Case Study – Arrow Electronics

8 Mar

Confidential to Betsy Levine, branch general manager at Arrow Electronics circa 1997: Quit your job.

I’m sure by now she already has. Betsy’s management performance review is one of five exhibits evaluated in Harvard Business School Case Study 9-800-290, Compensation and Performance Evaluation at Arrow Electronics.

Arrow’s industry has dramatic turnover, up to 25 percent annually. Its employees, and those of its competitors, feel no attachment to any particular company. When these companies need to build market share quickly due to pressure from suppliers, they do it by stealing customers from another distributor via job-hopping salespeople. Even the company’s 43 branch general managers only have an average life span of three to four years.

The main reason salespeople jump ship: pay. There appears to be nothing particularly compelling about Arrow’s culture – in fact, its culture is “no one stays.”

Betsy’s drama began when Steve Kaufman, Arrow’s CEO, recognized that “problems” existed with the company’s Employee Performance Review system, or EPR. No one was happy with the three-year-old system: not employees, not managers, and certainly not Kaufman.

Kaufman was in a state of shock that “no one” in his entire organization received a 1 or 2 (the lowest scores) in one of the seven performance areas. As he put it, “that can’t be right.” Unfortunately, that’s the wrong mindset. He wonders why it is so difficult to get his managers to evaluate their employees “accurately.”

Well, because they can’t. An employee evaluation such as Arrow’s, which ranked employees on measures such as judgment and initiative, is highly subjective. What’s accurate to one manager is inaccurate to another.

Kaufman may suffer from his own educational background and experience: He’s a quant*. He has an engineering degree from MIT, an MBA from Harvard, and 11 years with McKinsey as a strategy consultant. He’s completely overlooking the impact of emotion and subjective judgment on the managers’ assessments of their employees.

Kaufman even decreed that “Every employee must receive a 2 on at least one of their seven areas of evaluation. No exceptions.” This silly, arbitrary assessment of course rubbed his managers the wrong way, let alone the employees. Part of Kaufman’s desire was to determine who was really worthy of promotion. But determining leadership potential from a subjective rating alone is faulty. What if the employee’s manager feels threatened? Even more important: What about the employee’s intrinsic desire to lead? Wouldn’t it be better to ask people if they want to lead and then assess their potential and provide training?

The CEO wants to “upgrade” his team — rather a loaded word, don’t you think? Any new hires need to be “better than the average of the existing team,” so that’s why he needs to measure performance “accurately” via the EPR. Well, wouldn’t the most expedient way of increasing the average be to increase the performance of every individual member of the team, rather than hire one or two better-than-average superstars?

So in addition to the written case, we’re given five written Management Performance Reviews to evaluate as exhibits. Three of them are extremely sparse and vague – one says to “develop some continued educational goals.” About what? Another refers to “developing direct reports” under position-specific knowledge and skills. How is that position-specific knowledge for a manager? Three of them were extremely poorly written, including a reference to a “pier group.”

And then we get to Betsy’s review. Poor Betsy. She exemplifies the problem Kaufman wants to solve: She’s a newly promoted branch general manager in her role for less than a year – exactly the person who’s likely to leave in another year or two, and exactly who Arrow wants to retain in order to grow its leadership team in years to come.

So what kind of review does she get? A coal raking. A mean-spirited, highly critical rant that at the same time acknowledges that there is “little to no turnover” in Betsy’s area – a key metric Arrow needs to improve. And that Betsy goes out of her way to help others in the company, which she’s dinged for. And that her customers, both internal and external, are satifisied. She even gets downgraded for the opinions of those who are not her direct reports! Her evaluator goes off topic on many of the questions, filling in what he wants to cover when he (I’m assuming it’s a “he”) is supposed to be addressing something else entirely.

And that underlies the fundamental problem with Kaufman’s EPR process: the pre-fab structure used to evaluate employees doesn’t focus on what’s really important to the company, just what’s most important for filling out the form. And the variation in the narratives – some are inscrutable, misspelled one-sentence responses, while Betsy gets a three-page diatribe – points to a flawed process poorly executed.

Kaufman made a fundamental error: The “problems” are not with the EPR. The problems are with the system as a whole.

* Quant: A person who works in finance using numerical or quantitative techniques.

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