The high cost of labor efficiency — and the ‘Good Jobs’ alternative

Editor’s Note: Is treating employees well, minimizing costs and earning a high return for investors, all at the same time, too good to be true? No, says MIT Sloan School of Management professor Zeynep Ton, author of “The Good Jobs Strategy.”

On this Labor Day, Ton speaks to Making Sen$e about how paying workers low wages and scheduling their hours on the employer’s terms is a choice; it’s far from a business necessity. When labor is understood as a strategic asset, not a cost to be minimized, everyone — from customers to shareholders — fares better over the long-term, Ton tells Paul Solman in the text of their extended conversation below.

She shares her research on four diverse companies who are doing it right — the Spanish supermarket chain Mercadona, U.S. convenience mart QuickTrip, Trader Joe’s and wholesaler Costco — and explains some of the high costs to treating labor in the way that’s traditionally been viewed as efficient.

As many Americans enjoy a weekday off on Labor Day, plenty of part-time workers are putting in hours in retail or service jobs. Ton appears in Paul Solman’s Labor Day broadcast segment on the explosion of part-time workers, many of whom suffer from the new scheduling technology that can make their part-time loads seem a lot more like full-time gigs. Watch that story below.

— Simone Pathe, Making Sen$e Editor

How do businesses view workers?

Well, the dominant view in business is to see labor as a cost to be minimized and to pay employees as little as possible. And the intention is that is the best way to make money and offer low prices at the same time. But it’s not the only way and it’s not the best way.

Well, why isn’t it the best way? I mean, labor is a cost, machinery is a cost, land is a cost – that’s how economists look at the factors of production.

Let me give you an example. Let’s take a retail store – an area where companies seem to see labor as a cost to be minimized and they pay [workers] poverty level wages, with unpredictable schedules, and design the work in a way that makes it very difficult for them to succeed.

But let’s think about the supermarket. There are 40,000 products that need to be shelved. There are lots of promotions that need to be carried out. There are customers that need to be served. This is a complex operating environment. When you operate this environment with the mindset that labor is just a cost, then there are operational problems, there are customer service problems, and all these problems reduce sales and profits.

Most companies set their labor budgets as a function of sales, so when sales are lower, labor budgets are reduced. So when the mindset is to see labor as cost to be minimized, retailers and lots of other companies find themselves in a vicious cycle. And this vicious cycle is not good for customers because they end up getting bad service; it’s not good for companies because they leave a lot of money on the table and it’s downright brutal for employees.

Maximizing Part-Timers

Say you and I are running a company. We need to schedule our employees for when there are a lot of customers, and when there’s nobody, we don’t want to incur that labor cost. There are lots of workers out there willing to do the job.

There’s a reason why retailers tend to provide employees their schedules two weeks in advance and change them all the time – because they want to match labor supply as close as possible to customer demand. Think about any retail establishment – customers don’t come at a nice uniform rate. Sometimes there are lots of customers; sometimes there aren’t enough customers.
And they can measure this in as short as 15-minute increments now with technology. So their view is: Why don’t we match the number of people that we have as closely as possible to customer traffic? That way, when customers are there we can serve them better, and when they’re not there, we don’t have any [workers] idle, standing around doing nothing.

Is that not the best way to minimize costs?

Well, this is not the only way because then what ends up happening is low morale, absenteeism, employee turnover, operational problems, customer service problems and there we are in the vicious cycle of retailing again.

We don’t have to pay our employees a lot for them to want to work for us. We don’t have to offer them good schedules. But if we do — if we pay them decent wages and if we offer them better schedules — then they will contribute a lot more than what we invest in them.

What Can We Learn from a Spanish Supermarket?

Let me give you a specific example of one of my favorite companies. Mercadona is Spain’s largest supermarket chain and one of the most successful companies in Spain. They offer the lowest prices in Spain, period. And they beat their competitors on a wide range of metrics. Eighty-five percent of Mercadona’s employees are full-time, and they are salaried. They receive their schedules one month in advance.

These employees provide great service. These employees do their jobs without making errors. These employees contribute greatly to sales and reducing costs.

Why can Mercadona provide them schedules one month in advance? Because they cross train them. So when customers are there, they attend to customers. When customers are not there, there are lots of other tasks that need to be done that don’t require customers, like shelving merchandise, inventory replenishment – all these things.

Cross training, in itself, improves employee morale because you’re not doing the same thing over and over again. It’s great for customers because they receive better service, and it’s great for companies because their employees are always productive, whether the customers are there or not.

As an operations management professor, you’re the kind of person who teaches people how to be most efficient, yes?

Yes. Absolutely. I can teach my students how to minimize costs, labor costs, and match the traffic to labor as closely as possible. But that’s one objective function. Business is much greater. If you focus on that one small objective, you’re missing lots of other things.

But most businesses who have the technology, or the access to the consultants that have the technology, use this labor maximization approach, don’t they?

Most good retailers use technologies in a very good way. I’ll come back to my Mercadona example. Mercadona uses a software scheduling system that they’ve produced in-house – a very sophisticated system — to provide stability and predictability to their employees. So it’s not a matter of whether you have this technology or not; it’s how you use the technology that determines whether you provide good jobs or bad jobs.

But this is just one company in Spain…

Not just one company in Spain – Mercadona is one of four companies that I’ve studied. I deliberately went after low-cost companies because I wanted to show that if we can offer good jobs and make a lot of money while offering the lowest prices to the customers, then we can do it anywhere.

So I looked at Mercadona, Costco – a large wholesale company that you’ll be aware of — Trader Joe’s and QuickTrip – a large convenience store chain with gas stations that has have been in Fortune’s 100 best companies to work for 12 years in a row. They offer good jobs, low prices and outstanding returns for their investors.

