Chapter 9 Staying Streamlined Networks, not conglomerates Expert systems, not experts HR planning, not personnel admin Role of job security A demographic kicker
Excerpt from Downsizing: Reshaping the Corporation for the Future
By Robert M. Tomasko
Even with great attention to running a lean field organization and managing with it well selected and trained general managers, the Roman empire crumbled. Some blame it on repeated onslaughts from leaner and meaner competitors from the north. Others say it was due to a bloated, high overhead headquarters in Rome. In spite of the suggestions made here for giving managers a piece of the business that they feel they own, it is possible to become too far out of touch with home base. Corporate empires, as did the Roman one, will eventually crumble if continuous attention is not paid to managing a company's size. Staying downsized can be a lot harder than getting there.
The slash and burn approach to streamlining may produce significant overhead reductions in the near term. And a combination of fear and adrenalin might even keep the survivors on a common course for awhile. But sustainable downsizing, in many cases, requires a complete rethinking of the logic behind a corporation's organization. And, as they are developed, it will also require use of computer networking and tools such as expert systems. Most important, though, are the changes needed in human resource management. Career paths will need to change direction, performance appraisals acquire teeth, and pay systems eliminate their management-bias. And paradoxically, to insure continual productivity improvements more attention, not less, will need to be given to providing job security for those who work in downsized organizations.
Networks, not conglomerates
Today, for many industries, this era has ended. Companies now operate in a period of vertical disintegration, where competitive advantage comes to those not wedded to one source of supply or technology, where attempts to build corporate size through acquisitions of dubious synergy are no longer rewarded by the stock market. Organizations will resemble spider webs more than pyramids. The planning done by the large supermarket chain described in Chapter Three was oriented toward bring its organization back in alignment with its competitive strengths. This is a movement happening across much of U.S. industry.
Lewis Galoob Toys Inc. does not look like a big company. To some observers it is a very alien form of business creature. But it did sell over $50 million of toys in 1985. The ideas for the toys are purchased from independent inventors or large entertainment businesses. Engineering and design work is handled by outside contractors. The builders of the toys themselves are selected by evaluating bids from the many toll manufacturers based in Hong Kong. These businesses in turn have most of the actual work done across the border in labor-cheap mainland China. Common carrier freight lines bring the finished toys to the U.S. where they are sold through a network of commissioned representatives. The Galoob staff number just over 100, not even enough to include an accounts receivable department; revenue collecting is also contracted out. What does the Galoob company do? It manages a network of relationships. It is what the dean of the University of California at Berkeley's business school, Raymond Miles, calls "a switchboard instead of a corporation."
One of Galoob's competitors, the meteoric seller of Teddy Ruxpin talking bears and Laser Tag, Worlds of Wonder, reached over $300 million in sales in less than two years of existence. With no time or desire to build a corporate bureaucracy, it adopted an organization network similar to Galoobs'. It hired executives like Stephen Race who typifies the new breed of general manager that is cropping up in more and more streamlined corporations. He learned flexibility and independence while a management consultant where one day he would be trying to influence a rust bowl manufacturer to focus more on marketing than manufacturing, and the next be flying to Brazil to help a clothing maker improve profitability. This background also taught him skills useful in influencing people who work for different bosses in companies other than his. It is vital when one has to manage networks of contractors instead of subordinates.
These "solar system organizations," as called by some observers, have outside suppliers orbiting around a small central corporate nerve center. They may not become the organization of the future, but they certainly will be among the types that add value without adding clutter. Companies like Worlds of Wonder and Galoob are in businesses where sales can shift as rapidly as the roller coasters their young customers ride; for them it can make good strategic sense not to get over committed to fixed assets. This style of operating also makes sense for those who want to be driven by customer-pull, not factory-push. It has enabled consumer products companies like 315-person Minnetonka, Inc. (Softsoap and Calvin Klein's Obsession) to challenge and occasionally out-innovate giants like Procter & Gamble. It works when a careful analysis of value added and comparative advantage is done; this sort of planning has convinced many consumer electronics firms to leave the factory to someone else and focus their organization-building in marketing, sales and distribution. Sometimes one company's low value added is another's high: California-based Flextronics concentrates on manufacturing, procurement and customer service for electronics firms with complimentary skills.
