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CHAPTER 1

The Measuring Stick

* A Disaster Off the Scilly Isles
* The Measuring Stick
* Putting the Twelve to the Test
* A Case in Point
* Mountain Climbing

A Disaster Off the Scilly Isles

"What do we know to be important but are unable to measure?"

In the dense fog of a dark night in October 1707, Great Britain lost nearly an entire fleet of ships. There was no pitched battle at sea. The admiral, Clowdisley Shovell, simply miscalculated his position in the Atlantic and his flagship smashed into the rocks of the Scilly Isles, a tail of islands off the southwest coast of England. The rest of the fleet, following blindly behind, went aground and piled onto the rocks, one after another. Four warships and two thousand lives were lost.

For such a proud nation of seafarers, this tragic loss was distinctly embarrassing. But to be fair to the memory of Clowdisley Shovell, it was not altogether surprising. The concept of latitude and longitude had been around since the first century B.C. But by 1700 we still hadn't managed to devise an accurate way to measure longitude -- nobody ever knew for sure how far east or west they had traveled. Professional seamen like Clowdisley Shovell had to estimate their progress either by guessing their average speed or by dropping a log over the side of the boat and timing how long it took to float from bow to stem. Forced to rely on such crude measurements, the admiral can be forgiven his massive misjudgment.

What caused the disaster was not the admiral's ignorance, but his inability to measure something that he already knew to be critically important -- in this case longitude.

A similar drama is playing out in today's business world: many companies know that their ability to find and keep talented employees is vital to their sustained success, but they have no way of knowing whether or not they are effective at doing this.

In their book The Service Profit Chain, James Heskett, W. Earl Sasser, and Leonard Schlesinger make the case that no matter what your business, the only way to generate enduring profits is to begin by building the kind of work environment that attracts, focuses, and keeps talented employees. It is a convincing case. But the manager on the street probably didn't need convincing. Over the last twenty years most managers have come to realize their competitiveness depends upon being able to find and keep top talent in every role This is why, in tight labor markets, companies seem prepared to go to almost any lengths to prevent employees' eyes from wandering. If you work for GE, you may be one of the twenty-three thousand employees who are now granted stock options in the company. Employees of AlliedSignal and Starbucks can make use of the company concierge service when they forget that their mothers need flowers and their dachshunds need walking. And at Eddie Bauer, in-chair massages are available for all those aching backs hunched over computer terminals.

But do any of these caring carrots really work? Do they really attract and keep only the most productive employees? Or are they simply a catch-all, netting both productive employees and ROAD warriors -- the army's pithy phrase for those sleepy folk who are happy to "retire on active duty"?

The truth is, no one really knows. Why? Because even though every great manager and every great company realizes how important it is, they still haven't devised an accurate way to measure a manager's or a company's ability to find, focus, and keep talented people. The few measurements that are available -- such as employee retention figures or number of days to fill openings or lengthy employee opinion surveys -- lack precision. They are the modern-day equivalent of dropping a log over the side of the boat.

Companies and managers know they need help. What they are asking for is a simple and accurate measuring stick that can tell them how well one company or one manager is doing as compared with others, in terms of finding and keeping talented people. Without this measuring stick, many companies and many managers know they may find themselves high and dry -- sure of where they want to go but lacking the right people to get there.

And now there is a powerful new faction on the scene, demanding this simple measuring stick: institutional investors.

Institutional investors -- like the Council of Institutional Investors (CII), which manages over $1 trillion worth of stocks, and the California Public Employees Retirement System (CalPERS), which oversees a healthy $260 billion -- define the agenda for the business world. Where they lead, everyone else follows.

Institutional investors have always been the ultimate numbers guys, representing the cold voice of massed shareholders, demanding efficiency and profitability. Traditionally they focused on hard results, like return on assets and economic value added. Most of them didn't concern themselves with "soft" issues like "culture." In their minds a company's culture held the same status as public opinion polls did in Soviet Russia: superficially interesting but fundamentally irrelevant.

