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SAN JOSE, Calif. (Profitable.com) Deloitte’s Center for the Edge today unveiled the 2010 Shift Index, which reveals that in order to achieve profitable growth and long-term economic recovery, companies must not overlook the importance of fostering significantly more passionate workforces.
Deloitte’s study finds that companies in the United States have experienced long-term performance deterioration, as evidenced by a 75 percent drop in return-on-assets (ROA) over the last 40 years despite gains in labor productivity. However, the data suggests that a continued focus on the economic downturn and timing of the recovery misses the competitive challenges ahead for companies as performance pressures continue to build well beyond the recovery.
According to the Shift Index, the solution lies in empowering passionate employees, those who feel truly engaged with their work and constantly push the performance envelope, by accelerating institutional innovation and driving corporate growth. However, Deloitte’s 2010 Worker Passion Survey – one of several separate studies that feed into the overall Shift Index report – reveals that only 23 percent of U.S. workers are passionate about their current jobs.
“By squeezing resources tighter in response to the near-term downturn, companies risk losing passionate employees,” said John Hagel, co-chairman, Deloitte Center for the Edge. “These individuals will play a critical role in sustaining the extreme performance improvement required for firms to survive and succeed beyond the recovery. Unfortunately, as the recovery picks up steam, these very employees are likely to be the most at risk for fleeing for better employment platforms.”
Passionate Employees Key to Corporate Survival
This year’s survey findings indicate that passionate workers actively seek out performance challenges and are much more active in connecting with others who can help them, some of the very attributes necessary to stem the 40 years of performance erosion that public companies in the U.S. have experienced.
According to the survey, passionate workers are twice as likely to be inspired and energized by unexpected challenges as the disengaged (38 percent vs. 19 percent, respectively). This questing disposition can lead to innovation, both in products and business processes – the type of innovation that can unlock extreme performance improvement.
Moreover, passionate workers are twice as likely to participate in inter-firm knowledge flows than disengaged workers. The Shift Index reveals that effective participation in an increasing range of diverse knowledge flows will be a key driver of overcoming performance challenges beyond the recovery.
“Passionate workers actively seek like-minded people using digital tools and social media to advance dialogue, learning and collaboration,” said Hagel. “Their urge to connect fuels inter-firm knowledge flows, which often go unrecognized but are a vital part of any organization that wants to be successful in today’s hyper-competitive environment.”
According to the Deloitte 2010 Worker Passion survey, 23 percent of the population already appears to be pursuing their passion as a profession and an additional 20 percent say they are interested in doing so. For many workers, pursuing their passions means working independently as contractors, consultants or other forms of self-employment.
The survey reveals that 26 percent of workers would like to become an independent contractor or consultant, and that independent contractors are more than twice as likely to be passionate about their work as those who work for corporations.
According to the survey, many of the individuals who choose traditional employment do so for reasons that are steadily eroding —guaranteed employment and healthcare benefits. Factors most cited by those currently employed by firms for their hesitation at becoming independent were a need for steady income (58 percent), need for healthcare (50 percent), uncertainty in the current economy (47 percent) and need for benefits (45 percent). These factors are also the most cited by those employees that remain at their current jobs despite the fact that it does not allow them to pursue their passions.
“This creates urgency to find ways to more actively engage those who are already passionate while pursuing approaches to more effectively motivate and engage the workers who have yet to find passion in the work they do,” said Hagel. “Executives need to look at all of the institutional and technological barriers that frustrate employees and prevent these employees from seeking out challenges that will drive performance improvement.”
“By removing the impediments to questing and connecting behaviors, executives can help passionate employees be less frustrated and less likely to leave,” Hagel continued. “Even better, those passionate employees will not be diverting their energies from workarounds and will be able to focus, instead, on engaging in, and overcoming, real performance challenges.”
Economic Recovery Blurs Challenges Ahead as Profitability Declines in the Long-Term
The Shift Index reveals a dramatic increase in performance pressure on American companies. Given the decades-long trend of declining ROA on an economy-wide level, companies should not expect to see significant sustained performance improvement with the economic recovery. To the contrary, the Shift Index findings strongly suggest continued long-term erosion of performance.
Underscoring the validity of this ROA measure, the 2010 Shift Index includes analysis of return-on- invested capital (ROIC) and return-on-equity (ROE). The survey found that a downward trend in company performance follows the same troubling pattern.
According to the survey, ROIC has declined by 79 percent, even more severely than ROA over the past 45 years. Like ROA, ROIC measures the performance of the firm based on business fundamentals. This measure represents the pure earning power of a company, accounting for how net income provides a return to both debt and equity stakeholders.
Moreover, ROE is also following a downward trend, with a 24 percent decline. This measure represents the income generated by the shareholders’ money and tends to fluctuate widely. The more modest drop in ROE is in large part the result of a significant and sustained increase in debt leverage over this period, which has the effect of cushioning the deterioration in ROA for shareholders.
“In order to reverse current performance trends, leaders must commit to a strategic restructuring of the firm’s management practices and institutional structure to generate maximum value from existing resources,” said Hagel. “This means an increased focus on driving scalable participation in knowledge flows and fostering a passionate workforce to reap increasing returns on performance improvement.”
Executive Turnover Expected to Increase in the Upturn
The economic downturn led to fewer changes in leadership in the last year, likely due to the propensity by companies to “stay the course” and avoid additional instability in an uncertain environment. In fact, executive turnover in 2009 reached a four-year low with a decline of 74 percent.
As the economy improves, the 2010 Shift Index predicts that executive turnover may rise as executives seek new opportunities and companies are more willing to make leadership changes. Companies will also be making strategic decisions to strongly position themselves for the upturn which will require new hires in order to gain different skill sets.
“Companies considering a leadership change need to look for business leaders that understand the power of passion in the workforce and are prepared to take on the challenge of transforming industrial-age corporations for the digital era.” said Hagel. “Most importantly, companies need to shift from an obsessive focus on quarterly earnings to develop a compelling view of the long-term future that can help to inspire and provide direction and focus for the employees while at the same time attracting and motivating a broader network of participants beyond the individual enterprise, key to performance and profitability in the upturn.”
About the Shift Index
For a deeper look at the Shift Index methodology and findings, please go to http://www.deloitte.com/us/2010shiftindex.
As used in this press release, “Deloitte” means Deloitte LLP and its subsidiaries. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries.