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Best Business Books 2008: Human Capital

Talent Unleashed

(originally published by Booz & Company)

Peter Cappelli
Talent on Demand: Managing Talent in an Age of Uncertainty
(Harvard Business Press, 2008)

Edward E. Lawler III
Talent: Making People Your Competitive Advantage
(Jossey-Bass, 2008)

Clayton M. Christensen
Disrupting Class: How Disruptive Innovation Will Change the Way the World Learns
(McGraw-Hill, 2008)

Alex Frankel
Punching In: The Unauthorized Adventures of a Front-line Employee
(HarperCollins, 2007)

Despite a widespread recognition that human capital constitutes their primary resource and provides their key competitive advantage, companies are ambivalent about what human capital means and reluctant to commit resources to its development. There are two principal reasons for this: The value of human capital remains resistant to quantitative measures, and the focus on short-term financial results shortchanges talent development, which is inherently long term. As a result, enterprises of every variety struggle to retain, develop, and leverage the very resource they depend upon most to meet future business challenges.

One hopes that some future Nobel laureate is presently occupied with devising a formula to put robust metrics around the value of talent so that organizations might find a way to justify its development. But short of that, this year’s four best books on human capital offer clues as to how to address the talent conundrum. Two tackle the issue directly, though from different perspectives. The other two address entirely different issues that upon closer inspection turn out to be intimately related to human capital.

Two Takes on Talent
In Talent on Demand: Managing Talent in an Age of Uncertainty, Peter Cappelli offers a strongly argued and arrestingly original take on human capital. He begins with a historical overview of talent management since World War II, noting that presently popular practices such as 360-degree assessments, action learning, peer networks, executive coaching, and “high potential” programs have all been around under different names since the 1940s. What has fallen off the radar screen since then, according to Cappelli, the George W. Taylor Professor of Management and director of the Center for Human Resources at the Wharton School, is a core commitment to the rigorous and systematic workforce planning that is needed to support these practices and give them context.

Like strategic planning, and in tandem with it, talent planning has been a casualty of a globally competitive and highly uncertain business environment. Cappelli points out that whereas more than 95 percent of large organizations had a talent planning process in place in 1950, less than 20 percent do today. He says this deemphasis on planning has translated into a lack of internal training and development. Companies rely on formal business education as a substitute, which has led to a boom in MBAs but has undermined the work-based competencies that support the development of tacit knowledge on the job.

The problem is exacerbated by outside hiring, the default option when organizations are uncertain how to demonstrate the payoff for talent development. Talent searches are expensive, and outside hiring blocks employees’ prospects for internal promotion, aggravating retention problems as high potentials leave because they don’t see a way to move forward. As Cappelli shows, such an approach is especially unsuited to an era in which talented people define their value in the marketplace by their personal portfolio of skills, and so tend to judge potential jobs by the opportunities they provide for development.

In the absence of systematic workforce planning, companies are doomed to ricochet uncertainly between an oversupply and an undersupply of talent. Unable to respond proactively, leaders are constantly operating in crisis mode, squandering valuable resources in the process. In the language of operations and supply chain management, this amounts to a mismatch of costs. Cappelli believes such mismatches require intervention, but advises companies to spend less time obsessing over finding the ideal matching point and more time planning what to do when good-faith estimates of talent needs prove off the mark. He offers an ingenious method for reducing mismatched costs by calculating the financial risks of buying rather than developing talent. This is not quite the same as a formula for defining the value of human capital, so there’s probably no Nobel in the offing, but it provides a strong starting point.

Cappelli believes that centralized and coordinated development programs are needed if organizations are to reduce mismatched costs. But he maintains that such efforts must be flexible, data-based, and capable of reflecting a full range of cost factors. He also suggests these programs adopt a variety of tools to manage talent. These include the separation of work from job title to facilitate the distribution of stretch assignments, the creation of job boards to help employees manage their careers, and online learning that can be delivered as needed (while recognizing its drawbacks compared to face-to-face instruction, in terms of both social context and motivation).

Cappelli’s eagerness to sniff out and rebut conventional wisdom propels this book well past the boilerplate that is so common in books about talent management. The bottom line of Talent on Demand: Companies have almost exhausted the value of cost-cutting schemes and incremental process improvements as a competitive advantage, so they must pursue innovation. In order to develop their capacity for innovation, they have to commit to growing more talent; the endless back-and-forth poaching of people from other companies is a zero-sum game that will not be sufficient to build the human capital needed in the years ahead.

Edward E. Lawler III, director of the Center for Effective Organizations and a distinguished professor of business at the University of Southern California’s Marshall School of Business, has also taken on the human capital conundrum this year. His book Talent: Making People Your Competitive Advantage demonstrates a rigorous but humane patience with organizational change that provides an interesting contrast with Cappelli’s head-on assault. (See “The Talent Lie,” by Edward E. Lawler III, s+b, Summer 2008.)

