Are Your Human Resources an Asset or a Liability?

Theory X or theory Y?

In the 1950’s Douglas McGregor proposed theory X and theory Y.  He suggested that managers see their employees in one of two ways:

• Either — a cost that needs to be minimised and controlled
• Or — an asset that should be developed and valued

It was an astute observation, but it is difficult to show which perspective is the most productive. To do so you would need evidence — two identical companies that varied only in their approach to managing people.  Given the differences between organisations and their unwillingness to share sensitive information, it is hard to see how you could find a test case.

Monica Romis, a research student at MIT in the early 00’s, managed to overcome this obstacle. She was able to find two nearly identical companies and add data and facts to the debate.

The test case

Nike is one of the biggest sportswear brands in the world.  In 2004 it had over 800 suppliers employing more than half a million people across 51 countries.

During the 1990’s the organisation came under significant public scrutiny because of its sourcing strategy.  Nike was accused of exploiting child labour and underpaying workers. It was a public relations disaster. 

The Nike product has become synonymous with slave wages, forced overtime, and arbitrary abuse

Phil Night ~ C.E.O. Nike 1998

Initially Nike ignored the accusations. The way in which their suppliers treated their staff was non of their concern.  However as criticism continued Nike developed a supplier code of conduct. It detailed acceptable standards for suppliers.  To enforce this code of conduct they also audited supplier’s plants in three different ways:

• A basic environmental, safety and health audit
• An in-depth management audit of working practices
• Independent inspections by an external body — the Fair Labour Association

Nike gave Monica Romis and the research team at MIT access to the data they had collated. She was able to find a matched pair that would provide information to test Douglas McGregor’s theory.

The t-shirt factories

The comparison pair were garment manufacturers in Mexico.  They were alike in many ways:

• Both manufactured t-shirts for Nike and other brands
• Both were technically competent, scoring well in the safety and management audits
• Both produced a high quality product, meeting Nike’s standards
• Both were subject to Mexican labour laws
• Both had similar, informal skill based promotion policies
• Both had unionised labour forces
• The same Nike supplier management team managed both organisations

The differences

Of course no two factories could be the same. One was family owned, the other belonged to an Asian conglomerate. One was based in a rural location and the other in a city.  But Professor McGregor’s hypotheses highlighted more interesting differences.

Plant A – Workers are an Asset

Plant B – Workers are a Cost

Organisation Multi-skilled team working Job rotation, employees operate more than one type of machine Heavy investment in training Culture Worker participation in production planning and scheduling Workers can suggest alternative ways to perform an operation Collaborative relationships between supervisors and workers Quality and output targets are a collective responsibility Peer and self-supervision play a large role Large degree of autonomy and power on the shop floor Management wary of mistreating highly skilled workers Wages Fixed daily wage Productivity bonuses based on team productivity Voluntary overtime Average wage $17.2 per day

Specialised narrowly defined jobs Workers perform the same job for many years Limited scope or motivation to acquire new skills Management set production orders from the top Operators have to follow precise work instructions Hierarchical relationship between managers and workers Management have total responsibility for output and quality Tight management monitoring and control of the shop floor Workers have very limited autonomy or say in shop floor matters Some abuse of staff Fixed daily wage Productivity bonuses based on individual piece rate Mandatory overtime Average wage $13.6 per day

So what?

The different approaches to managing people did give different results. Unsurprisingly employee engagement and morale was significantly higher in plant A. 

Less intuitively the limited commercial information also suggested that plant A was more productive even though it paid higher labour rates.

	Plant A	Plant B
Total # of workers per production area T-shirts per day per production area Daily wage (fixed salary + bonuses) per worker T-Shirts per worker per day Cost per t-shirt	6 900 $17.2 150 $0.11	10 800 $13.6 80 $0.17

Conclusive support for theory Y?

The plants were similar, but not identical, so it is dangerous to draw a slam dunk conclusion. Any statistician could drive a coach and horses through the results.  But it is a thought provoking case study.  

Besides which… which plant would you want to buy your next t-shirt from?

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Image by Chris Yarzab