What Will Be the New Social Contract for the 21^st Century?

As the tech sector struggles and the go-to response seems to be mass layoffs, “lean” is often bandied about as the method of short-term cost-reduction and high efficiency. As is often the case, Elon Musk led the way by buying Twitter and then quickly laying off half its workforce. Though Twitter users have had some minor annoyances, the service seems to work as before the layoffs. Then, Mark Zuckerberg, apparently a fast follower of Musk, laid off 11,000 people from Meta Platforms Inc. in the Fall of 2022 and this March announced another layoff of 10,000 more.

It seems the contagion is spreading to auto companies as they try to shed their image as rust-belt manufacturers of gas guzzlers and become green tech companies selling battery-electric self-driving cars. Some reports estimate^[1] that Ford will lay off 12% (24,000) of its workforce, and General Motors announced early retirement buyouts for “the majority of” its U.S. salaried workers, which translates to 100% of its workers with at least five years in the company. While there was a time when these layoffs focused primarily on factory workers, now they are hitting technical professionals.^[2]

A Wall Street Journal article reported on Zuckerberg’s view of “How to Run a Company” in 2023. The report noted that as he shifted Meta’s funding from Facebook to big, long-term investments in the metaverse, the company seemed to crumble. So, he shifted gears from what may have been too much long-term R&D spending to “the year of efficiency” and declared flatter is better. He’s quoted as saying he would eliminate waste by eliminating middle management and canceling unnecessary projects, indicating that he had learned that “leaner is better.”^[3]

In the world of new technology, mainly revolving around digital products and service, there seems to be a view that even highly skilled technologists are replaceable parts. They are almost like contractors who come self-contained, responsible for their training and development, plugging in their computers and letting it rock. Like vagabonds, they go where the work is. 

This view is often a two-way street. We know many young people considering a job ask themselves: “How long do I have to stay to get the signing bonus and for the stock options to vest?” Of course, with the recent tech company struggles, we doubt lucrative, upfront incentives to join are on the table.

So What’s Changed?

We are pretty sure the tech sector’s employee relationships were not always so transactional. Early employees of companies like Apple, Amazon, Google, and Facebook were welcomed as part of a team and joined because they were excited by the companies’ visions. Apple’s vision is short and sweet: ”Bringing the best user experience to its customers through innovative hardware, software, and services.” And even in 2022, Facebook’s mission remained visionary and people-centered:^[4]

“Our full mission statement is: give people the power to build community and bring the world closer together. That reflects that we can’t do this ourselves, but only by empowering people to build communities and bring people together. Our lives are all connected.” 

There is a danger that working toward positive visions and valuing employees as team members to be respected will be considered antiquated — and the new norm will be moving fast, breaking things, and doing whatever it takes to drive up the company’s market value. In that scenario, mission statements and proclamations to value people will seem like quaint relics of the past. 

There is a danger that working toward positive visions and valuing employees as team members to be respected will be considered antiquated …

So the question is: What will be the social contract of the 21^st century? We hope it is more than everyone for themselves.

Where Does ‘Lean’ Fit In?

When lean practitioners see the word “lean” bandied about, as in “lean out the workforce,” it strikes a nerve. For us, lean is not something you do to lay off employees. Instead, it is a way to become healthy and highly responsive to customers. Our model remains Toyota, a company striking in its contrasting view of human resource development. 

Toyota is the original model for a lean enterprise. The term “lean” as applied to Toyota’s management system doesn’t mean the ruthless cutting of people and projects. Rather, it means lean in a holistic sense of healthy people who can adapt to the environment and live fulfilling lives. Slash-and-burn waste reduction is often the desperate act of a failing company trying to compensate for past strategic or operational failures by throwing everything — and everyone — considered unessential overboard.

And respecting people means they are integral to the team, not easily replaceable cogs in a machine.

The Toyota Way is about continuous improvement and respect for people — so people are the source of creativity, adaptability, and even “waste elimination.” But getting that extra effort beyond the minimum needed to do their jobs requires treating people with respect. And respecting people means they are integral to the team, not easily replaceable cogs in a machine, and it means developing them. 

Respecting Employees

Let’s consider how Toyota develops product development engineers, who are somewhat like software engineers.