At least that's the way it used to be. In a recent about-face, they have started to pay much closer attention to how companies treat their people. In fact, the CII and CalPERS both met in Washington to discuss "good workplace practices...and how they can encourage the companies they invest in to value employee loyalty as an aid to productivity."

Why this newfound interest? They have started to realize that whether software designer or delivery truck driver, accountant or hotel housekeeper, the most valuable aspects of jobs are now, as Thomas Stewart describes in Intellectual Capital, "the most essentially human tasks: sensing, judging, creating, and building relationships." This means that a great deal of a company's value now lies "between the ears of its employees." And this means that when someone leaves a company, he takes his value with him -- more often than not, straight to the competition.

Today more than ever before, if a company is bleeding people, it is bleeding value. Investors are frequently stunned by this discovery. They know that their current measuring sticks do a very poor job of capturing all sources of a company's value. For example, according to Baruch Lev, professor of finance and accounting at New York University's Stern School of Business, the assets and liabilities listed on a company's balance sheet now account for only 60 percent of its real market value. And this inaccuracy is increasing. In the 1970s and 1980s, 25 percent of the changes in a company's market value could be accounted for by fluctuations in its profits. Today, according to Professor Lev, that number has shrunk to 10 percent.

The sources of a company's true value have broadened beyond rough measures of profit or fixed assets, and bean counters everywhere are scurrying to catch up. Steve Wallman, former commissioner of the Securities and Exchange Commission, describes what they are looking for:

If we start to get further afield so that the financial statements...are measuring less and less of what is truly valuable in a company, then we start to lower the relevance of that scorecard. What we need are ways to measure the intangibles, R&D, customer satisfaction, employee satisfaction. (italics ours)

Companies, managers, institutional investors, even the commissioner of the SEC -- everywhere you look, people are demanding a simple and accurate measuring stick for comparing the strength of one workplace to another. The Gallup Organization set out to build one.

The Measuring Stick

"How can you measure human capital?"

What does a strong, vibrant workplace look like?

When you walk into the building at Lankford-Sysco a few miles up the road from Ocean City, Maryland, it doesn't initially strike you as a special place. In fact, it seems slightly odd. There's the unfamiliar smell: a combination of raw food and machine oil. There's the decor: row upon row of shelving piled high to the triple ceilings, interspersed with the occasional loading dock or conveyor belt. Glimpses of figures bundled up in arctic wear, lugging mysterious crates in and out of deep freezers, only add to your disquiet.

But you press on, and gradually you begin to feel more at ease. The employees you run into are focused and cheerful. On the way to reception you pass a huge mural that seems to depict the history of the place: "There's Stanley E. Lankford Jr. hiring the first employee. There's the original office building before we added the warehouse...." In the reception area you face a wall festooned with pictures of individual, smiling faces. There are dozens of them, each with an inscription underneath that lists their length of service with the company and then another number.

"They are our delivery associates," explains Fred Lankford, the president. "We put their picture up so that we can all feel close to them, even though they're out with our customers every day. The number you see under each picture represents the amount of miles that each one drove last year. We like to publicize each person's performance."

Stanley Lankford and his three sons (Tom, Fred, and Jim) founded the Lankford operation, a family-owned food preparation and distribution company, in 1964. In 1981 they merged with Sysco, the $15 billion food distribution giant. An important proviso was that Tom, Fred, and Jim would be allowed to stay on as general managers Sysco agreed, and today all parties couldn't be happier with the decision.

The Lankford-Sysco facility is in the top 25 percent of all Sysco facilities in growth, sales per employee, profit per employee, and market penetration. They have single-digit turnover, absenteeism is at an all-company low, and shrinkage is virtually nonexistent. Most important, the Lankford-Sysco facility consistently tops the customer satisfaction charts.

"How do you do it?" you ask Fred.

He says there is not much to it. He is pleased with his pay-for-performance schemes -- everything is measured every measurement is posted and every measurement has some kind of compensation attached. But he doesn't offer that up as his secret. He says it is just daily work. Talk about the customer. Highlight the right heroes. Treat people with respect. Listen.

