By David H. Maister
Financially successful companies share a number of characteristics, not the least of which are high standards set by their managers. In Practice What You Preach, David H. Maister spells out what an effective manager must believe, be, and do in order to create financial success for a company.
In the book, Maister presents the results of a survey of 139 offices of 29 firms in 15 countries in 15 different lines of business. His findings: The most financially successful businesses do better than the rest on virtually every aspect of employee attitudes. Attitudes drive financial success. But Maister doesn't stop there. He drops responsibility for these attitudes firmly on the shoulders of the managers. The skills and behavior of managers drive employee attitudes -- and employee attitudes drive financial success.
For two decades, Maister has been a consultant for a broad range of professional-service firms. A former faculty member at the Harvard Business School, he uses statistical explanations of his survey, case studies, and his own conclusions to outline what managers can do to create a high culture of achievement.
Maister's book is at once theoretical and practical. What follows is drawn from Chapter 9, one of his most complicated. This excerpt focuses on his conclusions. In the book, he goes into much more detail about how his study led him to them.
The Path to Performance
Warning! This chapter's a little bit complex, but very, very important. To encourage you to make the effort with this chapter, let me tell you, right up front, one of the conclusions you'll see reported here.
It turns out that we can prove that if an average office increased its performance by going from an average of "somewhat agree" to "agree" on the staff's rating of quality and client relationships, this would cause a doubling of its financial performance! That's right, cause. We will also show, specifically, what causes ratings of quality and client relationships to improve.
Although I obtained a Master's degree in mathematical statistics 30 years ago, it turns out they've made a few advances since then. (Surprise!) The approach used in this chapter is known as structural-equation modeling. It was new to me, and it took me a while to get my mind around it. But it was worth the effort, because what is presented here is, I think, truly profound. I've tried my best to make it accessible to the general reader, but it still may take a bit of concentrated attention!
Correlation calculations check to see whether two things tend, on average, to move together (like height and weight). However, structural equation modeling checks to see if one of those things (say, extra height) can be said to cause the other (extra weight). If causality can be found, it estimates how much of weight change can be said to be caused by differences in height. (Not enough, regrettably. It seems diet and exercise also have something to do with it, alas!)
Rather than explain the workings of the technique I'll jump straight to the results.
One factor has a direct causal relationship with financial performance, and that is our measure of quality and client relationships. Here are the individual questions that make up that factor:
-- We make our clients feel as if they're important to us.
-- We keep clients informed on issues affecting their business.
-- We have a real commitment to high levels of client service, and tolerate nothing else.
-- Client satisfaction is a top priority at our firm.
-- The quality of work performed for clients by my group is consistently high.
-- We are extremely good at building long-term client relationships.
-- The quality of service delivered to clients by my group is consistently high.
-- Most people in our office do "whatever it takes" to do a good job for their clients.
-- We do a good job of resolving client problems when they occur.
-- We listen well to what the client has to say.
-- We have a real commitment to high-quality work, and tolerate nothing less.
-- We always place the clients' interests first, ahead of those of the office.
Conventional wisdom is right. Quality and client relationships drive profits. However, we can now provide a concrete estimate of how big this effect is. By definition, the financial-performance index of the average office in our database scores 100 (it's an index). So, by going from an office average of "somewhat agree" to "agree" on quality and client relationships (in the eyes of staff) the average office would more than double its financial performance!
This is really strong stuff!
What Really Drives Client Relationships?
We've seen the power of quality and client relationships. In chapter 5, we asked, "But what drives quality and client relationships?" We now have some answers. Two factors have a direct causal effect on quality and client relationships. These are high standards and employee satisfaction.
For the record, here are the component questions of the employee satisfaction factor.
-- I am highly satisfied with my job.
-- I get a great sense of accomplishment from my work.
-- The overwhelming majority of the work I'm given is challenging rather than repetitive.
-- I am committed to this firm as a career opportunity.
Raising employee satisfaction (i.e., these four questions) by 1 point on our 6-point scale (again we'll use the example of from "somewhat agree" to "agree") would improve the score on quality and client relationships by 0.4 (which is about a 10% to 15% improvement in most cases). This, in turn, would raise the financial performance index by (0.404 times 104.12) or 42.06.
Let's say that again, in reasonably plain English. We have strong evidence that a 10% to 15% percent increase in the scores given by employees to the elements of employee satisfaction will cause a 42.06 point increase in financial performance (or 42.06 percent for an average office).
Let's say it one last time. Improve your office average by about 10% to 15% on the rating of these four items by your staff, and it will cause a 42% improvement in financial performance, including both profitability and growth.
What about improving high standards? Here are the elements that make up that factor:
-- The quality of the professionals in our office is as high as can be expected.
-- Poor performance is not tolerated here.
-- This is a very demanding place to work.
-- When necessary, people put the needs of the office ahead of their own.
-- We have a strong culture. If you don't fit in, you won't make it here.
From our study, we can conclude that a one-point change in high standards would have two immediate consequences. Employee satisfaction will increase and the score for quality and client relationships will increase.
Combining these two effects, we can calculate that if the average office with a high-standards score of "somewhat agree" could raise its performance to "agree" (or any other one-point change, such as from "agree" to "strongly agree"), its financial performance would rise from 100 (the average office) to 140.4, a 40 percent improvement. Not too shabby!
So where are we? Perhaps for the first time, we can now actually look at the profit implications of various managerial and policy decisions in a rigorous way. We are now in a position to suggest to managers precisely where they should focus their attention.
Is it easy? No! But we now know precisely what needs to be done. Not surprisingly, almost every aspect of employee attitudes and culture is involved in some way, some directly and some indirectly. But we have solid evidence of what the right path looks like. In simplified form, this is what we have shown:
-- Financial performance is driven by quality and client relationships.
-- Quality and client relationships are driven by employee satisfaction.
-- Employee satisfaction is driven by high standards, coaching, and empowerment.
-- High standards are driven by fair compensation and commitment, enthusiasm, and respect.
-- Coaching is driven by long-term orientation and commitment, enthusiasm, and respect.
-- Empowerment is driven by long-term orientation.
Now, there's a litany worth posting on the wall!
From "Practice What You Preach - What Managers Must Do to Create a High Achievement Culture" by David H. Maister. Copyright 2001 by David H. Maister. Reprinted with permission of The Free Press, a division of Simon & Schuster Inc.