Monday, June 17, 2013

SAS Institute: A Different Approach to Incentives and People Management Practices in the Software Industry

Harvard Business Review Case Analysis Prod. #: HR6-PDF-ENG

SAS Institute: A Different Approach to Incentives and People Management Practices in the Software Industry

Case intro:

The SAS Institute is a large, growing software company headquartered in the Research Triangle in North Carolina. Founded more than 25 years ago, it has evolved a unique approach, given its industry, to developing and retaining talent including using no stock options or phantom stock and not paying its salespeople on commission. The CEO and Vice President of Human Resources must decide how well their current management practices will continue to serve them as the company gains greater visibility and faces an increasingly competitive labor market.

Case analysis:

SAS Institute is the largest privately owned software company in the world that has been in existence for over 35 years. One of the main reasons for the company’s continued success and growth is its unique work culture and people management practices. But now the management is facing a challenge of attracting and recruiting a talented work force that could help it build and maintain its intellectual capital. The management must also decide whether to maintain its unique approach to pay and other people management practices in an increasingly competitive labor market.  
SAS maintains focus on the people – both customers as well as employees. The product development process at SAS is primarily driven by customer wants, feedback and insights and the company tries to provide a high level of customer service. Evans and Lindsay (2005) refer to this as the “value-creation process which is most important to running the business and maintaining or achieving a sustainable competitive advantage”[1]. I found a similar customer focus at General Electric where I had to analyze and justify the importance of every task from the customer’s perspective, and reduce inefficiencies or chances of errors, which is one of the core principles of Six-Sigma. The customer focus has given SAS a distinct advantage over its competition in terms of the range of its product line and level of integration.
SAS has further strengthened its value-creation processes with its unique recruitment, people management, compensation, benefits and performance management policies, which Evans and Lindsay (2005) refer to as “support processes that provide the infrastructure for value-creation processes”[2]. The organization culture at SAS is flat, informal and family-friendly. The company believes in “treating everyone fairly and equally”[3] and creating a good work environment. SAS encourages an open door policy, open communication and minimal hierarchy. It is important to encourage open communication within the company in order to address any concerns that can prevent it from achieving its goal. A good work environment will definitely help SAS in attracting and recruiting the best talent.
Goodnight believes that “if you take care of the employees, the employees will take care of the company”. SAS’s commitment to employee welfare is reflected in the benefits it provides such as on-site medical facilities, gyms, Montessori day care, insurance, elder care counseling, flexible work schedules, scholarships to children of employees, help with housing and subsidized cafes. This has been one of the contributing factors to SAS’s low employee turnover rates – less than 4% annually, in an industry characterized by high attrition rates and has also helped the company gain a good reputation. Caproni (2012) explains this as the “reciprocation rule” to influence people which can be simply stated as “if you give me something, I will feel obligated to give you something in return”[4].
Frequently, employee benefits come at a cost of low pay scales, which could also pose a challenge in attracting and retaining the best talent in the industry, if the competitors are offering much higher compensation packages. Infosys also faced a similar challenge attracting entry-level employees because their compensation packages were the lowest amongst its competitors, but the benefits offered were better. So they had to restructure their compensation and benefits plans to match the pay scales of their competitors.
The organizational culture at SAS also strongly emphasizes collaboration, teamwork, cooperation and mutual respect. In an effort to retain employees, there are frequent cross-functional transitions and re-assignment of employees. This is a contrast with the culture at Matsushita where the CEO had promoted internal competition by creating divisions based on products. As stated by Yoshino and Endo (2005), “employee loyalty was cultivated at division level and young staff recruited as trainees typically spent all or most of their careers within the division in which they started”[5]. Initially, it worked well for Matsushita, however with time, the divisions developed their own subcultures, had intense internal rivalry and later posed a major challenge to transforming and uniting the organization. SAS Institute has also developed a strong culture and sometimes, that can hinder re-engineering and transformation efforts.
