Bonus Episode: The Employee Engagement Industry Has Failed

Introduction:

In this week’s bonus episode, Bill Fotsch, a business consultant, explains why he thinks much of the effort that he and many others have put into creating employee engagement over the past three decades has been wasted effort—well intentioned, but wasted. The fact is, Fotsch says, employees today are no more engaged than they were some 30 years ago when the concept of employee engagement first gained currency. So what’s the answer? Fotsch has come to the conclusion that it’s something he calls “economic engagement,” which happens to be the name of his consulting business. What exactly is economic engagement? He says it’s getting employees to focus on serving customers, and doing so profitably. He says it’s not so much about sharing financials with employees but about getting employees to understand the strategies and actions that really drive a business’s profitability. Fotsch is so convinced that he’s cracked the code that he’s gone beyond mere consulting and has been buying stakes in businesses so he can implement his ideas and prove his concept. So far, he says, it’s working.

— Loren Feldman

Show Notes:

• See how you score on an economic-engagement benchmark survey.
• Here’s Gallup’s G12 employee-engagement survey.
• Bill Fotsch co-authored an article that argues economic engagement is a logical successor to open-book management.

Guests:

Bill Fotsch is founder and CEO of Economic Engagement.

Producer:

Jess Thoubboron is founder of Blank Word.

Full Episode Transcript:

Loren Feldman:
Welcome, Bill. It’s great to have you here. You’ve spent decades working mostly with privately-owned companies. And you recently had an epiphany that things haven’t gone, over the last few decades, quite the way maybe you thought they would. And you think there’s a better way of running businesses. Can you tell me what it is that you’ve realized?

Bill Fotsch:
Thank you, Loren. I think that’s really an apt question, because I actually found that I was in the employee engagement industry and didn’t even know it.

Loren Feldman:
Explain that.

Bill Fotsch:
Maybe that’s like a lot of good discoveries. What I mean by that is as follows: 30 years ago, I started in this space. It just so happens that 30 years ago, William Kahn, a professor, coined the phrase “employee engagement.” And about the same time, Gallup came up with their G12, which was a measure of employee engagement. By the way, I didn’t know either of those things 30 years ago. Well, if you look at the original G12 data on employee engagement, it said that less than a third of employees were engaged at work. And it was a very damning thing.

Loren Feldman:
Did that get a lot of attention 30 years ago?

Bill Fotsch:
Oh, yeah. I mean, it fundamentally created an industry, and it was the employee engagement industry. And Gallup is not the only company, but I think they’re certainly one of the most prominent. And they had their G12: Here’s how you measure employee engagement. And so that was happening.

I was just working with companies to improve financial results and the lives of their employees. We didn’t even use the phrase “employee engagement.” In any event, 30 years later, the same measure—the same G12 measure of employee engagement that Gallup has championed—the data they share says that less than a third of employees today are engaged in work.

Loren Feldman:
So 30 years later, nothing has changed?

Bill Fotsch:
But we’ve spent billions of dollars, countless research! I mean, it’s sort of like the quality industry, only it’s sort of worse, because it didn’t go anywhere. Which company you know of is not talking about employee engagement?

Loren Feldman:
Well, but at the same time, we’ve just been through this period post-pandemic with The Great Resignation, as it was labeled, which was kind of the sudden discovery that people wanted more out of their work hours, that they wanted purpose. They wanted to care about what they were doing, and they were willing to—and eager to—switch jobs to find that and a better paycheck, of course. But purpose mattered.

Bill Fotsch:
Yeah. Do you think purpose didn’t matter five years ago?

Loren Feldman:
We weren’t talking about it as much.

Bill Fotsch:
Well, I’ll take that point, and I think I agree with that. But when did purpose start becoming important, or when did purpose get lost? And, put another way, for 30 years, I’ve been working on improving the business results, and of course, the lives of the employees who drive those results. So it was all about purpose—and very measurable purpose.