Every year in Japan, Toyota welcomes a new freshman class of engineers. They come from the best universities, are all top students, and are eager to apply their recently acquired knowledge and skills. But wait a second: They will discover on the first day that Toyota values their general theoretical background but does not consider them practicing engineers. First, they will need to go through training and, in effect, graduate from Toyota University. 

It starts with one year of general training, including working as a shop-floor team member doing production jobs for several months. This work is how they will begin to viscerally understand the Toyota Production System. The trainees will also spend several months working for a Toyota dealership, selling autos to understand the customer. And they will spend time with designers who work on computer-aided design systems because Toyota expects its engineers to do their own CAD drawing (many companies would view engineers as above that and hand that off to designers). 

The centerpiece of year two is a “freshman project.” The new engineers are assigned an experienced engineer as a mentor and do a challenging design project — a real one for a real vehicle — which may be the first time they ever designed something that is part of mass production.

At this point, you might think they are ready to work as engineers but not quite yet. Toyota requires that the trainees go through two cycles of engineering a new vehicle part — two development programs. They traditionally engineer the same part, like perhaps the bumper, but they go through all phases of engineering, so they are learning something new all the time. Then, and only then, say after eight years, they are considered full engineers who can work with minimal supervision. Still, they will have mentors for the rest of their careers.

Learning by Doing

Toyota’s development system is based on the master-apprentice model, where one would not take, say, a person who graduated from culinary school and ask them to work independently to make meals. Trainees would start at the bottom, working under a master chef and gradually work from preparing ingredients to cooking a few dishes and, after years of being mentored, get to prepare a full meal. Toyota has the same respect for the required skills of an engineer who needs years of direct mentored experience to learn the craft of engineering and Toyota’s product development processes.

The lean product development process is very structured, with various tools, methods, and ways of communicating that can only be learned by doing. Following the process makes many good things happen. One is that the process becomes relatively controlled and predictable, allowing Toyota to set a several-years-out launch date for the vehicle in production and almost always meet all the cost, quality, and timing targets. This approach also allows Toyota to know how many engineers it will need to staff those programs. 

When we look at the huge fluctuations in hiring and firing engineers at most automakers and tech companies, we wonder if they even understand what these people will be doing and how many they need. 

Toyota also has set up a major engineering center, the Toyota Technical Center, in Ann Arbor, Michigan. At the Center, they do complete engineering for vehicles unique to North America, like the Tundra and Sequoia, and the North American version of vehicles like the Camry. Toyota took decades to develop engineers in the U.S., so they have the skills and understanding of the Japanese engineers, with some modifications in training to fit American culture.

The engineers who undergo this intense training are exceptional, know Toyota processes, and are socialized into the Toyota Way. So, they learn to continually improve processes and treat others with respect, including, over time, to develop less-senior engineers. These engineers are the brain trust of Toyota, and the last thing Toyota wants to do is lose it to layoffs because of short-term financial pressures.

Protecting the Brain Trust

One way to protect this brain trust is to use contract engineers, and Toyota uses a significant percentage. Contract engineers come from companies that Toyota develops a long-term relationship with and undergo intensive training in their own right. However, Toyota can hire and let them go fairly rapidly. If Toyota suddenly needed several engineers, for example, to quickly engineer several battery-electric vehicles, but it was not a long-term need, they would add contract labor. Once the unusual need for engineers had passed, it could let them go. But they would protect the brain trust.

Toyota was one of the few large companies that avoided mass layoffs during the Great Recession — even at a plant in Princeton, Indiana, that made Tundra Trucks and Sequoia SUVs, where sales plummeted by almost half, they kept Toyota workers employed.^[5] About half of the workforce was not needed for daily production, so they alternated between working production and “going to school” in the factory, learning all the various disciplines of the Toyota Production System, including better problem-solving. Toyota took the time to invest in its people rather than divest.

Now, ask yourself: If it takes eight years to socialize a new engineer into their highly evolved culture, does it make sense to use mass layoffs in a “year of efficiency” to get rid of the “unessential?” Once that crisis has passed, it would take another eight years to get new hires up to speed.

Correcting Lean Misunderstandings

Over the years, common misunderstandings about what lean is, what the journey is like, and how to advance have proliferated. Often, these misunderstandings come from how people simplistically talk and think about lean as if it is some concrete thing, or fixed toolkit, that you insert into an organization and step back to watch the results.

