Episode #261: The Lost Chapter from Implementing Value Pricing

Here it is, folks! At long last we have Chapter 32 — otherwise known as the “Lost Chapter” — from Ron’s book, Implementing Value Pricing: A Radical Business Model for Professional Firms. The short version is available below and details on all 26+ pages for Patreon members are available at the bottom of this post. Enjoy!

­­Chapter 32: Attracting, Developing, and Inspiring Knowledge Workers

The management of knowledge workers should be based on the assumption that the corporation needs them more than they need the corporation.  They know they can leave.  They have both mobility and self-confidence.  This means they have to be treated and managed as volunteers, in the same way as volunteers who work for not-for-profit organizations.
— Peter Drucker, A Functioning Society: Selections from Sixty-Five Years of Writing on Community, Society, and Polity, 2003

Today’s knowledge workers, unlike the factory workers of the Industrial Revolution, own the company’s means of production. This is what Daniel Pink, author of Free Agent Nation, calls “Karl Marx’s revenge.” People are not assets––and will not be replaced by computers no matter how far advanced artificial intelligence becomes––or inventory, or resources; they are individuals entitled to sense of mission and purpose in their lives, who congregate in firms to make a difference in the lives of others. The universal need of every worker is to perform meaningful work, in a community with others of like mind, to make a difference in the world. The real aspiration of an organization is to make people better, not just make them better off.

People Have Value, Not Jobs

Peruse a corporate annual report or website, and inevitably you will read that “people are our greatest asset” (or “resource”). Stalin use to say it as well. Thinking of workers as resources––from the Latin resurgere, “to rise again”––is equally demeaning, implying people are no different from, say timber, to be harvested when you run out. Even Michael Eisner, former chairman and CEO of Disney, has been recorded as saying, “Our inventory goes home at night.” There’s a new twist––people are now inventory to be turned over. Perhaps one of the reasons for the use of these demeaning words is managers do not understand the worth of their people because they cannot be measured as exactly as accountants record assets, inventory, and other tangible resources. Humans deserve more respect than a phone system or computer. Assets are passive, bought and sold in the marketplace at the whimsy of their owners; conversely, knowledge workers have ultimate control over their careers. Why do we insist on perpetuating this belief that people are resources to be mined rather than human capital to be developed?

Becoming a Lightning Rod for Talent

Southwest Airlines does not hire for skills—it will teach people what they need to know—but for attitude, which is very difficult to teach, or change. It hires attitude, and teaches functionality.

Attracting good people and hiring are two of the most important jobs to which everyone in the organization can contribute input and ideas. Executives spend more of their time—or at least they should—making people decisions than any other. No other decisions have as many repercussions throughout the firm, or have lasting significant effects than hiring choices. Typically, the average firm is batting 0.333 on its hiring decisions; that is, one-third turn out to be good decisions, one-third are minimally effective, and one-third are abject failures. It is rare in any other area that executives would accept this level of performance.

The Importance of Continuing Education

Knowledge organizations must have a healthy respect for these three categories, so as not to make their team members feel as if they are not spending enough time in the production of earnings when they are investing in their human capital. In spite of this, is there any doubt that most firms underinvest in Becker’s second category in ruthless pursuit of his third category?

I have the good fortune to speak to thousands of owners of professional knowledge firms who confirm they don’t spend more than the minimum on their people’s continuing professional education. For certified public accountants (CPAs), this equates to 80 hours every two years.  According to the American Institute of Certified Public Accountants, the average CPA firm spends just .8 percent of its revenue on continuing education, approximately equal to what is spent for broadband internet service. However, companies like Accenture, the Big Four accounting firms, and consulting houses such as McKinsey, Bain & Co. spend approximately 6 percent of their gross revenue on education. How else do firms expect to increase the human capital and effectiveness of their knowledge workers if they don’t invest in continuous learning? Sure, they can invest in technology or a better widget machine, but those are merely tools. They are the equivalent of having restrooms in your building, not competitive advantages that enable you to do better than your competitors. What counts is what knowledge workers know this year that they didn’t know last year that is more valuable to the company or its customers.

Lean and Six-Sigma Initiatives

I have gotten into vociferous debates with advocates of Lean and Six-Sigma for professional firms. Since the VeraSage Web site has a full record of these debates, and I spell out the arguments for effectiveness over efficiency throughout this book, I will not repeat those writings here. Suffice to say, I do not believe that Lean and Six-Sigma are necessary in professional knowledge firms. They are far too inward looking, tending to focus more on efficiency than effectiveness. Consider Toyota, a Lean company that is having serious quality problems as I write these words. No doubt, these automobiles were produced efficiently, but obviously not effectively. Nor do these programs provide any guidance on how to solve this thorny customer issue.