To get enough popular Teddy Ruxpin dolls built quickly enough Worlds of Wonder had to make some in its competitor's factories. And this new twist to corporate networking is not limited to toy makers. To meet heavy demand Chrysler is having some of its full size cars built at an idle American Motors Corporation plant in Kenosha, Wisconsin. Lee Iacocca has decided it is better to rent a competitor's plant than build one he may have to painfully shut down. Moves like this, and greater reliance on suppliers to preassemble the components they provide, are helping to build what Iacocca's lieutenant, Harold Sperlich, calls a company with enough mass to be efficient, but small enough to be manageable. Ford has been following a similar strategy. Its president has decided to manage size as well as market share and be willing to "live with some shortage of our ability to get our full share in a peak year."
Giving up complete self sufficiency may be hard for some companies, but for many it will be the only way they can stay downsized. To preserve some of DuPont's cutbacks the company is starting to buy rather than develop all its own technologies. A number of established companies have found it is useful to develop close relationships with embryonic, "Silicon Valley-like" firms already at the state-of-the-art in technologies they are interested in, and contract with them to do R&D and product development. This strategic partnering (the small outfits receive money not otherwise as easily available to fund their growth) is more effective than trying to duplicate their innovative environments in the larger company. It also often has better results than directly purchasing these start-ups, a move that too often drives the creative talent elsewhere.
The corporate raider's traditional call to action, "this company is worth more dead than alive," makes more sense to turn around to say: many individual businesses under a broad corporate umbrella will not be alive and kicking until their superstructure is killed off. Some companies have had a history of not letting this superstructure form: Hewlett-Packard, Johnson and Johnson, and 3M. Others, such as Campbell Soup, have used a reorganization to limit its influence. Bankers Trust New York Corporation, long a typical banking mini-conglomerate, has become one of the leading corporate investment banks by narrowing its scope, selling off its consumer branches, and focusing its organization on what it does best. Eastman Kodak has capitalized on its 10% work force reduction, which included cutting its top management slots by 25%, by making a major overhaul in its basic organization design. This historically integrated company was broken into seventeen smaller, autonomous business units as a response to its chief executive's objective to find a way to "make a big company act like a small company."
"How big is too big?" is a question many executives are starting to ask. Like the issue we examined earlier of how many people can one manager manage, the best answer is still the usual "It all depends." But some guidelines are starting to emerge. According to Alonzo McDonald, former president of Bendix: "When it comes to motivating people, you hit diseconomies of scale early." For some companies this had meant limiting divisions to 10,000 people, factories to 1000, and offices to 100. While these numbers are arbitrary, and need to be determined company-by-company, the principle behind them is not. Ralph Cordiner, reorganizer of General Electric in the 1950s, felt it was important to keep a decentralized unit small enough that a good manager could get his arms around it. Peter Drucker has taken this advice and expanded it a little, saying that the rule is that a small group of executives "four or five maybe - can still tell without having to consult charts, records, or organization manuals, who the key people are in the unit, where they are, what their assignments are and how they perform, where they came from and where they are likely to go."
In Europe, the intellectual home of corporate bureaucracy, companies are also starting to search for ways to prune back overgrown structures. To help arrest profit and market share declines Germany's global air carrier, Lufthansa, is planning early retirement and redeployment strategies to allow it to eliminate management layers. The object is to build a company of profit centers around groups of interrelated air routes, instead of running Lufthansa as one worldwide, tightly integrated system. Another German firm, Siemens, has already moved farther along on these same lines. For many years it has been known as "Ma Siemens," Germany's largest privately owned bureaucracy. Now, under the activist leadership of a new chief executive, large - but, in the European style, layoff-less - staff reductions have been made over a several year period. To make use of the possibilities they offered, considerable management attention then went into creating meetings and other forums to bring together the managers and staff who develop Siemens products with those who sell and market them.
