Neelesh Hundekari is Partner Consumer and Retail at A.T. Kearney
One of the most glaring observations from our recent study on managerial productivity of Indian companies was that no company in India measures productivity of one of their most important assets, their managers. For most companies, their managerial and people productivity, when measured as ratios of profits to managerial compensation, or Earnings before interest, tax, depreciation and amortisation (EBITDA) to total personnel cost, has gone down over the years. Also, most companies have 10-20 percent more managers than what they need.
We discussed these findings with several chief executive officers, chief financial officer and chief human resources officer, and they all unanimously agreed to these. However, when it comes to acting upon these, we came across a clear reluctance. One part of this reluctance stemmed from the cultural taboos associated with firing people, while another came from the sheer difficulty and pain associated with firing. Finally, there seemed to be a preference towards opportunities to reduce costs in wholly different areas other than personnel costs; or even a desire to ride this issue over; hoping that the revenues or sales volumes will increase sufficiently this year in order to make this issue less critical.
Still, there are a few others who have chosen to act on it by freezing hiring or holding onto the current year’s ratio. It is, however, evident that driving greater manager productivity is a very strategic issue and intimately connected to the values and culture of the organisation. Hence there cannot be a uniform or one-size-fits-all solution. However, business leaders can choose an approach aligned to one of the four strategic responses.
'The Capitalist' response
We call the first approach ‘the Capitalist response’. Viewed from a purely investors’ lens, there is just no reason to tolerate lower productivity from the most valuable asset. Just as underperforming physical or financial assets will be looked at carefully, likewise it is the responsibility of the CEO to scrutinise underperforming high-value human assets. The board must ask the CEO to either increase the volumes or reduce the headcount using a zero base. If one goes back into history and compares manager productivity, it would be easy to find that there were times when the same company was a lot more productive. Without even looking at benchmarks, why can’t we aspire to get back to the same level or productivity again.
Savings need to be reinvested in the company – it could be into creating people assets in new areas that could be important tomorrow. So, by all means, leadership should increase productivity in traditional areas (reduce headcount) and invest in new-age skills.
People could be reskilled and redeployed in new areas where capacity is needed, high performers could be paid more to increase retention and increase productivity. Or reduce the headcount, increase profits which can be ploughed back as new capital investment, which should generate returns as per the current Return on Capital Employed trends.
'The Socialist/ Work-Life Balance' response In the second approach, which we call 'the Socialist/Work-Life Balance response’, extra manpower can be reallocated internally, so there are fewer work hours for everyone. This response could work well for scenarios where people in some divisions or offices are overworked. When redundant resources are reallocated; output remains the same and yet everyone benefits from better work-life balance. If implemented along with a freeze on compensation increase; this approach can address 10 percent of the extra cost. There could be others who would prefer extra vacation days. Clearly, employee satisfaction will improve. This solution is ideal for companies that believe in paying less but not reducing employment.
'The Diversity' response
In the third approach, that we call 'The Diversity' response; people can be given increased flexibility to work part-time or flexi-time which is often requested for various reasons including domestic pressures, maternity and other life stage priorities. Typically, companies find it difficult to allow such flexibility if they are short on manpower.
The vast majority usually prefers a full-time job that makes the best use of their time and skills and pays them handsomely in return for that. However, this bias for full-time employment limits organisations from tapping a vast and talented pool that only wants to work for limited hours every week.
Indeed, highly talented employees abound who cannot commit to working 40-plus hours every week; but will still be extremely productive in the 25 hours that they will be happy to. Simple math shows that even if 20 percent of employees take up working half-time; it will reduce the extra manpower by 10 percent. Many working mothers with young children would love this opportunity to be able to work without having to take a break from their career. Younger employees who want to prepare for higher education or just take some additional education while working would again welcome this opportunity.
'The Development' response
Finally, per the Development response, companies can focus on the redundant time and make it productive by focusing on learning and development. A 10 percent extra manpower roughly translates to around four extra hours per week per person. If we were to offer the training and development opportunities for four hours per person per week for learning new skills and get people to actually spend that time in learning something new; they will never risk career stagnation. Four hours per week can mean 26 calendar days of learning in a year; which is better than what best in class would offer in terms of learning and development (average of 12-15 days a year). Even though this approach requires a complete transformation of the learning and development function; companies that are able to make use of this opportunity will never have to worry about skill obsolescence.
The choice of the right response depends largely on the organisation’s vision, mission and core values. If the goal is to simply increase shareholder value; then the capitalist response is ideal. If people management is critical, then one of the other three responses can be chosen.
Except in some cases, there need not be a net reduction in employment on rolls, which should alleviate the anxiety of dealing with surplus people and the attendant emotional turmoil that surfaces immediately when confronted with lower people productivity. The ultimate choice, however, rests with CEOs and CHROs.
The author is Partner Consumer and Retail at A.T. Kearney