Understanding the wide range of outcomes achieved by firms trying to implement Total Quality Management (TQM) and similar process improvement initiatives presents a challenge to management theory: A few firms reap sustained benefits from their programs, but most efforts fail and are abandoned. In this paper I study one dimension of this phenomenon: the role of impending layoffs in determining employee commitment to process improvement. Currently, the literature provides two opposing theories concerning the effect of job security on the ability of firms to implement change initiatives. The "Drive Out Fear" school argues that firms must commit to job security, while the "Drive In Fear" school emphasizes the positive role that insecurity plays in motivating change. In this study a contract theoretic model is developed to analyze the role of agency in process improvement. The main insight of the study is that there are two types of job security, internal and external, that have opposing impacts on the firm's ability to implement improvement initiatives. The distinction is useful in explaining the results of different case studies and can reconcile the two change theories.
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