The Myth of Corporate Efficiency

For decades, American businesses have been caught up in strategies to improve efficiency and productivity. For the most part, they've worked. Our processes are lean. Our efficiency is six-sigma. However, our productivity has unfortunately run far ahead of employee compensation in a way that has made the CEO a multi-millionaire, while a vast number of their workers aren't paid a living wage.

It’s a system that maximizes profit. But it’s also a system that assumes that everything can be stripped to the bare bones; that business can make do with minimal staffing, minimal supplies, minimal alternatives. Nothing is there that makes the system in the least unprofitable. The system stands strong. Nothing can challenge it. Until something does.

Sixty years ago, there were exactly 500 companies in the Fortune 500. Today, only about 60 of those companies are in the Fortune 500. Most of them don't exist any more. Most of them failed as businesses. They were disrupted by newcomers with a better strategy. They failed to sufficiently innovate with their products and services. They were poorly managed. They had boards with no vision. They made the wrong bets.

Working in financial services my whole life, I've been employed by banks, savings institutions, credit unions, mortgage companies, and of course consulting firms that serve these financial services entities. Today I work as a compliance consultant. The sad truth is that I'm rarely called to help a client be in compliance. There isn't budget for that. Instead we are most often called to help a client get the proverbial ox out of the ditch. But I digress.

The real issue here is how American corporations function. Or rather it is a particular level of dysfunction that I am so used to seeing. Most of the industries in America, from financial services to airlines, manufacturing and health care function pretty much the same. We now have companies that are super-lean, infinite-sigma systems. They are absolutely dependent on every cog remaining in place. Because that’s the most profitable way of running a company, so we're told. That’s what happens when any industry is subjected to the winnowing of the marketplace—make the product as cheaply as possible, provide the least amount of service, all at the highest possible prices people will tolerate.

Has anyone flown in coach on a US-based airline lately? This has to be the epitome of dysfunction. The most dysfunctional of them are the so-called "low cost" airlines, which nickel and dime you to death. In the end, you realize you are having a wretched experience and have, in the end, paid pretty much the same as you would have paid anywhere else. But we don't have to blame the airlines. They're just following the American business model.

Perhaps the most revealing trend is one that we've been seeing for decades. A company gets in trouble. Maybe the business fell off. New competitors showed up. The company failed to meet its business projections or sales targets. Someone decided that costs were "out of line" (whatever that means). There is always the very same knee-jerk reaction. Slash and burn. Corporate layoffs. Call the division managers and tell them how many heads they have to cut. And make sure they do it urgently.

Corporate layoffs became such an accepted practice that one CEO of a Fortune 500 firm bragged about the fact that he required a ten percent turnover of staff every year. Managers in his firm were required to rank their staff from best to worst every year. Ten percent of the staff was required to be in the worst ranking, and then they were fired. He thought that this is what made his company great. It certainly made him a multi-millionaire. Today that company, which I won't name, has fallen on its sword. It's not such a great company any more, and hasn't had any successes to boast of in years.

So here's the thing, I have never seen any company slash its way to greatness. So it puzzles me that every time a company is going for greatness, it thinks it can lay off people. This slash and burn strategy needs to stop. We need to start paying executives to come up with winning strategies. We need to pay them to successfully reinvent their companies - over and over again.

Companies only become great companies by innovating. Not slashing and cutting. You know I'm right. Some of greatest companies today - think Apple or Amazon or Google or Facebook - became great by innovating, by reinventing a way to do something. Yet several of the companies that we thought were great a few years ago, don't exist today - or they have had to go through bankruptcy to survive.

I don't know about you, but as a consumer I'm weary. I find myself more and more often doing battle with a computer. Walking through a store and not being able to find someone to help me. Or the one that irritates me the most ... trying to do business with an incompetent employee, who is as poorly paid as they are poorly trained. It happened again this weekend.

Last Saturday, I went into a well known national restaurant chain. I wanted a tuna sandwich with Provolone cheese on it. The clerk taking my order at the counter said, "We don't have Provolone cheese." Okay, I told her to put Swiss cheese on it instead. She replied, "We only have ..." and started reading a list of every kind of cheese they had. I told her I didn't want any of those. I only wanted Swiss cheese. She again tried to read me the list. I stopped her and reiterated my desire for Swiss cheese. She huffed and said, "We don't have Swiss cheese." I looked at the menu board behind her and saw a ham and Swiss cheese sandwich. I asked her what was on that. She said it was Swiss only for that sandwich. I asked why she would tell me there is no Swiss cheese when clearly they have Swiss cheese. She explained that it only comes with that sandwich. So, being the clever one that I am, I told her I wanted to switch my order to the ham and Swiss cheese - only I would substitute the ham for tuna. She rolled her eyes and went over to ask the manager if she could make the substitution. To my great relief, the manager approved the substitution.

Incredibly, I finally got the sandwich I wanted. But I was exhausted from the ordering process. All of it could have been avoided if the company had paid enough to hire someone competent and spent the money to train them. But as sure as their business slows, or they get out done by a competitor, their first reaction will be to fire that clerk. I feel sorry for her. I know they are paying her poorly. She's not had a proper education. She's not been trained. And she will pay the price, while the CEO will still be a multi-millionaire.

This has become so common in American culture that it is actually a surprise when I have a pleasant experience buying a product or service. Whether I'm in a lunch counter or a hospital, a bank branch or calling a plumber, I pity the poor workers. Most of them are overworked and underpaid. This is because running the company on the ragged edge of failure is exactly the sweet spot. Or at least it is as far as corporations whose goal is to milk every penny from the process are concerned.

This thinking isn’t just pervasive and accepted—it’s also actively considered a very good thing. Businesses don't want people "sitting around when they aren't needed." Instead, they view people as resources that they can go out and get whenever they need them. It's as if the CEO believes there is some pool of expertly trained and experienced resources waiting, fresh, and ready whenever the need arises. The value of an expert brought in to get the proverbial ox out of the ditch after disaster strikes is so much less than the value of having that person on hand to plan and monitor. You cannot decide to hire some better pilots after the plane has crashed.

We've offshored and now we're reshoring. We've outsourced and we've insourced. At what point will we invest? At what point will great companies have great people and treat them great? At what point will we start making resilient companies that provide great products or services with those great people? At what point will we stop believing in the myth of corporate efficiency?