Enterprise Issues: There's profit in empowerment of your people

Many managers merely pay lip service to their workforce and ignore the real potential

IF SOMEBODY was to write a business version of Gustave Flaubert's Dictionary of Received Ideas, the great novelist's satire of conventional wisdom and cliche, it would certainly contain the entry: "People: our most important asset."

As with any notion that has lost its freshness, it is well worth asking what it means and whether it is correct. Surprisingly, this mainstay of management-speak has rarely been checked against reality. Perhaps even more surprising, when it is, it turns out to be true.

After all, it is easy to be cynical about the lip-service paid by most managers to that precious resource, their workforce. It only takes a little casual observation to demonstrate that many managers subscribe to other schools of practice - especially the "grind 'em down, keep 'em in the dark, and work 'em hard for as little as you can get away with paying" schools.

Even in so-called "people businesses" such as advertising or management consultancy, it is clear that many bosses hate the thought of ceding any control to employees or, well, having to manage their staff. In most companies the personnel or "human resources" department has little to do with managing human resources, acting rather as a sort of compliance office to make sure the company is not breaking the law.

Yet recent research that tries to quantify the potential effects of decent people-management suggests that the gains could be huge, dwarfing the likely impact of more R&D, better strategic planning or quality drives. A study carried by high-profile academics for the Institute of Personnel and Development uses a regular survey of 67 medium-sized manufacturing companies in Sheffield since 1990. It assesses and quantifies the links between a variety of management policies and the companies' productivity and profitability performance.

The study finds that people management is one of the management inputs that does affect business output. What is a real eye-opener is the fact that people- management is both vastly more important than the other elements of management and has a very big impact on profits and productivity. As the IPD concludes, with some satisfaction: "The findings underline the general message that it is how companies manage their employees that is crucial to business success."

The research, carried out by Professor Michael West at Sheffield University, Professor Stephen Nickell of Oxford University and other researchers at Sheffield, addresses four questions. Is there a link between employees' job satisfaction and company performance? Is "organisational culture" a guide to company performance? Which people-management policies make most difference to results? And how do they compare with the impact of other policies such as investment in R&D, investment in new technology and competitive strategy?

The answers are: Yes, job satisfaction alone can raise profits by 5 per cent; yes, "cultural" factors can account for 10 per cent of the variation in profits between different companies; job design - particularly giving workers shopfloor responsibility - and skill development each explain about half of the contribution of people policies to company performance; and people policies can explain nearly a fifth of the variation in profitability and productivity, compared with 2 per cent for strategy, 1 per cent for quality drives, 1 for new technology and 8 for R&D.

Of course, the sample is small and there are difficulties in measuring the left side of the regression equations in the study, the measures of management input. Job satisfaction is relatively easily measured - proportion of employees surveyed reporting that they are satisfied in about 15 areas, including autonomy, safety, physical conditions, pay, promotion prospects, job security and so on. And this one indication of the success of human resource policies can account for 12 per cent of the difference in profits between companies.

The numbers are impressive enough, but remember that the analysis is based on a sample of relatively small manufacturing companies. Just think how much bigger the pay-off in improved productivity and profitability could be for a bigger business presenting a bigger management challenge, or for a company in a private or public service industry where people are the main input.

Of course, if it were easy to boost profits by 20 per cent by tweaking personnel policies, every business would have done it, rather than just a few. But is it the training programme, the appraisal system, the variety of work or the pay relative to competitors that matters?

I feel the answer is the degree to which individual employees get autonomy and control over their own work. This is vital for job satisfaction, allowing swifter problem-solving and decision-taking, and ensuring relevant information influences decisions quickly. It must be an important part of encouraging employees to internalise the aims and needs of the business.

Research by Bill Lazonick at the University of Massachusetts found productivity gains from the devolution of control to the shop floor. He reported a case study of a failing Massachusetts toy factory which, as a desperate last measure, handed over the running of the business to the women assembly workers. They boosted productivity and quality and turned the company around. But the managers hated losing control so they closed the factory.

This is the real catch. Not only do businesses need to do the right sort of human resource management, they have to want to do it to get it right. Whatever the next piece of research turns up, it will not be a mechanical solution. It will not be enough to say that people are the business's most important asset; managers will have to really mean it.