At SAS, internal promotions, employee referrals and hiring for “cultural fit” are given a higher preference when recruiting people. Although this has worked well for the company so far, it could encourage nepotism and pose as another challenge in recruiting the best talent in the industry. Cha and Chatman (2003) state that “it makes sense to hire people who will fit the culture, possibly even trading off some immediate skills necessary for the specific entry job for better culture fit”, but they also warn about the “similarity-attraction effect” whereby people recruit others similar to them and not necessarily the best talent. While working at Accenture, I found that the organization made a conscious effort to recruit people from different age-groups, gender, ethnicity, educational background (like engineering, commerce, arts etc.), and work experience and considered “diversity as a critical strength”[6]. The reasoning behind this was that a diverse team could produce better ideas, perspectives and solutions than a team comprised of members with homogeneous backgrounds, which I found very effective. SAS will also need to consider altering its recruiting strategy for diversity to continue its growth and become a global organization.
SAS focuses on long-term commitments instead of short-term profits, both in business as well as employee recruitment. As a result, the employees trust the organization and have confidence in the long-term success of the organization and are able to focus on the quality of their work. The company is also open to risks and experimentation and gives employees the freedom to innovate and explore their ideas and creativity to come up with new products. Both these strategies have worked well for SAS in supporting its competitive strategy of developing customer-driven products and can help in attracting competent and innovative talent. 
SAS does not outsource and uses very few contract workers. This has benefited the company in terms of high quality products, but as other competitors reaping the benefits of lower labor costs, management at SAS might need to rethink their strategy for cost-effectiveness. In terms of compensation, SAS does not provide stock options or financial incentives. As SAS grows globally, it might need to revisit these criteria as stock options and financial incentives (such as joining bonus or commissions) are a way of attracting the best talent in some countries and paying them as per their capabilities and expectations.
For performance management, I agree that the strategy adopted by SAS of giving frequent feedback on performance instead of an annual appraisal is very effective and is being adopted and implemented by many organizations. Also SAS’s philosophy of assuming that their employees are intrinsically motivated works well for them because they select employees that are professional and self-starters, but it may not work well with a non-professional or hourly compensation based employees.
Most of SAS’s people management policies and work culture have worked well for the organization in the past and will continue to do so. But some will need to be revisited to sustain competitive advantage. SAS had a global revenue of $2.43 billion in 2010. The outsourcing policy has been realigned with the SAS Alliance Outsourcing program in order to maintain the competitive advantage. By maintaining focus on the customers and employees SAS has maintained customer loyalty as well as high employee retention and has been voted as the “Best Company to Work for”, for the second consecutive year by Fortune Magazine in 2011. As the organization grows, re-structuring, delegation and leadership development might be required at the managerial level to meet the demands of an evolving market.


[1] Evans, J. R., & Lindsay, W. M. (2005). Principles of Six Sigma. In An Introduction to Six Sigma & Process Improvement. (1st ed.). (p. 29). South-Western.
[2] Evans, J. R., & Lindsay, W. M. (2005). Principles of Six Sigma. In An Introduction to Six Sigma & Process Improvement. (1st ed.). (p. 29-30). South-Western.
[3] Pfeffer, J. (1998). SAS Institute: A Different Approach to Incentives and People Management Practices in the Software Industry. Harvard Business Review, 6, 5
[4] Caproni, P. J. (2012). Gaining and Using Sustainable, Ethical Power and Influence. Management Skills for Everyday Life: The Practical Coach, 166-168.
[5] Yoshino, M. Y., & Endo, Y. (2005). Transformation of Matsushita Electric Industrial Co., Ltd. 2005 (B). Harvard Business Review, 905413, 2-4.
[6] Nanterme, P. (n.d.). Inclusion & Diversity at Accenture. Accenture. Retrieved from http://www.accenture.com/us-en/company/people/diversity/Pages/index.aspx

 

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