Perhaps the first initial approach to the turnaround management methodology was Joseph Scanlon’s “The Scanlon Plan” (White, 1979, 292-312) created during the depression. Scanlon was a local union president of a financially troubled steel mill who created a methodology to help enlist the employees in a turnaround of the company, with the success of the effort leading Scanlon to apply the methodology to other declining firms.
Although originally designed as a crisis management plan, Scanlon received recognition when the methodology applied equally to healthy companies as well with a 46% increase in productive efficiency for the Adamson Company. So impressed was organisational behaviourist Douglas McGregor, that Scanlon was persuaded in to joining M.I.T Industrial relations staff (Lane, 1975, 57-64).
The Scanlon Plan Process would now days be described as participative management, but at the time the plan was used by firms in financial crises.
The Scanlon Plan involved two systems:
· The Participation System and
· The Equity System
The Participation System is comprised of an open suggestion system and two committees.
The first was the production committee for which there was one for each department. This committee composed of one management representative and one or more non-elected non-supervisory employees. The committees job was to identify problems which interfered with increasing productivity, reduce costs and increase output. Small expenditure suggestions could be put in to effect immediately, while large expenditure items were sent to the second committee, which was the screening committee (Check, 1979, 9).
The screening committee held representatives of senior management and an equal or greater number of elected non-supervisory representatives. It acted on the suggestions recommend by the production committee, and also assumed responsibly for suggestions not acted on by the production committee (i.e. oversight).
Finally the screening committee oversaw the production of financial data supporting the assignment of the monthly bonuses. The participation system allows full communication throughout the firm on production improvements, financial position, upcoming changes and bonuses (Frost, Ruh, & Wallace, 1973, 282-285)
Likewise the Equity System allows for the transparent calculations of two metrics. The ratio and the bonus plan.
The ratio is normally calculated by the total payroll cost divided by the total sales value of production, within a specified timeframe that does not work to the disadvantage of either the employee or the employer. The ratio is used to calculate the payroll saving.
The bonus plan works by assigning all cost savings for the period to a pool. Distribution of the pool is based on three requirements:
· Both the employee’s and the company receive fair shares
· A reserve fund is set a side each month for months when bonus deficits occur.
· Each member must receive a fair share of the pool.
The advantage of the Scanlon Plan is that the company must go through an exacting analysis of profit and loss in order to derive the ratio (Lane, 1975), hence encouraging a focus on financial results. This audit is similar to the situation analysis in the ACTP methodology. Likewise the increased transparency, which means that all employees know the financial situation of the company, is also similar.
With both, performance improvements can be made in an open atmosphere free of denial and politics, and finally all staff receive the same bonus in order to recognise the contribution of both staff and management. It also makes administration easier.
The disadvantage of Scanlon plan is that the very advantages can also be disadvantages. The equal bonus may not reflect the actual work or contribution performed by all staff, because education and specific skill sets may have a major effect on what savings were the most cost effective. Further, the Scanlon plan can take some time to introduce in to large companies, even though it was originally set up as a crisis measure (Check, 1979) because few multinationals (if any) existed when the plan was invented. This can mean that by the time the system is implemented financial ruin may be inevitable, especially if management were in denial about the firm’s problems (Castrogiovanni, Baliga, & Kidwell, 1992, 26).
Finally, the Scanlon plan relies on the presupposition that the firm itself is inefficient in its operations; but as the turnaround of British Steel in the 1980’s shows (Beauman, 1996, 16), the timing of the recovery is equally important, because market, currency and interest fluctuations still effect underlying profitability.
Moreover as Hofer indicates (Hofer, 1980) company operations may already be efficient, and it is a strategic turnaround that is needed. That’s is “super” operational efficiencies won’t work, if the firm is not correctly targeting the proper markets (O'Neill, 1986, 80-88).
There has been considerable debate as to whether the Scanlon Plan actually works due to a both a lack of empirical research, and a surplus of partially biased research (White, 1979). The inclusion for the Scanlon Plan however, is included for historical purposes in relation to the next methodology created sixty-six years later.
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