His voice trails off because he sees he is not giving you the secret recipe you seem to be looking for.

Whatever he's doing, it clearly works for his employees. Forklift operators tell you about their personal best in terms of "most packages picked" and "fewest breakages." Drivers regale you with their stories of rushing out an emergency delivery of tomato sauce to a restaurant caught short. Everywhere you turn employees are talking about how their little part of the world is critical to giving the customer the quality that is now expected from Lankford-Sysco.

Here are 840 employees, all of whom seem to thrill to the challenge of their work. Whatever measurements you care to use, the Lankford-Sysco facility in Pocomoke, Maryland, is a great place to work.

You will have your own examples of a work environment that seems to be firing on all cylinders. It will be a place where performance levels are consistently high, where turnover levels are low, and where a growing number of loyal customers join the fold every day.

With your real-life example in mind, the question you have to ask yourself is, "What lies at the heart of this great workplace? Which elements will attract only talented employees and keep them, and which elements are appealing to every employee, the best, the rest, and the ROAD warriors?"

Do talented employees really care how empowered they are, as long as they are paid on performance, such as at Lankford-Sysco? Perhaps the opposite is true once their most basic financial needs have been met, perhaps talented employees care less about pay and benefits than they do about being trusted by their manager. Are companies wasting their money by investing in spiffier work spaces and brighter cafeterias? Or do talented employees value a clean and safe physical environment above all else?

To build our measuring stick, we had to answer these questions.


Over the last twenty-five years the Gallup Organization has interviewed more than a million employees. We have asked each of them hundreds of different questions, on every conceivable aspect of the workplace. As you can imagine, one hundred million questions is a towering haystack of data. Now, we had to sift through it, straw by straw, and find the needle. We had to pick out those few questions that were truly measuring the core of a strong workplace.

This wasn't easy. If you have a statistical mind, you can probably hazard a pretty good guess as to how we approached it -- a combination of focus groups, factor analysis, regression analysis, concurrent validity studies, and follow-up interviews. (Our research approach is described in detail in the appendix.)

However, if you think statistics are the mental equivalent of drawing your fingernails across a chalkboard, the following image may help you envision what we were trying to do.

In 1666 Isaac Newton closed the blinds of his house in Cambridge and sat in a darkened room. Outside, the sun shone brightly. Inside, Isaac cut a small hole in one of the blinds and placed a glass prism at the entrance. As the sun streamed through the hole, it hit the prism and a beautiful rainbow fanned out on the wall in front of him. Watching the perfect spectrum of colors playing on his wall, Isaac realized that the prism had pried apart the white light, refracting the colors to different degrees. He discovered that white light was, in fact, a mixture of all the other colors in the visible spectrum, from dark red to deepest purple and that the only way to create white light was to draw all of these different colors together into a single beam.

We wanted our statistical analyses to perform the same trick as Isaac's prism. We wanted them to pry apart strong workplaces to reveal the core. We could then say to managers and companies, "If you can bring all of these core elements together in a single place, then you will have created the kind of workplace that can attract, focus, and keep the most talented employees."

So we took our mountain of data and we searched for patterns. Which questions were simply different ways of measuring the same factor? Which were the best questions to measure each factor? We weren't particularly interested in those questions, that yielded a unanimous, "Yes, I strongly agree? Nor were we swayed by those questions where everyone said, "No, I strongly disagree." Rather, we were searching for those special questions where the most engaged employees -- those who were loyal and productive -- answered positively, and everyone else -- the average performers and the ROAD warriors -- answered neutrally or negatively.

Questions that we thought were a shoo-in -- like those dealing with pay, and benefits -- fell under the analytical knife. At the same time, innocuous little questions -- such as "Do I know what is expected of me at work?" -- forced their way to the forefront. We cut and we culled. We rejigged and reworked, digging deeper and deeper to find the core of a great workplace.

