Another Systems Tale

Another Systems Tale

Another example that illustrates the value of systems thinking is the case of TechCo (the name is fictitious; the company is real). TechCo is a midsize technology company that designs and produces computer chips used in consumer products and business equipment. The firm constantly creates new components to meet the specific needs of its customers; most of those components are adapted from previously successful designs.

For TechCo delay is deadly . Product life cycles are short, peaking within two to three years and then decaying swiftly. Profitability depends on getting to market quickly with a workable component. The press for speed goes hand in hand with quality, since every failure in the design process delays the introduction of new components and thwarts revenue growth. Because of the importance of quality, the CEO defined the organizational climate as having an “institutionalized intolerance of error.”

In the mid-1990s TechCo ran into serious problems. Its revenue growth and shareholder returns were flagging, prompting top management to review operational productivity. Rising turnover among design engineers was identified as the cause of those problems. During the prior seven years the company’s overall turnover rate had risen from 6 percent to 15.6 percent. The defection rate among engineers was even more pronounced and more damaging since engineers controlled the development of new parts from past designs. Experienced , able engineers with deep knowledge of the company’s proprietary designs and technologies were critical to the achievement of low design error rates and rapid product launches, the twin drivers of TechCo’s revenue growth. However, for some unknown reason engineers with the most education and years of service were leaving, as were those with high performance ratings.

The CEO was aware of the problem but was unable to stem the tide: “We’ve tried everything,” he complained, “pay, stock, training, coaching, new managers, hiring different people, screening differently. But nothing works.” Indeed, nothing worked because the cause of the engineering turnover had not been identified. The root cause or causes could be learned only by examining the entire human capital system. Using the techniques described in the previous case, this is what we discovered :

• There was a clear barrier to advancement. TechCo’s best-trained and most experienced engineers were hitting a promotion “wall” roughly halfway up the job level ladder. If one tracked the annual movement of engineers into the firm through hiring, up and down through promotions/demotions, and out through defection, it was impossible to miss the fact that promotions were highly improbable once people reached that wall. That was where most defections were occurring. The best and brightest—the fast- trackers who received early and rapid promotions in TechCo up to this level—created their next promotions by leaving TechCo and taking engineering jobs elsewhere.

• The incentives were misaligned . Like many high-tech companies, TechCo counted on variable pay and stock options to spur performance and encourage loyalty. Fully one-third of an engineer’s pay varied with performance. These practices are highly suited to entrepreneurial cultures, where risk taking is encouraged and rewarded, but TechCo had no such culture. Its reliance on direct intensive supervision, documentation, by-the- numbers work, and intolerance for errors limited opportunities for entrepreneurial expression. The presumed incentive value of variable pay was in fact being squandered and appeared to contribute to increased turnover. The reliance on stock options also enhanced the risk. Variability in the price of the company’s stock was very much driven by general market movements and industry swings rather than by the products and contracts and decisions of the company. Therefore, options acted more like lottery tickets; their value was beyond the control of TechCo employees .

• TechCo paid twice for supervision. The company paid above-market wages , presumably to attract and retain self-directed goal-oriented individuals who needed little monitoring. It paid again through intense supervisory and control practices ostensibly exercised in the name of error reduction. Faced with these findings, TechCo’s head of technology said , “We hire the kind of people who should be able to think for themselves , but we don’t allow them to.”

These observations suggested a number of opportunities for solving TechCo’s problem with engineer turnover, ranging from changes in management philosophy and organizational climate to changes in the ways employees were recruited and their careers were developed. As this case reveals, viewing human capital management practices from a systems perspective can lead to the articulation of fact-based opportunities for change. Systems thinking, supported by empirical knowledge of how things really are working, is a key principle for managing human capital to achieve business goals.