• Paul Hobin

The Fallacy of Overhead "Liabilities"


The premise of this article: (1) Overhead departments are traditionally viewed as liabilities – they cost money and generate no revenue. With an “asset mindset” we can change the view (and we should).

(2) Contract and temporary work are eroding permanent white collar employment. Why do employers choose a revolving door of people without the tenure for a deep understanding of how the business works, much less a dedication to its mission? Maybe because permanent overhead staff that accept the liability label provide nothing that a cheaper contract alternative cannot offer. We can and should change that, too.

A lot of my writing is about the workplace as I believe it should be, rather than how it is. This article more than others may be “unhinged” from the reality that most of us experience. Don’t read this as an expression of how the world works; I know that in the large majority of cases it is not. My intent is not “We should all do this tomorrow.” My intent is that we focus on this path, implement what we can where we are, talk about the ideas and see if we can move our employers in these directions…and if not, maybe we look for new employers that are more welcoming of these ideas or are already using them.

A Facebook friend responded to one of my articles with this idea: “Sales are what drives everything and everyone. All other departments are liabilities unless they are bound fundamentally on serving either those that sell or the client.”

“All other departments are liabilities” is, despite its direct simplicity, a statement overlain on complex organizational dynamics. When a situation is sufficiently complicated there are multiple sides, aspects and arguments. It is this feature of complex situations that makes my friend’s “liability” charge both entirely correct and thoroughly wrong, all at the same time.

If corporate overhead departments like HR, AP, IT, accounting and procurement want to maximize our value and thereby maximize our personal success, we must understand this dual potential of our roles. We can be a liability, a burden on the enterprise, people that others must carry. Or we can be assets, driving changes that improve performance and profits. We have some choice in the matter — so let’s choose correctly.

The Manufacturing vs Services Analogy

"Sales are all that matters" is analogous to the macroeconomic notion that manufacturing is the only true source of wealth in an economy, and all else (services) is fluff.

Despite having modern adherents, that idea became obsolete the moment one farmer went further afield than his next door neighbor to trade milk for eggs 15,000 years ago. As soon as we needed roads to transport goods and a marketplace to trade goods among strangers, we needed services – the services that link together the people exchanging the goods, providing the tangible infrastructure (roads, a building) and the intangible infrastructure (laws about business relationships and the means to enforce them).

Eliminate all the services and we have zero manufacturing because goods can’t be exchanged outside a tiny radius and a handful of people. To talk about the primacy of manufacturing in a context other than pre-trade pre-history is therefore simply foolishness.

Likewise no enterprise exists without sales, but to consider sales inherently superior to HR, AP, accounting, IT or procurement is a similar foolishness. Eliminate all the "liabilities" of the services supporting sales and we have zero sales.

Our Choice: Liability or Asset

There is a problem with the "liability" of corporate overhead, if we fail to think about our roles in the asset/liability context and simply accept the liability label. Too many take the technically correct but limited view that since we can't have sales without HR[1], what does it matter if I’m a liability? I can’t be a profit-generating asset in the traditional sense; isn’t HR being a liability just the way it is?

Only if we have no imagination. Here's an interesting thought from Peter Drucker: "What happens inside any organization is effort and cost. To speak of 'profit centers' in a business as we are wont to do is polite euphemism. There are only effort centers. The less an organization has to do to produce results, the better it does its job. That it takes 100,000 employees to produce the automobile...is essentially a gross engineering imperfection. The fewer people, the smaller, the less activity inside, the more nearly perfect is the organization in terms of its only reason for existence: the service to the environment."[2]

Drucker’s paradigm puts sales and HR on an equal footing. We’re both “effort centers”. Don’t buy it? Hasn’t Amazon taken practically all of retail and proven that sales can be produced with zero sales people? That “sales” is therefore just as much an overhead liability as HR?

I am not promoting this argument. I don’t buy it myself. I’m using it to knock the idea that sales is inherently superior off its high horse so we can take a fresh look at what everyone is capable of contributing to the enterprise.

