Sack the weak?

In the 1980s, massive conglomerate GE was led by Jack Welch, who became known as “Neutron Jack” in no small part for his scorched-earth policy of firing the worst 10% of performers each year and to get fresh hires.

"Up until this point, people who had a job at a company like GE or IBM basically figured that they had a job for life. But he explicitly said that this notion was going to be a thing of the past under his watch," says author David Gelles in an npr interview about his book The Man Who Broke Capitalism.

Intuit Inc. is set to cut 1,800 jobs, aiming to replace underperformers and executives with new hires to enhance its focus on AI-driven products. CEO Sasan Goodarzi announced in a letter to employees on Wednesday that about 10% of the global workforce will be affected.

The intention is not to reduce costs but to rehire the same number of employees, mainly in engineering, product, and sales divisions.

Over 1,000 of the laid-off employees "are not meeting expectations," Goodarzi noted in the company blog. The company is also cutting the number of executives by around 10% to boost decision-making speed.

Changes to drive growth: Intuit CEO

Tech firms have been aggressively shedding workers since early 2023, adjusting priorities and trimming their workforce. Big names like Microsoft, Alphabet’s Google, Amazon.com, and Salesforce have cut jobs in 2024. Until now, Intuit, renowned for TurboTax and QuickBooks, had avoided large-scale layoffs, according to Bloomberg.

“The changes we are making today enable us to allocate additional investments to our most critical areas to support our customers and drive growth,” Goodarzi emphasized in his letter.

Goodarzi stressed Intuit’s commitment to generative AI and its core base of small- and medium-sized business customers. The company aims to attract more fintech talent for its Credit Karma division, which focuses on loan aggregation and cash flow tracking.

Post-layoff hiring plans indicate that Intuit remains optimistic about its growth, particularly concerning small business and Credit Karma, according to Kirk Materne, an analyst at Evercore ISI, according to Bloomberg.

Intuit will close offices in Edmonton, Canada, and Boise, Idaho, consolidating some tech roles into larger hubs. The company will also speed up its expansion in Canada, the UK, and Australia.

The firm anticipates incurring between $250 million and $260 million in costs related to the job cuts, primarily from severance, said Bloomberg, citing a filing with the US Securities and Exchange Commission on Wednesday.

AI-centric strategy at Intuit

When he was managing Intuit’s TurboTax and QuickBooks, Goodarzi realized that customers didn’t want to handle their own taxes or bookkeeping. "The future was, it’s done for you," he recalls in a 2023 Fortune article.

This insight led Goodarzi, who became CEO in 2019, to steer the company towards an AI-centric strategy. This shift involved two significant acquisitions totaling $20 billion, layoffs, and substantial AI investments, predating the technology’s recent surge in popularity.

Intuit’s AI journey has been ongoing for years, culminating in the debut of Intuit Assist, its first major standalone AI product for consumers, said Fortune. Embedded in TurboTax, Credit Karma, QuickBooks, and Mailchimp, Intuit Assist can predict cash flow issues for small businesses and manage email marketing campaigns.

Goodarzi is confident that betting on AI and leveraging a vast data repository will solidify Intuit’s dominance in tax and accounting software for individuals and small businesses.

“At the end of the day, there are certain decisions you have to make,” Goodarzi told Fortune. “And the decision I made was, as a team, we’re going to bet the company on data and AI."

Today, Intuit is best known for TurboTax and QuickBooks. Since going public in 1993, Intuit stock has skyrocketed by 23,190%, far outpacing the S&P index and the Nasdaq.

Should underperformers be removed annually?

When Jack Welch championed the controversial approach to managing underperformance by advocating the annual removal of the bottom 10% of employees it certainly raised eyebrows. This policy, detailed in his 1999 shareholder letter and his book Jack: Straight From the Gut, aimed to improve organizational performance by replacing low performers with higher achievers.

Other prominent companies, including Ford, Conoco, Sun Microsystems, Cisco, and EDS, have implemented similar strategies.

