The Innovators: Winning the Productivity Game

NEW YORK (TheStreet) -- In the 1960s when manufacturing dominated the world's economy, Edward Deming, a New York University professor, noticed that manufacturers resolved problems as they occurred, but there was no system for continuously improving manufacturing performance.

In response, Deming developed "Statistical Process Control." He tried and failed to sell it to U.S. auto companies, but found enthusiastic supporters in Japan's central government. Japan's unprecedented transformation from cheap goods to best-in-the-world manufacturing is largely attributed to Deming. Still today, Japan's top corporate award is, "The Deming Prize."

By dramatically increasing manufacturing productivity, Deming improved the standard of living for every Japanese citizen.

Fast forward to 2009. Think Microsoft ( MSFT), Thomson Reuters ( TRI) or even Orkin. Each of these companies is essentially a collection of leased buildings and people. What is the system for improving productivity in these pure human capital plays?

With 75% of GDP from advanced countries now coming from services it is time for a fresh approach to productivity improvement -- one that is focuses on workforce capabilities.

Like Japan in the '60s and '70s, America's standard of living depends on productivity growth. But we have a problem -- our comparative advantage is eroding. The Conference Board reported that 2008 productivity growth from emerging economies was 5.5%, down from 8.3% in the BRIC countries for 2007.

This sustained growth, largely attributable to investments in state-of-the-art manufacturing processes and technologies, far surpasses the growth rates from advanced counties such as the U.S. (1.7%), Japan (0.9%) and the European Union (0.2%).

In summarizing the productivity challenge of today's service-intensive economy, The Conference Board concludes, "Innovation remains a crucial trigger for growth and recovery. But it requires continued investment in capital and labor -- iincluding management and workplace practices, organizational structure, technology applications, and human resource strategies...."

What are your company's productivity-enhancing "workplace practices" and "human resource strategies"? The annual employee survey? Your new five-point performance appraisal scale? More likely than not, over the past 12 months your workplace practice of choice has been downsizing.

Downsizing often does improve output per hour, but how does it affect growth? The Economist reports that 2008 patent filings, an important indicator of innovation and growth, dropped from a three-year average growth rate of 9.3% to 2.4%. As in past downturns, mass layoffs will likely reduce mid- and long-term productivity by suffocating risk and innovation.

What must U.S. companies do to drive productivity and revenue growth? Build and manage a comprehensive, disciplined system for improving workforce capabilities and outputs. Then assign it, with metrics and review dates, to an executive team member. Don't look to HR for a solution; today's HR programs are not designed for productivity improvements. It's time to build a new model that "bends" the curve on workforce productivity. Here are three components to consider.

Effective Executive Teams

Executive team performance may be your organization's biggest productivity lever. Effective executive teams choose a differentiated business strategy and then design an organization that efficiently delivers that strategy.

Successful executive teams know the answer to the question, "Are the outputs of our team 'better' than last year?" That answer is knowable. Ask team members to define the four or five outputs for meeting the organization's financial targets. "Create a compelling strategy" might be one. Then have team members define level 1, 2, and 3 performance for each. Finally, as a team, assess performance every six months.

Key Position Excellence

"When people in our most important positions outperform their competitor peers, we win." Let's be honest -- not all roles are equally important to the bottom line. At Kraft ( TRI), brand managers are critical; at Coldwell Banker, it's the real estate office manager. Choose two or three roles with the biggest impact on customer and shareholder satisfaction and build a complete system that ensures year-over-year performance improvements. Here's how:

Clarify success measures for the role (i.e., lagging indicators of performance). This unambiguously answers the question, "How am I doing?"

Define the four to five most important activities for each role. Get rid of your over-engineered competency models. Determine the four or five things your top 5% do each week and find out how they do it. For sales managers these might include maintaining a full pipeline, improving executive positioning and upgrading sales capabilities. For real estate managers it includes agent recruiting and community relationships.

Assess incumbents and move low performers. Assess incumbents on each success measure and on each activity. Transfer or terminate individuals who will not be considered A or B players on the open market.

Design HR systems to improve performance on the key activities. Align all HR systems to the five activities (e.g., selection, training, appraisal, career paths, base pay). For example, use top 5% practices to create training content for the major activities. Eliminate all training that does not drive performance improvements on the major activities. Want a mini-MBA? Pay for it yourself.

Define your company's culture in business terms and behaviors. When IBM ( IBM) reset its culture, it held a 72- hour "values jam" (like a jazz jam session where everyone gets to play). IBM employees set a very clear set of business focused values: Dedication to every client's success; innovation that matters for our company and for the world; and trust and personal responsibility in all relationships. Once the values are clear, assign a leader from the executive team to lead and report progress every quarter. IBM did this by assigning culture to the Senior Leadership Team, a working group of the "best" 300 leaders at the company.

Deming changed the world by building a system that drove step-function improvements in manufacturing productivity. Toyota ( TM) adopted Deming's system; General Motors did too, but a decade too late. In today's service-rich economy a new productivity system is needed - one that focuses on human capital. Like Toyota and GM, the winners will get there first.

-- Written by Brad Hall