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In good company
how social capital makes organizations work

Ubiquity, Volume 2001 Issue January, January 1 - January 31, 2001 | BY Donald J. Cohen , Laurence Prusak 

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In Good Company: How Social Capital Makes Organizations Work
Elements like trust, mutual understanding, and commitment provide stability and connection that sustain organizations in a volatile market.
By Donald J. Cohen and Laurence Prusak


The Challenge of Volatility

Nothing endures but change. -- Heraclitus The software industry offers a striking example of volatility in organizations. Silicon Valley companies lure bright young software designers away from one another with the bait of higher salaries and juicier stock options. Today's hot new product may be hotter tomorrow, or forgotten. Some firms double or triple in size in months and are swallowed by one of the technology giants. Others run through their venture capital and disappear, their ex-employees snapped up by growing companies hungry for more talent. Fortunes are made and lost. Job hopping is expected and seen (with some justification) as part of the creative ferment of the region. A recent New York Times article pegged the typical annual turnover rate of Silicon Valley companies at well over 20 percent.

But look at SAS Institute, the world's largest privately held software company. In the two decades of its existence, SAS has grown from a company offering a single statistical analysis tool to a developer of data warehouse and decision-support software used by almost 4 million people at more than 30,000 user sites. SAS software organizes seat-and-route data for major airlines, manages clinical trial data for pharmaceutical companies, and calculates the consumer price index; it helps marine biologists track dynamic changes in fish stocks and analyzes masses of transaction data for most of the Fortune 100 companies. SAS Institute's turnover rate is below 4 percent. Long-term jobs are the rule, not the exception. As Stanford University's Jeffrey Pfeffer notes in a New York Times Magazine article on the issue of loyalty in a virtual age, "the company says that people will have three or four careers during their working lives and it hopes all will be at SAS."

Rob Cross, director of advanced technology, who has been with the company for almost twenty years, says, "Salary levels at SAS are good but not extravagant. Annual salary is not what draws people here." One of the things that does is satisfying, engaging work. SAS Institute spends around 30 percent of its budget on R and D, giving its software engineers ample resources to develop and improve products. Cross explains, "SAS encourages people to move around if they want to, but a lot of people have a long-term relationship with a single project -- some have spent twenty years on the mainframe program. They have a chance to supplant their own work with better work. There's a lot of sense of code ownership."

The firm also achieves its high level of employee commitment through a culture of trust and respect, generous benefits, and recognition of the importance of people's personal lives -- a value embodied in day care and recreational facilities and reasonable working hours. Although some SAS employees work long hours to get projects done, many work a thirty-five-hour week and adjust work schedules to meet family needs without endangering their careers. The company's respect for workers is reflected, says Cross, in an emphasis on "judgment, not rules" and little emphasis on hierarchy. There are no more than three or four levels between anyone in the company and President James Goodnight. No division exists between office dwellers and cubicle dwellers -- everyone has an office. During one period of expansion, when people had to double up, Goodnight moved out of his large office into a smaller one so that two employees could use the space until a new facility was finished.

The mutual long-term commitment of employees and company pays off for SAS. Pfeffer says that its low turnover rate saves the company about $70 million a year (presumably measured against industry averages). Its stable workforce also supports a 98 percent customer retention rate. No revolving-door company could hope to build the kind of solid, responsive customer relationships that that figure suggests. The engineers committed to continued development of the code they "own" helps SAS incorporate 85 percent of customer requests for features and improvements into its products. Says Goodnight, "If you treat employees as if they make a difference to the company, they will make a difference to the company." Fortune magazine ranked SAS number three in its 1997 list of the 100 best companies to work for in America, and SAS made the top 10 in Business Week's 1997 listing of the best companies for work and family.

While magazine articles and books go on about free agency, contract work, and the death of loyalty, SAS Institute and many other successful organizations consciously strive to foster employee commitment, loyalty, and longevity. They see the value not only of hiring but of retaining talented employees -- the benefits of relationship and membership as well as experience and expertise. If a fifth or more of an organization leaves every year, how can the people in it come to know and trust one another, and how can the organization maintain its sense of what it is and how it does things? Thoughtful commentators including Arie de Geus, Frederick Reichheld, and Sumantra Ghoshal and Christopher Bartlett point to the continuing (and perhaps increasing) importance of loyalty, continuity, and longevity. Speaking at the 1998 Knowledge Forum at the Haas School at Berkeley, Peter Drucker said the following: "The challenge is to make the knowledge worker want to stay with the corporation, want to contribute and be productive. Turnover has always been expensive, but today your means of production can walk out the door. You need them more than they need you. They are not "assets" -- assets can be bought and sold, yet they are the only value."

