Sunday, September 2, 2007

Social capital, restructuring and attrition

Social capital in an organization refers to the collective value of all social networks (connections among the individuals) in that organization. These connections have 'value' for both the organization and the employees.

A significant portion of the 'work' in organizations gets done through these connections (often referred to as the 'informal organization') rather than through the 'formal structure' in the organization. These 'connections' motivate employees to do things for one another beyond what is specified in the job descriptions. Hence social capital has a positive influence on productivity. The importance of social capital in the creation of intellectual capital has also been recognised. Since these 'connections' are difficult to copy, social capital could be a source of sustainable competitive advantage for the organization.

These 'connections' (social capital) could also help in addressing 'relatedness' needs of the employees. So in addition to enabling the employees to get their work done faster/easier/better, these 'connections' contribute in meeting their their social/'connectedness' needs. Thus social capital could add to 'personal effectiveness at work' and the 'total employee deal' as perceived by the employees and hence it could have a positive influence on employee engagement and retention.

Organization restructuring is one of the popular ways of responding to a dynamic business environment. While the business case for restructuring is quite compelling in many contexts, the hidden costs of restructuring in terms of loss of social capital often gets overlooked. Restructuring breaks up the human networks/connections in organizations and dilutes the social capital in the organization. Since (as mentioned above) these connections are valuable for both the organization and the employees, there could be adverse impact on the organization (in the form of reduced productivity, reduction in the rate of intellectual capital creation, increased employee turnover/ attrition etc.) and on the employees (in terms of reduced engagement, work effectiveness, satisfaction etc.). Of course, many of these factors are interrelated and hence the adverse effects could get amplified.

As we have seen above, organization restructuring and the consequent loss of social capital could reduce the 'value' that the employees derive from organization and hence this could lead to employee turnover/attrition. The social networks bind the employees to one another and hence to the organization. It can also be said that one of the reasons that the employees don't want to leave an organization (to join another organization) is the reluctance to 'start all over again' (in terms of having to build new networks/connections). Thus if a restructuring breaks up their existing connections, employees might have less reason to stay on in an organization. Costs of attrition are well known. Apart from these costs attrition also leads to a further erosion in human capital as more social networks/connections get broken when employees leave. When 'key' employees (with a large number of strong connections) leave the impact on social capital would be more. It is also possible that employees might leave in groups if these groups have a large number of strong connections within them (especially if another organization offers an opportunity to maintain these connections).

Thus one of the key hidden cost of restructuring could be in terms of loss of social capital and its ripple effects. Loss of connections/social capital could lead to attrition which in turn leads to a further erosion of social capital. This could lead to a vicious cycle and organizations should be careful about this. When an 'impact assessment' is done for the proposed restructuring exercise, the impact on social networks/connections/social capital should also be factored in. Since these social networks also serve as communication channels, the communication strategy for restructuring requires even more emphasis (as the restructuring could have broken up some of the existing communication channels). The overall change management plan should give specific attention to retain key people (people with a large number of strong connections) so as to reduce the erosion of social capital. The plan should also focus on creating an environment that would facilitate building of new connections to replace the old ones hence to restore and enhance the social capital in the organization.

See a related post here.


Anonymous said...

Hi Prasad,

Interesting post. One company that is trying to help non-profits, small businesses and students capitalize on their social capital (your argument is especially relevant with non-profit organizations who even moreso rely on the capital of their employees- especially someone like an Executive Director) is called Quire Inc. They make an online project management technology that allows groups to collaborative and coordinate their activities on the Web site. It's an interesting 2.0 take on productivity- even for Joe Community Member or Jane Fundraiser.


Cheri said...

Interesting Ideas! I know it takes time and energy to nuture social networks. I'm curious though if through the process of breaking and reforming that some teams might be able to build even stronger social networks as they leverage both "past" and "new" relationships after a re-org.

I can see where it could be overwhelming to try to attend to the inactive work relationships at the same time you build new ones though!