Introduction

Most organisations pay lip service to the idea that people are their most important asset. CEOs make obligatory speeches about the extraordinary talent, loyalty, and aptitude of their workforces; while in government, political leaders praise the dedication and hard work of their civil servants. Yet few organisations go beyond the platitudes to develop a thoughtful strategy for investing in people – one that views people as true strategic assets. 

The People Factor shows that for-profit companies that pursue an exceptionally workforce-focused strategy achieve better long-term financial returns than their peers – and that similar gains can be realised in government. Based on analyses of the financial performance of hundreds of companies in the US and Europe, as well as interviews with employees and managers, and surveys of thousands of public and private sector workers and university graduates, we found that organisations that follow specific people-focused principles, can deliver exceptionally high performance in the public and private sectors.

The purpose of our study was to understand these principles, how companies put them into operation, and to examine whether such an approach could be adapted to government. We argue that a new approach to managing human capital in the public sector is badly needed. The United States is facing some of its most serious challenges in 50 years, yet decades of neglect have left the government workforce chronically weak, with the most experienced civil servants at the brink of retirement. America needs a well-functioning civil service, with well-trained, highly-motivated public servants. But this requires that the US re-invest in the government workforce, along the lines of the best practices employed by leading private sector organisations.

We wrote the book after serving in senior positions in the government. In our prior careers (in the private sector and in the military, respectively) we observed that high-performing organisations devote considerable time and effort, and senior management attention, to recruiting, training, mentoring, evaluating, and retaining their employees. However, the US government, in most cases, does just the opposite. Many laws and regulations governing the civil service actively discourage or prohibit the very practices that we had witnessed being successful in other contexts. But where government agencies have been able to place more emphasis on their employee development, the results have been impressive.

The principles outlined in the book are widely applicable to any organisation, but particularly to governments seeking to improve governance and develop better legal and operating frameworks for their civil service professionals. 

Key findings

1.    1. Organisations that invest in their workers in certain specific ways, perform much better over time, as measured by financial performance

We developed a ‘people factor scorecard’ to collect and measure data on the full range of ‘people practices’ in an organisation – how it provides training, job security, corporate recognition and human resource benefits, how it evaluates performance, links performance to pay, and handles promotions and dismissals; as well as how it structures jobs, teams, management, and work assignments. Importantly, our scorecard was assembled along two dimensions. The left hand side of the scorecard included traditional elements of human resource plans, such as policies on recruiting, promotion, training, performance evaluation, salary, benefits, layoff policies, and recognition of employees. The second half of the scorecard is devoted to what we term ‘intrapreneurship’. This seeks to measure the more subtle characteristics of an organisation, such as creating an atmosphere of innovation, teamwork, and a culture where individuals can experiment with new approaches. We collected data on how work is structured, the amount of flexibility in getting work done, lateral assignments, the degree of input that workers have about decisions that affect them, and linking rewards to performance. (See ‘People Factor’ Scorecard).

The two sides of the scorecard were tabulated to produce a ‘people score’ for each company. We then analysed their financial returns over 4 and 7-year periods (measured using total shareholder return, a metric combining stock price appreciation and dividends) relative to other companies in the same industry cohort, and where appropriate, the same geographical base (for example, comparing German construction companies to their competitors within Germany). The company analyses were supplemented by qualitative surveys of thousands of private sector employees in Germany and the US. 

Across all industries, companies with the highest people factor scores showed higher financial returns than companies with the lowest scores. This was true over both 4 and 7-year periods. The average return of the highest scoring companies in the US sample was 27%; compared with 8% average returns for the lowest scoring firms. The highest scoring European companies also showed returns about three times higher than the lowest. In both cases, companies with people factor scores in the middle range also exhibited financial returns in between these extremes, (although not in a clear line that correlated closely with their scores). 

A key characteristic of these top ‘people factor companies’ is that they earned high scores on both traditional HR practice and intrapreneurship. Such organisations truly looked and felt poles apart from ordinary companies. They frequently offered a different kind of work experience to their employees, for example; much more flexible schedules, sabbaticals, performance rewards that were transferable to families and friends, extensive training stipends for education in subjects that appealed to the employees but had little or no benefit for the firm (for example, languages, art history, carpentry) and work environments that featured lounges, coffee, jogging paths, bicycle amenities, and special lighting. They offered more job security, laid off fewer employees (relative to their peers), and worked harder to outplace employees if they were forced to make redundancies. This philosophy cut across all sectors. For example, the construction companies following this approach used cyclical downturns to train their employees in new skills, such as landscaping, sales, HVAC design, and alternative energy technologies. When the cycle picked up, the companies were better placed to win contracts because they had a skilled, motivated workforce already in place.

