Systems Concepts

The ProductCo story underscores the first principle of effective human capital management: systems thinking, that is, an awareness of the connections that link organizational units, people, processes, and behavior.

Organizations are complex systems with many linked elements and subsystems. A change made in one subsystem produces effects in others. Organizations are in turn embedded in larger systems that include customers, suppliers, shareholders, competitors, regulators, and the general economy. Thus, any major change in pricing, products, or internal policies ripples through the larger system.

We conceptualize the system for human capital productivity with the graphic image shown in Figure 1-1. Here an organization—a system unto itself—operates within a large “macro” system of customers, competitors, and so forth: the market environment. This model, which was first developed in 1994 and was refined in the field over the intervening years, is a synthesis of research results on the drivers of human capital productivity. It provides the conceptual underpinning of our analytic tools and the various case studies described in this chapter and later chapters in this book. The model reflects the observation that productivity is not inherent in a practice or program but is a consequence of how that practice or program is aligned with the broader context of the system. A successful human capital strategy is one that is aligned with business needs and is internally coherent; that is, it is made up of mutually reinforcing practices.

Figure 1-1: A Systems View Of Human Capitol Productivity 2003, Mercer Human Resource Consulting LLC

Systems thinking is fundamental in environmental science, macroeconomic forecasting, weather studies, the social sciences, business, and many other fields. Although executives understand it intuitively, they don’t always apply it when they formulate strategies and practices, including people practices. With that in mind, let’s consider a few key aspects of systems thinking and their applications to the ProductCo case.

Systems Are Made Up of Interrelated Parts

Parts can be “elements” such as individual employees. They also can be subsystems, organized collections of people, practices, and technologies within the larger enterprise. Divisions and business units are subsystems, as are the bundles of practices and individuals that make up purchasing, marketing, legal, and other functions.

The existence of interrelated parts has important implications. One is that the operations of parts may or may not be tightly linked. Hospital emergency rooms are systems with very tightly linked parts. An aircraft carrier in the middle of operations is a system with tightly linked parts. The launch of airplanes is a result of closely coordinated efforts of several functionaries acting in unison to get them off the deck swiftly, safely, in the right order, and properly configured. Other organizations accomplish their missions with much less subsystem coordination. A law enforcement agency, for example, does its work with dispersed units acting relatively autonomously in different areas or in pursuit of different types of crime. Carriers and cops have many things in common, such as strong hierarchies and command and control structures, but the organizational subsystems through which they accomplish their missions operate with different degrees of interdependence.

Interrelated parts operating with varying degrees of interdependence have important implications for human capital. An obvious one is that some people perform better in some parts of an organization than in others. A more subtle implication is that the effectiveness of reward programs will vary with the degree of interdependence among the parts. For example, programs that reward individual accomplishments can be counterproductive when tight coordination and teamwork are required. Placing individual achievement on a pedestal detracts from the willingness of employees to cooperate with others with whom they are tightly linked.

The fact that organizations are systems of interrelated parts is a fundamental principle. Failing to accept its implications creates the risk of mismanagement. Managers must understand how the component parts of their organizations are interrelated and, more specifically, how human capital practices can best be matched to interrelationships.

Changes and Practices in One Part of the Enterprise Can Have Consequences in Others

Because of linkages across component parts, changes in any subsystem often are felt in another subsystem. For example, a change to “mass customization” in manufacturing—that is, building large numbers of products to the differing specifications of various customers—may have consequences for the way a company markets its products. A corollary of this principle is that implementing planned changes in one part of the enterprise without making changes in other, related parts is a recipe for failure.

Consider a change in how the call center employees of a financial service firm do their work. Let’s say that under the current arrangements each service rep performs a job with narrowly defined responsibilities. For example, a rep who helps a customer with an automobile loan payoff will transfer that customer to someone else if the customer inquires about her mortgage. The mortgage rep then will hand off the customer to a third employee for matters related to credit card balances.

Let’s suppose that this financial services company has created new work arrangements under which each service rep responds to all customer service needs: one-stop shopping. For this change to be successful, changes in several other organizational subsystems are required. For example, changes in technology are needed to provide service reps with quick and complete access to the full portfolio of customer information. Training also may increase in importance as reps will need expertise in a broad spectrum of products and services. Changes in the supervisory system may be required as well. Supervisors will need broader expertise. Further, systems of measurement and metrics also may need changing. Under the current arrangement reps are rewarded for handling each call as quickly as possible. That might not be an appropriate metric under the new work system.

The point here is that a change in any one part of an enterprise usually has implications for other parts. Managing successfully requires recognition of this fundamental principle.

The Potential Causal Pathways Are Many

Every complex system is a web of causal connections and pathways of influence. Consequently, the same end usually can be achieved through different means. Indeed, this is the meaning of the term equifinality. One practical implication of the principle of equifinality is that the route to success for one organization may not be the route to success for another. Even companies in the same industry seldom have the same configurations. They have different subsystems, different parts. Thus, a practice that works well in one will not necessarily carry over successfully to another.

Another implication is that it is possible to find an optimal route to success for each system. Although there may be several ways to achieve growth and profitability goals, for example, some ways are better than others, depending on the unique properties of the organization. Thus every organization can—and should—determine the optimal approach to managing its human capital. That optimal approach can become a unique source of competitive advantage.

Causal pathways within systems often contain feedback loops (Figure 1-2). A feedback loop indicates that one organizational practice or condition has consequences for another, which in turn affects the first. For example, the type of people a company attracts and hires today can affect which of the company’s veteran employees decide to stay or leave. The kinds of people who stay will in turn affect the company’s ability to attract other desirable types.

Figure 1-2: Feedback In A Causal relationship

The existence of many causal pathways has another implication: namely, some of them may go unrecognized. When strong causal pathways go unrecognized, managers are left to act on the weak ones. Failures to discern the potent pathways are often rooted in an over-reliance on anecdote or organizational folklore.

Unintended Consequences Abound

Because organizational systems are made up of interrelated parts with multiple causal pathways, new programs and practices can have unintended consequences. Failure to anticipate those consequences explains why many new programs fail to achieve their goals and produce unwanted “side effects.”

How can we deal with unintended consequences? One way is to make them less likely. This can be accomplished by understanding the dynamics of the organization’s systems and the way in which a planned change will ricochet through the organization. Techniques for doing this with respect to human capital practices are at the heart of this book. Essentially, these techniques bring discipline to the understanding of human capital systems and shift the task of managing from the realm of intuition to the realm of fact.

Our experience with an energy company provides a good illustration. In an effort to reduce costs that company abandoned a pay system with many narrow bands in favor of a broad-band system. The new system meant that there were fewer pay grades. It also provided a means of reducing overall wage and salary costs; for example, a pay adjustment could be made within a band without incurring the costs associated with promoting individuals to new bands. Fewer pay bands also went hand in hand with “delayering,” that is, reducing the number of levels of hierarchy and the managers required to staff them. The unintended consequence of this approach to cost reduction, however, was a complete disruption of the career system. The company had at its disposal only two real ways to reward its employees: pay and promotion. The two were closely interrelated. The move to the new system essentially eradicated promotion as a reward and thus removed much of the incentive for staying with the company.

Combined Changes Can Produce Costly Problems or Can Work Exceptionally Well

The nature of systems is such that programs and practices that are implemented in combination may produce different outcomes than they would if they had been implemented separately. That is the lesson of the ProductCo case. Sometimes the combined effects are devastating. The field of medicine provides a useful analogy: Some perfectly safe and effective drugs produce lethal side effects when taken together.

The combined effect of different programs is actually better in some circumstances. For example, research indicates that sophisticated selection techniques can contribute to organizational performance.^[2] Training can do the same thing. However, the combination of the two can be exceptionally powerful, producing a better result than would be expected if one merely summed the benefits of the two practices in isolation.

In a similar vein, research by one of the authors of this book and his colleagues found that people-centered interventions that aim to improve productivity—objective setting, job redesign, and so forth—often have positive results but that those results are highly variable.^[3] This is not a surprise, but that variability was reduced greatly when multiple interventions were made simultaneously. In other words, making several related changes at once reduces the risk of failure. Terms such as interaction effect and complementarity have been used to describe this combination effect. Finding and then acting on the complementarities among management practices is a sure path to success.

Closed Systems Often Fail to Change and Self-Correct

Although no business organization can isolate itself from the larger business environment, some companies act as if they could. Filling all open positions through internal promotion is an example. Organizations constantly are exposed to influences from the larger systems and the environments in which they are embedded. Technological advances and the entry of new competitors are examples of influences that an “open” organization will respond to, for each of those influences can have major effects on the human capital of the enterprise.

^[2]Ann P. Bartel, “Formal Employee Training Programs and Their Impact on Labor Productivity: Evidence from a Human Resources Survey,” National Bureau of Economic Research Working Paper, July 1989, no. 3026, 37.

^[3]Richard A. Guzzo, R. D. Jette, and R. A. Katzell, “The Effects of Psychologically Based Intervention Programs on Worker Productivity: A Meta-Analysis.” Personnel Psychology, 1985, vol. 38, 275–291.