More significant than his leveling of sales and HR, Drucker illuminates both the liability and the potential of all overhead. Administrators – overhead liabilities – have the opportunity to make a “more nearly perfect…organization”. That is where our challenge and our opportunity lies, to turn liability into asset.

This is absolutely not about cutting staff while increasing workload, loading more responsibility on fewer people year after year, effectively reducing rates of pay and creating workplace misery. In speaking first of “the fewer people” Drucker put an incorrect emphasis on head count. Do not start with cutting heads – the critical factor is “less activity.” Fewer people should be the end result of producing equal value with fewer labor hours – less activity – and a genuine reduction in staffing requirements, not an ill-advised cost savings ploy carelessly tossed on the backs of a diminished workforce.

Departing further from Drucker, I am not promoting simple efficiency or an undefined “do more with less” cliché, but a change of mindset for both management and staff. A mindset that says it is our individual responsibility to reimagine our roles on a continuous basis with two objectives. In order of priority: (1) how can I deliver greater value to my internal clients? (2) how can I deliver greater value (usually but not always measured as profit) to the enterprise as a whole? Similar words, very different ideas.

Greater Value For Internal Clients

Before we can deliver greater value to internal clients, do we actually know what “value” looks like to them? Are we sure? A procurement colleague delivered a significantly reduced cost on a client’s largest annual expenditure. The client was livid – because the quality wasn’t there, and therefore the great price had less than zero value to them.

As their buyer I developed a technical knowledge of the client’s field that exceeded their own. (The client’s focus was creative; mine was mechanical. I didn’t replace the client’s expertise because I couldn’t possibly do that. I supplemented it with a procurement-based focus on technical matters the creative client had little interest in.) With this knowledge I delivered what they prized most highly – better products (incidentally, for less than the anticipated additional cost).

By changing the status quo and delivering value the client could not achieve on their own, I moved a bunch of my salary dollars from the “liability” column to the “asset” column. It’s too bad we can’t quantify the amount because the goal (even if not achievable) is to do enough each year to eliminate all those liability dollars, to deliver new value equal to what it costs the enterprise to keep us.[3]

Greater Value For The Enterprise

At the enterprise level greater value usually means bottom line profit. Looking at the enterprise as a whole – HR, IT, accounting, procurement, operating groups and divisions, product lines, geographic regions – the only thing all those sub-entities typically value in common is how well the enterprise is doing financially – how much profit it’s making.

This is decidedly the second priority as demonstrated by the example of the angry client. The enterprise would have considered my colleague’s cost saving to be good value; it was not. It had an immaterial impact on the bottom line in one year, damaged the brand, damaged internal relationships, and thereby diminished capacity to generate future profit. Delivering value in the way the client defines “value” comes first.

Our enterprise-level value will usually be pure profit. But how to create it, if we exist on the expense side of the income statement?

Answer: we eliminate our labor. If we can cut 200 hours of the labor we expend and still produce the same (or even better) results, that’s the goal we should be aiming at. Doing the work of HR, IT or procurement makes us a liability. Reimagining the work in a way that eliminates labor or other costs or otherwise produces greater value makes us an asset.

We need not fear the “job elimination” prospect of this. Our situation in white collar is markedly different from blue collar job loss. When a manufacturing job disappears a new blue-collar job is not created to replace it. When a white collar job disappears the very automation that has eliminated it creates a systems job (or at least part of one) to plan, create, implement and manage that system. It’s not a 1-to-1 exchange, but in addition to the new automation systems roles, whole new white collar categories are continuously being created in social media, networking, medicine, commercial space systems, green energy….and many others.

White collar, overhead “liabilities” are actually in a pretty good place. With so much changing within the enterprise and without, there is a never-ending supply of ways to tweak our roles to eliminate effort, save a few (or a lot of) bucks…and then move on to the next challenge or the next role, because new ones are constantly being created.

Eliminating some of our labor hours, or even all of them, isn’t eliminating us – if we define ourselves not as “benefits analyst” or “hardware refresh analyst” or “facilities buyer” but as the change agents responsible for making change happen.