The forces driving volatility are real. Mobility, exciting opportunities, and (as we write) extremely low unemployment tempt people to move from job to job. Organizations change their composition and even their aims and behaviors in the face of global competition, converging companies and technologies, new products, and new customer demands. But rather than celebrate volatility or simply accept its consequences, some organizations work hard to limit it and counter its potentially destructive effects on social capital.

The fact that these are volatile times is part of our motivation for writing. "The challenge of volatility" refers both to the ways volatility challenges social capital and the ways that attention to social capital can help organizations deal successfully with volatility that might otherwise threaten their cohesion and the commitment and cooperative of their employees. Existing social capital and especially deliberate investment in social capital in times of stress and change can help organizations preserve their essential values, connections, and skills -- their essential identities -- in potentially disruptive situations.

We have alluded to two elements of volatility. One is the volatility of talent at a time when the battle to retain good workers is at least as important a part of the "war for talent" as the battle to attract outstanding people in the first place. The other is organizational volatility: the changing practices and policies, the mergers and acquisitions and hirings and firings that organizations undertake to master changing competitive environments. The two are connected, of course. Tactics in the battle to retain talent include taking steps to hold on to good people during periods of disruption and difficulty. But organizations trying to solve the problem of volatility must deal with two related but different questions:

-- How do we bind new employees to the organization?

-- How do we maintain trust relationships, networks, and shared aims and understandings in the organization in the face of potentially disruptive change?

The first question asks how organizations turn newcomers into committed members of the group; the second, how that sense of membership -- and social capital in general -- survives when some of the rules of the group change.

Building Commitment

We start with the first question and an example of a company trying to create a committed workforce in a young, volatile industry through its hiring practices and the process it uses to assimilate new people into the organization.

Viant is a small, growing company, barely five years old, that helps organizations design and build electronic businesses. Whether it continues to grow and prosper in the fluid world of Web-business consulting remains to be seen, but Viant, under the leadership of CEO Bob Gett, devotes significant time and resources to attracting and holding on to good workers in an industry in which job hopping is expected. He believes that the number one crisis for growing businesses is "access to talent, and keeping that talent after you've invested two or three years in developing it." Gett believes that the long-term commitment of people who have genuinely become part of the organization, who have absorbed the "Viant DNA," gives the company a competitive advantage. This conviction supports both careful attention to hiring and assimilation processes and Gett's determination to grow the company "organically" rather than through acquisitions that dilute the company's sense of identity or set up clashes between cultures.

Hiring for the Long Term

Candidates for jobs at Viant are judged more in terms of cultural fit than experience or sheer intelligence. Bob Gett explains, "Our definition of 'best' is not the conventional one of people with the most experience or accomplishments in their careers. It is more about how they interact with each other in a team setting. What we're developing is less hard skills than a way of working." As a result, most hiring decisions are made only after a lengthy period of interviews with multiple people. As Gett remarks, "You've got to hang out with people for a while before you know them." As many as eight Viant employees who will work directly with the new hire interview candidates on the same day and then get together to discuss them. "When the group talks together and compares observations," Gett comments, "they begin to understand the candidate. And if the group says, 'OK, Harry is right for us,' then he starts with eight people believing in him. The interview process begins to make him part of a team."

In other words, the hiring process itself begins to create a network of connections that will help integrate the new person into the company. The newcomer starts with advocates and potential mentors; he is on the way to being part of the culture before he officially joins it.

Many organizations that strive for high social capital and long-term stability similarly hire for cultural fit. At Russell Reynolds Associates, at least ten people interview candidates for each recruiting position, and CEO Hobson Brown screens every hiring decision in the eighteen countries where the firm has offices to make sure candidates have the requisite "sociability and cooperative spirit." RRA's willingness to forgo clear economic gain in favor of cultural compatibility shows how seriously it takes the issue. The company recently considered hiring a very senior recruiter with outstanding skills, knowledge, and an undoubtedly valuable network of personal connections -- the bread and butter of executive recruiting, some might argue. Negotiations broke down because he was clearly unwilling to be a team player; Russell Reynolds Associates would not compromise its belief in the centrality of peer relationships, despite the profit potential of his joining the firm, and chose not to offer him a job.

