Are our businesses being strangled by red tape? If Peter Drucker’s comments in recent Harvard Business Review article are to be believed, they most certainly will be. “The growing burden of rules and regulations for employers… threatens to strangle small businesses,” he says.
Drucker identifies this as worldwide trend. But its presence on the local business scene is endorsed by Cam Moore, president of the Canterbury Manufacturers Association. “With 98 percent of New Zealand businesses employing less than 10 people, reversing the growth in business compliance costs is critical if people are to have time to innovate and to grow their businesses,” said Moore.
“Taking the wealth of bureaucratic and legal requirements and add them to the complete uncertainties inherent in the Resource Management Act and the prospect of sustained growth of our small to medium enterprises (SMEs) is seriously eroded,” he said.
Drucker quotes US statistics, which show that such costs amounted to “around $5000 per employee in 1995” (the last year for which reliable figures were available) and that they have grown since. This has resulted in the extraordinary growth of professional employee organisations (PEOs) and temping agencies over the past decade. Temping agencies provide temporary employees whereas, in many cases, PEOs provide outsourcing of management of all facets of managing employer/employee relations.
Together these agencies hold out the prospect of significant cost savings, reportedly anything up to 25-40 percent of employee-related costs. Rather than address employee wages, health care, insurance, pensions and the myriad of other employee-related paperwork, employers find considerable attraction in total avoidance of these items albeit that the cost of an hourly worker might be substantially higher than the cost of the full-time employee.
Another reason for the rapid growth in this trend is the increasing need for specialisation in an economy moving inexorably to knowledge work as the major creator of wealth and jobs. Although organisations more commonly require specialist skills, they may not need them full-time or be able to attract them without stimulating and clearly defined career path to match. PEOs and temping agencies can therefore match specialist skills with wider range of organisations and, on the face of it, provide better value to both employer and employee.
But, is this the path to greater productivity and profitablility? Drucker doubts it and so do I. Temp agencies claim to sell productivity but this is always function of “who manages and motivates them”. Whilst an agency is placing people, it is unable to actively manage and motivate. The PEO has better opportunity but may lack the incentive to motivate client employees. Its primary function, after all, must be to focus on growing its own business. How can it attend to motivation of individuals placed in wide range of disparate organisations, where each is usually there for only short time?
The problem arising is lack of oversight. Plainly each organisation must take responsibility for the productivity of those it relies upon – employee, temp or otherwise. With limited opportunities to employ “better people” organisations must manage their knowledge workers for greater productivity. Drucker argues that workers are “capital” and “productivity of capital” is critical to an organisation’s success or even survival and so this demands careful management of our key people, permanent employee or temp. In the traditional workforce, the worker served the system, but in the knowledge economy, the system must serve the worker.
If Drucker is also correct in suggesting that employee-related compliance costs are not going to reduce and will in fact increase, the challenge for New Zealand businesses lies in successful resolution of the resulting dilemma. In balancing short-term cost advantages against longer-term profitability, or even survival, Drucker urges that whilst “employees might be our greatest liability, people are [also] our greatest opportunity”. As with many things in business, paradox arises whereby in an attempt to give away management of the “employee” facet of the organisation, in whole or in part, with the laudable aim of saving costs, are we opening up the possibility of ultimately giving away the organisation itself?
Perhaps the answer is to be found in deciding what any new-found management time derived from an outsourcing decision might in fact be spent on. If the new-found freedom is spent partly on identifying people’s potential and developing it, significant benefits might yet accrue. M
Grant Cameron is principal of Christchurch-based law firm Grant Cameron Associates. He is fellow of the NZIM and president of NZIM Canterbury.
