The argument for adopting “best practices” seems ironclad, at least on the surface. If you want your company to get better, you look at what great companies do (or at least companies that perform better than yours), and then copy it. This assumption is so obvious that most management writers, consultants, software vendors and gurus don’t even talk about it explicitly. They show you the differences, say, between firms that use Six Sigma, that fight the war for talent, that outsource IT or manufacturing, or that use their enterprise software, and those that don’t, to “prove” the value of their wares. This “follow the leader” strategy isn’t outright wrong, but trying to be just like General Electric, MTV, Procter & Gamble, SAP or whatever company you admire most isn’t as sound an idea as it might seem.
The first problem is that correlation is not causation, a mantra you’ve no doubt heard if you ever took a statistics class. Yet it is easy to forget that even the best-managed companies succeed despite rather than because of what they do. This point becomes obvious when you look at CEO behavior. Southwest Airlines founder and longtime CEO Herb Kelleher made no secret of his penchant for consuming large amounts of Wild Turkey whiskey—indeed, he repeatedly bragged about it to the press. Do you really believe that if your CEO starts drinking large amounts of Wild Turkey, your firm’s performance will improve? It sounds silly, but many companies borrow practices just because Toyota, Wal-Mart, Apple Computer and especially General Electric uses them. As I’ve mentioned before in this column, GE’s performance-evaluation system, where the “A Players,” the top 20 percent, get the lion’s share of rewards, has been copied by many companies. Unfortunately, controlled studies provide no credible evidence to support such beliefs. As long as a company’s business processes require that people share information and coordinate with one another, organizations that reduce pay differences between the top and the bottom tend to perform better over time.
How can you avoid the best-practices trap? My answer is to look at successful companies to spot ideas that might work in your firm, but then to get more solid evidence before you decide to use them. Look beyond the success stories to the studies that control for the “correlation is not causation” problem, something that most business writers, consulting firms, and even many academics fail to do. Toyota and its much-praised “lean production” system provides a counterpoint. Toyota’s success isn’t just supported by testimonials; we now have extensive research showing that the more an automobile plant uses human-resources and production practices like Toyota’s, the lower the cost and the higher the quality will be. This finding was first reported in James Womack’s The Machine That Changed the World and confirmed in multiple studies by the Wharton School’s John Paul MacDuffie.
What if there aren’t any studies on whether or not a practice is sound? After all, you may have an idea for a practice that isn’t used in your industry, or is used in another industry, but that may not apply to your company. The answer is to try a small, but controlled, pilot study or experiment. Unfortunately, too many companies try new programs just because senior management is smitten with an idea, not because there is any evidence that it will work for them. I saw this happen years ago when I was working with a chain of convenience stores. Senior leaders became enamored with Tom Peters’ and Robert Waterman’s In Search of Excellence, especially their suggestion—inspired by places such as Disneyland—to get “close to the customer.” Ignoring internal suggestions to try pilot programs first, these executives spent millions on a company-wide courtesy campaign aimed at getting clerks to offer greetings, smiles, eye contact and thanks to every customer. Unfortunately, research by their own researchers, and some I did with Stanford colleagues as well, showed that such fake social amenities had no measurable impact on store sales. Customers just wanted to get in and out of the stores quickly. Executives eventually abandoned the program, but they could have saved a lot of money by testing the idea first.
The second way that best practices can do bad things to companies receives even less attention. It turns out that the process of changing from a good to a great practice can hurt—even kill—a company. There is compelling evidence that, once implemented, enterprise-wide software systems like those sold by SAP and Oracle can lead to enormous cost savings and stunning enhancements in customer service. But your local salesperson or solutions consultant isn’t likely to mention that many implementations fail, or that the successful ones often cost many times more than the original estimate. In 1999, in the magazine Transportation & Distribution, Amy Zuckerman reported that ERP systems in companies with more than $500 million in revenue took twice as long, on average, to install as originally estimated, and cost almost twice as much. A botched software implementation in 2001 caused Nike to miss its quarterly earnings target by approximately $100 million, prompting CEO Philip Knight to ask, “This is what we get for our 400 million?”
In another domain, a 2002 study of approximately 200 high-technology start-ups published by Stanford professors James Baron and Michael Hannan in the California Management Review demonstrates that just because something is a good idea doesn’t mean it is worth doing to your organization. Numerous studies, many of which are summarized in Jeffrey Pfeffer’s Human Equation (Harvard Business School Press, 1998) show that superior long-term performance is sparked by “high-involvement work practices.” Companies such as Southwest Airlines, SAS Institute and Trader Joe’s, for example, create strong emotional bonds between people and the company, hire people on the basis of cultural fit, and rely more on peers than managerial authority to guide the work. Baron and Hannan’s research showed that start-ups founded with a high commitment model or “blueprint” went public earlier and died off at lower rates than those with traditional “top-down” models. But here’s the rub. Baron and Hannan also found that, when firms changed their HR practices, or “blueprints,” after they were founded, it doubled their chances of failure, even when changing to a superior approach.
So the message is that even when you are changing to a better practice, the process can damage or kill your firm. What should a manager do when faced with the decision to convert to work practices or technologies that have actually been demonstrated to be superior? First, do everything you can to get estimates of the real costs and failure rates associated with the conversion. And remember that people who sell you new ideas may have incentives for giving you overly optimistic projections. Demand evidence about the costs from outside firms, or perhaps somewhere in your own firm that made the changes under similar conditions. Second, consultants and software salespeople don’t like talking about failures. Insist on a list of every firm that has tried to implement their new idea, both those that are dead and those that are still alive. For example, Enron was once ballyhooed by McKinsey as a “talent management” success story. I wonder if they ever mention Enron to new clients whom they advise on talent management these days. I would think not.
I don’t want to leave the impression that all, or even most, ideas that seem good can do bad things to your company. There are some changes you have to make, like it or not.
Robert I. Sutton is co-author, with Jeffrey Pfeffer, of The Knowing-Doing Gap: How Smart Companies Turn Knowledge into Action. He coleads Stanford University’s Center for Work, Technology and Organization. Professor Sutton’s next column will appear in May.
Illustration by John Kascht