Some companies that value cultural fit, lasting relationships, and collaboration have invented ways of establishing working relationships with potential employees so that they can gather even more extensive evidence for judging fit. IDEO, the product design firm that relies on collaborative brainstorming to develop many of its new product ideas, gets to know job candidates very well. Some of the firm's senior staff at its Palo Alto home office teach in the master's program in engineering design in Stanford University's Mechanical Engineering Department. They essentially conduct a three-year "interview" of promising designers who are students in their classes and often also have internships at the company. At the end of that time, IDEO has a clear sense both of candidates' abilities and their compatibility with the company culture, and the successful candidates understand a great deal about IDEO.

Orientation and Training

It is hard to enthusiastically recommend orientation and training, since much of it is so badly done. Even the best programs struggle with the drawback of being removed from real work and real work environments. Employees often resent time away from their "real jobs" and see little practical value in what they are taught. Nevertheless, some orientation and training programs can be a useful part of the process of integrating and aligning new people, of moving them toward membership. (Orient literally means "turning to the east" and, by extension, getting one's bearings or turning in the right direction.)

Successful orientation programs put as much or more emphasis on communicating cultural behaviors and values as on teaching skills and procedures that probably do not match how work is really done. Because they strive to initiate newcomers into what the company is really like, they are best taught by active veterans than by full-time trainers or -- worse -- outside training specialists hired to introduce new employees to a company they only know at secondhand. Their participation also means that newcomers and veterans get to know one another. In fact, connecting with people from other parts of the company may be the single best justification for orientation programs. For all these reasons, needless to say, the best orientation programs cannot be solely Web- or CD-ROM-based.

Bob Gett sees the mandatory three-week Viant training program as, in part, an opportunity to "scrape off some of the junk they got from prior organizational learning." The teachers of Viant's training are company veterans who bring their own experience of the work to the case studies and projects in the course. Viant's program is always taught at a single site, in Boston, so that people hired by the company's eight offices can begin to form personal networks that will help them in their work and help hold the company together. For three weeks, participants from all Viant offices spend most of the day together in intensive sessions, and they stay in the same apartment building at night. They return to their separate offices with contacts that span the company.

New hires at Russell Reynolds Associates now get an orientation module when they start their careers at the firm, which contains much of the explicit information that used to be part of the new associates programs. Relieved of the necessity to teach that material, the program sessions they attend within their first six months focus on acculturation as well as bonding and relationship building. As at Viant, company veterans introduce newcomers to the company. Seasoned RRA partners teach the new associates sessions, so most of the work consists of cases, role-playing, and "war stories" told by the individuals who have lived them. Often these teacher/trainers are area or country managers, practice leaders, or outstanding search professionals from around the world who are flown in for the program. They give the content the stamp of real experience. Their participation also provides additional opportunities for new members to meet and form bonds with one another and with the leaders of the firm. At Russell Reynolds, these social/business connections are an explicit goal of the program, according to Alice Early, who directed the Russell Reynolds training program for almost a decade. She adds, "When the sessions are in New York, new associates attend a cocktail reception at the New York office where they meet the people they need to know to get things done and make things happen." Early says too that participants in the Russell Reynolds program become a "class" whose members tend to stay connected, as members of college classes often do. They form cross-office, cross-practice, and cross-border relationships that they draw on during their subsequent careers with the firm.

Needless to say, these programs are costly. They demand money and attention in industries under pressure to meet client needs quickly. They demonstrate commitment to transmitting organizational values and norms and to building strong connections between the firm and new employees and among the members of the firm. They provide a vivid example of social capital investment made in the expectation of long-term returns.

Longevity

The assimilation processes described above and the SAS Institute example with which we started this chapter suggest some of the things good companies do to retain talented employees. Close ties to others in the organization and identification with organizational values and aims are more reliable bases for longevity than the promise of a lot of money. When John Seely Brown says that organizations need to understand and tap identity formation, he recognizes that work is a primary source of an individual's self-esteem. Though money matters a great deal in this society, it is not everything, and organizational leaders should ask themselves if they want to hire people who "follow the money." Explaining why his firm does not offer up-front bonuses to entice experienced brokers to join, Ben Edwards, CEO of A. G. Edwards, explains, "It would tend to attract the wrong kind of people and it would be unfair to our loyal employees. The message would be that the best way to make a lot of money is to jump around from firm to firm."9 This suggests a further problem with trying to buy loyalty: mercenaries are "loyal" to the highest bidder, ready to move on when the inevitable better offer comes along or when the company's rosy future dims. Those who live by the stock option will die by the stock option. As we write, many dot-com companies that attracted employees with promises of stock-option wealth a year or two down the road are struggling to hold on to them now that the value of company stock has dropped.

