Getting the Best from Knowledge Workers: How Does Human Resources Management Contribute?

Date November 8, 2004
Speaker Craig A. MARSH(Theseus Institute, France)
Moderator SANBONMATSU Susumu(Senior Fellow, RIETI)


Allow me to begin by explaining about my institute, the Theseus Institute in the south of France, which derives its name from an ancient Greek myth. Theseus was the son of the king of Athens who went to Crete to kill the Minotaur that was eating the seven sons and daughters that the kingdom of Crete paid as a yearly tribute to the monster. To do this, Theseus had to find his way through a labyrinth using a ball of string given to him by the daughter of the king of Crete, who had fallen in love with him. He succeeded in killing the Minotaur and returned to Athens a hero.

As a classical scholar myself, I am proud to be associated with this myth, and we still believe that it holds relevance when applied to modern management. We believe there is still a maze faced by modern managers in organizations and that they are, metaphorically, still stuck in technological, competitive and cultural mazes. We consider it our mission to help managers find their way out of these mazes. Our mission is to redefine management for the information age.

In my talk, first of all, I will outline some of the profound changes that are taking place in society which we cannot avoid. My experience with various cultures suggests that these changes are taking place worldwide at varying speeds, especially in developed countries. For me, the consequence of those changes is that standard ways of thinking about power, control and the nature of employee relationships are inadequate. I will finish by offering examples from my own research of some radical solutions that certain organizations are finding to revolutionize their internal structures to meet these changes.

As I prepared this talk, I happened to be in Florence with my family, and it occurred to me that the Renaissance in Europe had some parallels for the kinds of changes now happening in management. In 13th- and 14th-century Europe, people's lives were completely dominated by Christianity. This form of autocratic government represented by the Pope was rigid, stable and had existed unchanged for centuries; it was becoming increasingly insensitive and detached from the needs of ordinary people. The painting of the Angelo in Formis is the kind of art that was represented by this version of the world: This two-dimensional art represented nothing more than the power of the church and bore no relation to the reality of the ordinary person.

Then something changed in Florence and within a hundred years, an artist called Masaccio was able to produce a painting such as Saint Peter Enthroned at the Santa Maria del Carmine, perhaps the most influential painting in the history of Western art. He managed to break out of a standard way of thinking and behaving and look at the world in a completely different way, portraying the religious subject as a "real" man. The painting is no longer simply on two dimensions, but the artist has an unlimited canvas on which to work. Most of all, the role of man suddenly became important and the role of God less important. This was the revolution we now call the Renaissance. This happened in 15th-century Florence because the patrons of the flourishing trade there, the Medici family, made a deal with the church that allowed artists to suddenly be exposed to contact with other worlds, giving rise to such new methodologies as use of perspective. Art became a catalyst for the change and was worshipped in and of itself as an art form. Although there were crises - plagues, wars and schisms in power relations in Rome - man became the center of the world, not religion.

In the 21st century, we have some very interesting parallels to the Renaissance. We have globalization opening our eyes to new ways of working and seeing the world, and there are new cultures in the working environment. We have multiculturalism. We have technology as a catalyst for change. We have, of course, our own crises of civilization. Moreover, we have democratization, which is a relatively recent process in political terms, and ideas of democracy are starting to filter through into business, fundamentally changing its nature. In that sense, perhaps we are at the same point as Masaccio and the changes and the revolution that we are faced with are yet to come.

Democratization represents the creation of circumstances in which people are able to express their own potential and individuality. The generation of youth all over the developed world today has seen their parents' sacrifices career-wise and seen the impacts on their freedom, self-reflection, self-knowledge and self-actualization - and they are reacting against this. In Japan, there is the issue of the so-called freeters (casual workers). Although this phenomenon of young people with a different set of values from those of earlier generations has been recognized as present in every generation, there does seem to be a fundamental change in values going on in developed societies, where individuals in this new generation do not appear to be prepared to subjugate themselves and take a position of inferiority to other people. They wish to involve themselves in their own futures and they are not prepared to accept the arbitrary use of power as a means of reinforcing status. These changes are unavoidable and these young people's ideas are starting to have an effect on the way companies operate by changing the nature of employment relationships.

As an example of an unwritten but understood contract that organizations have with the people who work for them, the "relational psychological contract" used to be very clear: security, loyalty, commitment, seniority pay, regular promotions, carefully defined responsibilities, lifetime employment et cetera. For several decades this was the deal accepted by both employee and employer. What seems to have happened is that we are now moving to something called the "transactional contract" represented by uncertainty and more mercenary behavior - with employees being more prepared to leave. People are more interested in taking responsibility for their own self-development. There is the idea of pay for performance instead of pay for seniority. There are movements in all directions, not just upward, but possibly outward. There is the role of competencies that can be used in a number of different areas.

