Research on the Impact of Flex
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Transcript of Research on the Impact of Flex
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The Impact of Flexibility
on Organizational Performance
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Copyright 2004 by Davies-Black Publishing, a division of CPP, Inc. Adapt ed f rom Leveraging the NewHuman Capit al: Adapti ve St rat egies, Resul t s Achieved, and St ories of Transformat ion, S. Burud & M.Tumolo. All rights reserved.
Research on the Impact of Flexibility onOrganizational Performance
The evidence is in: flexibility is good business
Until now, flexibility has been seen as simply a highly desirable perk for employees. This
report, drawn from a large body of research and the experience of numerous firms, shows
precisely how employers gain benefit from providing flexibility in when and how work gets
done -- from lower costs and enhanced organizational performance, profitability and
shareholder value. It establishes flexibility as essential element of a human capital
strategy, a powerful business tool and key component of successful management practice.
Lower Costs
Flexibility helps reduce or eliminate costs associated with turnover, health care, overhead,
labor, quality, and legal fees.
TURNOVER
Employees experiencing conflict between their work and family responsibilities are
three times as likely to consider quitting their jobs, compared to those who are not
experiencing conflict. (Johnson, 1995)
The following firms experienced significant turnover-related savings after they adopted
flexible human capital cultures and practices.*
Ernst & Youngestimates saving $17 million in turnover-related costs during 1997
and 1998, with flexible work arrangements and a culture that made simultaneous
work and personal success possible. It improved retention of employees,
particularly women (65% of the people who used the flexible work arrangements
had earlier considered leaving), and improved client satisfaction (Casner-Lotto,
2000).
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Copyright 2004 by Davies-Black Publishing, a division of CPP, Inc. Adapt ed f rom Leveraging the NewHuman Capit al: Adapti ve St rat egies, Resul t s Achieved, and St ories of Transformat ion, S. Burud & M.Tumolo. All rights reserved.
Corningavoided a $2 million loss in turnover-related costs when employee
turnover was cut in half. It adopted family-friendly policies with increased part-
time work and job-sharing opportunities (Miller, 1998).
Aetna Life and Casualtysaved $1 million a year by allowing part-time return after
family leave. It cut attrition by more than 50% over 5 years (Johnson, 1995).
Fifty percent of women were leaving Kodakfollowing their maternity leave a
statistic that Kodak reduced to 10% by modifying its maternity leave policy
(National Report on Work & Family, 1991)
*(Formulas used to calculate savings were not provided by the firms.)
The figures above are even more impressive when we look more in depth at the real
costs of turnover.
The real cost of turnover amounts conservatively to 50-75% of the departing
hourly employees annual salary, 150% of a salaried workers salary. This
figure includes the directcost of finding, hiring, and training new workers and the
indirectcosts resulting from lost productivity and inefficiencies, which are 80-85%
of the total. (Kepner-Tregoe, 1999) (Phillips, 1990)
When an employee leaves, productivity is affected from the time the worker decides to
leave until a replacement worker is fully up to speed, for the leaving/incoming person, co-workers and supervisors. Thus, a company with 5 exempts and 5 hourly people (paid
$60,000 and $25,000 respectively) leaving annually is losing over half a million dollars
each year.
Even these figures may understate the real cost. The more intense the knowledge or skill
of the job, the longer it takes. New attorneys billing rates and legal skills only equal their
salaries, benefits and allocated overhead after three to four years of employment,
according to the Boston Bar Association. A law firm begins earning a return on a law
associate between the fifth and tenth years of employment (Boston Bar Association, 1999).
The cost of turnover formula also does not consider lost relational capital, i.e. relationshipsheld by the employee within and outside of the organization, or the cost of errors, internal
inefficiencies, lost ground in customer satisfaction, and lack of progress on continuous
improvements while a new person is learning the ropes. For key employees (the one who
keeps a key customer satisfied enough to stay or who generates substantial sales), this
difference can be significant.
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Copyright 2004 by Davies-Black Publishing, a division of CPP, Inc. Adapt ed f rom Leveraging the NewHuman Capit al: Adapti ve St rat egies, Resul t s Achieved, and St ories of Transformat ion, S. Burud & M.Tumolo. All rights reserved.
HEALTH CARE COSTS
Health insurance is the largest and fastest growing element of labor costs. Health costs
are reduced by flexible human capital strategies, specifically when employees have
sufficient resources to meet the demands they face and when they have a sense of
control.
Stress and Depression
Depression and stress increase health costs; flexible human capital cultures
reduce stress.
Depressed employees health care bills are 70% higher than those of other
employees. Employees reporting high stress have 46% higher health care
costs.
