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November 2004 Examining Worker Productivity
by Bill Snyder Kathryn Shaw's detailed research inside steel mills set a higher standard for how to evaluate the impact of management practices on worker productivity.If you're a manager, you've heard it all before: Build teams, develop trust, empower your workforce, be proactive, etc., etc., etc. There's no shortage of management gurus and consultants to sell you expensive advice about how to make your workforce more productive. And no wonder. With the rise of globalization and an ultra-competitive economy, managers who don't understand the imperatives of increasing efficiency and productivity and, ultimately, shareholder value are quickly "pursuing other interests." But how do managers know which of the many human resource practices currently being heralded as innovative really work? Human resource departments often propose that managers adopt new practices such as offering employees more flexible hours, job sharing, employment guarantees, and ongoing training. One study in 2000, for instance, found that 85 percent of 700 companies surveyed had implemented at least one of these relatively new HR practices. Meanwhile, productivity has been on the rise since the mid-nineties. Is there a link between the two trends? Hard evidence that innovative HR practices boost employee productivity—much less the bottom line—is hard to find. And that's a problem for thoughtful managers. After all, you'd never spend money on a machine tool or computer unless you had good reason to think you could demonstrate a reasonable return on your investment. In a series of groundbreaking studies, economist Kathryn Shaw, the Ernest C. Arbuckle Professor of Economics at the Business School, identified quantifiable links between imaginative HR practices and increased productivity. Characterized by deep analysis of individual plants and data collection across an entire industry, her work sets a new and higher standard for research in the developing subspecialty of personnel economics. Shaw, who served on the Council of Economic Advisers during the Clinton administration, began her study of productivity while a member of the faculty at Pittsburgh's Carnegie Mellon University. Fittingly enough, her work focused on the steel industry, the historic heart of western Pennsylvania's economy. Although she grew up in California's San Fernando Valley, Shaw was born in Youngstown, Ohio, and many of her relatives had a connection to the mills, as engineers or accountants or plumbers, or simply residents who knew the local economy depended upon Big Steel. When money became available to do research in the mills, she saw it as "a great opportunity to get inside firms and see how they improve performance." "There is no business that is more interesting to visit—you can really 'see' what matters and what doesn't,” she says. "The mills are also a work of art—of color and drama and people—and, in fact, I have a collection of oils and original photographs of them." Shaw now works on productivity in high-tech companies where she sees people sitting at computer terminals—low key in comparison. After months of observation of 36 integrated steel finishing lines, Shaw found that plants that used the most innovative human resource management system were rewarded with a gross annual payout of $2.24 million more annually per line than those with traditional systems. More recently, Shaw examined the effect of new information technology and new human resource practices on another classic old-economy industry: valve production. "When people think of IT, they usually think of computers on desks," she says, "but in this case the technology was embedded into the machine tools." Plants that combined the most advanced machinery with better training and development of better employee communication and teamwork skills were able to produce customized products, a significant competitive advantage over shops that could produce only standard valves, she says. Workers in the advanced plants need more than excellent mechanical skills. They must be trained to be flexible and to work on varied products at the same time, and to take more responsibility for solving problems as they arise. The high level of precision in the studies was not coincidental. Shaw and her colleague Casey Ichniowski, a professor of business at Columbia University, interviewed experienced workers, supervisors, HR managers, union officials, and production experts to understand the production process and to determine the best data for measuring technology and productivity. Their demanding approach was aimed at producing empirical estimates of the value of alternative human resource management practices and eventually became known as "insider econometrics," because it goes so deeply within industries and individual workplaces to acquire and analyze performance data.