However, I would question whether this is working. What this development seems to be creating is a great deal of uncertainty, and the deal remains one-sided. Companies still believe they have the power and control, so the transactional contract works so long as the company is willing to put the means, the measures and the resources into individuals. My argument is that the power dynamic has changed and that power is no longer with the organization. One of the reasons for that change is that there soon will be a shortage of young workers in the developed world, what with declining birthrates in Japan and in most of Western Europe. This is going to put the onus on the individual, who will have more power than the company ever had.

The other major change is the nature of knowledge work, which is unmeasurable and uncontrollable. The first category of knowledge is "self-actualized knowledge." This is the stage in knowledge creation where a person uses his or her intelligence to create something new from nothing. It is the first step of idea creation inside an organization. That creative process is not measurable or controllable despite what companies do to set targets for creativity or to establish processes for creativity and innovation. The second step is "contextual problem-solving," where that knowledge is applied to particular problems within the organization. Finally, there is the process of sharing information for the benefit of an organization. It has to be brought to the surface and turned into something that can be passed from one person to another. Companies are trying to find ways of controlling this process, but the dilemma is that the more you try to control the process the less effective it is. Knowledge workers - software developers, consultants, financial investors - cannot be controlled; they have to control this process themselves.

We all know that technology enables, but technology also has a huge equalizing effect. Not long ago, managers could control how information flowed to employees because there were limited methods of knowledge distribution; now you can send an e-mail to a thousand people simultaneously at no cost. This has had an equalizing effect on organizational structures. At one company I was talking to recently, the engineers came up with a rating system for the quality of their project managers and they were regularly exchanging information through their own informal e-mail system. In this way, technology has an enabling quality.

The means of production in a knowledge company is in the heads of the employees and requires investment in human capital. First, intellectual capital is needed for the idea-creation phase. Then social and emotional capital are needed for the idea problem-solving and transfer phase. Individuals are needed to develop and use relationships to generate the knowledge inside the organization. This requires courage, resilience, self-awareness, self-confidence, and good-quality and well-structured relationships, as well as knowledge, skills and expertise. The problem, again, for organizations is that those areas - especially emotional and social capital - are self-developing and the power is in the hands of the people who work for the organization, rather than the organization itself.

In sum, we have several changes occurring that are leading to fundamental differences in the way we conceive of organization. The problem is that the standard human resources (HR) processes through which we manage people are not up to this challenge. The link between HR processes and results has always been difficult to quantify and can be represented by a "black box." The HR processes involved include knowledge sharing, intended to lead to innovation; appraisals, intended to lead to targets met; individual performance pay, leading to motivation and commitment; self-directed teams that look after themselves, leading to synergy; and training and development, leading to improved competence.

I once spoke to a young manager at Alcatel, a large French telecoms products manufacturer, who developed a programming language that allows old proprietary computer systems to talk to new, high-end computers. He wanted some reward for his efforts, yet Alcatel's employment contract says that it owns all "tacit and explicit knowledge" produced by its employees. The company went to court and received a favorable ruling, but nobody at the company could make it work and he refused to help. It was a lose-lose situation, and the manager has since left Alcatel. The traditional company control of the knowledge products of its people, without any incentives, is outdated and does not work.

Another example is individual performance pay, which is becoming quite popular. This is extremely risky. I have seen several occasions where introducing an individual performance pay scheme actually destroys the original reason for Introducing the scheme in the first place by incentivizing the wrong things, encouraging individualistic behavior, and creating a situation in which employees feel unfairly treated. Common cases are companies paying software engineers for each line of code they write, which has no effect on the quality of the final product. Another is the very famous case in the UK in the 1980s of private pension salesmen being rewarded based on sales numbers, which led to worthless pension schemes being sold.

More philosophically, organizations are collective organization operations. There is an inconsistency between expecting your people to work in teams, expecting them to share knowledge, and paying them individually for performance. In short, even so-called modern HR processes are not delivering what we need. The reason is that this attempt to retain control, and "process" the nature of knowledge work, simply does not work.

There are, however, some instances of organizations taking a radical view of what it means to be an organization. I will share with you a few examples to illustrate the challenge faced by any organization working in the knowledge sector these days.

