Pocket Picking isn’t Profitable

Posted on April 7, 2011

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In light of all the recent news about RIFs and cuts for government workers’ and healthcare workers’ compensation across the nation I thought I would share some Jeffrey Pfeffer wisdom.

In his 2007 book “What were they thinking: Unconventional wisdom about management,” Jeffrey Pfeffer devotes a chapter to reductions in labor.   Entitled “Stop picking employees pockets: it seldom fixes anything,” Pfeffer relays that large companies in financial difficulties often turn to their hourly workers and front line employees to take reductions in salaries and benefits (Pfeffer, 2007).  Throughout this chapter he gives examples that show that this strategy fails to work and in some scenarios actually worsens company problems (Pfeffer, 2007).  In his examples, being low cost does not correlate with being profitable.  A fixation on labor costs, although tempting, diverts management’s attention from other aspects of operations that might provide them more leverage in their competitive market (Pfeffer, 2007).

Pfeffer reminds us that labor costs depend on wages but also on productivity.  Unsatisfactory working conditions and reductions in compensation make a difficult environment in which to cultivate employees who are committed, creative and engaged.  Pfeffer (2007) argues that it is precisely in a time of challenge that companies need employee loyalty and effort.  Instead of cost cutting labor, efforts should be directed to improving service, quality, productivity and training.  These kinds of efforts require the input of the front line workers.  Pfeffer advises to avoid the death spiral of cuts that go so deep they affect productivity and morale.

Instead of cutting, offer the customer something of value.  A great company with a great product doesn’t save money by reducing the size of the cereal box while charging the same price.  A great company enhances something about the cereal to charge more.  A great company may cut price to increase volume (eg. buy two at a reduced price).  A great company focuses on growth opportunities rather than reduction opportunities.   A great company gives the customer what they want.

As citizens we need government employees to provide the services we need.

In a hospital, patients want someone there to care for them. Perhaps this information from Pfeffer will encourage administrators and CFOs to find means to keep employees in all industries adequately compensated and in the levels needed to give the customers what they want…

what is a hospital without its people?

In a hospital setting, the true product a hospital is offering…is its people.

*Review the evidence for yourself. Pfeffer’s book is available from Harvard Business School Press

Additional resource: Mark Graban also talks about maintaining product quality