But, as in most regions, some companies have always managed to stay lean. The innovative French resort operator, Club Mediterranee, follows IBM's rotation scheme as it continually moves generalist staff (but of the carefully specified "Club Med mold") between headquarters and field, as well as among its vacation villages. Another French business also illustrates how a company can become big without becoming bureaucratic. Carrefour S.A., the $6 billion dollar pioneer of the hypermarket concept (gargantuan sized stores selling food and other goods), keeps its company expanding but its organization lean by decentralizing as many functions as possible to their stores. A headquarters staff of less than twenty (including secretaries) guide the business. Almost half these people are involved in the human resource management function, one of the key ways Carrefour keeps control and insures consistency in its operations. Only one layer of management is between the central office and the stores, a tier of regional managers. Each of these has, at most five assistants. Continual attention to employee training, at all levels, is what makes the lean structure work. In a typical year two out of every three workers receive some form of training; Carrefour spends over 2% of its payroll costs on these programs. Providing the training a responsibility of line managers, at all levels, not that of a separate staff development bureaucracy. Individual departments within Carrefour's hypermarkets are run as profit centers. The best performing department in a given speciality through out the Carrefour system, say casual clothing or frozen foods, is expected to play a key role in managing that speciality on a company-wide basis. This requires that, in addition to being responsible to a store manager for its own profit plan, this clothing or food unit will also help other clothing or food department managers select merchandise, train staff and develop business plans. The lateral networks created by this cross-company interchange help tie what can easily become a very fragmented business together, and help maintain the small headquarters staffing over the long run.
While it may seem that companies like Club Med and Carrefour are very decentralized, in fact the opposite is true. They stay lean by actually having more central control over their far flung stores and resorts than do some companies that keep tens of thousands of employees all at one location. But they substitute "soft" controls (focused cultures, carefully selected employees, mandatory training) for the "hard" ones (staff, supervisors, systems). These companies all seem to manage-by-mission. Their company philosophies include, as Carrefour's does, the nice-sounding phrases about people being important and the need to be responsible to all of a company's constituencies, but they also make it clear what is concretely expected of everyone. Deming would be very pleased with them. At Carrefour, every employee is told they have responsibilities in four areas: people, merchandise, money, and assets. Job descriptions are built around these areas; training programs are keyed to teach the skills needed to perform in each; performance reviews provide regular report cards on how well each is handled. Across the Atlantic, Frederick Smith, founder of Federal Express, achieves a similar result by making videos so he can be seen by his package carriers across the U.S., continually emphasizing the importance to Federal Express' customers of the boxes and envelopes they are handling. By stressing how critical the contents of these packages are to their recipients, he has turned what could be an ordinary, routine delivery job into something that has an important mission attached to it. And this, along with an investment in a state-of-the-art information network, has allowed him to run Federal Express with far fewer managers than would be otherwise needed to provide the same consistently high level of service.
In addition to maintaining their lean management structures, companies that stay streamlined well into the 1990s will have found ways to keep the size and scope of their headquarters staffs in check. The experiences of Carrefour, TRW, Xerox and others indicate this is possible, but it does require some creative organization redesign. As we considered in Chapter Five, a key to effectively managing staff resources is to treat them less like overhead and more like actual businesses. Some companies have carried this philosophy further and found ways to turn overhead into profit.
In the last several years an increasing number of companies, including Control Data, Morgan Stanley & Company, Parsons Brinckerhoff, Polaroid, Security Pacific National Bank, Union Carbide, Xerox have turned carefully selected headquarters staff functions into businesses that sell their wares outside the home company. Control Data provides personnel services to other businesses for a fee, Parsons public relations department has become an accredited advertising agency, and Xerox sells logistics and distribution services to customers of its reprographic equipment. These companies have several objectives in mind when doing this, one of the more exciting and entrepreneurial approaches to staying lean:
- Lowering overhead costs,
- Making profits,
- Building a broader staff service than their own company can afford alone,
- Bringing more of a customer-orientation to their headquarters staff, and
- Retaining high performers by adding new challenges to their jobs.
