Understanding the 3/2 Rule of Employee Productivity

When you triple the number of employees, you halve their productivity, or adding 10% employees the productivity of each drops by 6.3%.

What causes the productivity decrease? Companies sometimes rationally choose to be in high-volume, low-margin markets. But a more possibility is expensive relationship friction, increased internal communications, and labyrinth bureaucracy.

I think it is largely down to communications: the degree to which a vision is shared and the effective dissemination of new ideas ideas and working practices. Innovation velocity is dependent on collaboration; and collaboration among larger groups and creation networks require different skills and tools than what most executives are used to from smaller situations and is therefore often underestimated.

Productivity in large enterprise is clearly a subject that deserves attention, as it is something you can measure before hiring someone. If the S&P companies all achieved their average productivity, then they would between them generate an additional $2.9 trillion profit between them.