So I have four very different companies, but when I looked at them, I saw that they were doing the exact same thing. They were designing the work in a way that made their employees extremely productive. They were designing it so that their people won’t be making errors. They designed the work so that their employees can contribute greatly to sales and to lower costs. In fact, I found four practices that were common among them and now any company can adapt these practices.

What’s the Hold Up?

But if it’s so obvious, why hasn’t this strategy spread widely?

Because it’s not so obvious. There is a “Good Jobs Strategy” that delivers value to multiple stakeholders, but it’s not obvious. I didn’t know the ingredients of this strategy until I started looking at the companies.

So there must be institutional impediments, no?

Oh, there are lots of barriers to implementing this strategy. One is that a lot of companies are wired for the short term. We can always focus on the short term and start cutting investment in labor. The short-term focus prevents you from taking a longer-term perspective.

The second is if you can make money by offering bad jobs and bad service, people will still work for you. Customers will still come to your stores as long as your prices are low enough. There are lots of examples of companies that operate differently and make money.

And then the third thing is that excellence is a lot harder to achieve than mediocrity. Getting there requires lots of changes, and we know from research that large-scale changes are difficult to implement and oftentimes things get bad before things get better. And if you have very short-term oriented investors, it’s hard.

There are lots of things that we know work so well, but we just don’t do them. We all know that regular exercise is good for us, but most of us don’t do it regularly. Why not? Because it requires a long-term mindset. It’s hard work. It’s discipline. So the “Good-Job Strategy” is just like that. It’s a better strategy, but it, too, requires a long-term view, a disciplined mindset and a lot of commitment.

Like saving for the future, let’s say?


Change 40 Years in the Making

But I went to Harvard Business School in the ’70s; taught there in the ’80s. I’ve been hearing this short-term-is-the-problem story as long as I’ve been exposed to business schools, and yet it continues. That’s how we, in the business community, think about the world, and labor as a cost.

Yes. That’s not how everybody thinks about it, but that’s the conventional view – the dominant view. We have to change investors’ perspectives. We, as business school academics, have a role to play in this.

But it hasn’t changed in 40 years.

Well, just because it hasn’t changed doesn’t mean that it’s not going to change. They found out that doing X-rays on pregnant women led to babies having cancer. For 25 years, nobody did anything about it – 25 years! But that changed over time. So many years ago, smoking was accepted. Now it’s not.

We can change things. There is a way to operate a business that benefits employees, customers and investors all at the same time – and the society, of course, as the icing on the cake. It’s not easy, but it’s not rocket science.

I think we have people’s lives at stake. We have society’s children not growing up with parents who can attend to them because their schedules change all the time. So the costs of a bad jobs strategy are not for businesses, but for our society, and “hard” should not be an excuse not to implement a “Good Jobs Strategy.”

But if I’m a businessperson, it’s not crazy for me to say that labor is a cost? If I minimize it, it might be advantageous to me since I’m under short-term pressures from my investors.

You’re not crazy. But if you see labor not just as a cost to be minimized but as a strategic asset, you can do so much better for your business. Companies that I studied invest in their labor to reduce their costs, to improve their profits. They don’t do this for charity. They do this because it’s great business.

I have a lot of sympathy for especially middle-level managers. I talk to so many store managers that are under so much pressure to reduce those costs and they end up doing things that hurt their employees, and they know it’s not good business. But I don’t have a lot of sympathy for their leaders because offering bad jobs is a choice. It’s not a necessity.

But isn’t it cheaper for consumers if you minimize the cost of labor?

It’s not necessarily cheaper for consumers. We end up paying for all those operational problems — high employee turnover, absenteeism, bad morale, bad customer service, low sales and low profits — all the messes at the stores. In fact, the companies that I’ve studied that offer their employees more predictable schedules, higher wages and meaningful work, do so by providing their customers the lowest prices and great service at the same time.

Sounds too good to be true!

I didn’t make this up. This is based on my observation of highly successful companies. And recently, we saw an example of a “Good Job Strategy” at Market Basket. Employees protested because they wanted their CEO back, but what I think they really want is to continue their “Good Job Strategy.” They want to be able to operate in a company that takes care of its customers and takes care of its employees. They see that as very possible and highly profitable, but also rare — so they want to hold on to it. That’s why they were out there in the streets.

And the customers were out there too.

You see the loyalty from their employees and customers, and from everything that I’ve read, it’s a quite profitable company.

Well, the point is that the profits haven’t been going back to the shareholders.

Well, it’s always easy to improve profits in the short term. Even I can do that. Consider Costco, which has a policy that they won’t mark up anything more than 15 percent, and that’s how they became the trusted brand in the eyes of the customers. Costco can actually eliminate that policy and increase its prices and most customers wouldn’t even notice for a while. And the shareholders would get a greater return in the short term. But it would come at the expense of long-term performance.

As a consumer, I’m so frustrated by stores where nobody attends to me. This is the kind of thing you’re talking about?

Yes. Or the products are not on the shelves. We hear about retailers investing millions and millions of dollars in their supply chains. They get the products all the way from China to their stores and the product gets stuck in the back room – never makes it to the selling floor. Why? Because they didn’t have enough people because employees didn’t care enough to be able to bring it to the selling floor. So all of these problems cost companies a lot of money.

What can a customer do?

They can walk with their feet. They can choose to shop at stores, or dine at restaurants, or go to hotels that treat their employees better.

But how do I know how the hotel is treating its employees? I only know whether an employee is nice to me or not.

I’m now working on creating an index that will hopefully inform customers.