As more companies realize that managing the life cycles that staff function ride is easier to discuss than continually implement, ways such as selling staff services will become increasingly valuable tools to help keep headquarters slim. Companies will also find a growing variety of ways to get staff work done without putting the people who do it on the payroll. Conference Board economists estimate that a quarter of the U.S. work force is now made of contingent employees (part-timers and contract employees). Some temporary agencies are starting to provide as-needed managers and staff professionals, especially in the financial and engineering functions. "Business services" is now the Bureau of Labor Statistics fastest growing industrial category as more companies are deciding to buy as needed rather than own all the talent required for their operations. Some consulting firms are also starting to reformat their services so they take on more day-to-day responsibility for areas in which they formerly only provided advice or inputs.
The objective of all these reconfigurations of the shape of the corporation is to increase management's value added while decreasing management costs. Paul Strassman, Xerox's ex-strategy planner, calculates that American management productivity is fairly weak. His measures of Return on Management indicate that the management of most U.S. companies are barely paying their own way. The purpose of steps such as corporate networking, vertical disintegration, selling staff services, and buying instead of making is to significantly increase this kind of return.
Expert systems instead of experts
The field of artificial intelligence includes work in robotics, machine vision, natural language processing (getting computers to understand common English, not just computerese) and expert system building. Putting aside the interesting philosophical questions of to what extent machines can actually think, or mimic human thought processes, it is worth considering how the work in this field is actually being applied. The first two areas are already having a considerable impact on manufacturing technology and strategy. They are creating factories without factory workers, allowing for quick change-over manufacturing, and are helping make short production runs of highly customized products economical.
While it is unlikely robots will occupy the desks of corporate planners or compensation analysts in the foreseeable future, it is more likely that they will receive some help from computer based expert systems. These are computer programs that try to mimic the thought processes used by an acknowledged expert(s) in solving problems in that expert's field. The programs usually include a large data base of up to date facts about the issue being considered. They also include a set of rules that the expert uses to make inferences about a problem and what needs to be done about it. These rules form the heart of the expert system; eliciting them from the guru of a field is usually not very straightforward. Most of us are unaware of all the steps we actually take to solve problems; after we become good at something we develop many short cuts to get to a useful answer. It is the job of an expert system builder to learn what the particular expert being studied short cuts are, and then to reduce them to computer code. Doing this know-how elicitation job well is the most difficult part of the process. How well it is done often determines how useful the final system is and how far beyond the obvious its help goes.
When the "finished" system is ready for a novice to consult, it usually uses a computer screen to ask a series of questions that describe the particular problem at hand. Then the program uses its rule and knowledge bases to figure out other questions to ask. When this phase of the consultation is over, the expert system will match the patterns in the information provided with those its rules suggest are typical of situations it knows about. From this it can characterize, or diagnose, a problem and suggest some courses of action to take. Its programming is usually done in such a way that it can also give an indication of how confident it is in its recommendations, sometimes based on its asking its user how confident he feels in the accuracy of the background observations being provided. Many expert systems also are able to explain the chain of reasoning they used to reach a particular conclusion, something that can help give their users more confidence in what is being suggested. The word "finished" was put in quotes earlier because some of these systems are open ended: they get smarter with use. They remember the features of each problem they are used to solve (and the solutions they came up with) and use these to add more short-cuts to their lists of rules.
Systems like this have great potential to make scarce and costly expertise available to a wider audience. Many are still in demonstration or prototype stages, but these have often been useful enough to convince companies to continue funding their development. Their use in leveraging expensive staff talent is illustrated by ExperTAX, an expert system used by the accounting firm, Coopers & Lybrand. It draws on the knowledge and experience of 40 senior tax partners to provide an easy to use, question and answer format, system that will put some of their expertise in Coopers' 96 offices around the U.S. It is intended to be used by junior auditors to provide advice to smaller clients who would not usually be able to afford the attention of top tax professionals. The system cost over $1 million to build and is able to be run from a desk top personal computer. Its internal logic includes 2000 rules elicited from observing these senior partners at work on a variety of client problems. The system was not built to replace accountants; its focus is to enhance the level of advice its staff can provide, not to just automate a manual process.
Some companies have built expert systems around the know-how of skilled, one-of-a-kind, professionals nearing retirement. General Electric captured this way the knowledge of their foremost expert on maintenance of diesel-electric locomotives. Now they are able to have the system available around the country at customer maintenance locations, rather than flying the expert to the scene of a malfunctioning engine (or hauling the locomotive to him, as often was the case before the expert system was built). A number of these systems have been developed to assist with financial planning, determining creditworthiness for bank loans, and to help insurance underwriters calculate premiums for complex risks.