Combined psychosocial problems--stress and depression--led to costs
nearly 2.5 times higher than workers who didn't report such concerns
(Goetzel et al., 1998). Organizations pay an additional 5-15% in wage costs
for the lost productivity from stress and other suboptimal psychosocial work
conditions.
An estimated 16% of health care costs are preventable by reconstructing
these aspects of jobs(Karasek & Theorell, 1990; p125, 168).
Burnout
Fifty-four percent of workers, whose employers lack supportive work and
family policies, report burnout, compared to 27% of workers whose
employers have them.
A study of U.S. companies found that flexible scheduling of work hours
reduced the number of employees reporting burnout from 39% to 28%
(Northwestern National Life Insurance Company, 1992). A study of emotional exhaustion among social welfare workers found that
burnout affected job performance (as judged by managers) and was a
strong predictor of turnover (Wright & Cropanzano, 1998). A study of
emotional exhaustion among social welfare workers found that burnout
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Copyright 2004 by Davies-Black Publishing, a division of CPP, Inc. Adapt ed f rom Leveraging the NewHuman Capit al: Adapti ve St rat egies, Resul t s Achieved, and St ories of Transformat ion, S. Burud & M.Tumolo. All rights reserved.
affected job performance (as judged by managers) and was a strongpredictor of turnover (Wright & Cropanzano, 1998).
REAL ESTATE / FACILITIES COSTS
Enabling employees to telecommute or work remotely can reduce real estate-related
facilities costs, according to the following company evaluations:
Ernst & Young used a policy of encouraging virtual work (work at home and
elsewhere) to eliminate one million of the seven million square feet it rents
nationwide. The policy offered employees a desk only if they were in the officemore than half a day. By increasing the employee-to-desk ratio to five to one,
E&Y expected to avoid $40 million in real estate costs by saving on a $40 per
foot office space charge (Pacelle, 1993).
AT&T avoided $10 million in office space costs over 5 years (Minnesota Center
for Corporate Responsibility, 1997), or $3000 per teleworker, through
telecommuting (Gemignani, 2000).
AT&T also saved an estimated $80 million in 1994 by closing offices.
Telecommuting employees and their managers also discovered that rather
than having more distractions at home, there were more distractions at theworkplace that impeded productivity -- meetings, colleagues, and frequent
interruptions (e.g., telephones) (Noble, 1995).
LABOR COSTS
Flexible human capital strategies can reduce labor costs for the same output, increase
profitability (by boosting output per employee and efficiency among groups and across the
organization), and reduce waste (lost work time, poor concentration, mistakes, turnover,
etc.)
First Tennessee National Corporation raised its ratio of managers to
employees, reducing overhead costs by shifting greater responsibility and
rewards to employees.
Merck reduced overtime in the payroll division by 50% by expanding use of
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Copyright 2004 by Davies-Black Publishing, a division of CPP, Inc. Adapt ed f rom Leveraging the NewHuman Capit al: Adapti ve St rat egies, Resul t s Achieved, and St ories of Transformat ion, S. Burud & M.Tumolo. All rights reserved.
flexible work arrangements (Casner-Lotto, 2000).
Bell Atlantic Corporation avoided a portion of disability leave expenses by
permitting employees, who would otherwise be on disability, to telecommute
(Bureau of National Affairs, 1992).
A CPA firm that provided on-site child care during tax season increased the
number of staff available and income generated (Johnson, 1995).
The total labor costs required to achieve the same earnings results can be lower in
organizations that employ flexible human capital strategies. This result happens even
though (in fact because) labor rates salary, benefits, bonuses and other employee costs
-- may be higher.
Costs resulting from work slowdowns, strikes, and theft may also be reduced in
organizations employing flexible human capital values and practices, since these
problems happen more often when employees do not feel respected or that their interests
are aligned with the organization.
QUALITY
There are many costs associated with poor quality, including dissatisfied customers and
injuries to reputation. Some costs are related directly to the issues that flexible human
capital strategies address.
Employee Attitude
NCR found the highest quality plants had the highest employee ratings of job
security, management, company performance, cooperation, goals and
objectives, and other measures of employee attitude (Ulrich, Halbrook, Meder,
Stuchlik, & Thorpe, 1991).
Mistakes
A 1992 study conducted by the St. Paul Companies found that staff whobelieved work was causing problems in their personal lives were much more
likely (30% compared to 19%) to make mistakes than those who had few job-
related personal problems. (Johnson, 1995) Mistakes can be costly, as focus
group data from a California utility demonstrates. An IT computer technician
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Copyright 2004 by Davies-Black Publishing, a division of CPP, Inc. Adapt ed f rom Leveraging the NewHuman Capit al: Adapti ve St rat egies, Resul t s Achieved, and St ories of Transformat ion, S. Burud & M.Tumolo. All rights reserved.
received a call at work that her mother, who was in a nursing home, had fallen.Company policy permitted two hours to be taken off midday, but that was not
enough time for her to reach her mother and return to work. That afternoon,
distracted by worry, the employee accidentally erased a computer tape. The
tape would ultimately be needed for a court case and more than $2 million
would be spent to reconstruct it (Burud & Associates, 1989).