Longevity and Social Capital

Longevity builds social capital because relationships and trust develop over time. Other things being equal, the longer people stay in an organization, the more they will know and understand one another and the deeper and more extensive their networks of relationships will tend to be. London School of Economics professor Richard Sennett remarks, "The short time frame of modern institutions limits the ripening of informal trust. . . . Strong ties depend on long association. And more personally they depend on a willingness to make commitments to others."

Some of the benefits of longevity are easily measurable -- most obviously, reduced costs of hiring and training. A few years ago, an engineering group at Hewlett-Packard calculated that it took twenty-five months to get a new engineer up to speed, and $150,000 would be invested in that individual before the company began to see a return. Greater trust and richer knowledge of the organization and people in it are also benefits. Long-term employees are often repositories of organizational stories who pass on important legends and emblematic tales to newcomers, ensuring continuity. We also suggest (with Frederick Reichheld) that longevity helps organizations build customer loyalty. Although not synonymous, longevity and loyalty are closely related: most people who stick with an organization are loyal to it and identify its interests with their own to a significant extent. Reichheld says, "Employees who are not loyal are unlikely to build an inventory of customers who are." He notes the time it takes to build solid relationships with customers and adds, "the same business philosophy and operational policies that earn employees' loyalty and boost their morale are likely to work for customers."

Reflecting on what is now an almost fifteen-year partnership, managers at Boston Financial and New York Life Mainstay Funds attribute their successful relationship in part to the long-term involvement of key players from both companies. That stability has led to strong trust relationships -- to mutual confidence that one partner company does understand the other's issues in all their complexity. Among other things, this confidence and trust have helped the partnership weather change and allowed Boston Financial to provide the innovative technologies that met real client needs. While pointing to specific innovations that have marked the collaboration between the two groups, longtime Boston Financial Senior Vice President Paul O'Neil sees maintaining a successful relationship through more than ten years of change as Boston Financial's most important accomplishment. Moving into its second decade, the relationship remains strong. "This is not a sprint." he says. "We're marathoners."

Holding on to good employees reduces volatility -- obviously, since high turnover forms part of our definition of volatility. Longevity also helps reduce the disruptive effects of unavoidable volatility. The people who know the company well, embody its values, and trust one another can help pilot it through the rough seas of new partnerships, competitive challenges, and initiatives.

Measuring Retention Rates

Longevity is one social capital indicator and benefit that has the additional advantage of being fairly easy to measure. In fact, most organizations already track retention or turnover rates. Many organizations compare their rates with those of other firms in the same industry, assuming (as SAS Institute and HP do, for instance) that a turnover rate lower than the industry average indicates a relatively higher level of satisfaction and commitment, as well as less money spent on recruitment and training and greater continuity and cohesion. In some fields that have traditionally high turnover rates, though -- some consulting firms, with annual turnover as high as 30 percent, come to mind -- being at or slightly better than the average may not be cause for celebration or complacency. Revolving-door companies need to calculate the costs and benefits of high turnover. If the costs outweigh the benefits, they should examine the assumptions, structures, and culture behind the statistics regardless of how they stack up against the competition.

Statistics alone do not tell the whole retention story. Who leaves and why also matter. The first Ford Taurus was designed by a community of engineers brought together from various parts of the company. The project was a huge success, but within a few years every major contributor to it had left Ford -- a loss that deserved but never received analysis. As Sumantra Ghoshal and Christopher Bartlett point out, many firms that strive for stability, commitment, and maximization of their human resources try to understand why good people leave: "The best firms don't simply track defection rates; they categorize departures and then track defection rates by category. MBNA, for instance, tries very hard to be an excellent place to work, so when an employee who's performing well quits, the company does an exit interview to find out why. . . . People who leave because their spouses have been transferred to the west coast are not lumped in with people who are going down the street to work for a competitor."