Loren Feldman:
You spent a couple of those decades working at the Great Game of Business, which happens to be my sponsor, where the focus is on opening the books to help employees better understand what drives the business and get more engaged in the business.

Bill Fotsch:
That was a privilege, and that was 19 years of my life focused on that. And was it great? Absolutely. Did I learn boat loads from Jack Stack and the rest of the crew at Great Game? Without question. So, nothing but applause. By the same token, over time, I had another epiphany. This was in 2008-2009, because I was working with a variety of coaching clients in those days, very much as part of Great Game coaching, and the economy tanked.

Loren Feldman:
I remember that.

Bill Fotsch:
Anybody who was working with a business remembers that. And every one of the clients I had had exactly the same problem: a shortage of revenue and a surplus of costs. So suddenly, the epiphany was: We really got to get after revenue. And it just so happened, there had been visibility to Fred Reichheld and Net Promoter Score, but it was picking up momentum. And I want to tell you, we were desperate. And we were trying all kinds of things at all kinds of different companies. And my compensation was tied to their results, so I had more than a casual interest.

And part of the problem was, there were more and more marketing dollars chasing fewer and fewer sales. So that ratio kind of went to hell. So, I mean, it was a tough time. But we were getting sort of strange results. Some companies would give us really strong scores, but then we’d ask, “Do you know anybody who would value the same sort of things that our company provides?” And they were kind of quiet.

And then we had folks who gave us mediocre Net Promoter scores, but they would give us two and three different companies that they thought would be valuing the same sorts of things that our company had. I started realizing the number wasn’t nearly as important as understanding the why and the dialogue with these customers. And that became a new insight into what we were doing. Because whether it’s Great Game of Business, or open-book management, there is, at best, a tangential reference to customer. And customer is at the core of what any business is about. Like, of course! John Case and I ended up writing an article that—

Loren Feldman:
John Case has been your co-author. He happens to be the former Inc. reporter who coined the phrase “open-book management.”

Bill Fotsch:
Precisely correct. But when John Case and I co-wrote—I believe the title of the article was “Open-Book Management 2.0”—we called it “economic engagement.” And it wasn’t to say anything was bad about open-book management, but it was to say, “There are some additional things that you want to consider to be that much more successful.” And the notion of customer was absolutely one of those things.

Loren Feldman:
What changed, in your mind?

Bill Fotsch:
In a way it was kind of simple, and it was spawned, to some extent, by the research that we’ve been doing over the last several years to kind of test this hypothesis. And that is that if you look at the Gallup 12 questions, you will not find the word “customer” or “problems” anywhere in there. And by the way, this isn’t just Gallup 12. If you look at most measures of employee engagement, you will not see the word “customer.” You will not see the word “profit.” Because the focus of the questions is fundamentally: How can we, the company, serve the employees? Which is, it’s kind of like a nice thing.

Loren Feldman:
But you’re saying that the focus was on serving the employee, not serving the customer or the business?

Bill Fotsch:
Yeah, and that may sound like a small difference, but it’s kind of huge.

Loren Feldman:
There are a lot of businesses who say, “I put my employees first. If I take care of my employees, they’ll take care of the customers.”

Bill Fotsch:
I understand. And that I would call honorable and a leap of faith. Because how do the employees actually know the specifics of what the customers need or want? What are the boundaries around what they can or cannot do, which starts bringing in the economics? And so I simply say, when Kodak went out of business, because they were for years and years and years and years and years—I mean, they built housing for their employees. That they treated them incredibly well was without question. And they ended up letting most of them go.

Loren Feldman:
So what you’re telling me is, over that 30-year period you’re describing, the massive interest in employee engagement that sprung up not only failed to increase employee engagement. It didn’t serve the businesses either.

Bill Fotsch:
I think folks would argue that point. And I’d love to be involved in the arguments, because they can come up with particular companies that are known to be strong in employee engagement. Costco! I’m a big Costco fan. That would be an example. But I know the folks at Costco, including some members of the management team, and the notion that they are not focused on the customer is laughable. So it’s the lack of focus on the customer. And then the reason I throw in profits is, if you’re serving customers unprofitably, then you don’t get to do that very long.

