Cash Leading to Lack of Operational Efficiencies

Cash can hide the failings of poorly run companies. Since the goal is to make money, everyone is happy as long as the cash is rolling in. It acts as an aphrodisiac. Leaders and investors do not ask if performance could be better.

A prime example is Emdeon, i.e. WebMD. Finance leaders sold Wall Street on the ideals of synergies. Unfortunately, cash blinded everyone and operational efficiencies were never achieved.

In the capitalistic system, competitors improve their positions and ultimately overtake the poorly run company. The downside is the displaced employees of the poorly run company.

The solution is well defined performance measures and cutting underperforming products and services.

Costs beyond Indian Labor

There is a cost that is unvalued in utilizing Indian labor. The direct labor cost is easily determined and compared to other values. On top of this labor cost is time spent in completely defining a project, additional time due to miscommunications, and effort in managing the project from such distant separation.

While it is easy to demonstrate the difference between Chinese labor and American labor cost, other factors need to be valued. For instance, Callaway Golf has kept its manufacturing in the US, so that it is closer to its customer. By doing so, the company can respond more quickly to demand.

Train for the Performance Desired

BMW's and Mercedes are bought more often in the US than Maserati's. It is because Germans create great engineers. We look to Italy for style and not a well engineered engine. In Italy, students are trained to appreciate design and the culture rewards it. In Germany, order and engineering ideals are cultural standards, which are part of the schooling.

If America is to maintain its position, then it needs to design its schooling around the factors that will take it there. For instance, if America intends to be in manufacturing then it needs to train its people to think in terms of the Toyota Production System ideals.

Why Toyota's System Will Never Work in the US

One of the tenets of the Toyota Production System, the system that is beating Ford and GM, is simplification. Unfortunately, this ideal is not trained in the United States. Our schools teach how to handle ever increasing complexity. Therefore, employees believe that dealing with complexity adds value to their position. For example, a boss comes to an employee with a new daily task. The employee gladly accepts the challenge. The employee is meeting his training he has received his whole life. He believes that he is matching expectations and adding value to the company. As well, this complexity means job security. Whether intended or not, the employee is making it harder to be replaced.

Oddly, franchises design the operations so that they can hire anyone and train them quickly. This entails simplicity. Simplicity is built into the system.

Ultimately, employees will need to be praised and rewarded for taking out unnecessary steps and for removing actions that do not lead to positive financial results.

Short-Term Results

Why do companies bow to the Wall Street analyst? The knee-jerk reaction to a quarter that falls short of expectations is a hiring freeze. Obviously, this helps the short-term net income and appeases the analyst who determines the stock price. Unfortunately, it hinders the five year or ten year initiatives. The example is a hiring manager who needs two employees to implement the initiatives his boss is pushing. Those initiatives will be effectively a year later if they are performed at all.

The real problem is new hires are not the cause of the bad quarter. The CEO should focus on the root of problem. For example, Starbucks stated that Frappuccinos' preparation time were the reason same-store sales did not meet expectations. Nonetheless, a hiring freeze is in place.

Performance

There is a general ideal that employees should not be judged based on performance. The ideal is people are generally going to do well and therefore should not be judged. Unfortunately, you would not buy a bad album of your favorite artist just because he/she is your favorite artist. You expect that the artist will perform. You like the individual but not what he/she has produced, i.e. a bad album.

The same is true of performance-based judgments. The employee is there to do a function that creates a return for the company. He/she is not there to simply fill a hole.

We should remember that our American ancestors immigrated so that their actions would be the basis and not their lineage and entitlement. Why should entitlement be a part of business? Leave entitlement to the French and their new graduates.