While many of these corporate-oriented applications are still in their infancy, enough have been usefully employed to mark expert systems as something for organization designers to watch closely. As their development progresses they should be able to facilitate more leanly staffed headquarters and fewer management layers throughout the company. The real payoff of expert systems is not in what they can do themselves, but what managers can do with them. Two broad uses of work in artificial intelligence are already apparent. The research mentioned above in natural language processing should eventually allow managers to have an intelligent "front end" on their desk top computer. Managers will be able to easily access corporate data bases, strategic planning models, financial and operational analysis packages by typing their requests into the terminal in day-to-day English, stating what they want to know, and letting the "intelligent" program select which data bases have the information or what models need to be run to determine the solution requested. This will help end many of the computer literacy problems managers face today. The second general application of artificial intelligence of special interest to managers is the possibility that they may have a dozen or more automated assistants, in the form of individual expert systems, to help them identify and solve problems in areas they used to bring to their bosses or staff assistants for help with. These may include everything from help doing annual budget planning to customized advice on how to best develop subordinates for promotion.
Will expert systems completely replace staff experts? No, not completely. But they will leverage their skills and knowledge. They will allow managers to factor more considerations into decision making that they otherwise might have. They will allow companies to track the implications of more embryonic staff issues than they usually do, and to do it in a way that does not add to staff size. And as staff issues become more mature, building expert systems to advise on them will allow more of these issues to be handled by line management, not the central office.
Human resource planning, not personnel administration
Maryann Keller, an automobile industry analyst, has had many opportunities to compare the Japanese and American ways of managing. She notes "The Japanese regard cost control as something you wake up every morning and do. Americans have always thought of it as a project. You cut costs 20% and say: 'Whew! That's over.' We can't afford to think that way anymore." This warning certainly applies to downsizing as well. Without making changes in the way the size and shape of corporations is managed, it will be business as usual and mid level bloat will return. These are partially people issues, but the job is far bigger than the scope of the traditional personnel function. The issues involved in organization planning involve power and strategy more than good relationship building and administrative procedure.
Staying streamlined requires, in most companies, a strengthened human resources function. This does not necessarily imply a bigger staff department, but more attention being paid to human resources management from senior executives and line managers. Planning and monitoring the size and shape of a company is a general management responsibility, not something that can easily be delegated to a staff unit. It is something that needs to be closely related to the business planning process. In recent years there has been considerable talk, and minimal action, about the importance of closely integrating human resources and strategy planning. In most companies it is unrealistic to expect the initiative for this to come from the personnel experts, though they certainly have a valuable role to play in the linkup. Leadership on this, if it is going to be kept from being just another staff-talking-to-other-staff activity, has to start at the top. Much of the detailed planning is also best left to senior line managers, some of whom hopefully will have had experience working in the human resource function at some point in their careers.
As they prepare to stay downsized over the long haul, it can make sense for some firms to move the training function out of the personnel area and group it with other culture-building and control units such as finance, information systems and communications.
Even with redeployments such as these there is still plenty the human resources group can do to keep the company downsized. Here are a few of the key action areas:
- Make it hard to get hired. Develop detailed selection criteria for new recruits that take into account their fit with the overall company culture as well as the requirements of the job they are being considered for. Deliberately understaff: use contractors and part time employees as buffers to even the swings of cyclical businesses. Continually look for ways short of hiring people to get low value added work done.
- Make it hard for poor performers to stay. Put real teeth in the performance review process. Adopt a single simple system that can be applied from top to bottom of the company. See that it evaluates a small number of performance targets to are linked to each job's mission. Also insure that how a person accomplishes a job is rated as well as what is accomplished. Obtain relevant inputs to the process by having managers rated by their subordinates and staff by their internal customers, as well as by their bosses. Use the results of the reviews primarily to improve performance, not to distribute salary increases.
