
The 3/2 rule of employee productivity - mixmax
http://www.cybaea.net/Blogs/Journal/employee_productivity.html
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zeteo
This study seems fundamentally flawed. The Fortune 500 are the 500 companies
with the highest revenue. This means that smaller companies only make it into
the Fortune 500 if they already have very high revenues/employee. Since
costs/employee are necessarily bounded, what the study ends up comparing is
the productivity in the most profitable small companies with the productivity
in the (roughly) average large companies. That's a serious sample bias and
invalidates the conclusion, IMO.

~~~
ora600
But S&P 500 are not the 500 companies with highest revenue. Its 500 companies
selected by a committee to be representative of the american economy. Its not
as biased as you suggest.

<http://en.wikipedia.org/wiki/S%26P_500#Selection>

~~~
crizCraig
Yet they are still pretty large companies:

 _The stocks included in the S &P 500 are those of large publicly held
companies that trade on either of the two largest American stock market
exchanges; the New York Stock Exchange and the NASDAQ._ Wikipedia

~~~
ora600
I agree that companies with 3-100 employees will just not appear in SP500.

However, Mercury Interactive was included when it had around 1000 employees.
1000 is a lot, but you can still learn by comparing a company with 1000
employees to HP with 300,000.

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kylemathews
It's not just bureaucracy + increased communication costs of course. At some
point, it just becomes harder to find as many skilled employees to hire either
because there isn't any left (a common problem when looking for skilled
developers) or the really talented people are looking for smaller/younger
companies where they can get outsized returns.

~~~
mixmax
I think this is the exact problem Goolge is facing right now. It's
increasingly hard for them to keep their high standards in hiring worldclass
engineers and hackers. There simply aren't that many of them.

~~~
btmorex
Is that really Google's problem? I mean I realize there aren't a lot of great
engineers, but it seems to me that their primary problem is that they are no
longer the "hot" company to work for. I think all companies reach this point
as they mature. Either they have to start paying a lot more than their
competitors or they have to lower their standards. Most companies do some of
both (best example would be Microsoft right now, they have good engineers, but
not as good as they used to. They also pay well)

~~~
mixmax
The two are probably linked. A hot company for hackers is one where there are
other hackers that are great. Once you reach the point where your company
isn't only staffed with only great hackers but also merely good developers the
company seizes be as hot as it was.

It's a hard problem to solve. Especially if, like Google, you're a publicly
traded company that needs to grow constantly to appease investors. Growth
means hiring more people.

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nocman
One other potential problem I see with this study is that it doesn't seem to
take into account that not all employees put in the same amount of time for an
employer. For instance, some employees work only part time. So if 80% of your
workforce is part-time, you're going to have a lot more employees than a
company that produces the exact same profit with all full-time employees. The
numbers would look a lot worse for you because of your high employee count,
even if your productivity per employee-hour is the same.

Also, in salaried situations, you may have some employees who work 60-80 hour
weeks while others only work 40 hour weeks. Now the high hour-per-employee
count will probably effect productivity in other ways (extended periods of
long hours tend to actually reduce productivity), but the difference in hours-
per-salaried-employee is going to have some bearing on productivity also. This
may not make as big a difference as the part-vs-full-time situation, but it
could be significant.

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radu_floricica
Yet another flaw with this study is domain bias. Domains which require many
employees per company are domains which are based on economies of scale, and
usually have low profits per employee (manufacturing, retail). A better study
to support (or refute) the conclusion would be one comparing similar
companies.

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greenyoda
Whether it's possible for an employee to contribute a huge amount of profit is
highly dependent on the business and the function of the employee. If you're a
restaurant chain (like one of the examples in the article), and most of your
employees are waiters or cooks or delivery drivers, then there's no way that
any one of them can possibly generate a million dollars of profit. If you're a
software developer or a banker, then you can. Making generalizations across
such widely different business categories doesn't seem to make sense.

A better methodology would have been to track productivity per employee vs.
number of employees, but broken down by industry group. Then you could see if
the relationship is true of only some industries, or across all of them.

~~~
chibimagic
It _is_ broken down by industry group. If you look at the graph, each industry
is a different color.

~~~
Zakharov
It's fairly hard to tell from the graph, but it seems that if you look at any
particular industry, the gradient is much less steep.

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scotty79
anything is linear if you use a log-log scale and a thick marker pen

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netmau5
Sometimes I wonder why big corporations can even exist competitively as there
is such downward pressure on productivity as they grow. Some companies handle
this better than others, Amazon being one that comes to mind first, but
everyone ultimately suffers a significant efficiency loss at scale. The only
reasonable answer that occurs to me is that the economies of scale and
available capital provide such a dominating competitive advantage as to allow
outmaneuvering of smaller companies whom are 10x as profitable.

~~~
bioh42_2
_Sometimes I wonder why big corporations can even exist competitively as there
is such downward pressure on productivity as they grow._

High barriers of entry. In 99% of cases the barrier is either capitol
requirements, government regulation or both.

Or to put in other words, any business which can be challenged by a startup,
will be. And it is only a matter of time until enough startups iterate through
enough business plans until they find one that will steal your business.

So either be productive or be behind significant barriers to market entry.