Lawler grounds our present plight with regard to human capital in the shift to a global knowledge econ­omy that thrives on innovation but undermines the structures required to sustain it. And he can be scathing, particularly in his description of the kind of siloed, bureaucratic, and shallow way that many organizations now approach the development and management of talent. He proposes that before they act, companies gain a more rigorous understanding of where they stand on the spectrum of HR strategies, from talent-driven to expediency-driven approaches.

At the talent-intensive end of this spectrum is what he calls the HC-centric organization (HC standing for human capital), in which business strategy is determined by talent considerations, functions are aligned to support working relationships, and performance is systematically managed and measured. At the other end is a structure-centric organizational model that seeks competitive advantage through low wages and sparse benefits, a com­mitment to automation and mech­an­ization, and the extensive use of offshoring.

Lawler adjusts his recommendations depending on where an organization lands on the spectrum. He acknowledges that the structure-centric approach can be highly profitable when well designed and executed, though only for businesses that deliver simple, low-value-added products and services. Yet he cautions that the low-cost operator approach, though it may look like a rational choice, often contains such heavy hidden costs as high turnover and alienated customers. He also notes that many HC-centric organizations are “high-involvement companies” that leverage the power of their brand to appeal to people who want work that enables them to develop their skills and contribute to a company or a cause. Because these companies invest in employees, turnover tends to be expensive, so they provide incentives that emphasize work–life balance and a sense of community.

Lawler is not reluctant to question conventional wisdom, though he does so in less probing terms than Cappelli. He notes that many HC-centric organizations talk about the need to treat people fairly without ever bothering to define precisely what fairly means. He says that focusing on best practices can cause an organization to lose its competitive advantage by teaching solutions to yesterday’s problems, and views process improvement programs like Six Sigma as potentially hostile to innovation. Lawler is also dismissive of the kind of forced appraisal distributions (known as “rank and yank”) popularized by Jack Welch, asserting that such schemes often spur the departure of talented people who do not wish to work in internally competitive environments.

Consistency and clarity are qualities that Lawler values. He warns against not “walking the talk,” that is, preaching a talent focus and then rewarding managers solely on the basis of financial and operating results. He also notes that appraisal processes often fail because perfor­mance measures consist of vague terms or poorly defined personality traits. This practical take on human capital strategies and tactics makes Talent a trove of wisdom, some of it conventional and much of it not.

Learning Disruption
In his popular book The Innovator’s Dilemma, Clayton M. Christensen, the Robert and Jane Cizik Professor of Business Administration at Harvard Business School, brilliantly demonstrated how disruptive technologies derail organizations that do not understand the trajectory governing innovation cycles. In Disrupting Class: How Disruptive Innovation Will Change the Way the World Learns, he adapts his visionary theory to the challenge of public education. Although the focus of the new work is K–12 schooling, it is the best human capital book of the year because Christensen’s observations about product modularity, learning trajectories, and the ways in which markets adapt to innovation have radical implications for organizations seeking a fresh approach to human capital development.

Christensen’s understanding of product architecture shapes his insights about learning. In the early stages of a product’s development, he explains, the interfaces among its parts are distinct. If someone changes a part, all the parts connected to it must change; customization is costly and difficult because it requires a complete redesign of the system. But as technologies mature, standard interfaces emerge that make interoperability possible. Components can be modularized, and modularity permits customization.

Public education, says Christensen, is still stuck in the batch processing mode of non-interoperability, and thus must adhere to a one-size-fits-all design. The first step in improving education, then, must be moving from monolithic to modular architectures that can be adapted to suit various needs and support distinctive learning styles. Beyond this modularity, the author envisions a fundamentally different kind of education based on user-designed platforms that offer learners a means to create, rather than simply choose, both the design and content of their learning, a process that supports and frees innovative talents.

If public education is still primarily based on a monolithic instructional style, corporations have for the most part moved on to a phase of learning that customizes content and delivers it in the form of ex­periential opportunities integrated into everyday work. This constitutes progress, but extrapolating from Chris­tensen’s model, it appears that this too can evolve into a new phase of self-designed learning that better supports a culture committed to innovation. In this phase, on­going feedback loops will enable learners to calibrate and adjust what they generate and verify mastery as they go, replacing evaluations and assessments performed by outside experts.

Christensen’s insights about how disruptive technologies succeed in the marketplace also have important implications for the development of human capital. He observes that disruptive technologies never find a market among traditional customers for an existing product; selling a disruptive product requires identifying an untapped pool of non-consumers. For example, Sony sold its first tinny, in­expensive transistor radios to teenagers who were not buying the large, better-quality, and far more expensive table radios of that era. In other words, disruptive technologies gain a foothold only when offered for applications to customers who have no alternative. Later in the product cycle, if all goes well, improvements and modularity create opportunities for more widespread adaptation.

