Monday, September 04, 2006

Jack Welch squelched

I'm glad a mainstream magazine finally came out of the woods to debunk Jack's rules (see FORTUNE's "The New Rules", August 7, 2006). FORTUNE's story essentially argues that it's very much time for new rules of success, ditching an obsession with managing quarter-to-quarter earnings to please Wall Street and in the process, disinvesting in the future. The new model, the article concludes, is about invention and true transformation, not merely expense cutting and economies of scale.

But the damage Welch has done to business management is far and wide. Welch's fixation of Six Sigma, for instance, runs counter to the spirit of innovation as it allowed little room for new ideas or an entirely different approach to things. Instead, the best and the brightest talent were often deployed to fix an existing proess (e.g. drive down defects by 1%) rather than come up with new products or technologies.

As Vishua Dixit, vice president for research at Genentech, puts it: "Nothing will kill it [innovation] faster than trying to manage it, predict it, and put it on a timeline."

Well documented is also the use (and abuse) of forced ranking, or what Welch called "the vitality curve", as a workforce performance tool. To be fair, there is clearly a need for organisations to differentiate among employees based on performance and to take action on the lower-rated employees. Not doing so may result in "mediocrity creep" and possibly a loss of faith by top performers in their managers. However, using forced ranking opens the company to potential lawsuits filed by disgruntled forced-ranked employees. Ford Motor Company, for instance, paid out US$10.5 million over forced ranking-related discrimination claims.

A year or two of good, fair forced ranking can weed out non-performers. Thereafter, former "A" performers may become "B" performers and former "B" performers may become "C" performers - especially if a company is cutting its workforce. Even for companies that are not reducing headcount, unless it can consistently hire new talent and train them (and make sure they don't leave voluntarily), firing the bottom 10% is a very myopic approach to boost performance and keep costs in line, and one that is often conducted to the detriment of employee morale since there is a chance that all employees could be performing at acceptable or even above-average levels.

"People don't come to work to be No. 1 or No. 2 or to get a 20% net return on assets. They want a sense of purpose. They come to work to get meaning from their lives," said Christopher Barlett of Harvard Business School.

In defending his advocacy of forced ranking, Welch also instituted the "four E's of GE leadership", namely, very high Energy levels; the ability to Energise others around common goals; the Edge to make tough yes-and-no decisions; and the ability to consistently Execute and deliver on their promises.

To critics, the four E's are "E-Z" to espouse. But evaluating these aspects of leadership is subject to varying degrees of interpretation, subjectivity and favouritism. Just ask around and see if you've heard of a CEO's brother-in-law who is a "C" performer. Not surprisingly, many employees believe that their continued employment rests not on what they do but on who supports them. The belief that your survival in a forced ranking system boils down to your manager's communications skills and effectiveness as an advocate for you can undermine the entire organisation.

For some companies, the drawbacks of forced ranking far outweigh its perceived benefits. Employees may become less willing to help others who they would be ranked against. Low morale may result when employees compete against each other instead of work with each other.

Furthermore, a forced ranking system usually leaves out softer qualities, such as honesty and dedication, that some consider essential to any organisation. Again, this is not rocket science and there are no steel calipers you can use to make measurements.

Related stories:
Overvalued: Why Jack Welch Isn't God
The interesting demise of the legend of Jack Welch

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