The 3/2 rule of employee productivity
cybaea.net
cybaea.net
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.
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.
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
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.
In my opinion, this comparison would only have been interesting if a large chunk of companies within the same industry would have been measured.
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.
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:
http://en.wikipedia.org/wiki/Business_judgment_rule http://crookedtimber.org/2008/07/25/what-obligation-maximise...
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.
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.
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.
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.
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.
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.
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.
It was Fred Brooks who observed that. So famous is the observation that's known as Brooks' Law.
Not to denigrate Barry Boehm, mind you, who is a fantastic researcher.
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.
http://www.google.com/imgres?imgurl=http://cs.wellesley.edu/...
I wonder where the White Dwarfs and SuperGiants are?