~~~
_delirium
Network effects are a major barrier as well. The biggest problem facing a
Facebook or eBay competitor, and the problem that's faced various would-be
Windows competitors, is that it's hard to beat a platform that derives value
in large part from its ubiquity.

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j_baker
I think it's a bit more nuanced than this. It's like the example given in the
Mythical Man Month. If you want to grow corn, you can pretty much be assured
that no matter what you do, you can harvest the corn more quickly if you put
more people towards harvesting it. This is because harvesting corn is a
_partitionable_ task (in other words, you can easily divide the work up
amongst an arbitrary number of workers). Of course, productivity per person
will go down, but the overall rate at which you're harvesting corn will still
grow.

Programming isn't easily partitionable. Programmers need to communicate with
each other to do their task. Thus, adding more people makes you progress
faster _up to a point_. At a certain point, adding more people starts to slow
you down. Therefore, individual worker productivity will go down more quickly
faster than it would for the corn harvesters.

Lumping all the different positions from all these different kinds of
companies ignores these differences and really makes it difficult to apply the
idea in general. For technology companies in particular, I'd say that the
productivity loss can be even _higher_ than 3/2.

~~~
stoney
But that's assuming that you're hiring more programmers to do the same task.
Programming is partitionable at a larger scale - if I hire more programmers I
can start more projects/create more products.

So I guess what I'm saying is that for a one product company, yes, there is a
point where the productivity loss from adding another employee gets very big.
But for multi-product companies (think Google, Adobe, Microsoft, Apple), more
employees just means more parallel projects.

~~~
larrik
It would seem that way, but I seriously doubt all of those parallel projects
exist in vacuum. They likely will share frameworks, they should certainly
share UI elements and designs.

I mean, Apple can't have the iPad, iPod, and iPhone teams not talk to each
other, their clearly linked on numerous levels.

Likewise, Microsoft's apparent reliance on "parallel projects" is why we geeks
poke fun at them so much. Anyone remember the screen shot of the 20+ styles of
Window decorations just in Microsoft products on XP? Or howabout the fact that
the Windows team has to basically reverse engineer (or at least re-develop
from scratch) all of the UI features of the Office team.

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Jabbles
I don't think the correlation is that strong. Most of the points are in the
centre. Is there any statistical data on how strong the correlation is?

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Isamu
An update of this is at [http://www.cybaea.net/Blogs/Data/Employee-
productivity-as-fu...](http://www.cybaea.net/Blogs/Data/Employee-productivity-
as-function-of-number-of-workers-revisited.html)

This echoes the often-cited effect that communication overhead increases
drastically with headcount. Barry Boehm: adding programmers to a late project
makes it later.

~~~
jacques_chester
> Barry Boehm: adding programmers to a late project makes it later.

It was Fred Brooks who observed that. So famous is the observation that's
known as Brooks' Law.

Not to denigrate Barry Boehm, mind you, who is a fantastic researcher.

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mistermann
I wonder how much can be attributed to: the larger you get, the less
transparency, which contributes to the greater likelihood of hiring someone
who is "corrupt".

Most of the work I've done is at large corporations, and some of the things I
see there, I can't fathom there _not_ being a brown paper bag full of cash
being involved somewhere during the decision making process. I was having
lunch with a friend of mine the other day, and according to him, in his
industry, it is _routine_ for employees to take kickbacks in the form of
"unrelated" consulting gigs through their side companies in exchange for
choosing a certain vendor. That's just the way it works.

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stcredzero
It reminds me of the Main Sequence graph:

[http://www.google.com/imgres?imgurl=http://cs.wellesley.edu/...](http://www.google.com/imgres?imgurl=http://cs.wellesley.edu/~cs112/assignments/assign1/HR.jpg&imgrefurl=http://cs.wellesley.edu/~cs112/assignments/assign1/assign1.html&h=564&w=824&sz=51&tbnid=WJx5qfvKHs3FMM:&tbnh=99&tbnw=144&prev=/images%3Fq%3Dmain%2Bsequence&zoom=1&q=main+sequence&usg=__aFXgeDXUrr6JiJKYW-
hy54_RHwk=&sa=X&ei=O1pUTa-FGcT_lgebycTbCg&ved=0CDMQ9QEwAg)

I wonder where the White Dwarfs and SuperGiants are?

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hartror
This throws aside IMO the major contributing factor, that these big companies
generally run in heavily commoditized sectors where the margins have been
forced down by the competition. High volume, low margin.

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ojbyrne
Isn't this just rational behavior? As long as the marginal profit produced by
hiring another employee > 0, then you hire another employee.

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spazmaster
This study focuses on big corporations. I wonder how these findings would hold
to small companies - let's say, that a company grow from 5 to a 100 employees.
Management-layers and meetings would certainly bog down productivity, but as
much as for large corporations, or more?

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jonmc12
Automation? With 100,000 robot waiters Darden Restaurants would have a much
more favorable ratio.

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cullenking
I wonder at what point it starts dropping off. I know that if I added two
employees to our company (currently just my co-founder and I), we would be
vastly more efficient, since neither of us would have to context switch so
much.

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stretchwithme
Creative knowledge workers make more than those operating their creations. And
companies that can really scale have many more of the latter.

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duncanj
I suspect that a relationship of this sort is due to Parkinson's law. But I
have trouble identifying a power law from his graph.

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xeodox
I'd think it's more steep than this.