Solving Our Temp Labor Problem

Our problem in white collar work is the degradation of permanent, well paid, secure employment by short term contract roles with pay rates that don’t compensate for zero benefits and regular periods of unemployment between gigs.

The trend puzzled me. The learning curve in complex organizations is five years long in my experience. Five years is when I had acquired the institutional knowledge to solve any problem or know who could point me in the right direction. It was only starting in year six that my employers maximized their benefit from the decision to hire me. A string of contract workers couldn’t duplicate the contributions institutional knowledge allowed me to make.

Jim Collins’ research has pointed to measurable value in longer service lengths. Charting the rise and fall of significant American corporations, Collins’ focus is on the top echelons of management, but the bulk of his findings are scalable from the CEO down to clerical staff.[4]

A key finding from Collins’ research reported in Good To Great is that CEOs who presided over “good to great” transitions were almost exclusively insiders; people who knew from experience with the organization what the company most needed to become great. 95% of CEOs during the good to great transition years were insiders. The poorly performing, in some cases failed, companies used as comparisons had an insider CEO rate of 69%.[5]

Collins summed up the findings this way: “Larger-than-life, celebrity leaders who ride in from the outside are negatively correlated with going from good to great. Ten of eleven good-to-great CEOs came from inside the company, whereas the comparison companies tried outside CEOs six times more often.”[6] Those ten insider CEOs had a median service of 13 years and an average of 15 years with their company at the time they were named CEO or chairperson.[7]

If the inefficiency and lack of productive value of short-term workers is as evident as I believe and research like Collins indicates, then why has the paradigm become so popular? How do we reconcile this lack of value with the decision to pursue it?

Perhaps there is no lack of value in contract workers, or more to the point, there is no value premium achieved by many permanent employees.

We need to ask what we’ve accomplished that couldn’t have been done by a temp. What are we doing now, what do we have planned for the next year that cannot be accomplished by a talented contract worker? What value premium are we delivering? We better have an answer, otherwise why do we think we deserve the benefits, sick time, paid holidays, vacation and security of permanent employment?

I am not proposing that employees owe employers indentured servitude in exchange for a good income with some security. I am proposing that every permanent employee, regardless of title, by virtue of their choice to dedicate themselves to a single employer and remain there for an extended period, has the ability to drive significant advancements in the employer’s business that short-term freelancers probably cannot produce.

We need to demonstrate why our wage, our benefits, and our long-term security is a good buy for the employer. We do it by leveraging what we have that the contract worker does not — deep understanding of how the corporation works from years of experience coupled with a vested interest in the company’s long-term success.

We reimagine our role. We find the value premium. We deliver new value every year. And we are assets to the corporation.

[1] I usually use procurement as the example because that’s my corporate home, but much of my writing applies to any department providing internal support services. “HR” is a randomly chosen placeholder for all of us…in HR, procurement, AP, IT, finance, accounting, facilities, risk management or many other internal support organizations.

[2] Drucker, Peter F. The Effective Executive Harper Business: Harper Collins, 2006, p 14

[3] Similar to the idealized workplace discussed in the preamble, I often present ideas in terms of goals beyond our capacity to achieve. Can we really “do enough each year to deliver new value equal to [our cost]”? Not likely. The reality is that an administrator’s job is designed with about 2,000 hours of transactional work per year that has to be done. Thus the goal of “changing the status quo and delivering greater value” is something we have to find time for, squeeze in here and there. The probability of creating change with demonstrable value equal to our employment cost, year after year, is remote. But that doesn’t mean it shouldn’t be a goal…or at least an aspiration.

[4] I cover Collins’ body of work at https://www.paulhobin.info/single-post/2018/09/16/Jim-Collins-The-Best-Author-in-Business-Books

[5] Collins, James C. Good To Great Harper Business: Harper Collins, 2001, pp 249-251

[6] Collins, p 40

[7] The distinction between the value provided by elevating long-term employees to leadership, and the destruction often wrought by Collins’ “celebrity” outsider leaders, is detailed in Good To Great chapter 2, “Level 5 Leadership”.

#JimCollins

© 2017-2019 by Paul Hobin

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