Want proof? Check to see if any of the firms that have undertaken these initiatives have trashed their timesheets. If Lean and Six-Sigma truly were customer-focused strategies, they would have realized long ago that customers do not enjoy being billed by the hour. They also would have figured out that timesheets are a lagging indicator whose measures are meaningless to the customer, as the focus is on inputs, efforts, and costs, rather that output, results, and value. The VeraSage Institute’s Web site is full of Trailblazer firms that have eliminated these strategies, and not one has undertaken Lean or Six-Sigma programs.

Generational Astrology

An enormous amount of ink has been spilled on this topic, usually along with the different characteristics of the Baby Boomers and Generation X, Y, Z. One reason for this increased attention is there are simply more generations interacting in the workforce today than in the past. One reason is life expectancy. The average knowledge worker today will outlive their employer, with an average active work life of approximately fifty years compared to the average organizational life of thirty. This translates into the average worker today having many more jobs—and even careers—than those of their ancestors a century ago.

It may be an interesting academic and historical exercise to create lists of the differences between the Baby Boomers and Generation X, Y, and Z, but knowing the personality traits between the generations does not necessarily assist a company in attracting or inspiring its knowledge workers. All of this “generational astrology” has all the explanatory power of asking people their signs—it is an incredibly weak theory.

A more robust explanation for today’s workers—no matter when they were born—is the fact that they are knowledge workers, who are far wealthier than their parents—they grew up in what economist Brink Lindsey calls “The Age of Abundance.” Wealth provides more options, from extending education, traveling the world, living with parents longer, or simply delaying gainful employment.

Personality Testing and Performance Appraisals

The most widely used is the Myers-Briggs Type Indicator (MBTI), created by Pennsylvania housewife Isabel Myers. This particular test is utilized by 89% of the Fortune 100, given to 2.5 million people each year to identify strengths and enhance teamwork. She thought the test could bring about world peace.

These tests are also popular among consultants, who are paid good money to administer them in a convivial atmosphere. But the fallacy is the tests measure what we are like and who we are, not what we know, believe, or what we can do. They confuse labeling personality with understanding it. These tests are reassuring confirmations of what people already know about themselves, what psychologists call the permanency tendency. They also tend to validate the positive characteristics we all believe we possess, the so-called Pollyanna principle. Companies might as well bring their people together to play with Ouija boards, which are equally entertaining while having roughly the same empirical validity. As they say, if you really want to learn what someone is like, marry them or work for them.

Compensating Knowledge Workers

Any organization of humans—be it a school, a nonprofit agency, a governmental unit, or a business—is going to have a bell curve of high, average, and below-average performers. One study found wide differences in performance for complex jobs (e.g., attorneys, physicians, and cartographers), where the top one percent of producers generated 2.27 times the output of average producers (Davenport 1999: 66). It is estimated the best computer programmers are at least twelve times as productive as the average. Alan Eustace, a vice-president at Google says “one top-notch engineer is worth 300 times or more than the average” (The Economist, October 7, 2006: 22).

Given human nature, not much can be done about this distribution, but what we can do is not exacerbate the problem of below-average workers by designing systems around their weaknesses at the expense of placing a ceiling over the heads of the superior performers. Public schools do this all the time. They “dumb down” the standards for the slowest learners, while letting those with above-average abilities stagnate and get bored. A business organization should not do this to spare the feelings of the less effective team members; rather, it should design processes and compensation systems that take into account different levels of performance.

Are Professionals Really Knowledge Workers?

My colleagues and I at VeraSage Institute spend the majority of our time working with, by any common definition, knowledge workers, at accounting, law, and technology firms; advertising agencies; consultancies; engineering; actuaries; architecture; and software programming firms; and so forth. We educate them on the difference between manual (and service) workers, and knowledge workers.

But I can always count on at least one of my colleagues to cause some cognitive dissonance, and Dan Morris has not let me down. He thinks I am wrong about most professional firms being filled with knowledge workers; he believes the majority of them are more akin to factory workers in the days of Frederick Taylor and Henry Ford. Now I know this is a heretical view, but Dan has assembled a very powerful argument to support his assertion. He does not deny professionals have the potential to be knowledge workers. His argument is they are not largely because of the incentives and structures of the firms in which they operate, which function more like sweatshops of yore. 

Summary and Conclusions

We have covered a lot of ground in this chapter, and rightfully so, since human capital is the most important component of the firm of the future’s intellectual capital. It is time for leaders to stop viewing employees as simply problems, procedures, and costs. People are not assets, inventory, or resources; they are individuals entitled to a sense of purpose in their lives, who congregate in organizations to make a difference in the lives of others. The universal need of every worker is to perform meaningful work, in a community with others of like mind to make a difference in the world.

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