When the dust finally settled, we made a discovery: Measuring the strength of a workplace can be simplified to twelve questions. These twelve questions don't capture everything you may want to know about your workplace, but they do capture the most information and the most important information. They measure the core elements needed to attract, focus, and keep the most talented employees.

Here they are:

  1. Do I know what is expected of me at work?
  2. Do I have the materials and equipment I need to do my work right?
  3. At work, do I have the opportunity to do what I do best every day?
  4. In the last seven days, have I received recognition or praise for good work?
  5. Does my supervisor, or someone at work, seem to care about me as a person?
  6. Is there someone at work who encourages my development?
  7. At work, do my opinions seem to count?
  8. Does the mission/purpose of my company make me feel like my work is important?
  9. Are my co-workers committed to doing quality work?
  10. Do I have a best friend at work?
  11. In the last six months, have I talked with someone about my progress?
  12. At work, have I had opportunities to learn and grow?

These twelve questions are the simplest and most accurate way to measure the strength of a workplace.

When we started this research we didn't know we were going to land on these twelve questions. But after running a hundred million questions through our "prism," these exact questions were revealed as the most powerful. If you can create the kind of environment where employees answer positively to all twelve questions, then you will have built a great place to work.

While at first glance these questions seem rather straightforward, the more you look at them, the more intriguing they become.

First, you probably noticed that many of the questions contain an extreme. "I have a best friend at work" or "At work I have the opportunity to do what I do best every day." When the questions are phrased like this, it is much more difficult to say "Strongly Agree," or "5" on a scale of 1 to 5. But this is exactly what we wanted. We wanted to find questions that would discriminate between the most productive departments and the rest. We discovered that if you removed the extreme language, the question lost much of its power to discriminate. Everyone said "Strongly Agree" -- the best, the rest, and everyone in between. A question where everyone always answers "Strongly Agree" is a weak question.

Much of the power of this measuring stick, then, lies in the wording of the questions. The issues themselves aren't a big surprise. Most people knew, for example, that strong relationships and frequent praise were vital ingredients of a healthy workplace. However, they didn't know how to measure whether or not these ingredients were present, and if so, to what extent. Gallup has discovered the best questions to do just that.

Second, you may be wondering why there are no questions dealing with pay, benefits, senior management, or organizational structure. There were initially, but they disappeared during the analysis. This doesn't mean they are unimportant. It simply means they are equally important to every employee, good, bad, and mediocre. Yes, if you are paying 20 percent below the market average, you may have difficulty attracting people. But bringing your pay and benefits package up to market levels, while a sensible first step, will not take you very far. These kinds of issues are like tickets to the ballpark -- they can get you into the game, but they can't help you win.

Putting the Twelve to the Test

"Does the measuring stick link to business outcomes?"

Gallup had set out to dense a way to measure strong workplaces: workplaces that would attract and retain the most productive employees and scare away the ROAD warriors. If these questions were in truth the best questions, then employees who answered them positively would presumably work in higher-performing departments. That was our goal when we designed the measuring stick. Would it prove to be true in practice?

Throughout the spring and summer of 1998 Gallup launched a massive investigation to find out.

We asked twenty-four different companies, representing a cross section of twelve distinct industries, to provide us with scores measuring four different kinds of business outcome: productivity, profitability, employee retention, and customer satisfaction. Some companies had difficulty gathering this data, but in the end we managed to include over 2,500 business units in our study. The definition of a "business unit" varied by industry: for banking it was the branch for hospitality it was the restaurant or the hotel for manufacturing it was the factory and so on.

We then interviewed the employees who worked in these branches, restaurants, hotels, factories, and departments, asking them to respond to each of the twelve questions on a scale of 1 to 5, "1" being strongly disagree, "5" being strongly agree. One hundred and five thousand employees took part.

Armed with all this data, we were set to go. We knew the productivity, the profitability, the retention levels, and the customer ratings of these different business units. And we knew how the employees of the business units had answered the twelve questions. We could now see, finally, whether or not engaged employees did indeed drive positive business outcomes, across 2,500 business units and 24 companies.