Weathering Change: Mending the Social Contract

We can think of the promises, expectations, and benefits that connect individuals and organizations as a social contract -- a mainly tacit agreement about expected behaviors, agreed-upon values, and what the parties in the relationship agree to give and expect to get. Some of the terms of the agreement between an employee and a firm are quite explicit, of course. Written contracts specify the new employee's position, salary, and benefits, and may include clauses about ownership of intellectual property, confidentiality, and the like. But most of the agreement -- the social contract that defines much of the relationship -- is not spelled out in writing. It includes many of the expectations that make a job worthwhile and binds individuals to the organization: the promise of interesting work; expectations of recognition and advancement; a cooperative environment; respect; opportunities to make decisions and initiate projects and so forth.

As Professor Denise Rousseau points out in Psychological Contracts in Organizations and as earlier discussion in this chapter suggests, the terms of this implicit contract are negotiated over time, by many people in many situations. How recruiters and managers talk about the company and the position being offered is part of the negotiation, defining an often informal but powerful set of promises. Even the reputation of a company (or candidate) before they meet begins to "write" the contract. For instance, Hewlett-Packard has a (generally well-deserved) reputation for being a good place to work, with opportunities to work cooperatively on a variety of interesting projects. If a new hire at HP finds this not to be true, he may feel that an agreement has been broken, unless his conversations with the company have made it clear that his impression of its reputation is wrong. Equally important are what Rousseau calls "ongoing repetitive interactions," the behaviors during work that continually reinforce or redefine the terms of the relationship.

In her research, Rousseau found that many of the people who were dissatisfied with their jobs felt that promises about their opportunities and the nature of their work implied in interviews and conversations during the "wooing" period had not been kept. What is true of courtships between individuals also goes for the courtship between a firm and a potential new member: a courtship that promises too much is likely to mean a disappointing and unhappy marriage.

The social and psychological contract between an employee and an organization is never entirely fixed. As Rousseau puts it, "Today's contract performance changes tomorrow's contract terms." A wide range of events and circumstances -- performance reviews, new responsibilities, conversations with supervisors, leaders' statements about the aims and values of the business, to name a few -- redefine or renegotiate it to one degree or another. It defines a living relationship, which means a changing one. But this expected adjustment occurs in the context of core expectations that remain the same. Changing those central provisions breaks the contract and threatens to destroy the relationship (and social capital with it). Trust, cooperation, and a sense of equity are all at stake. Threats to core beliefs, behaviors, and expectations threaten the sense of membership in general: witness the religious and political groups split by differences that one faction sees as a betrayal of a group's identity.

The most familiar business example of contract breaking is the downsizing that occurs in organizations with a tradition (and implied promise) of long-term employment for workers who remain productive and fulfill "their side of the bargain." Though few companies explicitly guarantee lifetime jobs in return for commitment and hard work, the widespread sense of betrayal that downsizing caused shows how powerful the expectation of job security in exchange for skill and commitment has been. Social contracts are broken locally too. These breaches are less publicly visible than are large-scale events like downsizing, but they happen every day and the damage they do, though less dramatic, may ultimately be greater. They happen, for instance, when a supervisor denies an employee decision-making opportunities that she has been led to expect, or when promised opportunities to learn new skills are lost in order that employees can keep up with daily work demands. How can organizations help maintain their social contracts with members and limit damage when breaking them is unavoidable, when economic conditions or the volatility of an industry make changes necessary that threaten the contract's terms?

First, they need to be aware of what those terms are, and recognize that implied expectations that are more powerful than explicit contract clauses. As Denise Rousseau points out, tradition, observed behaviors, and the expectations of peers all contribute to the social contract. An employer who is unaware of the implicit terms of the bargain with employees may be blindsided by the betrayal they express when one of these hidden provisions is violated. A legalistic focus on the written contracts ("Where is the clause that says you would spend half your time on research?") misses the point that the dispute is about the nature of a relationship and the terms of membership, not the details of impersonal transactions that most formal contracts define. And an employer who sticks to the letter of the law regarding what it owes employees -- who reduces a relationship to transactions -- will have employees who obey the letter of the law when it comes to what they owe the company. Experience shows that "working to rule" can bring most organizations to their knees.

