The Coming Imperative for the World’s

陌路狂奔

It is 30 years since Peter Drucker identified &quot;knowledge worker&quot; productivity as the biggest management challenge of the modern era. But the late, great management thinker did not distinguish between types of knowledge work. Only by doing so can managers see the true nature of the challenge - and how, by rising to it, they can exploit a new source of competitive advantage. <br /><br />The conventional definition of knowledge workers as people who &quot;think for a living&quot; covers an extraordinary range of activities. Research scientists, foreign exchange traders, teachers, call centre operators and administrators - all are paid to think. Yet some of these jobs are routine, easy to automate and lend themselves to rules. Others, such as the highly interactive work of salespeople, lawyers and managers, are subtle, complex and difficult to codify. Economists have tended to lump all knowledge work into one category. Since Ronald Coase, the British economist, introduced the concept of transaction costs in the 1930s, economic activity has been mostly divided into transformations (broadly the growing or making of things) and transactions (exchange of information, products and services such as transport, trade and most knowledge work). The distinction helped explain the role of transaction costs in determining where companies end and markets begin. <br /><br />However, in developed economies, transactions have grown to dominate economic activity - nearly 85 per cent in the US - due to increased specialisation of work, technology and globalisation. Drawing from both Drucker and Mr Coase, I believe the time has come to break down further the broad category of transactions in order to capture the distinction between routine transactions and interactions that rely heavily on judgment and context, which economists call &quot;tacit interactions&quot;. An analysis of US Bureau of Labor statistics shows that the overwhelming majority of new jobs created in recent years in the US have been in occupations in which tacit interactions are the main component. Workers engaged in tacit interactions - such as complex negotiations - now make up 41 per cent of the US labour force. They have also enjoyed wage growth far in excess of the national average. Getting the most from these valuable employees has become a pressing issue for managers in every industry. <br /><br />Corporations have spent the past half-century honing their ability to make things efficiently. But our research suggests it is increasingly difficult to differentiate on the basis of manufacturing efficiency. Decades of experience and the spread of best practices makes it hard to gain a lasting competitive edge. Based on profits per employee as a proxy for productivity, the performance gap between the best and worst performing transformation-intensive companies (such as mining or manufacturing) is relatively narrow.<br /><br />In the 1980s, companies started to focus more on differentiation through increasing the efficiency of transactions, using management techniques such as business process engineering, supported by investments in IT. But, again, the spread of best practices makes it harder to achieve a durable competitive advantage. Our research found a marked narrowing of the performance gap between leaders and laggards in transaction-intensive sectors such as retail or airlines. When it comes to tacit interactions, however, few companies have paid much attention to how they might differentiate themselves by increasing the productivity of interactions. Many executives assume that only a small minority of employees are engaged in this type of activity. Often they are surprised to learn how much of their company&#39;s value-added depends on tacit interactions and the number of employees associated with these activities. A telltale sign: in sectors where tacit interactions dominate, such as publishing, healthcare and software, the gap between the best and worst performing companies remains wide. <br /><br />This new frontier of studying tacit interactions is interesting not only because it is virgin territory but also because successful management techniques are hard to copy. In contrast to transformations and transactions, which can be mapped and codified, tacit interactions depend on complex mixtures of judgment, problem-solving and information exchanges, often involving group behaviour that is difficult to replicate. However, to get the most from workers involved in tacit interactions, managers must abandon much of what they think they know about strategy, organisation and information technology. For example, since the days of Alfred Sloan, former president and chairman of General Motors, companies have resembled pyramids, with a handful of tacit workers (managers) at the top co-ordinating armies of workers engaged in transformations and transactions. This model needs to be rethought when tacit workers make up a large proportion of the workforce both deep inside the company and on its boundaries, interacting with customers, suppliers and partners. The way technology is used must change, too. The IT investment wave of the 1990s aimed to streamline and automate transactions. Everyday examples include automatic teller machines and online shopping. But one cannot improve the productivity of marketing managers or lawyers by replacing them with machines. Technology needs instead to support collaboration (examples include video conferencing and instant messaging) and serve up the information required to make the most of every interaction. <br /><br />More generally, standardisation and automation, the established tools of productivity improvement, are unlikely to yield results when tacit workers are involved. Management must shift its focus from efficiency to effectiveness, which requires changing from measures of output to measures of outcome, fostering organisational change, learning, collaboration and innovation.<br /><br />Understanding tacit interactions is important not only in business but also in the public and nonprofit sectors - wherever activities are specialised and people interact, worker to worker. With due respect to Drucker, the management of workers (knowledge or otherwise) involved with transformations and transactions is now relatively well understood; increasing the effectiveness of tacit interactions is not; it is the biggest management challenge - and perhaps the biggest opportunity - of the modern era. <br /><br />McKinsey examined the performance of 8,000 companies across several sub-sectors and found that as tacit interaction intensity increases from low (less than 14 per cent of economic activity) to high (greater than 62 per cent), performance differentials between top and bottom quartile performing companies increases significantly. An analysis using revenue growth yields shows similar performance differentials. <br /><br />The writer is a partner in McKinsey&#39;s Silicon Valley office. <br />