- Slow down the upward-only fast track. Design career paths than cover more horizontal territory than vertical, that include more functional specialties than hierarchical levels. Try to keep people out of mid level and senior staff jobs until they have had some experience in the line organization. Limit appointments to key line executive positions to managers who have spent some of their careers in the human resource function. Do not assume all good performers will stay for their entire careers; over invest in training.
- Keep the pay system from building excess management back into the company. Adjust aspects of the compensation and job evaluation systems that lead to bloated management organizations. Look hard at two-track pay scales - but be sure the non-management side applies to all staff professionals, not just R&D types. Consider applying skill-based pay to staff workers; examine the possibility of customizing your job evaluation criteria to match the skills essential to your company's basis of competition.
Providing job security: the downsizing paradox
Welch's view is a good statement of the way the employer-employee bargain is being redefined in many downsized businesses. Planned downsizers, like GE, as well as companies that have been less focused in their reductions, have a sometimes elongated period of transition and consolidation to go through while reshaping their organizations, systems and strategies. Strong leadership from the top of the company, like that Welch provides, is essential to moving effectively through this period. But at the close of this period, many companies may find it to their advantages to rethink something paradoxical to the ideas of downsizing: managing the company to provide as high a degree of job security as possible for those remaining. At post-downsized Apple Computer temporary help is used to staff up to 10% of its jobs. Michael Ahearn, Apple's staffing manager says: "If we bring someone on board full-time, there is an implied obligation that the job won't disappear."
The vice president of Sony of America, Samadi Wada, provides a Japanese-eye view of what happens when workers and managers are continually concerned about how long their jobs will last: "...I understand why some American companies fail to gain the loyalty and dedication of their employees. Employees cannot care for an employer who is prepared to take their livelihood away at the first sign of trouble." As we have considered in Chapter Seven, IBM is one of the American companies who have taken this point of view to heart. It defends its costs and inconveniences by citing concrete benefits to their business, such as their ability to cut out two thirds of the cost of product manufacturing through the skill and smarts of their work force. They maintain these achievements would have been impossible without the productive and committed work force that their full employment practices help produce. Other employers committed to providing employment security, like the Lincoln Electric Company, cite the same benefits occurring for the same reasons. Many U.S. manufacturers have found the secret to getting continual productivity improvement is making sure that the people who you expect to deliver it know that in doing so they are not paving their way to an unemployment line. This is a view that applies in the office as well as the factory, to staff professionals and mid managers as well as assembly workers. And it is one that companies concerned about staying streamlined, not just temporarily lean, can do much worse than to consider.
Balanced attention to all the corporation's constituencies
Through most of the 1960s and 70s the stock market rewarded companies that maintained strong growth rates, often through unrelated acquisitions, and also achieved ever increasing earnings, even if they were generated by underinvesting in their base businesses. Sticking to the knitting was dull, usually unrewarded, and something considered suitable for old women. By the mid-1980s the piper had to be paid. Many companies had lost their competitive advantage to more focused overseas rivals, and bloated corporate structures were strangling both profits and good ideas for the future. And the always-short-term-oriented stock market switched to favor value generated by lean companies having equity returns better than any nearby safer alternative. The restructuring this has led to has caused more turmoil than many industries have seen since the depression. Some companies with clear missions and purposes are taking advantage of it to reposition themselves to provide sustainable value for their customers. Others' reactions are more keyed to immediate fears of corporate raiders and today's price of capital. They are still leaving themselves open to being tossed around by the concerns of the moment.
Mission-driven businesses, like Apple Computer, Chrysler, TRW and Xerox, are no stranger to restructurings or the downsizing that frequently accompanies them. But through careful planning and follow through they have built organizations that were stronger, not just smaller. While not losing sight of the stock market, they also have not ignored their employees' needs. Corporate missions are built on the interrelated needs of all the constituencies mentioned before. To the extent those of one group must be emphasized for a time, a "correction" in corporate attention will eventually occur and provide attention to the requirements of the others. These companies work hard to avoid the bitter criticism of one long service oil company manager: "We used to be a community.... Now it's clear there is only one important group - the shareholders." Planned downsizers, while reacting to immediate pressures, are preparing for future challenges by not forgetting the employees they will have to count on to meet them.
A demographic kicker
© Robert M. Tomasko 1987, 1990, 2002