On the surface, eliminating the lowest performers seems like a sound strategy. The idea is that bringing in better employees will boost overall performance and underscore the organization's commitment to excellence. However, Edward Lawler from the Marshall School of Business at USC wasn’t so sure and released research in 2002 that backed his argument this may not be the best way to achieve maximum performance.

Lawler argued that while allowing poor performance to persist can harm an organization by creating a negative culture, the forced removal of employees may not be the most effective solution.

Identifying underperformers: The initial challenge in removing poor performers is accurately identifying them, he points out. Many employees do not perceive themselves as underperformers; in fact, over 80% believe they perform at an average or above-average level. Consequently, when asked to identify poor performers, there are rarely any volunteers.

Managers often hesitate to label their subordinates as poor performers due to various reasons, including a lack of courage, concern for the individuals, the disruption caused by firing, and insufficient tools for accurate identification. To address this, some organizations enforce forced ranking systems, requiring a fixed percentage of employees to be marked as poor performers, according to Lawler. While this approach ensures compliance, it frequently fails to identify the appropriate individuals.

Issues with forced ranking: Forced ranking assumes that employee performance follows a normal distribution, with most employees performing at an average level and a few performing exceptionally well or poorly. However, this assumption is not always accurate, says Lawler. Performance does not always fit a normal distribution, and mandating the identification of a certain percentage of poor performers can lead to incorrect classifications.

Moreover, in highly competent groups, satisfactory or even outstanding employees might be mislabeled as poor performers, which is counterproductive. This misclassification can weaken strong teams rather than improving weaker ones.

Legal and practical challenges: Forced ranking systems are prone to legal challenges, particularly when they negatively affect protected groups, according to Lawler. Courts have ruled that adverse impacts are permissible only if they stem from genuine performance deficiencies. Proving the validity of performance appraisals in such systems is difficult, as demonstrated by numerous court cases involving companies like Sandia Corporation and Ford.

Over time, identifying poor performers becomes increasingly challenging. While it may be easy in the first year to remove employees with obvious performance issues, it becomes harder to identify new poor performers as the process continues. Jack Welch himself noted that by the third year, identifying poor performers becomes a "war." Managers resist this continual pressure because there might not be a clear bottom 10% to identify.

Measuring performance: It is relatively straightforward to measure the performance of salespeople or production workers with clear, quantitative goals. However, assessing knowledge workers, whose contributions are often subjective, is more challenging, says Lawler. Before requiring managers to identify poor performers, organizations need effective performance management systems. Managers require training and comprehensive performance data, such as balanced scorecards and ERP systems, to evaluate performance accurately. Additionally, managers should be assessed on their ability to measure their subordinates' performance.

The hidden costs of dismissing poor performers: If poor performers cannot be accurately identified, policies requiring their annual dismissal are flawed. Even when they can be identified, the costs associated with turnover—such as settlements, continued benefits, lawsuits, and the expenses of hiring and training replacements—are significant, says Lawler. Research indicates that turnover costs can equal at least one year's salary of the replaced employee. Moreover, the new hire might not perform significantly better, leading to an expensive and potentially unproductive cycle.

In certain labour markets, replacing dismissed employees is extremely difficult, making the dismissal of poor performers impractical. This is particularly true in industries like information technology, biotech, and professional services.

Negative impacts on organizational culture: Forced ranking systems can create a dysfunctional environment, says Lawler. Managers might delay firing poor performers to meet quotas, focus development efforts only on those likely to survive the appraisal process, and disown appraisals to placate subordinates. These practices undermine the performance management system, foster competition among peers, and weaken teamwork and organizational performance.

A leadership approach: Rather than relying on bureaucratic rules, Lawler says organizations need strong leadership and sound judgment. Senior management must lead rigorous annual talent evaluations and take talent management seriously. Effective performance management requires replacing rigid rules with thoughtful leadership and judgment. Decisions about retention, development, and dismissal should be based on careful analysis rather than arbitrary quotas. By fostering a culture that values accurate performance assessment and development, organizations can achieve high performance without the drawbacks of forced ranking systems.