Wednesday 15 October 2014 8:22 pm

Competition in the office: Does it boost results?

Infighting can be distracting, but helps keep a company nimble.
City firms are no strangers to internal competition. The leading investment banks and Big Four accountancy firms reportedly allocate year-end bonuses in part through staff ranking each other’s performances, while numerous companies (elite strategy consultancies included) have adopted some variant of the “rank and yank” system popularised by former General Electric (GE) chief executive Jack Welch.
Reward the top 20 per cent of staff, the theory goes, coach the middle 70 per cent, and as for the bottom 10 per cent, well, “there is no sugarcoating this,” says Welch, “they have to go.”
Yet promoting competition among employees has a mixed reputation. Microsoft followed GE in dropping Welch’s practice some years ago, while a survey by the Institute for Corporate Productivity found that the proportion of US firms with internal competition systems fell from 49 per cent in 2009 to 14 per cent in 2011 (although it’s suspected that many kept the practice while switching the name to something less hostile-sounding). And with certain notable exceptions (US department store Sears included, more on which later), few firms have followed the logic of competition through to its brutal, Darwinian conclusion. Why?


If there’s one thing economists agree on, it’s that incentives matter – competition can be a galvanising force. But Julian Birkinshaw of the London Business School, author of a five-year study on internal competition, says that the topic all too often “conjures up images of turf wars among departments.” Sears, under the stewardship of Eddie Lampert, is often held up as an example of how things can go wrong. 
Lampert split the company into over 30 autonomous units, each competing for executives’ attention and financial support. But rather than creating a thriving, productivity-enhancing internal market rich with data on the fruits of competing strategies, Mina Kimes of Bloomberg Businessweek claimed that the result looked more like a Hunger Games novel. Motivational gains were outweighed by the cost of infighting – units failed to share best practice, and some undertook programmes that were in their best interest but not the wider company’s.
It’s a problem that Jeffrey Pfeffer and Robert Sutton, writing for the Harvard Business Review, say is also found in competition between individual staff members. They argue that “zero-sum” systems, where employees succeed or fail relative to one other, only benefit the winners. “We uncovered case after case where the costs of individual victories were borne by those people, groups, and units that lost the contests.” Those costs were transferred to the business as a whole. 


There’s a danger, however, of focusing on the immediately obvious shortcomings of internal competition, and missing the less tangible, longer-term benefits. Birkinshaw says that embracing competition is a good antidote to the dangers of corporate sclerosis – teams and individuals are incentivised to try out new ways of doing things, helping to break the mould of rigid management thinking. And when the incentives are thought-through properly, he argues, there’s no reason for the type of distracting infighting that Kimes says has troubled Sears.

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