But not every major change is a breach of contract. Rousseau says, "Substitution is actually a common form of contract keeping." She adds that "a breach of contract occurs when one party reneges on the agreement despite their ability to fulfill it" (italics ours). If management persuasively demonstrates that change -- even as drastic a change as downsizing -- is necessary for the health and survival of the firm, then perceptions of betrayal and bad faith on the part of the organization are reduced or avoided. And if the painful process is carried out and seen to be carried out fairly, that too makes a positive difference. So leaders of organizations should make the reasons for changes in the contract clear and demonstrate that the necessary pain is being shared as equitably as possible. Leaders who lay off workers to cut costs while granting themselves larger and larger bonuses breed resentment and cynicism.

The action taken by Hewlett-Packard when its business temporarily declined in the seventies was very different. David Packard says, "Because of a downturn in the U.S. economy . . . [w]e were faced with the prospect of a 10 percent layoff. Rather than a layoff, however, we . . . went to a schedule of working nine days out of every two weeks -- a 10 percent cut in work schedule with a corresponding 10 percent cut in pay. . . . The net result of this program was that effectively all shared the burden of the recession, good people were not released into a very tough job market, and we had our highly qualified workforce in place when business improved."

This approach turned a situation that could have diminished social capital into a social capital builder. It said, as clearly as possible, "we're all in this together." Both at that time and for many years later (as a powerful story of equity and solidarity), it built trust and a sense of membership in a collaborative enterprise. As we mentioned early on, change -- even difficult change -- accomplished with rather than against the members of the organization can actually increase social capital, fostering a sense of solidarity in crisis.

Part of a persuasive argument for serious change is recognition of its cost, including its emotional cost. One of the authors witnessed an oil company CEO openly upset when lower oil prices compelled him to announce layoffs at his organization. His expressions of feeling did not change the facts or put food in the mouths of the people who lost their jobs, but they made a big difference to the people who left and those who stayed. Various commentators have noted that downsizing makes the "survivors" feel less secure. Because of the CEO's behavior in this case, employees felt safe from job cuts driven by pure greed or arbitrary displays of power. Their leader's genuine concern about their fate convinced them that the cuts were critical to the company's success and would not be repeated unless a similarly difficult situation arose.

Sometimes too organizations need to admit that a change that makes sense on paper exacts too high a social cost, and change their minds. For instance, in 1999 IBM modified its pension policy. This seemed to make economic and organizational sense for the company, but some longtime employees who stuck with IBM during its lean years in the late eighties and early nineties felt that the rules were being changed to their detriment in the middle of the game. The betrayal this "broken promise" caused them to feel was too high a price for the company to pay for the apparent advantages of the new plan. In response, IBM rescinded the change for a significant percentage of the affected employees.

Managing Change at UPS

The social contracts at United Parcel Service have long included the expectation of promotion from within. Coming up through the ranks has had something like the force of a religious tenet or defining principle. The UPS "story" has always been one of people moving gradually through the company and of leaders who understand from personal experience what it means to be a driver or package sorter. The UPS values of hard work, versatility, broad understanding, and competence (rather than specialized brilliance) support the principle. Commitment, a cardinal value, is consonant with promotion from within, as is the UPS idea of success as a gradual accumulation of reputation, responsibility, and financial reward.

Jeff Sonnenfeld and Meredith Lazo's Harvard Business School case documents the emotional and practical difficulties of UPS's decision to modify this policy. In the eighties, the need for staff with high-level information technology skills was indisputable, but company leaders feared the damage that compromising the old ideal might do to the company's culture and, especially, to the powerful implied contract with employees. Sonnenfeld observes that some employees,

after hearing in their interviews and reading in the Policy Book that promotion-from-within was one of the most honored UPS policies, were confused and disappointed when they saw outside hires being placed in positions they thought they were being trained for. Some felt they had been misled. One entry-level programmer commented, "It's frustrating that management is not following the promotion-from-within policy. I understand that people with greater expertise are needed, but I wish they would have told us the real policy during orientation."

In part, the organization managed this difficult change of policy by making the need for it clear. As Denise Rousseau suggested, changes that are understood to be necessary for the continued success or survival of the organization are not seen as breaches of contract, as more capricious changes are.

UPS has also taken seriously the cultural issue of making sure that the newcomers adapt to the culture rather than transform it to a less desirable one. Even in skill areas like information technology, which would seem to have little in common with package delivery, the company consciously strives to hire the kind of people who will fit the traditional culture. UPS also uses orientation programs to acclimatize newcomers to the culture. In addition to attending training and orientation programs, many managerial new hires spend time at a sorting center or on a package car route to get a feel for the traditional UPS experience. (McKinsey, too, makes new employees at every level work on diverse projects before assuming much responsibility.) Ken Parks of human resources comments on the orientation process:

How do you infuse the culture into experienced folk who come in at a high level? It takes time for them to embrace it. After a few months, they start to say the same things as UPSers. They say "we," not "I" (except when taking responsibility for a mistake). The IS group includes a lot of people hired quickly. We made sure to include a lot of UPSers in the group. They didn't have the same level of technical skills as the new hires, but they had cultural skill.