So if you’re really going to have employees who are at the big table, thinking, acting—if you’re a Great Game of Business, thinking and acting like owners; I tend to like the word partner, but thematically, it means the same thing—they need to understand what the fundamental purpose of the business is, which I would think is real simple: serving customers and doing it profitably.

When our country was agrarian, like 100-plus years ago—and most folks worked in a family business, oftentimes a farm or ranch or dry goods store or a foundry—the distinction between the folks that own the company and the folks that were running the company just kind of didn’t exist. They tended to be one and the same. We’ve lost that connection as a function of the Industrial Revolution, which was a great advance. But now as we move into what most folks would have recognized for years as the knowledge society, how do you capture the hearts and minds of the employees if you’re not talking about serving customers and doing it profitably? I don’t know how to do that.

Loren Feldman:
So what does that mean? What are companies not doing that they should be doing?

Bill Fotsch:
It really spills right into the research that we did, because we had to define these things really precisely in order to measure whether they exist or not.

Loren Feldman:
Explain the research. You did this, you embarked on this research to see if you were right that employee engagement hadn’t improved?

Bill Fotsch:
It wasn’t designed around employee engagement, although we kind of arrived at that perspective. It was really centered around what originally was called open-book management, but evolved into what we now call economic engagement.

Because the fundamental differences were just two. And that is, one: much more focus on the customer. And I’ll get back to your question, okay? And then number two is: not so much focused on the financials, but understanding the economic drivers that drive the financials. So in an engineering firm, for instance, that I work with, we spent no time looking at the financials. We spent all kinds of time looking at revenue per paid hour, which was something that everybody understood and what drove the economics.

So back to the question you posed, centered around what we tested. What we tested was: Does what we now refer to as economic engagement drive improved business results? That was our test question. Then we had to define exactly what we meant by economic engagement.

There were five drivers. It starts with customer engagement. And then economic understanding, transparency, performance-based compensation, and employee participation. And each one of those five things were broken down into three questions that we would ask folks, and they would be able to objectively say: always, sometimes, never. And that allowed us to, in effect, score. But as it relates specifically to the customers? I don’t have it in front of me, but I’ll get it pretty close. One of the questions, as an example, is, “Do you systematically have conversations with and capture what employees value on a regular basis?”

Loren Feldman:
What employees value or what customers value?

Bill Fotsch:
I said “employees.” Thank you very much. What customers value. If any of your audience is interested in seeing where they stand, we can provide them with the link. They can do the survey themselves.

Loren Feldman:
Sure, please send that to me, and I’ll include the link in the show notes for the podcast episode.

Bill Fotsch:
What we found was that, again, what we called economic engagement that we were testing to see whether it drove financial results, what we found was kind of astounding. And that is, out of eight waves of research, with 50 to 150 companies per wave—two of which were done in Switzerland, all of the rest in North America—the companies that were in the top quartile of economic engagement had double the profit growth of the peer group (meaning the average) and the peer group had more than double the profitability of the bottom quartile. Well, when you see that once, it’s pretty interesting. When you see it eight times, as my Harvard Business School buddies would say, because they were helpful in the research, the likelihood that that is statistically significant is pretty high.

Loren Feldman:
So I’m struggling a little bit with understanding the difference between open-book management and economic engagement, as you describe it. And I guess I would point out, first of all, I would guess that most of the people listening to this podcast are only vaguely familiar with open-book management to begin with.

I think many people are generally aware that the notion behind it is that you show employees the books so that they understand how the business works. For example, they see profit margins for different product lines, and they get a sense of which products to emphasize. That, to me, sounds like economic engagement. How are you distinguishing between the two?

