Nearly 20 percent of Americans have bad jobs: low wages, few benefits, random work schedules and little prospect of social mobility. We're told that this is inevitable -- if you want to compete on price, the argument goes, then you just can't afford to invest in your workforce. Cheap goods, cheap staff: we may not like it but that's the way of the new globalized economy. The employees working for cheapskate bosses are told they should be grateful and work hard -- even though their dedication won't reap any rewards. Meanwhile, the bosses themselves handily assuage their consciences with the thought that it's all due to forces beyond their control.
But recent research by Zeynep Ton, a visiting professor at MIT's Sloan School, challenges the implicit assumption that in order to be able to offer customers low prices, you have no choice but to offer low wages and lousy working conditions. Highly successful retail businesses -- such a Trader Joe's, Mercadona and QuikTrip -- invest heavily in their workforces. Even the most menial of tasks at least offers the prospect that it could lead somewhere. And, surprise, surprise, these businesses also offer the lowest prices in their sectors and achieve solid financial results, all while delivering better than average customer service to a market that remains loyal. The trade off between decent jobs and decent profits isn't inevitable after all.
The problem, says Ton, is that most employers look on their employees as a cost driver rather than a sales driver. And managers trying to hit targets find it much simpler to cut costs than boost sales. Managing to those targets makes cost-cutting look effective, says Ton -- but it isn't. Take Home Depot (HD). Under former GE (GE) executive Robert Nardelli, jobs were shed or turned into part-time shifts and profits appeared to grow short term. Longer term, the business lost its only real claim to fame -- customer service. Customers grew disgruntled and, more slowly, sales started to drop. Most managers (and not a few market analysts) see their two choices -- cutting costs or boosting sales -- as though they were equal options, but of course
they absolutely aren't: a customer buying more has a far higher lifetime value than any short term cut can hope to deliver.
What Ton's research concludes is startling: a one-standard-deviation increase in labor levels can increase profit margins by 10 percent over the course of a year. Further research shows that for every dollar increase in payroll, a store could see anything from a $4 to a $28 increase in sales. Of course, this potential growth isn't infinite. But Ton's conclusion is clear: the short-term gains of cutting jobs, and cutting investment in your people generally, will come back to bite you. But spending more on your people can mean making more in sales.
This is a vital message for today, when so many executives have lost confidence in their ability to impact the progress of their businesses. It's the easiest thing in the world to blame any number of scapegoats -- recession, globalization, market short-termism, board pressure -- for abusive working conditions that do nothing to develop employees or to enhance a business. What's becoming clear is that there is still enormous scope to grow a business by investing in your people. What we need aren't just more jobs -- but good jobs that reward people who reward companies.