Another Systems Tale
Another Systems Tale
Another example that illustrates the value of systems thinking is the case of TechCo (the
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
from previously successful designs.
For TechCo delay is
. Product life cycles are short, peaking within two to three
and then decaying swiftly. Profitability depends on getting to market quickly with a
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
rate had risen from 6 percent to 15.6 percent. The defection rate among
was even more pronounced and more
since engineers controlled the development of new
from past designs.
, 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
There was a clear
TechCo’s best-trained and most experienced engineers were
a promotion “wall”
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
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-
who received early and rapid promotions in TechCo up to this level—created their
promotions by leaving TechCo and taking engineering jobs elsewhere.
The incentives were
Like many high-tech companies, TechCo counted on variable pay and stock options to spur performance and
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
supervision, documentation, by-the-
work, and intolerance for errors limited opportunities for entrepreneurial expression. The
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
TechCo paid twice for supervision.
The company paid above-market
, presumably to
and retain self-directed goal-oriented individuals who needed little monitoring. It paid again through
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
but we don’t allow them to.”
These observations suggested a number of opportunities for solving TechCo’s problem with engineer turnover,
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
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.