We were optimistic that the links would surface, but, truth be told, it was entirely possible that we wouldn't find them. The links between employee opinion and business unit performance seem inevitable -- after all, most of us have probably heard ourselves rattle off such cliches as "Happy employees are more productive" or "If you treat your people right, they wilt treat your customers fight." Yet in their attempts to prove these statements, researchers have frequently come up empty-handed. In fact, in most studies, if you test one hundred employee o inion questions, you will be lucky to find five or six that show a strong relationship to any business outcome. Disappointingly, if you repeat the study, you often find that a different set of five or six questions pop up the second time around.

We also knew that no one had ever undertaken this kind of study before, across many different companies. Since each of these four business outcomes -- productivity, profit, retention, and customer service -- is vitally important to every company, and since the easiest lever for a manager to pull is the employee lever, you would have thought the air would be thick with research examining the links between employee opinion and these four business outcomes. It isn't. You can track down research examining these links within a particular company -- with decidedly mixed results -- but never across companies and industries. Surprisingly, the Gallup research was the first cross-industry study to investigate the links between employee opinion and business unit performance.

Why does this research vacuum exist? More than likely it's because each company has different ways of measuring the same thing. Blockbuster Video might measure productivity by sales per square foot. Lankford-Sysco might use packages shipped and number of breakages. The Walt Disney Company might include only full-time employees in their retention figures. Marriott might include full-time and part-time. It is frustratingly difficult to pick up on linkages between employee opinion and business performance, when every company insists on measuring performance differently.

Fortunately we had discovered a solution: meta-analysis. A detailed explanation can put even the most ardent number cruncher to sleep, so let's just say that it is a statistical technique that cuts through the different performance measures used by different companies and allows you to zero in on the real links between employee opinion and business unit performance.

So, having entered the performance data from over 2,500 business units and punched in the opinion data from over 105,000 employees, we programmed the meta-analysis formulas, pressed Run, and held our breath.

This is what we found. First, we saw that those employees who responded more positively to the twelve questions also worked in business units with higher levels of productivity, profit, retention, and customer satisfaction. This demonstrated, for the first time, the link between employee opinion and business unit performance, across many different companies.

Second, the meta-analysis revealed that employees rated the questions differently depending on which business unit they worked for rather than which company. This meant that, for the most part, these twelve opinions were being formed by the employees' immediate manager rather than by the policies or procedures of the overall company. We had discovered that the manager -- not pay, benefits, perks, or a charismatic corporate leader -- was the critical player in building a strong workplace. The manager was the key. We will discuss this finding in more detail later in the chapter. For now let's concentrate on our first discovery, the link between employee opinion and business unit performance.

THE LINKS BETWEEN EMPLOYEE OPINION AND BUSINESS UNIT PERFORMANCE

If you are so inclined, you can find in the appendix a detailed description of all our discoveries and the methodology behind them. This is the top line.

* Every one of the twelve questions was linked to at least one of the four business outcomes: productivity, profitability, retention, and customer satisfaction. Most of the questions revealed links to two or more business outcomes. The twelve questions were indeed capturing those few, vital employee opinions that related to top performance, whether in a bank, a restaurant, a hotel, a factory, or any other kind of business unit. The measuring stick had withstood its most rigorous test.
* As you might have expected, the most consistent links (ten of the twelve questions) were to the "productivity" measure. People have always believed there is a direct link between an employee's opinion and his work group's productivity. Nonetheless, it was good to see the numbers jibe with the theory.
* Eight of the twelve questions showed a link to the "profitability" measure. That means employees who answered these eight questions more positively than other employees also worked in more profitable banks, restaurants, hotels, factories, or departments. To some people this might seem a little surprising. After all, many believe that profit is a function of factors that lie far beyond the control of individual employees: factors like pricing, competitive positioning, or variable-cost management. But the more you think about it, the more understandable this link becomes. There are so many things one employee can do to affect profit -- everything from turning off more lights, to negotiating harder on price, to avoiding the temptations of the till. Simply put, these will happen more often when each employee feels truly engaged.
* What about employee retention? Strangely enough, only five of the twelve questions revealed a link to retention:

