This study seems fundamentally flawed. The Fortune 500 are the 500 companies with the highest revenue. This means that smaller companies only make it into the Fortune 500 if they already have very high revenues/employee. Since costs/employee are necessarily bounded, what the study ends up comparing is the productivity in the most profitable small companies with the productivity in the (roughly) average large companies. That's a serious sample bias and invalidates the conclusion, IMO.
The equally big flaw is that it focuses on the _average_ employee rather than the _marginal_ employee. If you want to decide to hire another employee, your concern is not how productive your average employee is. Your concern is whether the next employee will be a net positive or a net negative.
I'll bet that Wal-mart's marginal employee profit is almost exactly $0. In other words, Wal-mart has hired so many people that there is no benefit to hiring one more, and has been so efficient in getting lean that there is nothing to be gained from firing somebody. (Of course, that ignores individual performance, but on average.)
The same analysis might be true for Goldman. Even though the average Goldman employee is raking in hundreds of thousands for the company, it's not clear that Goldman would profit an extra $200,000 just by hiring the next average employee. It's very likely that Goldman has a limited number of opportunities to invest and that the current staff is enough to handle those and no more.
Walmart could open a new store. That would need more employees and, presumably, the store would generate a profit for the group. So looking at the marginal employee doesn't tell the whole story either - hiring one more employee isn't enough to open the next store, you'd need to hire another 30 more (or whatever the figure is) to see an increase in profit.
Isn't the Walmart population in the US roughly stable at this point? I would imagine that if WalMart could identify a location where a store would be obviously profitable then they would open it immediately.
Exactly. It's not that diseconomies of scale don't exist, but this study doesn't really show them. Every company in the S&P 500 is big enough to suffer from levels of bureaucracy unheard of in smaller companies; virtually all of them are as unwieldy as they are large.
This isn't showing Walmart is less profitable per employee than thrifty independent retailers and small, focused chains. It instead illustrates the unremarkable fact that Walmart is less profitable per employee than Goldman Sachs.
It would be interesting to see a study done on profitability per employee based against employee wage.
Now it's just a hunch, but my guess is that Goldman Sachs with it's approaching-six-figure average employee wage is going to be a lot more profitable per employee than mega-marts employing minimum-wagers by the thousand.
But S&P 500 are not the 500 companies with highest revenue. Its 500 companies selected by a committee to be representative of the american economy. Its not as biased as you suggest.
My bad, but I think the study would have actually been less flawed with the Fortune 500. S&P are subjectively chosen "market leaders"; thus you not only get the bias towards companies with large revenues, but also an opaque bias related to the committees non-transparent criteria.
The stocks included in the S&P 500 are those of large publicly held companies that trade on either of the two largest American stock market exchanges; the New York Stock Exchange and the NASDAQ. Wikipedia
I agree that companies with 3-100 employees will just not appear in SP500.
However, Mercury Interactive was included when it had around 1000 employees. 1000 is a lot, but you can still learn by comparing a company with 1000 employees to HP with 300,000.
I think you need to be even more granular than that. For instance, I doubt the same standards apply to startups hiring salespeople as well as startups hiring programmers.
I would upvote you 10 times if I could, if only because your comment should be pinned at the top of this thread. The fundamentals of this study are very flawed, and anyone reading the article should know as much.
Point and case - the number one firm on their scale 'Ambac Financial Group' has declared bankruptcy - turns out not so productive per employee after all.
It's not just bureaucracy + increased communication costs of course. At some point, it just becomes harder to find as many skilled employees to hire either because there isn't any left (a common problem when looking for skilled developers) or the really talented people are looking for smaller/younger companies where they can get outsized returns.
I think this is the exact problem Goolge is facing right now. It's increasingly hard for them to keep their high standards in hiring worldclass engineers and hackers. There simply aren't that many of them.
