Research On The Impact of Flex

The Impact of Flexibility on Organizational Performance
Research on the Impact of Flexibility on Organizational 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 & Young estimates 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).
Copyright 2004 by Davies-Black Publishing, a division of CPP, Inc. Adapted from Leveraging the New Human Capital: Adaptive Strategies, Results Achieved, and Stories of Transformation, S. Burud & M. Tumolo. All rights reserved.
Corning avoided a $2 million loss in turnover-related costs when employee turnover was cut in half. It adopted family-friendly policies with increased parttime work and job-sharing opportunities (Miller, 1998). Aetna Life and Casualty saved $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 Kodak following 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 direct cost of finding, hiring, and training new workers and the indirect costs 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, coworkers 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. relationships held 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.
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
affected job performance (as judged by managers) and was a strong predictor 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 office more 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 the workplace 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
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 who believed work was causing problems in their personal lives were much more likely (30% compared to 19%) to make mistakes than those who had few jobrelated personal problems. (Johnson, 1995) Mistakes can be costly, as focus group data from a California utility demonstrates. An IT computer technician
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 strategies affect 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
customers, who in turn, are more inclined to be satisfied and loyal, generating strong 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 assetshuman 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 Fortunes Best Companies to Work For earned double the market return over 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 on performance and found support 3-9 times more powerful.
Telecommuting Increases Profitability An 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 the efficiency 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 Performance First Tennessee National Corporation has had an intensely employeecentered 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 Performance SAS, 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, & ROE A 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
ROE in 1996. In 1999, ROS was 66% higher, ROA was 20% higher, ROI was 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 Rewards and 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).
Human Capital Practices Increase Employee Commitment which Increases Shareholder Value The WorkUSA 2000 survey, 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 higher levels. 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].
Flexible Schedules and Parental Leave Lead to Higher Organizational and Market 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 Karol Rose Email: karol.rose@flexpaths.com Phone: 506.696.3709
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The Impact of Flexibility on Organizational Performance

Research on the Impact of Flexibility on Organizational Performance

Enhanced Organizational Performance

Increased Shareholder Value

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