LEGAL COSTS
Organizations that practice flexible human capital strategies (not just have them on paper)
can reduce their exposure to gender discrimination claims. Certain strategies are key,
particularly legitimizing part-time work, time-off during a career cycle, and flexible work
schedules. (Unbending Gender, Joan Williams) Recent judgments show how critical this
issue can be. $3 million award in one case; over $625,000 in another. In a Title VII disparate
treatment case, a female civil engineer who was passed over for promotions
after the birth of her son was awarded $3 million. The president of the company
had asked her, Do you want to have babies or do you want a career here?
(Williams & Segal, 2003, p. 130). Another plaintiff was granted over $625,000
in damages and attorney fees, who, after returning from maternity leave,experienced increased work, greater scrutiny of work, loss of schedule
flexibility granted to others in her department, and demeaning comments
regarding potential future pregnancies and her young child.
Enhanced Organizational Performance
Flexible human capital practices (when adopted as a whole in a congruent cultural
context) contribute to a work force that is more skilled, stable, and enthusiastic and free of
distractions. The studies below have considered how flexible human capital strategiesaffect an organizations profitability, ability to grow, and market value.
Talented and focused employees who are on flexible schedules are more likely
to be committed to the organizations goals and deliver superior value to
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Copyright 2004 by Davies-Black Publishing, a division of CPP, Inc. Adapt ed f rom Leveraging the NewHuman Capit al: Adapti ve St rat egies, Resul t s Achieved, and St ories of Transformat ion, S. Burud & M.Tumolo. All rights reserved.
customers, who in turn, are more inclined to be satisfied and loyal, generatingstrong sales.
An organization utilizing flexible strategies is more efficient in the short run, and
more profitable. It is also better poised for long-term success, able to innovate
and continually improve processes while minimizing overhead.
These organizations investments are in constructive, future-oriented assets-
human capital, innovation, and customer relationships-all leading indicators
that stock analysts use to evaluate stock price.
Higher Earnings
Practices that recognize both the value and the needs of employees enable companies to
grow in terms of profits and revenues and to sustain that growth over longer periods of
time, because they provide that critical fundamental element: the right people on the bus
and in the right seats (Collins, 2001).
Best Companies to Work for had Higher Employee and Customer
Satisfaction and Market Value
FortunesBest Companies to Work For earned double the market returnover a seven year period; employees satisfaction was correlated with
shareholder returns. (Edmans, 2008) Companies on Working Mothers'
100 Best Companies for Working Mothers list, which had flexible
schedules, telecommuting, etc., had customer satisfaction ratings 1-7
points higher than others, which translated into a 3-11% increase in market
value, or $22,000 per employee (Simon, 2002). The study also found that
when unemployment rates increased, market value also rose. A one
percentage point increase in the unemployment rate results in a 1.2-2.1%
increase in market value or $2,400-4,200 per employee. The research
allows one to compare whether fear or support has a stronger impact onperformance and found support 3-9 times more powerful.
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Copyright 2004 by Davies-Black Publishing, a division of CPP, Inc. Adapt ed f rom Leveraging the NewHuman Capit al: Adapti ve St rat egies, Resul t s Achieved, and St ories of Transformat ion, S. Burud & M.Tumolo. All rights reserved.
TelecommutingIncreases ProfitabilityAn economic analysis found when the number of employees working from
home increases by one percentage point, the firm's profit rate increases by
an additional six-tenths of one percent. For the average firm in the sample,
profits rose $84 million as a result.The researchers explanation is theefficiency wage theory, that above-market compensation (here including
the opportunity to work at home) reduces turnover, absenteeism and
tardiness and increases productivity and profitability (Meyer, Mukerjee, &
Sestero, 2001).
Flexible Culture Increases Financial PerformanceFirst Tennessee National Corporationhas had an intensely employee-
centered culture for a decade, with the principle of flexibility at its core. In
2001, FTNC was the most profitable banking company in the U.S. for the
fourth consecutive year, with an 18% five-year-average return on capital,
according to Forbes. It ranked fourth among the top 50 bank holding
companies, with an annual revenue-per-share growth rate of 12.5% over
the past seven-year period (See case study on FTNC in Leveraging the
New Human Capital, Burud & Tumolo, 2004) .