The same process applies to talent development. Customers never clamor for organizations to beef up their investment in human capital infrastructure. Like shareholders looking for short-term results, they are concerned with having their present needs met. Yet if companies fail to make these investments because they seek to placate the present market, they will miss the potential benefits of disruptive learning and the market will move on. That lesson alone makes Disrupting Class a must-read for anyone considering how to develop and profit from human capital.

On the Job
Smart technologies may have the power to erase the distinctions between the development opportunities offered to those in management and those on the front lines, and so might reshape our definition of human capital in the years ahead, but at present the employees at most companies face a far different reality. In Punching In: The Unauthorized Adventures of a Front-line Employee, Alex Frankel offers an insider’s look at this reality in a number of iconic companies.

A journalist who is not afraid to wear down his Adidas, Frankel hired himself out to UPS, Starbucks, Gap, Enterprise Rent-A-Car, and Apple. He also applied for jobs at the Container Store, Whole Foods, Home Depot, and Best Buy — filling out applications, taking extensive tests, and participating in group interviews. His experiences provide a primer for anyone interested in how talent is leveraged –– or wasted — on the front lines of today’s companies.

An organization’s conception of human capital is manifest in its culture, and culture is inculcated by process and behavior guidelines that are passed along as one employee imitates another. The process is most effective when the capacity for self-expression in the ranks is consonant with expectations set at the top and an autonomous spirit flourishes. As Frankel describes it, this is something few companies know how to do.

UPS is an exception. Delivery teams at the com­pany are charged with moving physical as opposed to symbolic matter, so when glitches occur, people performing the work must solve them by making a cascade of decisions in real time. By giving its frontline people the latitude and responsibility to do this, UPS enables them to function as strong individuals who can nevertheless authentically represent the brand. As Frankel observes, drivers and handlers bring a human component to cutting-edge technology, meshing the two so that neither dominates. Team members experience the sense of engagement that comes from using their knowledge to address new challenges, collaborate with colleagues, and gain recognition from customers and peers. The result is a deeply rooted esprit de corps. “We were global but endemic at the same time,” writes Frankel of his experience as a driver. “We were UPS guys, a staple of the cityscape.”

The notion of “being brown” has a galvanizing effect on the UPS workforce, and UPS is known for that. But, in fact, at each of the companies at which Frankel worked, dress reinforced the sense of distinctness. The green apron worn by the Starbucks barista, the jacket and tie required by Enterprise, the black T-shirt identifying sales staff at Apple stores: All were keys to the culture, worn with pride or, sometimes, resignation. Distinctive lingo also played an essential role in defining culture, especially at Starbucks, where mastering the profusion of terms required by the intricately customized products (“tall skinny flat with room and a shot”) was essential to the job.

At Gap, Enterprise, and Starbucks, Frankel experienced highly constrained environments in which workers’ movements were codified and they were judged on what they did at every moment, leaving little scope for autonomy or growth. Trouble arose when people operating in this system were nevertheless urged to be “authentic,” as at Starbucks, where the notion that the stores provide customers with a “third place” is a corporate mantra, even though workers are usually too harried to connect with customers. In such an environment, Frankel notes, heavy-handed culture-building tries to fill the gap between the work experience and the image the company is trying to project, but under the circumstances, it feels more like propaganda.

Pushing the culture isn’t a problem for Apple because people who work at the stores are already believers. As a result, Frankel finds that the company expends little effort in “building a fake sense of belonging” through corporate rhetoric. In addition, Apple judges staff members on what they achieve rather than what they do at every minute. This contrasts especially with Gap, which describes sales staff as associates, but requires them to give priority to constantly folding the merchandise. Because of this corporate policy, designed to brand the stores by avoiding the specter of clothes on hangers, frontline workers soon come to regard customers pri­mar­ily as “unfolders.”

With the exception of UPS (and Enterprise, where Frankel found the training almost cultlike), learning in these environments was haphazard and ad hoc, with churn-and-burn the expectation, if not the rule. Frontline talent was treated not as a resource to be sustained and developed, but as fodder to be processed through a revolving door. One cannot help but think of Lawler’s cautions about the hidden price that low-cost operators pay in high turnover and shoddy service.

Punching In and the other best books on human capital this year broaden our understanding of how human capital is and could be developed to meet the needs of a highly competitive global environment. None of them solves the biggest human capital challenges we face, but taken together or savored separately they provoke a wide range of ideas about how talent can be unleashed and more powerfully leveraged.

Author profile:

Sally Helgesen is an author and leader-ship development consultant. Her books include The Female Advantage: Women’s Ways of Leadership (Doubleday, 1990), The Web of Inclusion: A New Architecture for Building Great Organizations (Currency/Doubleday, 1995), and Thriving in 24/7: Six Strategies for Taming the New World of Work (Free Press, 2001). Her Web site is
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