07 NovInstitutional memory. An asset that does not appear on the balance sheet.

People are our most important asset. A well used saying in many corporate values statement. I think there is a special, vital ingredient on the infrastructure side of the house which deserves mention. Institutional memory. In a recent article on the Warren Buffet / 3G takeover of Heinz, there was a cutting comment about the methods used at prior acquisitions made by the 3G team. Referring to what happened at Burger King, the article commented that so many people were cut, that the longest serving member of a key team had been there just six months.

When I have seen combinations of deep and repetitive cuts being made, my broad, perhaps sweeping generalisation, is that they do weed out some people who deserve to be let go, although favouritism, often in its extreme form, nepotism, will gain the upper hand more often than not. What happens though on the infrastructure side of the business is that cuts are very seldom targeted and, as a rule, are made in linear fashion after a frustrating dialogue between business and the support functions, that normally goes something like this:

Business guy: “We want you to reduce headcount by 20%!”
Infrastructure guy: “Ok. Please tell me which businesses you are getting out of, which systems you are going to stop using,  so I can target my cuts and not affect service”
Business guy: “Oh, no. We’ll be in all of the same businesses, just less of everything”
Infrastructure guy: “Ok. That makes it tricky for us. For the most part we are very STP, we have a small number of people in each function. To ensure we have segregation of duties and cover all the working days, there is a minumum number of folk we need. Of course, you can do more volume and we need few if any people.”
Business guy: “I don’t understand. All sounds like nonsense. Just chop 20% across the board”

20% cuts are duly made, linearly across the board. Over and above those cuts, others leave, generally those most able to find an alternative. What’s left is a collection of some able and some less so, often with many long-timers amongst both groups. Some of them will be plodders, some not. Those remaining have some “institutional memory”, “how things are done around here”. When the next upturn comes, the organisation may be slow to react; people do not remember how to do things or what they did last time this happened. The wheel has to be re-invented.

I would say with all due respect to Jack Welch and his cut the bottom 10% mantra, that there is a limit to this. The limit is the “good plodder”; that long timer who knows how it all works, turns up on time, adjusts their holidays, is rarely sick, gets the work done and has few ambitions. You need some of those people. Your organisation will not survive if you only have plodders, yet no more will it do so if you have none of them

Lessons Learned: On the people side, “institutional memory” is a hard thing to measure. It is though a valuable asset. At some level, the business of large organisations goes on almost inspite of the latest grand plan and strategy. That capacity is very valuable. It needs to be carefully nurtured and respected.

For more on the 3G story, see: “Squeezing Heinz”, Jennifer Reingold,  Fortune Magazine, October 10, 2013. http://money.cnn.com/2013/10/10/leadership/heinz-buffett-3g.pr.fortune/

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