2.    2. People factor’ companies demonstrated higher employee job satisfaction and loyalty

Do better-performing firms invest more in their employees or does the people-focused strategy itself produce higher returns? We believe there is an element of both; but we attempted to identify the relationship between investing in employees as a strategic tool, and the impact on the company. To explore the mechanisms that might underpin such a relationship, we surveyed thousands of employees in the US and Germany regarding motivations, job satisfaction, and loyalty to their companies. The surveys tested the degree to which workers met 40 specific criteria; for example: ‘I am able to influence decisions that affect me’; ‘I receive credit for my accomplishments’; and ‘If I have an idea that benefits the company, I will receive extra credit’. Separately, we then tracked job satisfaction and loyalty among the respondents.  

Not surprisingly, most workers in the private sector do not get such benefits. For example, while two-thirds of workers believed that training for new responsibilities was ‘very important’, fewer than 30% of the respondents said their companies provided such training.

But employees who actually do enjoy these benefits are much happier. The survey was constructed so that we could independently ask respondents to rate how important they considered each of the criteria to be; and then compare that data with the prevalence of meeting the criteria, as well as independently measuring their job satisfaction and loyalty. The results showed that many of the ‘people’ criteria increased job satisfaction and loyalty by a significant margin. Whereas the median level of job satisfaction was about 34% (n = percentage of respondents who reported that they were ‘strongly satisfied’ with their jobs); the job satisfaction among employees who received a high degree of these specific benefits increased to as high as 57%. 

For example, the median level of job satisfaction for employees who reported that their supervisors gave them special training for new responsibilities was 54% (n=54% were ‘strongly satisfied’ with their jobs). Those who reported that they received ‘constructive criticism and advice’ from their supervisors showed a median satisfaction level of 50%. Job satisfaction reached 57% for respondents who said they could earn extra pay if their ideas benefitted the company. Similar gains were observed in the area of loyalty to the employer; and in both cases we found almost the same pattern in the surveys of US and German workers.

While this survey alone is not sufficient to establish causality between companies that perform well financially and their personnel policies, a number of other researchers, including Mark Huselid (Rutgers University), Jeffrey Pfeffer (Stanford University), and the human capital consulting firm Watson Wyatt, have recently produced studies that demonstrate a strong causal link between investing in employees and financial performance. 

3.    3. Government agencies that adopt best practice show vastly improved performance – demonstrate gains similar to private sector companies

Given the many differences between the private and public sector, we set out to determine whether investing in human capital could produce concrete benefits for the taxpayer in terms of productivity, performance, cost efficiency, reduction of waste and errors, and intangible benefits such as courtesy and ethical practices? We also examined whether the government would become a more appealing employer to young people if it were a better place to work.

We adopted a similar methodology to evaluate government agencies; based on interviews and output data, we assembled a ‘scorecard’ for the organisations and compared the initial score to the scores achieved following several years of the ‘people factor’ implementation. These were translated, to the extent possible, into specific metrics, for example the number of transactions processed on time, the cost per personnel transaction, and satisfaction levels of the ‘customer’. Again, we conducted qualitative surveys of public sector employees, as well as surveys of college students to ascertain their views on employment. 

Most government organisations operated in a traditional, hierarchical system that allowed little flexibility, provided low levels of training, and prevented employees from innovating. However, we identified a handful of agencies that had transformed their organisations and performance by investing heavily in ‘people-focused’ policies.

Once again, we discovered that the people-focused government agencies were distinctive in how they operate. For example, the Defense Logistics Agency (DLA) is a branch of the Department of Defense (DOD) that provides logistical support to the US military, including food, fuel, and weapon parts worth some $35 billion. It has 21,000 civilian employees operating in the US and overseas, primarily technical, blue-collar, unionised workers. Prior to 2001, DLA was a typical government bureaucracy with high costs, average performance, low-to-medium morale, and high attrition rates. When vice admiral Keith Lippert took over as agency head in 2001, he embarked on a radical program to transform the agency.

