Almost ten years ago, McKinsey sponsored landmark research seeking to quantify the total amount of economic activity consumed in “interactions” – the “searching, coordinating and monitoring required to exchange goods or services.”
Now, one of the authors of that original research report – James Manyika – is leading a new effort at McKinsey to push this analysis one level deeper. “The Next Revolution in Interactions”, an article published by the McKinsey Quarterly in the fourth quarter of 2005, reports on the initial results of this new work. It is a fascinating article with important implications for business strategy and information technology investment.
James and his co-authors distinguish three forms of work:
- Transformational – “extracting raw materials or converting them into finished goods” – examples cited include “mining coal, running heavy machinery, or operating production lines”
- Transactional – “interactions that unfold in a generally rule-based manner and can thus be scripted or automated” – examples of transactional jobs include cashiers, office clerks, truck drivers and accountants
- Tacit – “more complex interactions requiring a higher level of judgment, involving ambiguity, and drawing on tacit, or experiential, knowledge” – examples of tacit-intensive jobs include retail sales people, customer service representatives, registered nurses and general managers
Broadly, the article makes the case that there has been a pronounced shift in the composition of the US labor force towards tacit work, in part driven by a shift towards a service economy accompanied by aggressive efforts to automate transactional work. The authors point out:
This shift toward tacit interactions upends everything we know about organizations . . . . the rise of the tacit workforce and the decline of the transformational and transactional ones demand new thinking about the organizations structures that could help companies make the best use of this shifting blend of talent.
The article focuses in some detail on the role of information technology in amplifying the impact of tacit labor at three levels:
- “Eliminat[ing] low-value-added transactional activities”
- “Boost[ing] the quality, speed, and scalability of the decisions employees make”
- “Extend[ing] the breadth and impact of tacit interactions” through new and emerging technology
The authors suggest that this shift in the composition of work is important from a strategic perspective as well:
For the past 30 years, companies have boosted their labor productivity by reengineering, automating, or outsourcing production and clerical jobs. But any advantage in costs or distinctiveness that companies gained in this way was usually short-lived, for their rivals adopted similar technologies and process improvements and thus quickly matched the leaders. But advantages that companies gain by raising the productivity of their most valuable workers may well be more enduring.
They buttress this perspective with some interesting findings on performance spreads:
The performance spread between the most and least productive manufacturing companies is relatively narrow. The spread widens in transaction-based sectors—meaning that investments to improve performance in this area still make sense. But the variability of company-level performance is more than 50 percent greater in tacit-based sectors than in manufacturing-based ones. Tacit activities are now a green pasture for improvement.
In general, I agree with the analysis presented in the article. In particular, companies in the US have focused on improving labor productivity in large part by reengineering, automating, outsourcing or offshoring transactional activities. There are significant opportunities to build strategic advantage by developing organizational practices to improve the productivity of tacit labor.
On the other hand, the article reinforces an unfortunate bias among American managers by creating such strong distinctions across the three different categories of labor. US companies tend to look down on transformational and transactional labor, while giving much more status to tacit labor.
In practice, the boundaries across these labor categories are much less clear. Watch a really good front line production worker or truck driver at work and you will see a lot of tacit knowledge shaping performance. In large part, American managers have created a self-fulfilling prophecy – by defining certain work as routine, they have suppressed tacit knowledge, made existing tacit knowledge invisible and discouraged the development of new tacit knowledge.
In fact, the global success of Toyota (a company briefly referenced in the article) in competing with American auto companies is due in large part to the Toyota Production System, an approach that makes all workers problem-solvers who are continually pushing the frontier of performance. TPS hinges upon tightly integrating transformational, transactional and tacit activities in a sustained effort to drive rapid incremental improvements in performance.
More broadly, as the pace of change in global markets accelerates and uncertainty increases, the entire notion of routine, rule-based activities ought to be challenged. In the words of my colleague, JSB, companies will need to move from coercive processes to enabling processes that encourage all participants to develop and apply tacit knowledge in their daily activities. The winning companies will be those that reconfigure their organizations to enable all activities to become tacit activities.
There’s another bias that the article indirectly reinforces. Confronted by accelerating change, Western executives search desperately for “safe harbors”, sources of advantage that will give them some respite from growing competitive pressures. The article suggests that productivity improvements in tacit interactions may be more difficult to copy. This may be true, but the real message is that the only sustainable edge will come from accelerating the pace of capability building, rather than relying on any specific set of innovations in tacit interactions.
Perhaps the next revolution in interactions will come from efforts to accelerate the pace of tacit knowledge building in all activities, not just within enterprises, but across enterprises as well.