Sunday, November 15, 2009

Respect for people

Thomas L Jackson, JD, MBA, PhD
Portland, Oregon, USA
November 15, 2009

I finally solved a puzzle I've been working on for a long time. Followers of this blog will know that I contend that radical decentralization and the control system of hoshin kanri define a new type of organization that solves problems in real time. I call it the C-form or Cybernetic Form. The economic theory upon which my hypothesis rests is the transaction cost economic theory of Oliver Williamson, who will soon collect a Nobel Prize for his amazing work.

One of the features of Williamson's theory is an emphasis upon "asset specificity." To put it simply, Williamson says that when one party commits "specific assets," i.e., assets that he or she cannot retrieve after commitment to redeploy to other productive uses, the other party to the contract will have an incentive to "hold up" the agreement, human nature being what it is.

In the case of lean enterprise the puzzle is where are the specific assets and how do lean enterprises guard against hold up?

This is actually quite simple when we stop to consider that the major "asset" involved in a lean enterprise is a lean enterprise system or, to borrow a phrase from Toyota, a "thinking production system" (TPS). The TPS is highly specific in the sense of transaction cost economics because once it its imparted by the employer, through training, coaching, and experience, it cannot be redeployed by the employer. This only means that the TPS cannot be removed--literally and physically--from the employee and the same system imparted to another employee. Instead, should the employee decide to leave its employer, the employee could take the TPS with her and apply it elsewhere. In the extreme, the employee might choose to leave the employer and set up a consulting company to impart the TPS to other companies, even to the origiinal ower's competitors! In the language of the academic literature, the employer has a high risk of being "held up" by the employee who has acquired the speciific asset of the TPS.

In this sense, the imparting of TPS to an employee is exactly like the classic example of a specific asset: the building of a mine by a large multinational company in a remote area of a resource-rich but politically unstable developing country. Let's say the mine is constructed and large pieces of equipment are transferred (at great cost), and then there is a change in the government, a swing from far right to far left. The result is nationalization of the new mine and the "holdup" of the multinational company's specfici assets. Once again, the assets are "specific" because they cannot be redeployed. In this case, the multinational company would have to rely on the army of its country of origin to physically seize the mine, or at least the equipment (assuming it could be moved to more productive uses).

My implicit metaphor is almost complete. The mind of the employee is the mine site. The employer's TPS is the heavy equipment. The imparting of the TPS to the employee represents the transfer of the "specific asset" from the employer to the employee.

We certainly understand the risk. Training of any kind anywhere is a specific asset, because it can "walk out the door." People are smart; what can I say? Nowhere is this more true than in Northern Italy, from which I have just returned.

Returning to our Nobel Prize-winning friend, Professor Williamson: He would say that, given the  knowledge that the recipient of the specific asset--in this case the recipient of the TPS--can and indeed might easily "hold up" the employer by "walking out the door," the terms of the employment contract should be drafted carefully by the employer to securely bind the employee.

Now we have a problem. Courts of law--at least in Anglo countries--are unwilling to enforce noncompete agreements, because otherwise disgruntled employees who chose to leave their employees might starve. This is a humanitarian consideration of the Law, from which I have benefited personally on more than one occaision. An employee takes his/her knowhow and Godspeed. The only thing that the employer can actually protect is that body of knowledge protected under the law of copyright, which pertains to specific words, images (logos, photos, graphics), and outlines. The law of copyright does not pertain to words, images, and outlines that can be obtained from alternative sources. And, as we all know, the TPS has to a large extent been very well documented in the works published by Produtivity Press (of which I was for a short time CEO) and other venerable publishing houses.

It would seem, then, that any company contemplating investment in TPS should seriously question how it plans to avoid the "holdup" cost of "defection," i.e., the cost of its employees "walking out the door" with the specific asset of TPS. Indeed it should!

Lean thinkers leave their employers every day, taking with them a vast encyclopedia of how to navigate organizational development. Is there some bright young PhD student out there, somewhere, measuring the rate of defection of lean thinkers? I digress.

To come back to my original point: Hold on to your lean thinkers, or be "held up" (as in Jesse James) by your lean thinkers.

Your lean thinkers hold the "specific asset" of the TPS (Thinking Production System).

GOOD NEWS: These people are very very smart (assuming that they have been trained and coached by a competent Sensei).

BAD NEWS: The people are at least smart enough to evaluate the value-add of their contribution--to your organization or--for that matter--to any other organization. And without the right kind of contract, they are going to "walk out the door." If you are a good manipulator, you may be able to frighten those of your employees without competent legal representation to sign nincompoop, er, "noncompete" agreements that the courts will not enforce. All the courts will do is to control your former employees' utterance of certain words or their showing of certain documents or images--assuming the same are not readily available elsewhere from, say, the internet?


So, what is the right kind of contract (from the employer's point of view, naturally)? What knid of contract can keep people from walking out the door. This is really important, because they walk out the door, courts of law are on their side, not yours. The only thing you can really protect are specific words, images, and outlines--which ain't much.
  • You may be able to "protect" more, depending upon how much you are willing to spend upon legal intimidation, which of course forces intimidated parties (former employees) to spend money (perhaps considerable amounts) for legal advice.
  • Ultimately, however, restrictive noncompete agreements (restrictive or not) run out (the law requries them to be relatively short term); now what?


Toyota's TPS or Thinking Production System ultimately rests upon respect for people. Oliver Williamson's Nobel Prize winning economics explains why.

TPS requires the transfer of a very specific asset--the TPS itself--to each employee. If that weren't bad enough, to achieve a lean supply chain, you must transfer TPS to each supplier as well.
  • I know a little bit about this subject, having been rather deeply involved in the transfer of TPS to the suppliers of global sportwear giant Adidas to its suppliers all over the world.
So, how do we keep our "specific assets" from "walking out the door"? Again, it's simple:
  • Respect people
Yes, it sounds like a cliche. Yet, how powerful!

It is known that Toyota and Honda do not pay the highest wages in the U.S. But they are relatively low turnover rates. Think about it.

Employer A says, "I will pay you very well, but neve tell me how to run my company."

Employer B says, "I can pay you well, but not top dollar, But, I respect your opinion and expect you to speak up."

Who would you work for?


Jamie Flinchbaugh said...

Well that was the long way's almost like you learned to think Italian while in Italy.

Many organizations resist "over-investing" in the employees in the risk that they will lose that investment.

I was in one company's meeting discussing the closing of an operation and they were deciding whether or not to cherry pick the really good folks. I politely (OK, not so politely) that first they had to those people a REASON to stay.

Companies pay attention to the employment market and ebb and flow their "respect" based on how strong or weak the "market" is for talent. But real talent always has a market.

The cost of not investing in talent far outweighs the risk of losing it. And if you give people a reason to stay, then you won't lose too much.

Jamie Flinchbaugh

Tom Jackson said...

Well, Jamie, my friend, you nailed that.

It's not Italian that I'm trying to speak in this post, it's transaction cost economics. Italian is easier, trust me.

Love your common sense.

Like, we need a Nobel Prize to convince managers to respect their people.