Flexible Human Capital Culture Leads to Financial PerformanceSAS, a private software firm whose work environment epitomizes flexible
human capital values, had double-digit growth for the first 26 years of its
history, until 2002. In 2002, during the economic downturn in which other
companies sustained losses, SAS still had a 4.4 % increase in revenue.
(See case study on SAS in Leveraging the New Human Capital, Burud &
Tumolo, 2004)
Employee Involvement Leads to Higher ROS, ROA, ROI, & ROEA study of Fortune 1,000 companies found organizations with high use of
employee involvement (EI) programs high performance knowledge
development, information-sharing, organization- and team-level pay for
performance, and empowerment practices performed significantly better
than organizations with low employee involvement. High EI companies had
a 25% higher ROS, a 34% higher ROA, 26% higher ROI and a 40% higher
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Copyright 2004 by Davies-Black Publishing, a division of CPP, Inc. Adapt ed f rom Leveraging the NewHuman Capit al: Adapti ve St rat egies, Resul t s Achieved, and St ories of Transformat ion, S. Burud & M.Tumolo. All rights reserved.
ROE in 1996. In 1999, ROS was 66% higher, ROA was 20% higher, ROIwas 20% higher, and ROE was 14% higher. The market-to-book ratio in
1999 for high EI use companies was 1.8 versus .7 for low performing
companies (Lawler, Mohrman, & Benson, 2001)
Increased Shareholder Value
Shareholder revenues increase in companies that employ flexible human capital practices
according to evidence obtained in two ongoing research efforts by Watson Wyatt: the
Strategic Rewardsand WorkUSA surveys.
Retention (increased by access to flexibility) Increases Shareholder Value The latest Strategic Rewards survey, conducted in 2000/2001, obtained
responses from 3 million full and part-time employees of 410 U.S. and
Canadian companies - representing all major industries. Comparing
responses with firm performance revealed that firms with successful
retention strategies, and lower turnover as a result, had, on average, 5
year shareholder returns of 26% compared to 9% returns for companies
with unchanged turnover and 7% returns for those with increasing
turnover (Watson Wyatt, 2000).
In McKinseys research on talent management, there was clear
evidence of the economic benefits of retaining key employees; 88% of
HR executives in top-quintile companies (top 20%), in terms of
shareholder value, say they rarely lose employees to their competitors,
compared with 73% of mid-quintile companies (middle 20%) (Chambers
et al., 1998).
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Copyright 2004 by Davies-Black Publishing, a division of CPP, Inc. Adapt ed f rom Leveraging the NewHuman Capit al: Adapti ve St rat egies, Resul t s Achieved, and St ories of Transformat ion, S. Burud & M.Tumolo. All rights reserved.
Human Capital Practices Increase Employee Commitment which IncreasesShareholder Value
The WorkUSA 2000survey, conducted in 1999, surveyed 7,500 workers
regarding their attitudes about the workplace and their employers.
Employee commitment (Pfau & Kay, 2002) depended on:
Leadership effectiveness and supervision
Work environment
Adequacy of technology and resources
Compensation and benefits
Teamwork and work process effectiveness
Communications and decision-making
Job content and satisfaction
Work-life balance and flexibility
Diversity
Performance management
The study found that engaged and committed employees perform at higherlevels. The effect has quite a payoff; companies with high employee
commitment return 112% to shareholders over 3 years, compared to 90%
for average commitment and 76% for low commitment companies (Watson
Wyatt, 1999b).
Work-life Support Increases Shareholder Return
An analysis of Fortune 500 firms found decisions to provide work-life
support (which typically includes flexibility) increased shareholder returns.
The study found shareholder returns increased .36% on the day such a
decision was announced and .39% over the three days around the
announcement [Arthur, 2003 #695].
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Copyright 2004 by Davies-Black Publishing, a division of CPP, Inc. Adapt ed f rom Leveraging the NewHuman Capit al: Adapti ve St rat egies, Resul t s Achieved, and St ories of Transformat ion, S. Burud & M.Tumolo. All rights reserved.
Flexible Schedules and Parental Leave Lead to Higher Organizational andMarket Performance and Higher Profit-sales Growth
A study of HR/personnel directors at 527 U.S. firms found that firms with
more work/family benefits, such as flexible scheduling and parental leave,
had statistically significant higher organizational and market performance
(as reported by the firms) and higher profit-sales growth (Perry-Smith &
Blum, 2000).
In conclusion, organizations that demonstrate that they value and invest in their human
capital by creating a flexible work culture are able to grow revenues and profits and
generate substantially more value to shareholders.
Learn how FlexPaths can help your organization use flexibility to:
Make the most of existing talent
Solve for organizational challenges
Move the organization above the pack
Contact: Karol Rose
Email: [email protected]
Phone: 506.696.3709