Bill Fotsch:
Yeah, so the fundamental starting point is different. The starting point is not sharing financials. The starting point is reaching out and speaking with your customers and understanding what they value. Because unless you know that, you can’t intelligently talk about the economics, because the economics are defined by what your customers value. Note, I have not said anything about opening the books once, did I?

Loren Feldman:
So how do you create economic engagement?

Bill Fotsch:
So the point is, you create economic engagement by, one, understanding what your customers want. Two, translating that into a metric that defines the economics objectively in your company. Number three is, make sure that that is transparent throughout the organization. Do you notice, I still haven’t said the financials? And it’s not that financials are bad, or the financial literacy or teaching employees about the financials is a bad thing. It’s just not a necessary thing.

Loren Feldman:
You’re kind of suggesting it’s overkill—that you can just focus on a subset rather than the whole.

Bill Fotsch:
Yeah, and you can get people sort of rallied around: What are the customers telling us they really need? How does that translate, in terms of how we measure what we’re doing? And we can start making that very transparent, even tie in an incentive system to it, and then recognize folks who are participating and making good moves and improving it.

And again, I didn’t mention the financials once. We may share with them that, in fact, after the fact, “Yeah, it’s driving the numbers.” And over time, they may come to understand that, but the notion of starting by explaining the financials—it’s not as productive a way to go.

Loren Feldman:
It’s a lot of work.

Bill Fotsch:
It really is. And the other thing that’s true—because I’ve seen this happen—“We’re pulling everybody together today, and we’re going to teach you about the income statement and the balance sheet.” Envision what the faces of the people look like, as they’re entering that room.

Loren Feldman:
Well, I’ve been in some of those rooms, and I know what you’re referring to, and I know it can be hard to get there. But I have been in those rooms with people who have kind of gotten there, and who appreciate what those numbers mean and take it very seriously if they’re responsible for a line item and it’s not where it’s supposed to be. It can be an inspiring thing to see, when it’s working. I’m sure you’ve seen that.

Bill Fotsch:
Again, I want to say it’s not that that isn’t noble or well-intended. I’m just saying, most of the time—

Loren Feldman:
I understand. Could you walk us through an example? You consult with a company, and you want to bring these thoughts to bear. Where do you start? Can you give us an example of how it unfolds and what difference it makes?

Bill Fotsch:
It’s actually pretty straightforward. So it’s: What do we hear from our customers? What do they value? If the company doesn’t already have that, then there’s a customer survey that we arm them with. So that’s one data point. The second data point is: Let’s get the input from our employees. But again, very different than the Gallup 12 employee-engagement questions. It’s questions along the lines of: What’s the biggest opportunity for improving results at the company? What’s the biggest opportunity for increasing our sales by further delighting our customers? It’s questions along those lines. And what we found to be useful is doing that with both employees and with the management team—but separately, so we can see whether the management and the employees have a similar or different perspective.

Next, we’re going to look at the financials: classic financial trend analysis. So in the financial trend analysis, first and foremost, we’re going to look at whether they’re hugely in debt. And if they’re hugely in debt and cash flow negative, then the financials are screaming, and we’re going to have to do something about cash. But nonetheless, looking at: What are the financials telling us about the circumstances of the company?

So pulling that data together, we ask them exactly the same questions as we did in the research on economic engagement. So we can see, front-end, where they stand on customer engagement, on economic understanding, on transparency, on employee compensation, and participation. It’s almost like going to a physician, an internist, and getting a sense for the entirety of your health condition.

And then once we have that, we’re typically going to go through all of that information, because we’ve gathered it all at the same time. We’re gonna go through that information with a working group of not less than four and not more than 10 individuals who make up the leadership of the company, ideally, including a couple of, I’ll call it, “employee leaders.” And when we’re going through that, we ask each of them to think as though they were the president of the company, and this data was prepared for them alone to help them think through: What is the key issue or issues associated with the company?

