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 / Winter 2010 / Issue 61(originally published by Booz & Company)


Best Business Books 2010: Human Capital

Groysberg anchors his observations in the results of an in-depth, eight-year study of one of the most emblematic professions in the knowledge sector: Wall Street analysts. He chose this group of professionals for two reasons: It offers a shared, objective, and publicly available means for measuring performance, in the form of Institutional Investor’s annual analyst rankings, and it constitutes a “remarkably compact” labor pool that is large enough to produce valid observations but small enough to lend itself to coherent study. Groysberg was also attracted to analysts as a subject because the belief that individual talent is the prime determinant of analyst performance has become a virtual article of faith on Wall Street — among analysts themselves as well as employers, investors, and the companies they cover.

Like Goffee and Jones, Groysberg notes that the analysts — clevers in every sense of the word — routinely overestimate their own value and underestimate the role of organizations in providing a platform that supports and enables their performance.

Like other knowledge stars, Wall Street analysts tend to see themselves as free agents. This is a signal mistake in Groysberg’s view, because overemphasizing their independence often leads them (and their organizations) to imagine that their skills are highly portable. In fact, as his study reveals, the performance of star analysts declines sharply when they leave firms in which they have flourished.

Groysberg also posits that the dependence of talent on context makes knowledge more fragile than previously assumed, and more dependent on skillful leadership and carefully nurtured development. Such development has become difficult to sustain in an environment in which short-term market pressures dictate organizational decisions. The sad story of Lehman Brothers provides a case in point. Groysberg finds two periods in which the firm’s brilliantly led research department accounted for repeated high annual rankings for its analysts. But he also finds that subsequent market pressures, especially the demand for cost cutting in the run-up to the company’s IPO, led to rapid declines in these capabilities.

Although the evidence is strong that outstanding performance is firmly tied to organizational support, Groysberg points out situations in which this general rule does not apply. Not surprisingly, firm-specific knowledge tends to transfer less well than more general skill sets. Thus, star performers from companies with a strong culture, clear team structure, active development programs, and proprietary technology programs tend to do worse after leaving for greener pastures than those who have made their mark in firms that provide few resources and essentially treat employees as free agents — the old Donaldson, Lufkin & Jenrette (DLJ) being an example of the latter. Companies such as DLJ that invest less in their people foster talent portability, which exposes them to high turnover and makes them the incubators of the success of other firms. The transfer of whole teams — what Wall Street calls lift-outs — also appears to improve portability and increase the odds that stars will maintain high performance.

Groysberg’s data additionally reveals that female star analysts’ talents are more portable than those of their male counterparts, with women’s performance improving rather than declining following a move. Drawing on interviews, he suggests several reasons for this. First, women are more likely to build the kind of external relationships that provide support during a move, often because their relationships within their own firms are weak owing to cultural constraints. Second, women’s work experience makes them more skeptical of the idea that individual brilliance is enough to overcome entrenched cultural barriers. Third, women are more likely to weigh a variety of factors, including cultural fit, when contemplating a move, whereas men are more likely to base their decision on salary and bonus alone.

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