1. Do I know what is expected of me at work?
2. Do I have the materials and equipment I need to do my work right?
3. Do I have the opportunity to do what I do best every day?
5. Does my supervisor, or someone at work, seem to care about me as a person?
7. At work, do my opinions seem to count?
Most people would instinctively agree with the generalization "Engaged employees will stay longer." But our research suggests that the link between employee opinion and employee retention is subtler and more specific than this kind of generalization has allowed. Even more than the rest, these five questions are most directly influenced by the employee's immediate manager. What does this tell us? It tells us that people leave managers, not companies. So much money has been thrown at the challenge of keeping good people -- in the form of better pay, better perks, and better training -- when, in the end, turnover is mostly a manager issue. If you have a turnover problem, look first to your managers.
* Of the twelve, the most powerful questions are those with a combination of the strongest links to the most business outcomes. Armed with this perspective, we now know that the following six are the most powerful questions:
  1. Do I know what is expected of me at work?
  2. Do I have the materials and equipment I need to do my work right?
  3. Do I have the opportunity to do what I do best every day?
  4. In the last seven days, have I received recognition or praise for good work?
  5. Does my supervisor, or someone at work, seem to care about me as a person?
  6. Is there someone at work who encourages my development?

As a manager, if you want to know what you should do to build a strong and productive workplace, securing 5's to these six questions would be an excellent place to start. We will return to these questions in a moment.

MANAGERS TRUMP COMPANIES

Once a year a study is published entitled "The Hundred Best Companies to Work For." The criteria for selection are such factors as Does the company have an on-site day care facility? How much vacation does the company provide? Does the company offer any kind of profit sharing? Is the company committed to employee training? Companies are examined, and the list of the top one hundred is compiled.

Our research suggests that these criteria miss the mark. It's not that these employee-focused initiatives are unimportant. It's just that your immediate manager is more important. She defines and pervades your work environment. If she sets clear expectations, knows you, trusts you, and invests in you, then you can forgive the company its lack of a profit-sharing program. But if your relationship with your manager is fractured, then no amount of in-chair massaging or company-sponsored dog walking will persuade you to stay and perform. It is better to work for a great manager in an old-fashioned company than for a terrible manager in a company offering an enlightened, employee-focused culture.

Sharon F., a graduate of Stanford and Harvard, left American Express a little over a year ago. She wanted to get into the world of publishing, so she joined one of the media-entertainment giants in the marketing department of one of their many magazines. She was responsible for devising loyalty programs to ensure that subscription holders would renew. She loved the work, excelled at it, and caught the eye of senior management. Sharon is a very small cog in this giant machine, but according to the chairman of this giant, employees like her -- bright, talented, ambitious employees -- are "the fuel for our future."

Unfortunately for this giant, the fuel is leaking. After only a year Sharon is leaving the company. She is joining a restaurant start-up as head of marketing and business development. Her boss, it appears, drove her away.

"He's not a bad man," she admits. "He's just not a manager. He's insecure, and I don't think you can be insecure and a good manager. It makes him compete with his own people. It makes him boast about his high-style living when he should be listening to us. And he plays these silly little power games to show us who's the boss. Like last week he didn't show up for a ten A.M. interview with a candidate who had made a two-hour commute just to see him, because he had stayed out much too late the night before. He called me at nine fifty-five A.M., asked me to break the news to her, and tried to make it seem like he was giving me some kind of compliment, that he could really trust me to cover for him. I can't stand behavior like that."

Listening to Sharon, you might wonder if it is just a personality clash or even whether it is she who is somehow causing the problems. So you ask her,

Library of Congress subject headings for this publication: Executive ability, Management, Executives Attitudes, Employees Attitudes, Employer attitude surveys, Employee attitude surveys