Now we’ve gone through all that data in a working meeting that typically takes about an hour and a half. In the first half, we’re going through all the data. Now, we’re going to ask everybody to report out: What did they see as the key issue or issues facing the company? Not for all time but for, like, the next year. And everybody reports out. So we go from that individual perspective on the key issues to a group perspective on what the key issues are. Once we’ve got that group perspective, we say, “Okay, what would be an objective measure that would deal with those issues?”

I’m thinking about Adams Beasley, a remodeling company that I started working with in 2018, and went through that process. Where they came out is gross margin dollars per job. You know, they do large jobs. And it was a combination of: More jobs was good, but higher margin percentage was also good. And the net margin dollars—kind of the product of those two—really drove or addressed the various issues that they had brought up. With that, we said, “Great. Okay, now, what we need to do is three things.” We’ve got the input from the customers. We’ve got the input from the entire organization. We’ve distilled it down to that economic understanding, that thing that we’re going to drive. Now we’ve got to make it transparent. That’s called a scoreboard.

So we’re making it transparent, so everybody can see what’s going on. But everybody can also see how they fit into the puzzle. And commensurate with that, we put together an incentive plan. So if we’re successful at improving that performance metric, then how much is that worth? And a portion of what we’re creating goes to the employees. The rest stays with the company. And the final thing is then rollout. Final thing in terms of launching it is rollout, where we’re just laying out for everybody, “Hey, here’s what you told us. Here’s what developed out of this.”

Loren Feldman:
It sounds like that conversation led you pretty deeply into financials—talking about the company realizing that more jobs is good, but the margin on those jobs might be more important. That’s a financial analysis, isn’t it?

Bill Fotsch:
The comment I would make is a couple-fold: Typical financials do not show that.

Loren Feldman:
But it’s not a conversation that comes up just by asking, “How can we better serve the customers?”

Bill Fotsch:
Yeah, but suffice it to say that financial trend analysis is absolutely one of the things that we do in the front-end of this. But input from the employees on various jobs, input from the management on various jobs, and their thoughts about what are really the important things to drive the business, were at least as important.

And most of the time, Loren, I find that there’s a certain amount of confirmation. Because it’s like: What the customers are telling us? Oh. What the employees are telling us? Oh. What the managers are telling us? Oh. What the financials are telling us? It’s not all that common that those are four areas pointing in completely different directions.

But the point that I was gonna make, though, is that you could say we’re knee-deep in the financials. You could say we’re not at all in the financials. So it kind of depends on your definition of what the financials are. We spend zero time talking about, “Here is what the monthly income statement and balance sheet looks like.” Zero. We spend all of the time focused on—in the outset, in the first year—saying, “Hey, how can we increase our gross margin dollars?” And of course, that means we’ve got to get really tight with our customers. And it’s all kinds of nuanced things, like: When a customer asks for a change order, are we getting compensated for that?

Loren Feldman:
You’ve spent most of your career, as I understand it, as a consultant, but you believe in what you’re saying here deeply enough that you’re putting your money where your mouth is. And you have been buying businesses with the intent of running them with this philosophy in mind. How’s that going?

Bill Fotsch:
Absolutely, and great.

I think the notion of putting your money where your mouth is is just the right thing to do. And that’s one of the reasons I’ve always had a compensation agreement with my clients, where my compensation is tied to their results. But that’s near-term kind of results, like their annual incentive plan or something like that. There’s a next level of, I’m one of two owners of a remodeling company on the West Coast. We’re starting to see this as a hell of a great opportunity to do what the PE world does in roll ups, only roll up with a notion that we’re going to create a bunch of employee partners slash owners. The exit strategy will likely be an ESOP. So, yes, it’s been going on for a while, but I’m moving more aggressively, in terms of consulting to investment.

Loren Feldman:
Can you give us an example of a company that you bought? Where was it when you started? Where did you take it?

Bill Fotsch:
Yeah, well, I think of One Week Bath as an example, where I’m a 30-percent owner. Think of lean manufacturing concepts applied to how you would remodel a bath. This is kind of the deal: What another company would do in two months to remodel a bath, we’re going to do in a week—not we are going to—what we do is do it in a week.

