be done just as well by less high priced talent. By assigning some engineering assistants to do these, time of the expensive designers may be freed to concentrate on higher value added work. Their total number may be reduced, their output increased or pressures to hire more of them lessened.
In Chapter Six we will consider how activity cost information might help prune overgrown management structures.
This technique has been popular with many banks and insurance companies. General Electric has made use of it in all of its business sectors. When GE examined the results of 85 studies that looked at the activities of over 75,000 salaried employees it found that opportunities for $100 million in savings were identified. Follow-up reviews indicated more than half these were taken advantage of.
As with the seven other techniques we have reviewed here, activity cost analysis has strengths and weaknesses. Both it and value analysis are narrow in the way they collect data, but each along different dimensions. Because activity cost analyses typically consider only payroll numbers, other costs such as computers, subcontractors and travel are not factored into the study. If the bulk of a staff's budget is salary this is of minimal consequence, but this is not always the case. Value analysis techniques tend to analyze only the costs of end products, even though these are estimated in ways that take account of all the intermediate products that went into producing them. Activity costs will pick up these internally oriented activities which in some cases may be substantial. In staff work some products build on inputs to others, and the real cost reduction issue is providing the inputs cheaply, not eliminating one or the other product.
The healthy skepticism many managers give to what is written in a position description needs to be carried over to activity cost analysis. Even though the data is expressed in numbers instead of words, it can be just as inaccurate and subjective. Without resorting to time and motion studies it is useful to audit or have managers carefully confirm the validity of the time breakdowns that go into the analysis.
Earlier we criticized value analysis approaches for, at times, moving too quickly. Activity cost studies, if not closely managed to keep them on track, can produce the opposite result. Unless a action plan is developed to make early use of the volumes of data and reports produced, the study's only outcome will be to raise expectations, or worries.
We realized that the biggest difficulty in pinpointing targets for staff reduction is the inherent difficulty of evaluating how well they are performing. Eight commonly used approaches to evaluate their performance were summarized. Some are much more comprehensive than others, some provide only blunt assessments while other probe the details of how staff really spend their time and what they actually produce. And some are elaborate and time consuming while others are quicker and built on many guesstimates.
Several techniques, such as zero based budgeting and staff value analysis, lend themselves to one-time uses, while others are most effective when made part of a company's regular management practices (benchmarking, consumer surveys and productivity improvement planning). In Chapter Nine we will suggest that if ongoing attention is not giving to managing staff size then the gain and pain from these one shot efforts will be wasted.
But none of these techniques is perfect. Each seems to miss a useful feature that another has. Often they work best in combination. Their inadequacies also indicate something is missing. The purpose of the next chapter is to outline another way of thinking about headquarters staff functions. It suggests a way to better compare the apples and oranges of staff work.
© Robert M. Tomasko 1987,1990, 2002