To an outsider, the persistence of long-standing organizational norms at UPS seems more remarkable than the slippage. Promotion from within is still a company-defining expectation -- no longer universal but still the desirable norm. The effects of change are unpredictable, though. Over time, the modification of the promotion-from-within policy may prove more of a problem than it currently appears to be. The more recent decision to sell shares of UPS stock to the public for the first time is another change that makes business sense but whose long-term effects on the culture are unknown. (Recognizing the importance of private ownership, the company has made only 10 percent of its stock and 1 percent of voting rights available to the public.)

Some change, of course, invigorates organizations and can help avoid the clannishness of "the ties that blind." Ideally, UPS could get the best of both worlds: new skills, new flexibility, and new ideas, invigorating traditional values, norms, and behaviors. Dan McMackin notes that outsiders help "keep the company from being inbred. There is value in having different viewpoints; we need people with vision, not just good drivers." The ideal is seldom achieved, though, and it is hard to imagine UPS getting all the benefits of new blood with no dilution of the "brown blood" that has kept the company going for almost a hundred years. New viewpoints probably take a toll on old cohesion. McMackin recognizes the danger: "As we get bigger, there's a dance to be done between being inbred and losing our identity."

A similar dance goes on in many high-social-capital companies that must change to keep pace with a changing world while trying to hold on to their best traditional elements, their sources of trust, purpose, and committed membership. We believe that organizational awareness of the importance of membership and willingness to value the implicit contracts that support it can help them perform this difficult balancing act. In some unavoidable circumstances of crisis or challenge, organizations are forced to draw on their social capital. Sometimes companies respond to the crisis of lower sales or stock market valuation by cutting back on the very things -- from orientation to more open opportunities to travel budgets for internal meetings -- that build social capital. Instead, they should recognize the threat these situations pose to trust and collaboration and devote resources and attention to repairing damaged connections and replenishing potential social capital losses.

Employee Surveys

Ongoing surveys of employee satisfaction can help guide social capital investments at any time, but especially during periods of volatility. They are one of the tools organizations can use to measure trends in social capital and can identify particular problems. Both Motorola and Hewlett-Packard use regular employee surveys to find and fix local problems. Motorola's Individual Dignity Entitlement program treats any negative response to questions about the meaningfulness of work or managerial support as quality failures that must be addressed. The fact of a survey -- especially one supported by a long-term commitment of attention and resources -- also demonstrates that management recognizes the value of the social health of the organization.

According to Paul Siemion of UPS's human resources department, the company's commitment to a universal annual employee survey grew out of basic social capital questions that company leaders raised at the 1992 annual management conference. They asked, "How do we improve employee relations? How do we capitalize on the spirit of the organization?" In other words, how could the company increase its social capital and get more value from it? Part of the response was an employee relations index (ERI) survey that would give every center manager an annual report on working relationships with his or her people, and give every employee an opportunity to make his or her concerns known. Company leaders believed the survey could identify local problems that managers would immediately address, but they also recognized that it could also be used to diagnose trends in the "spirit" or social health of the organization. In practice, it has helped UPS gauge the impact of potential divisive situations (like the 1997 Teamsters strike) and of efforts to repair damage they might cause.

The ERI survey includes questions about the fairness of opportunities for advancement, the cooperativeness of coworkers, openness and trust in the working environment, the degree to which good work is recognized, and the accessibility of managers and their openness to new ideas. It also asks participants how confident they are that management will act on problems identified by the survey. Though far from a complete analysis of organizational social capital, it gives managers and the company as a whole important indications of trends in trust, communication, cooperation, and perceived equity -- all important social capital factors.