So that business premise was the case long before I first knew Matt. And like most of the folks who I’ve worked with, he already had an orientation towards what you might call employee engagement. But the idea of a weekly meeting, seeing where we’re at on every project, forecasting out initially gross margin, and now we’ve progressed to net income, which was not really in the cards. And Matt has me being relatively quiet about our financial success, but suffice to say that I feel really good about the increased value of my quarter-million-dollar ownership.

Loren Feldman:
Did you work with them to help the employees better understand how to serve their customers?

Bill Fotsch:
Absolutely. I think of Carson and what she’s done with respect to our marketing efforts, and in particular, accelerated our repeat and referral business. Or the folks out in the field, and the kinds of the things that they do routinely. And they do it because they know it’s the right thing to do, but in particular, our scores on customer satisfaction, we’re like off the freaking charts. It’s the entire group that is driving that, but it’s the folks who are on the front lines who are actually installing these baths in unbelievable lengths of time. And by the way, are we as good as we’re going to be? Hell no.

Loren Feldman:
Is there a strategy behind that? Or is it just an overall approach to doing everything you can to serve the customer?

Bill Fotsch:
It’s really a great question, Loren. Because we keep learning. We see our latest Yelp rating, and then we say, “Who the devil ran that job?” And, inevitably, the individual is at a weekly meeting, 30 minutes, that we’re going through all this stuff. And that individual is there. “What did you do? What was the magic?” And then they tell us.

Loren Feldman:
Occasionally, something must go wrong. How do you handle it when something doesn’t go well with a customer?

Bill Fotsch:
I gotta love you, Loren. You’re absolutely right. And one thing we’ve got a little more aggressive about was following up with past customers. And I’m talking about customers who we installed a bath for like five or 10 years ago. So this is sort of a weird example of when it didn’t go right.

So we call up our past customers, because we’re looking to strengthen a relationship and so forth. And one individual, we ask, “Hey, we’re One Week Bath. We really appreciate the privilege of working with you. We’re just following up again on how we did from a perspective years later. So tell me”—it’s the Net Promoter Score question from Fred Reichheld—“given the work we did for you in the past, would you be willing to refer us to a friend or colleague?” And the woman said, “Hell no!”

But we know that, whether they say yes or no—we don’t care—the next question is, “Why?” And the woman said, “You know, the damn faucet still leaks.” We installed the thing five years ago! I mean, there’s no warranty involved. It’s really a good thing that I was not on the phone. I would not have done very well at all.

Loren Feldman:
Wait a second. You’re not good at dealing with customers?

Bill Fotsch:
I would have been horrible at that—worse than horrible. I’d have been pissed off, okay? You know, whatever. Fortunately, I wasn’t on the call on this one. So, the individual—I think it was Robbie—says, “Oh, that’s really bad. Could we have somebody come by and just fix that?” And she’s just the nastiest lady, “Well, what the hell are you gonna charge me for that?” And Robbie says, “We’re not going to charge you. We just want you to be happy.” And the woman is now sort of confused, and maybe in disbelief.

So Robbie says, “I see that Raoul is going to be out in your neighborhood like next week. Could I just schedule him to come by? I don’t think it will take much time.” At this stage, she’s going like, “Really?” And Robbie says, “Well, yeah.” Well, do you know how many referrals we have gotten from this woman now? And we never would have done it. It never would have happened. And do you know how many folks at One Week Bath know that story?

Loren Feldman:
All of them?

Bill Fotsch:
Because it’s important that they know that story. Let me tell you, if you want to leave the world better than you found it, then invest in companies that are doing this. Because you’ll get higher returns, and you’ll improve the lives of customers, and you’ll improve the lives of employees, and you’ll improve your life. And I think that’s how we’re going to change the world.

Loren Feldman:
My thanks to Bill Fotsch, and of course to our sponsor, the Great Game of Business, which helps businesses use an open-book management system to build healthier companies. You can learn more at greatgame.com.