on September 12, 2009 by eldar in Corporate Parasites, Evolutionary Management, Comments Off

Jack Welch, Bell Curve, Performance Reviews and the Evolution

Have you ever heard of Jack Welch, turnaround head of GE, and his famous “Bell Curve” method?

If not, here it is. You force every team manager rank the members of their teams by the “bell curve”. It means that you sort people into three buckets: a few over-achievers, a few under-achievers, and the rest in the middle. Specific proportion may vary but normally it’s 10-20% on either side and 60-80% in the middle. Then you fire bottom 10% and hire new people instead. Lather, rinse, repeat. The theory says that you get great results. The fame of Jack “The Butcher” Welch says the same.

Have you ever thought that it’s essentially introducing evolutionary environment in the corporation? It’s like some forest, where various species dwell, and 10% of specimen are eaten by the end of the year. The fittest survive and procreate, making overall forest population more and more fit to the environment. Everybody (except those that are eaten) wins.

Speaking of procreation, one thing essential for the evolution is procreation that passes winning traits. How does it work in business? Simple: through the interview process. You see, interview process is designed to accept only those, who are deemed worthwhile by the people, who are already in. Granted, that’s not really procreation, but that’s pretty close analog of it. For example, in software development, if the team believes that C# is great and Java is not, it is not likely for anybody who is good at Java to pass an interview, simply because to be good at Java you have to believe that it’s good to spend the time learning it. Interview process is one of the examples of so called “club system”, where new members have to be recommended by existing ones. In a nutshell, it’s the way fittest (those who were not fired) procreate in any organization: by hiring those similar to them in some aspects.

So, with procreation and natural selection in place, astringent performance review systems a la Jack Welch convert your corporation into an evolutionary environment. Does it work? Well, in the wild evolution worked ok so far — it produced humans, right? And we all like humans, of course, so if it worked so well for us in the long run, it has to work well in managing businesses too. Right?

Wrong!

Lets assume that we have a perfect hiring process, when we get the new people of the same quality as the best people we already have, and a perfect performance review process, not tainted by misunderstandings, differences in styles, personal vendettas and straight incompetence of the management. Would you agree that if that perfect system does not work, there is something really wrong in the whole idea? And, unfortunately, it does not.

To illustrate, I made a small program that simulates such an evolutionary environment or corporation. To make it easily visible, the competition happens between dots of different color in the environment where some specific color is “ideal”. Think about the dots as bugs with masking color, like those white butterflies hiding on white birch trees. The more some dot’s color is different from the “ideal” color of the environment, the less fit the dot is, the less likely it is to procreate, the more likely it is to be eaten in the current cycle.

So, let’s run the program and you’ll see something like that:

Evolution in a static environment

Evolution in a static environment

Yes, I said it does not work. Yes, I understand that considering this picture it worked perfectly, or nearly perfectly. The problem is: yes, it does work, as long as the ideal color of the environment stays the same. Unfortuantely, the environment does not stay the same. In the example with white butterflies coal powered factories made the birch trees black, that eliminated white butterflies and forced them to become black. Fortunately for butterflies, their selection process and procreation was not that perfect, they did mutate and they had enough genetic diversity to become black and survive. Corporations with the perfect hiring process and perfect performance reviews process are not that lucky. Lets run the program again but include catastrophic change in environment every here and now, like it happens in a real economy with some crisis happening every 5-10 years. Here is the new picture:

Evolution with Catastrophic Changes

Evolution with Catastrophic Changes

You see? I even made hiring process not-so-perfect and introduced some mutations allowing to hire not that perfect candidates, and it still does not work. The picture with the “perfect” hiring process is even worser.

In fact, the only hope for a corporation with the perfect performance review system to survive strong changes in the economy is to hire pretty much at random. Then, it does adapt:

Evolution with High Mutations Rate

Evolution with High Mutations Rate

Granted, that’s what some of them do when it comes to hiring new CEOs, but who can afford hiring at random the rest of the staff in the modern world? And if your hiring process works, then all astringent performance review system does is a long-term harm. It pretty much drives the diversity out of the workplaces to the point, when your company doesn’t have the source material to adapt to sharp environment changes.

By the way, this phenomena is well-known in biological evolution. Many species got exstinguished exactly because they’ve become too fit to the current environment, and got killed, eaten, or starved to death once the environment had changed dramatically. Dinosaurs are just one great example, and we’ve lately seen a few corporate dinosaurs of the American economy following their way. By the way, according to the book “Truth About Managing People” by Dr. Stephen P. Robbins, that’s pretty much what happened in General Motors in the last 10-20 years. Notice that the book was written before the company was forced into the bankruptcy.

Of course, with the modern system, when CEO’s horizon is just 1-2 years, and then they are off destroying some other company, it works for them. It also works for speculative holders of shares. Unfortunately, it does not work for the business in question, and it does not work for those shareholders, who expect their shares to appreciate by the time, when they hit the retirement.

References:

Truth About Managing People, The (2nd Edition) by Stephen P. Robbins – FT Press, 2 edition (September 30, 2007), ISBN-10: 0132346036, ISBN-13: 978-0132346030, 240 pages

Tags: , , ,

No Comments

Comments are disabled.