Is that really Google's problem? I mean I realize there aren't a lot of great engineers, but it seems to me that their primary problem is that they are no longer the "hot" company to work for. I think all companies reach this point as they mature. Either they have to start paying a lot more than their competitors or they have to lower their standards. Most companies do some of both (best example would be Microsoft right now, they have good engineers, but not as good as they used to. They also pay well)
The two are probably linked. A hot company for hackers is one where there are other hackers that are great. Once you reach the point where your company isn't only staffed with only great hackers but also merely good developers the company seizes be as hot as it was.
It's a hard problem to solve. Especially if, like Google, you're a publicly traded company that needs to grow constantly to appease investors. Growth means hiring more people.
Personally I think Google has plenty of engineering talent. It's not that they don't have enough people to design the bridge, they just don't know exactly where it is suppose to go.
A third option would be to break the company up and let the by-products run like small companies that need to survive, potentially making it more attractive for recruiting purposes.
If that's the case, then why not stop hiring until more sufficient talent becomes available? Does this mean that Google's new hires are primarily there to increase headcount?
Your responsibility to your shareholders is not to maintain the highest profits/employee - it's to deliver the highest total profit per share. If you need people, and can maintain the 3/2 ratio, you should add them.
Your responsibility to your shareholders is not to maintain the highest profits/employee - it's to deliver the highest total profit per share.
Management is legally obligated to act in the long-term best interests of the company; that is NOT the same as "deliver the highest total profit per share." For more, see:
You seem to present a dichotomy for employment motivations: securing talent (i.e. so Facebook can't have 'em) vs. increasing headcount. However, Google is probably hiring because they have more opportunities and workload than their existing employee base can handle.
It's a difficult situation to be in. Google can't stop hiring because the only asset the company has is brainpower. If they don't continue to recruit the best they will wither into just another internet company. Many large companies can sit on their existing products because there exists some competitive advantage that prevents competitors from overtaking them in the near term. Google's competitive advantage is the algorithms and data, both of which result from having top talent, hence the need for them to continue hiring.
I'd argue that brainpower is not their only asset. It's an important input, but not their most important "asset". True assets can't walk out the door one day and not come back. People can do that, at any time. I'd say that Google's best assets are their vast technology infrastructure that's been "proven" and optimized for performance, reliability, etc., plus their brand and their existing userbase inertia. Employees can come and go. They are very useful and valuable. But Google's codebase and hardware isn't going to simply disappear one day on a whim. Folks like Guido and Vint Cerf and Thompson and Kernigan, etc., just might. Plus humans have egos and ambitions and dreams, and get old and tire or lazy or want lifestyle changes. Code and machines do not. A true asset can be sold off like a commodity. An employee cannot be sold off like this, not directly and explicitly anyway.
Google owns one unreproducible asset: its data. Indices, searches, clickstreams for hundreds of millions -- even billions -- of users, going back a decade.
One other potential problem I see with this study is that it doesn't seem to take into account that not all employees put in the same amount of time for an employer. For instance, some employees work only part time. So if 80% of your workforce is part-time, you're going to have a lot more employees than a company that produces the exact same profit with all full-time employees. The numbers would look a lot worse for you because of your high employee count, even if your productivity per employee-hour is the same.
Also, in salaried situations, you may have some employees who work 60-80 hour weeks while others only work 40 hour weeks. Now the high hour-per-employee count will probably effect productivity in other ways (extended periods of long hours tend to actually reduce productivity), but the difference in hours-per-salaried-employee is going to have some bearing on productivity also. This may not make as big a difference as the part-vs-full-time situation, but it could be significant.
Yet another flaw with this study is domain bias. Domains which require many employees per company are domains which are based on economies of scale, and usually have low profits per employee (manufacturing, retail). A better study to support (or refute) the conclusion would be one comparing similar companies.
Whether it's possible for an employee to contribute a huge amount of profit is highly dependent on the business and the function of the employee. If you're a restaurant chain (like one of the examples in the article), and most of your employees are waiters or cooks or delivery drivers, then there's no way that any one of them can possibly generate a million dollars of profit. If you're a software developer or a banker, then you can. Making generalizations across such widely different business categories doesn't seem to make sense.
A better methodology would have been to track productivity per employee vs. number of employees, but broken down by industry group. Then you could see if the relationship is true of only some industries, or across all of them.