To make sure that the ERI survey is more than "just a piece of paper," the company invests in an infrastructure to administer it and (especially) to oversee responsive action. Each of UPS's sixty districts has a full-time employee relations (ER) manager; others work at the regional and corporate level, for a total of about seventy-five employees directly responsible for making the survey work. (Most ER managers also have related responsibilities, including training and resolving disputes that involve nonunion employees.) ER managers promote and administer the survey, ensure confidentiality, bring results to the centers, and make sure that a follow-up meeting takes place. In characteristic UPS fashion, results are dealt with locally in face-to-face meetings of employees with their immediate supervisors. ER managers also help centers develop action plans to make necessary improvements. Participation rates have usually been above 75 percent and as high as 81 percent. Immediately after the Teamsters strike, participation fell to 72 percent, but it climbed again past 76 percent in the fall of 1998.

In many organizations, employee survey analysis takes so long that it reflects what the organization was like last year and therefore loses much of its value. At UPS, ERI survey results are returned quickly in order that they are relevant to the current situation, and to make sure that problems are promptly addressed. District staff get results three days after the surveys are completed; centers see results in a week. Even the overall corporate report that aggregates local results is generated within two weeks of the survey date. The company's investment in staff to manage the survey and response process, its determination to respond rapidly, and the importance it attaches to the overall results demonstrate and communicate its conviction that social capital, in the form of these relationships, is important.

ER managers use the survey to identify "most help needed" centers and devote a lot of their attention to changing behaviors there. At a corporate level, the survey provides analysis that can lead to future action. Tracing the rise and fall of the overall index gives the company a measure of how it's doing. Corporate analysts are also beginning to relate employee satisfaction measures to other important indicators and results such as injury statistics, retention rates for part-time employees, and safety statistics. They are considering exploring other correlations -- for instance, between customer satisfaction and favorable ERI responses from package car drivers. Survey results are part of UPS's balanced scorecard measure, which looks at organizational performance from four perspectives: people, customers, financial, and operational. Though far from an exact measure of social capital, the ERI survey gives a clear relative calibration of the levels of trust, communication, and connection in the company. The increasingly sophisticated analysis of its results promises to provide important indications of the economic value of these social goods.

Lucent Technologies Value in People survey similarly looks at the state of the organization's culture from the employee's point of view. According to Sue Klepac, Inventor of Possibilities at Lucent, 78 percent of employees respond to the survey, a figure that itself suggests confidence in the organization's commitment to cultural issues. Hewlett-Packard's semiannual employee survey also addresses social capital issues. Like the Motorola Individual Dignity Entitlement survey, it is designed to identify and quickly redress people's problems. Neither company, though, aggregates local results to generate the kind of overall evaluation that UPS has developed and continues to expand. The localness of these social capital assessments makes some sense. Just as "all politics is local," so all social capital is local (virtually by definition; since it consists of relationships, it can only exist between people, not as some quality "out there"). Though global actions affect local social capital for good or ill, local interventions are also important. We believe that this is a lost opportunity. At any time, these surveys can be an important tool for measuring social capital. In times of change, they can provide valuable information about how best to repair social capital damage.

Investments in Stability

We believe that the disruptions, uncertainties, and even the expanded possibilities of a volatile age make social capital more important than ever. With the boundaries of organizations remade again and again by mergers, acquisitions, and shifting partnerships, with global teams forming and disbanding and firms continually looking for new ideas, established trust relationships, mutual understanding, commitment, and other elements that characterize high social capital provide the stability and connection that allow organizations to hold together and members of organizations to work together. We all use our established personal networks and communities as tools for making sense of the world, and sense making is one of the most difficult and important activities people and organizations undertake in a changing and uncertain world.

Because volatility threatens social capital and because existing social capital helps manage volatility successfully, leaders need to be aware of the social capital effects of the changes affecting their organizations and take steps to preserve and rebuild their social capital stocks. Social capital surveys can be one item on that agenda. More important, we think, is continued appreciation for social capital and varied investment in it at a time when many cutting-edge commentators argue that some of its essential elements are dead, dying, or outmoded.

One factor affecting organizational volatility that we have not emphasized in this chapter is virtuality: both the idea of the virtual corporation and the communications technology behind telecommuting, virtual teaming, and other forms of work-at-a-distance. The possibility of working online and of people meeting electronically to carry out particular projects certainly contributes to the sense that jobs and organizations, no longer firmly anchored in particular places and times or limited to a local workforce, can change quickly. The subject of virtuality, so important in itself and so deeply connected with social capital issues, is discussed in chapter 7.


From Chapter 6 of In Good Company: How Social Capital Makes Organizations Work, by Donald J. Cohen and Laurence Prusak. Harvard Business School Press. Reprinted with permission.

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