Lipper adopted a purposeful ‘people-driven’ strategy. The agency invested heavily in training and redesigned processes that were not working (such as the hiring process). This entailed upgrading the role of the HR function, and investing in skills development, feedback, evaluation, performance management, workforce planning, and rewards for employee contributions. The cornerstone of the transformation effort was as $25 million investment in training, introducing a five-tier program for all those with the potential to become supervisors. The DLA also pioneered ‘intrapreneurial’ thinking: introducing teleworking, flex-schedules, team-shares, job-shares, and restructured the whole organisation into a more streamlined and transparent entity. Despite the constraints of the government’s rigid civil service classification system, the agency was able to redefine numerous job positions to bring them in line with its strategic needs. All these changes enabled the DLA to introduce global stock positioning, reorganise warehouses, and replace dozens of legacy IT systems.

The result: between 2001 and 2007 the agency doubled its volume of transactions; cut operating costs by 25%; reduced back orders by 30%; increased customer satisfaction to 89% (with only 1% ‘dissatisfied’); lowered job attrition rates from 17% to 2%; and doubled employee job satisfaction. Lipper attributes most of that success to the investment in the workforce, and the new ‘people-centric’ culture.

4.    4. The US federal government needs to overhaul its personnel policies and begin investing in the federal workforce, particularly training in leadership and management skills.

The US government is the largest single employer in the US and spends nearly one-quarter of its national budget on government salaries and benefits. But many of the most senior and experienced civil servants will soon retire. Nearly half the federal workforce will become eligible for retirement in the next five years, including nearly 90% of the senior executives who run some of the most vital areas, such as air traffic control. To replace even a fraction of those who are retiring, the federal government will need to hire hundreds of thousands of new applicants. But the government is having difficulty hiring the best graduates because of its poor image among students, its rigid personnel system, and its slow and cumbersome hiring process. The majority of college students surveyed for the book said they would prefer to work for private or non-profit organisations because the qualities they most looked for in a job – including working for a ‘caring’ employer and being able to rise to the top of an organisation – were lacking in a government career. They also reported being discouraged from government careers by the difficulty of locating a job, the length of time it took to be hired, and the lack of skills training and mobility.

In particular, we found that the government is suffering due to a lack of investment in training. Training is fundamental to the long-term success of any organisation. The whole military system is set up to train and support each individual. Professionals, including doctors, lawyers, architects and accountants – are all required to undergo periodic training to maintain their credentials. During the 2008-2009 economic crisis, most US industrial companies did not cut training budgets because they know that the financial payback from training is high. By contrast the federal government entrusts government workers with huge levels of responsibility for America’s safety, security, and health – but fails to train them. The US spends on its civilian government employees less than one-third per capita what private firms and the military spend, and training is one of the first line items to be cut when money gets tight. 

This lack of training is out of step with the increasing demands placed on civil servants. The volume and complexity of government transactions has increased significantly over the past 30 years, along with the size of the US population. The People Factor calls for a national investment in government training through a ‘Civil Service GI Bill’. This would include the design and provision of training in leadership, supervisory and managerial skills, as well as reform of the recruiting and hiring systems, expansion of internships, mentoring, mid-career hiring and education programs, and innovative tools such as an ‘HR Passport’ that would allow public and private sector workers to receive training in the other sector.

We argue that the government could reduce the total number of civil servants by 2% (though attrition) and use the savings for investing in the civil service. This would lead to $300-$500 billion in productivity gains and cost savings as well as better government service.

5.    5. If the US does not come to grips with the problems affecting the federal workforce, we will continue to witness a steady decline in the way that America is governed.

The immediate consequence of not investing in the public sector workforce is that we risk not being able to fix the economy or that the recovery takes much longer. Over the medium-term, the consequence of not investing in the public sector is that we will increasingly outsource core functions of government to private contractors and others who do not have the same mission focus that the government does. We also risk delivering poor service to our citizens; as well as losing the best and brightest from government, and falling behind in important areas such as science, technology, and energy development.

Over time, if we do not take this issue seriously, we will see a continued devolution of the federal government. We may move further and further away from the ideal of government public service and the ideal set of rules, regulations, and high moral standards that our founders expected from representative government.