Eighteen months ago, I had a meeting in Sophia, Italy with several HR managers from IT-based companies in the knowledge economy. We discussed the phenomenon of the new-generation of workers and they all agreed that young workers, with their lack of commitment and loyalty, were a big problem - except for a small software company called Stonesoft, which claimed it had near zero turnover. They recruited people based on their behavior and rigorously tested how well individuals behaved in a certain environment, how well they worked in a team, and their attitude to their work. This created a certain culture in the organization, one which looked after people, and the company managed to break the mold and retain its new young employees. This leads to the question of whether we ourselves, as managers, are not partly responsible for creating this environment that so-called freeters are responding to.

Through organizational dialogue, Grunfos, a very large Danish organization, determines the mission and direction of the organization. First, the senior management team decides what it believes are its mission, values and objectives, and then it engages with its employees in a dialogue about these points. At the next level down, the managers are interrogated and challenged on the mission and made to demonstrate it in practice. Those mission objectives change as part of this dialogue. By the time the knowledge workers at the bottom of the organization receive these ideas, they have had a full opportunity to contribute to the discussion.

With regard to market dynamics, Hewlett-Packard was interested in working out a better system for understanding how many printers would be sold. The old system was one of centralized planning, but the new system created a futures market for printer sales so that anyone could buy shares in predictions of printer sales. This led to 95% accuracy of predictions on printer sales by creating a market dynamic. Furthermore, the chairman of BP, Sir John Brown, committed to the market in 1999 that he would reduce hydrocarbon emissions at the company by 10% by 2010. Instead of simply imposing target reductions, he created a market whereby his managers were able to "buy" emissions credits and trade them. As a result, BP met its target by 2001. The trading system was put in place and was driven by the market.

Another example is Semco, a Brazilian company with 3,000 employees that produces e-business services for the energy sector. It allows its employees to decide their salaries based on what they believe their value and company performance to be. Ninety-nine percent of them do it fairly and it works.

One of the principles at AES is that any employee, at any level, can take any decision, no matter how big. The only requirement is that employees ask for advice from an appropriate individual inside the organization. Similarly, at St. Lukes, a marketing company in the UK, decisions are made depending on who happens to be at the company at the time. No control is retained by the chairman. Also, at Oticon in Denmark, any individual in the organization is allowed to come up with, promote, recruit resources for, and implement a project he believes to be viable. The project is then voted on by other engineers, and resources allocated accordingly.

As for Mondragon, a cooperative in Spain that is the country's seventh-biggest organization by revenue, each of the companies within the cooperative is owned by its employees. Each company is run by a representative of the employees who is elected every two years; everybody has an equal share of ownership in the cooperative and its output. Likewise, my own business school decided four years ago to put in place a system of collective ownership. It is entirely private, owned by the faculty and staff, which means that everyone has a share and a say in the decisions made.

My purpose in citing these examples is to show that some organizations are attempting to change this underlying control dynamic. They realize the locus of power and control in the organization has changed and that to resist it is futile. They have found ways to creatively place control in the hands of those who are delivering the knowledge product for the organization, such as by creating markets and giving employees decision-making power.

A word on leadership and the critical importance of the frontline managers: Their ability to use discretion, involve the knowledge workers in their fate, and coach them is at the heart of effective knowledge use and deployment. We often hear about leaders as being the people who intervene or motivate. But in this kind of changed environment, leadership is often more about knowing when to stop leading than when to contribute. Paradoxically, the route to power is actually to give it up. The more power you give up, the more power you obtain - through the respect, dedication and commitment of those working for you because they realize you have given them the means to do their jobs effectively.

Finally, a question about equality: Taking the psychological position of superiority to those that we are leading is no longer acceptable. As a test, if you consider yourselves to be a leaders, as a hypothetical question, take away all the things that represent your power (the salary, the authority to sign off on budgets, the big office, the big title, the car and the hierarchical position), then ask your employees if they would still follow you. If the answer is yes, then I think you have the right to call yourself a leader. This, I believe, is at the heart of the leadership challenge in the kind of new environment that we face.

Questions and Answers

Q: Do you think that what you describe as a revolution in management style applies uniformly to all industries? Perhaps the argument you made applies more to new industries but is not so true for traditional industrial sectors.

A: Talking about the knowledge environment logically means that you are bound to be talking about certain industries more than others. I think it is arguable that even manufacturing concrete products such as cars have a knowledge element to them. However, I think there are some industries where the only product is knowledge in which the "revolution" is closer to reality.

Having said that, regarding differences in company performance, part of my argument is that the changes being implemented are misdirected, such as the waning commitment to lifetime employment. Companies ought to be doing everything they can to retain knowledge workers for as long as possible because this idea of knowledge-solving in context requires knowledge workers not just to have intelligence and expertise, but knowledge of particular contexts to be built up over time. The idea that individuals should move around every two years inside the company is not consistent with how knowledge work gets done. Furthermore, the development of strong social links takes time and cannot be achieved by continually moving around. Therefore, the modern concept seems to have gone from the extreme from a job for life to a situation where we do not value the benefits of experience and longevity.

