1.
Only six of the eighty practices we assess cost money to
put in place. Another six actually save money (are
cheaper) than not doing them. The net cost of all eighty
is zero. Therefore, you cannot argue that companies that
make a lot of money will spend it on people management
practices since these practices, as we measure them, are
not cost items.
2. If you were making a ton of money, why would you
change your people management practices? Why would you,
for example, make your management style more
participative if you were making a ton of money being
autocrats? There would be no logical reason to do this.
Companies, in all likelihood, would continue behaving in
the same way. Making lots of money would not cause them
to change the way they manage people.
3. By talking to the execs at many of these
organizations I got to know the history of the company,
its culture, style, and values. Clearly, the leading
companies did not change their people management
practices once they started making a great deal of money.
Their companies managed people well for a long time. They
refined and improved how they managed people but did not
dramatically change their practices as a consequence of
making more profit.
Though logic suggested that people management
practices caused financial results, my critics had a
point. I could not prove with facts and data that this
was the case. To do so would require that companies be
measured on at least two points in time. Then you could
determine causality.
Prediction Over Time
It takes three consecutive years of financial data
for us to be confident of a company's financial
performance. To assess changes in people management
practices requires at least two measurements of the PMP
score, with three years separating each measurement. We
now have this data and more. We can assess causality
rather than speculate on what is causing what.
Changes
in people management practices bring about changes in
financial performance.
Here is how we studied causality. Three years of
company financial data was gathered prior to determining,
the company PMP score. After the first assessment of PMP
was completed, another three years of financial data was
collected. Then the second assessment of people
management practices occurred, three years after the
first assessment. Finally another three years of
financial data was collected for the time period
following the second assessment.
From this we created deltas to examine change. One
delta was the change in people management practices
between the two assessments. Another two deltas were the
changes in financials fi7om time one to time two and from
time two to time three. We then treated people management
practices as a predictor and examined what happened to
financials. Next we did another analysis treating the
financials as predictors and saw what happened to PNT
scores. The statistical technique we used is called
"crosslagged correlations."
When treating financials as predictors, the
resulting correlation with people management practices is
.14 (total of 52 companies). This is not statistically
significant. When treating people management practices as
predictors, the correlation with financial results is
.86, which is statistically significant. This means that
changes in financials do not cause companies to alter
their people management practices. Rather, changes in
people management practices bring about changes in
financial performance. This result, based on 52
companies, when coupled with the correlational trend with
over 330 organizations, makes a very strong argument for
people management practices causing financial results.
Recently, I was going over these financial trends
at a large utility company. One of the senior execs said:
"Of course people management practices should
cause financial results. How could you run a good
engineering department or a good accounting department
without hiring the right people, training them, rewarding
them effectively, etc. And these are the exact things you
are measuring in the PMP score."
I told the executive that I agreed with him. I then
asked, "How often is it when you try to improve
financial performance that you look at factors like your
management style, the effectiveness of training in
building competencies, reward practices, etc.?" The
room went silent and the exec replied, "That's why
you are here."
Table 2 on the next page shows changes in profits
for the 52 companies assessed multiple times. We
classified companies into one of three categories based
upon what had happened to their overall PMP score between
the three years. More companies improved their score than
stayed the same or declined. We then looked at how many
additional dollars in profits each group had at the end
of the financial period. This was three years after the
second PMP assessment.
Companies that improved PMP added $294 million in
profits per company, a gain of 60% over three years. The
companies that did not change PMP showed an additional
$78 million in profits per company, a gain of 16%. For
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