Obviously, it is easier to issue a mandate for mass layoffs or mass buyouts than to continuously improve, invest heavily in developing creative, adaptable people, and work to achieve challenging cost targets by enabling everyone to find ways to work smarter. At Toyota, lean thinking and management are a general way of life — even when the company is wildly profitable in a favorable market. Adding headcount is rarely an easy sell. Toyota has a rigorous Total Budget Control System, which uses monthly data to monitor the budgets of all the divisions down to the tiniest expenditure. 

At Toyota, lean thinking and management are a general way of life — even when the company is wildly profitable in a favorable market.

To behave according to these values, Toyota must resist the urge to treat its shareholders as its primary customers. Shareholders feast on radical transactional moves like mergers and acquisitions, extensive product lineup makeovers, and mass layoffs. Their goal is growth at all costs. 

A slower and steadier company, like Toyota, is much less interesting to investors, even when the company is very profitable with plenty of cash. Indeed, stock analysts often criticize Toyota for keeping large cash reserves rather than using stock buybacks and large dividends to boost the stock price.^[6]  

Silicon Valley Management?

The fast growth and enviable stock market returns of the tech sector, often thought of as Silicon Valley Management, is leading to a view that we are witnessing a renaissance in a new era of management best practice — radical cost reduction, treating people as replaceable parts, and leadership by an all-powerful autocratic CEO devoid of human emotion. Zuckerberg’s internal motto at Facebook, officially at least until 2014, was: “Move fast and break things.” The idea is that if you never break anything, you’re not moving fast enough.”^[7] Now it seems that breaking things includes the careers of long-term employees.

But does moving fast and breaking things portend a new long-term management strategy? Not everyone buys in. At least one journalist asks if Meta is the new AOL, which made poor technology decisions that led to massive downsizing.^[8] This article quotes an anonymous former tech CEO who said:

“Companies such as Meta, Google, Amazon, and Twitter had hired ‘stupid amounts of people’ in the last few years to work on ‘science projects.’ Speaking specifically of Meta, the executive said, “You just wonder what are these 100,000-some people doing? The app doesn’t change much.”

He added, “You can cut your way to profitability in the short term, but you can’t cut your way to growth.” 

Making Your Choice

So, what will be the — your — social contract for the 21^st century? Is it a purely transactional model? I, as an employer, will give you this as long as you do this, and we will be a team until it is inconvenient for one of us. 

If we consider the long-term success of Toyota going back to the 1960s, we see its social contract has not changed much. Toyota has done something unusual for a large, multi-national company. They have built a deliberate high-performance culture based on continuous improvement and respect for people. They are highly structured yet highly adaptable. We believe that building and valuing a strong culture and finding ways to adapt without destroying the culture will continue to set companies like Toyota apart as positive role models.

We are not suggesting other companies or industries, like the fast-paced tech sector, can or should copy Toyota’s model. Taking eight years to develop an engineer may not be feasible. But we can do better than the short-term transactional model. We can value people and real practical skills more than that. We can develop a social contract, at least for our core team, that includes investing in developing them, creating a strong, positive culture, and doing everything possible to make them long-term team members.

^[1] https://fortune.com/2018/10/09/ford-stock-today-layoffs-trump-trade-tariffs/

^[2] https://www.cnbc.com/2023/03/09/gm-buyouts-us-salaried-workers.html

^[3] https://www.wsj.com/articles/mark-zuckerberg-on-how-to-run-a-company-in-2023-29fd9c2c

^[4] https://www.facebook.com/notes/393134628500376/

^[5] Jeffrey Liker and Tim Ogden, Toyota Under Fire, NY: McGraw Hill, 2011.

^[6] https://asia.nikkei.com/Opinion/Japanese-companies-must-stop-gloating-about-cash-hoarding

^[7] https://www.thetimes.co.uk/article/mark-zuckerberg-calls-for-meta-to-move-faster-and-fix-things-hwnznpxt6

^[8] https://ktvz.com/news/2023/03/15/the-next-aol-metas-massive-layoffs-raise-questions-about-zuckerbergs-strategy-as-company-morale-sinks-2/