Q: As a comment, it seems to me that a good company, either consciously or unconsciously, would try to identify its core knowledge workers and then devise ways to retain that core. My question is, of these radical measures that you have identified, do you see them occurring in isolation or are the companies adopting a range of measures?

A: I completely agree that companies are identifying employees who are critical to the success of the company and treating them in a different way. But to say there is one class of superior employees ultimately is a big mistake that will result in divisiveness.

To answer your question, while I identify specific aspects of each of these companies in my presentation all of them have tried to implement radical solutions across the board, although I have only selected one element to illustrate a point. For example, at St. Lukes everyone in the organization has an equal share in the company. And Semco has a system whereby the organization gives equipment to people leaving the company to set up their own business. So each of these companies has done radical things across the board.

Q: Have any of these firms survived and thrived through changes in management, or do they look to charismatic leaders for that?

A: One of the things that seems to be happening is that these companies derive their radicalism from one person. They are either created by that one person or they are taken over by a person who changes the control dynamics. Often they leave, but the organizations to varying degrees seem to have outlasted their leaders. One of my main areas of interest is how close the connection is between these radical organizations and the leaders that create them.

Q: Many of the techniques you mention for motivating employees are already very common at Japanese companies, as far as I know. So I am wondering: Are Japanese companies having enough interaction with European and American companies? Also, I was wondering if you had any examples of Japanese companies operating in new ways?

A: Part of my reason for being here is to learn more about Japanese models. However, the model that I have heard about during my time in Japan seemed to me to be too critical of Japanese management and its failures, especially in other parts of Asia. There are probably excellent motivational practices in Japanese companies, but the Japanese are in some cases struggling to understand how their model can be exported.

It appears from what I have studied so far that Japanese companies are also struggling with certain dynamics, particularly with the kind of offer to make to young people coming into the market because the traditional one does not seem to work anymore. I recently read that that 70% of freeters, when they change jobs, are looking for a change in career, while 70% of the companies were looking to hire people with prior experience.

I was deliberately careful not to mention only Anglo-Saxon models of development. In fact, some of the new dimensions of Anglo-Saxon management are not working and are not appropriate for the knowledge environment, where more traditional management models may be more fitting. My message is that there are some major risks in trying to apply so-called management practices in the knowledge environment.

Q: You mentioned the metaphor about Renaissance art as being relevant to 21st- century business. How was art a catalyst for the Renaissance?

A: What art became was a vehicle for self-expression and for man to put himself back into the center of affairs instead of being dominated by the state. People were able to see themselves in pictures and realized they had a role to play in the affairs of life. This is the origin of the human-centered perspective.

Q: What is another way for people to secure their role within society or organization?

A: I think it will come down to certain visionary leaders who are put in their positions not because they are driven by personal ego, but because they themselves have a similar belief that they are creating a new society. I am working on identifying a common set of principles that drive these leaders, and these include the power of equality and ownership. Also, today's organizations are a relic because in a modern, democratic, postindustrial society, they are the one place where individuals still seem to accept autocracy. But they will eventually become outdated.

Q: Are all the examples corporations or can some have bonds or partnerships?

A: There is a variety of organizations, so it is not that this cannot be done because you have shareholders. A good model is the career of Lord Brown at BP, who firmly believes that the short-term view is a recipe for disaster and overturned that.

Q: The measures you mentioned sound remarkably like those used by every other startup in the '90s, but do you think that these organizations will survive and grow?

A: Working in start-ups is not all that it was cracked up to be. They can be as autocratic as working for any large organization. And I do not think the start-up environment is the only place where dynamic changes can happen. Semco and Oticon are two companies that demonstrate this well because both were small, traditional manufacturing companies that have since grown substantially through their development as radical organizations. Nonetheless, their managers are challenging the benefits of growth, not equating growth and profit with success.

Q: In Japan there are a lot of knowledge workers, so if you apply these examples in Japan the outcomes will be very different. What are the boundaries of knowledge workers in developed countries?

A: I think it is important to distinguish between transaction versus transformation. There are a lot of people engaged in transactional or processing work, but who do not add anything. The knowledge worker adds something and transforms it through their activity. The idea is not to say that we have certain people who transform and therefore we make them owners. It is to say that regardless of the contribution you are making, you have equality of ownership.

*This summary was compiled by RIETI Editorial staff.