It's not really broken down by industry group, since there's only one trend line for all the data points, not a trend line for each industry group. So it's hard to see which industries match his hypothesis and which don't.
Sometimes I wonder why big corporations can even exist competitively as there is such downward pressure on productivity as they grow. Some companies handle this better than others, Amazon being one that comes to mind first, but everyone ultimately suffers a significant efficiency loss at scale. The only reasonable answer that occurs to me is that the economies of scale and available capital provide such a dominating competitive advantage as to allow outmaneuvering of smaller companies whom are 10x as profitable.
Sometimes I wonder why big corporations can even exist competitively as there is such downward pressure on productivity as they grow.
High barriers of entry. In 99% of cases the barrier is either capitol requirements, government regulation or both.
Or to put in other words, any business which can be challenged by a startup, will be. And it is only a matter of time until enough startups iterate through enough business plans until they find one that will steal your business.
So either be productive or be behind significant barriers to market entry.
Network effects are a major barrier as well. The biggest problem facing a Facebook or eBay competitor, and the problem that's faced various would-be Windows competitors, is that it's hard to beat a platform that derives value in large part from its ubiquity.
I think it's a bit more nuanced than this. It's like the example given in the Mythical Man Month. If you want to grow corn, you can pretty much be assured that no matter what you do, you can harvest the corn more quickly if you put more people towards harvesting it. This is because harvesting corn is a partitionable task (in other words, you can easily divide the work up amongst an arbitrary number of workers). Of course, productivity per person will go down, but the overall rate at which you're harvesting corn will still grow.
Programming isn't easily partitionable. Programmers need to communicate with each other to do their task. Thus, adding more people makes you progress faster up to a point. At a certain point, adding more people starts to slow you down. Therefore, individual worker productivity will go down more quickly faster than it would for the corn harvesters.
Lumping all the different positions from all these different kinds of companies ignores these differences and really makes it difficult to apply the idea in general. For technology companies in particular, I'd say that the productivity loss can be even higher than 3/2.
But that's assuming that you're hiring more programmers to do the same task. Programming is partitionable at a larger scale - if I hire more programmers I can start more projects/create more products.
So I guess what I'm saying is that for a one product company, yes, there is a point where the productivity loss from adding another employee gets very big. But for multi-product companies (think Google, Adobe, Microsoft, Apple), more employees just means more parallel projects.
It would seem that way, but I seriously doubt all of those parallel projects exist in vacuum. They likely will share frameworks, they should certainly share UI elements and designs.
I mean, Apple can't have the iPad, iPod, and iPhone teams not talk to each other, their clearly linked on numerous levels.
Likewise, Microsoft's apparent reliance on "parallel projects" is why we geeks poke fun at them so much. Anyone remember the screen shot of the 20+ styles of Window decorations just in Microsoft products on XP? Or howabout the fact that the Windows team has to basically reverse engineer (or at least re-develop from scratch) all of the UI features of the Office team.
This echoes the often-cited effect that communication overhead increases drastically with headcount.
Barry Boehm: adding programmers to a late project makes it later.
I wonder how much can be attributed to: the larger you get, the less transparency, which contributes to the greater likelihood of hiring someone who is "corrupt".
Most of the work I've done is at large corporations, and some of the things I see there, I can't fathom there not being a brown paper bag full of cash being involved somewhere during the decision making process. I was having lunch with a friend of mine the other day, and according to him, in his industry, it is routine for employees to take kickbacks in the form of "unrelated" consulting gigs through their side companies in exchange for choosing a certain vendor. That's just the way it works.
This throws aside IMO the major contributing factor, that these big companies generally run in heavily commoditized sectors where the margins have been forced down by the competition. High volume, low margin.
This study focuses on big corporations. I wonder how these findings would hold to small companies - let's say, that a company grow from 5 to a 100 employees. Management-layers and meetings would certainly bog down productivity, but as much as for large corporations, or more?
I wonder at what point it starts dropping off. I know that if I added two employees to our company (currently just my co-founder and I), we would be vastly more efficient, since neither of us would have to context switch so much.