Deeply indeed. Integrated finishing lines coat and treat very large coils of flat-rolled steel. Shaw's sample of 36 included nearly every such line in the country that survived the meltdown of the steel industry in the eighties; her monthly data panels consisted of 2,000 separate observations. In a related study a few years later, she examined 34 steel minimill production lines that reheat very large steel beams and thin and shape the steel into thinner rods or bars for use in construction or manufacturing. Again, her sample encompassed most mills of that type. Studying an entire population, or almost all of it, Shaw says, eliminates the
problems inherent in any study that relies on a Don’t Just Stand There—Talk to Me Shaw and Ichniowski visited 75 steel lines owned by 50 different companies around the world. Although those companies used many practices, the researchers found that there were really just four HR systems within the plants. At one extreme is a "high involvement" system that incorporates innovative practices across all seven areas of HR management they considered—flexible job design, ongoing training in skills and problem solving, work teams, information sharing, elaborate pay for performance plans, employment security guarantees, and extensive employee screening. At the other extreme is the traditional system with no innovative HR practices. In between are a "communications system" of information sharing and a "high teamwork" system. In general, they found that the more innovative the system, the higher the gain in productivity relative to a traditional HR management system. The gain at the high end was 6.7 percent more "uptime," which may not sound like a lot but is in fact "huge," says Shaw. Uptime, she explains, is the percent of time the mill is up and running and not down due to problems. Mills without innovative HR practices have uptime of about 88 percent, so if you have all the innovative practices and add 6.7 percent, your uptime rises to 94.7 percent—and a top-line benefit of about $2.24 million annually per finishing line. The study did not attempt to translate the gain in productivity to an increase in margins or overall profitability. Did improved productivity mean lower product quality? Not at all. The study found improvements in the quality of output in roughly the same proportion as improvements in quantity. In the past, Shaw says, incentive plans in steel mills were generally based upon tonnage produced. If a worker saw a problem, he or she might well let it slide rather than slow down to fix it and reduce output. But more sophisticated management systems not only give the worker an incentive to push for quality, they give the worker the ability to do something about it. Although some production problems are very obvious, many others are not. Workers need training to recognize and understand subtle problems and the opportunity to communicate their observations, something that rarely happens in the hierarchical setting of the traditional factory. When the researchers (in a follow-up study) looked specifically at communication among workers on the more productive finishing lines, they found that nearly all crew members communicated with 70 to 100 percent of the operators on their crew and with about 50 percent of workers on the same line but in different crews. Measurable communication among workers on the more traditionally run lines averaged only 16 percent. Simply put, Shaw wrote, "Employees on the [traditionally run] lines are doing their own jobs on their own." Making HR and IT Work Together In December 1995, Business School professor Edward Lazear completed a study of the Safelite Glass Corp., the nation's largest installer of automobile glass, which had just made the transition from an hourly to a piece-rate compensation structure for its production workers. Like Shaw, he found that changes in HR management practices could do much to boost productivity. "Lazear's work again emphasizes that HR practices must fit the technology," Shaw says. "When individuals work alone to install windshields, piece rate is optimal." To name just a few other professors: Charles O'Reilly and Jeffrey Pfeffer focus on the "hidden value" that surfaces in companies when managers find the HR practices that are right for their firm's overall strategy. James Baron and Michael Hannan developed the Stanford Project on Emerging Companies, showing that in high-tech startups, company founders choose a set of HR practices that are right for them and rarely change these practices over time. Tim Bresnahan emphasizes the importance of a good fit between HR practices and new information technologies. The challenge for managers is to find the set of HR practices that best fits the overall strategy of their firm. When Shaw concludes that innovative HR practices raise productivity, the obvious question is, should everyone adopt these same practices? Clearly, the answer is no—practices must fit the technology and the strategy. The West Wing She writes as frequently as she can, but the time-consuming nature of her specialty has kept her output a bit lower than she would like. Nevertheless, Shaw has earned a half-dozen major awards for the quality of her teaching, and she finds time to take her kids to hockey practice. Appointed to the Council of Economic Advisers by President Bill Clinton in 1999, she helped formulate the administration's economic policy, attended morning briefings conducted by the president's chief of staff in the Roosevelt Room, had monthly lunches with Federal Reserve chairman Alan Greenspan, and meetings with the president in the Oval Office. But there was a downside: weekly commutes from Pittsburgh and long separations from her three children and husband, a trauma surgeon. Hard as the arrangement was, she says, "I'd do it again in a nanosecond." IT—A Key Driver for Innovative HR Value Consider a system that bases a manager's incentive pay on production, quality, and employee turnover. Production data can be collected using handheld computers or tablets, entered into relevant forms, and then downloaded, perhaps wirelessly, to a company database. That information can be linked to attendance records and then assembled in an easy-to-understand report by business analytics software. "We do see that companies making changes in incentive pay and teamwork are also linking production monitoring software to HR software—firms see this software as an enabler," Shaw says. Mark Lange, MBA '94, vice president of global marketing for PeopleSoft, which pioneered the development of human resource software, says that better software and better networks are allowing companies to link what formerly were separate streams of data—and then analyze it. Suppose, he says, a manager notices that broken drill bits are causing a slowdown. The next step is to identify a fix—perhaps workers need more training on procedures to drill a certain type of metal. The company might then place a learning program on a kiosk in the plant and encourage (or require) workers to use it. Kiosk records then could be matched against repair records to establish if, in fact, the training program had done its job. Although this punch press scenario is hypothetical, the technology already exists. The barrier, says Lange, is resistance to change. "Some HR folks will never get it; there’s an old guard that wants to stay in a room and manage the administrative trivia. Those are the folks whose job will be outsourced." Maybe so. But Shaw believes HR lies in the domain of all managers. She notes that Lazear's auto glass installer could shift to piece-rate pay for production because it introduced the IT to measure individual performance efficiently. Her steel companies and valve companies give more decision-making authority to front-line workers because IT provides them with the information to make informed decisions instantly. Shaw and her colleagues are developing the tools to satisfy the executive demand for deeper, more precise information about human resource management. Now it's up to the managers, not just HR professionals, to pay attention to HR practices and show their own companies the relevance. |
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