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Best Business Books 2010: Human Capital

Talent Redefined

(originally published by Booz & Company)

Rob Goffee and Gareth Jones
Clever: Leading Your Smartest, Most Creative People
(Harvard Business Press, 2009)

Boris Groysberg
Chasing Stars: The Myth of Talent and the Portability of Performance (Princeton University Press, 2010)

Jody Heymann with Magda Barrera
Profit at the Bottom of the Ladder: Creating Value by Investing in Your Workforce
(Harvard Business Press, 2010)

Peter Drucker famously defined a knowledge economy as one in which the human brain provides the primary means of production. He then noted the obvious corollary: that an organization’s most valuable resource is lodged in the heads of its employees and goes home with them at night. In the decades since, this disturbing vision of their assets streaming out of the building every night has led many companies to make a reappraisal of the value of their employees and to place a higher premium on talent. But it has also led to a somewhat overexalted view of the role that star performers play in organizations and the extent to which enterprise is dependent upon individual talents.

The consequences of this overvaluation are many. The continuing wild escalation in senior leadership pay — often in defiance of performance — is a direct result of our infatuation with star performers, and our belief in their almost totemic power to produce results. It has also created a cult of individualism that causes many genuinely talented people to misunderstand the nature of their contributions, and to view themselves as free agents when they are not. Finally, it has perpetuated an industrial mind-set based on rigid distinctions between those who make decisions in organizations and those who carry them out, bolstering the elitist presumptions of the former and negatively affecting the performance of the latter.

This year’s best business books on human capital suggest that this approach to talent is now due for a correction. Each sounds a cautionary note about overvaluing individual talent and suggests specific practices to address the resulting imbalances. (See “The Thought Leader Interview: Vineet Nayar,” by Art Kleiner and Vikas Sehgal, s+b, Winter 2010.) Each of the books also makes clear that the school of talent strategy that was focused primarily on star performers and so-called high potentials is obsolete, and that it is time for a more integrated and contextualized understanding of the value that human capital provides.

Clever Management

Clever: Leading Your Smartest, Most Creative People, by Rob Goffee, a professor of organizational behavior at the London Business School, and Gareth Jones, a fellow at the school’s Centre for Management Development, reinterprets the relationship between talent and the organization in knowledge-based environments in a fresh and compelling way. The authors define this relationship as an “interdependence among equals.” In their view, talent is as critically dependent on organizations as organizations are on talent. And they believe that both talented people and their employers tend to underestimate the importance of this mutuality.

Goffee and Jones argue we need a more realistic way of understanding the role that organizational resources play in the exercise of talent; they believe we also need new approaches to leading talented people. Argue is the operative word here, for Clever is written as a manifesto. It eschews footnotes for passionate advocacy that is couched in clear and commonsense terms. This approach serves the reader well: Clever is wonderfully written, immediately engaging, and structured to provide a clearly articulated point of view.

In the authors’ formulation, cleverness is not just a catchy synonym for talent; it’s a way of understanding how talented people — defined as “people with the potential to create disproportionate amounts of value from the resources that an organization makes available to them” — operate in the context of enterprise. “Clevers” are talented people who require an organizational context to thrive and provide value. This makes clevers different from talented individuals who are able to create value on their own, such as artists and solo musicians. The authors argue that the star system that has developed around this latter group, as well as the prevailing infatuation with so-called free agents, has distorted how we understand the former group, making it difficult to differentiate between the two.

Most books on talent speak in glowing (and often generic) terms about their subject, but Clever paints a more balanced portrait. The authors, for example, are explicit about the destruction that talented people can wreak, rightly pointing out that many highly dysfunctional organizations are full of clever people.

The book describes the characteristics that distinguish clevers. For example, the authors observe that a strong belief in their own intellect is central to the identity of clever people, which can make it difficult for them to let go of a project when it’s time to move on. They note that clevers see themselves as highly independent and self-reliant, and usually care more about projects that engage them than they care about the organization as a whole. In other words, they have a free-agent mentality, and thus often fail to recognize the extent to which they rely on organizational resources to bring their passions to fruition.

At the same time, Goffee and Jones make clear that clever people are not easily replaced in organizations. This is because the knowledge they hold is, almost by definition, tacit. Their skills are in many ways more like the craft skills of the medieval period than the codifiable and communicable skills that typified the Industrial Revolution. As a result, cleverness is hard to capture in conventional knowledge management systems, and clever people know this: It is one reason they value themselves so highly.

Clevers need leaders who are explicit in their recognition of the symbiosis between individual achievement and organizational requirements, firm in representing the needs of the latter, and skilled in providing opportunities that enable clever people to make the most of their talents. Much of the book is therefore devoted to an examination of how to lead clevers — both as individuals and in teams. In one of the most useful and original sections of the book, the authors create a typology of clever teams based on the distinctive ways in which clevers perceive themselves: as techies, creatives, problem solvers, professionals, strategists, or senior managers. The authors explain the inherent strengths and characteristic weaknesses of each type, and give highly specific suggestions for how to lead them to accomplish larger objectives.

Goffee and Jones emphasize throughout that authenticity is required of anyone who seeks to manage clevers. This is in part because clevers respond best to respect, but also because they are quick to recognize and reject insincerity as well as boilerplate explanations and generic motivational spurs. Interestingly, research indicates that the youngest generation of workers — often referred to as millennials — place a similarly high value on authentic communication. This suggests that leaders in the knowledge economy should cultivate their ability to listen and to empathize. It seems that the management of human capital will require leaders to become more human.

Talent in Context

For readers who find Clever light on supporting research, Chasing Stars: The Myth of Talent and the Portability of Performance is a perfect companion volume, as well as a brilliant book that offers extensive documentation. It is also the best business book of the year on human capital.

In it, Boris Groysberg, an associate professor in the organizational behavior unit at Harvard Business School, offers robust support for the view that talent in a knowledge economy must be understood in an organizational context. His thesis, derived from classical human capital theory, is that superior performance is achieved when talented individuals optimally leverage organizational resources. His findings, and the force and richness of both his data and his presentation, should have an indelible effect on how we understand exceptional performance. He also offers clear cautionary lessons about the portability of talent.

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.

Groysberg’s work calls into question the concept of an elite workforce of free agents building individual portfolios of skills — a concept that took hold in the wake of Drucker’s observations about the primacy of human capital in a knowledge economy. Groysberg shows how “lateral demand poaching,” which is based on the assumption that performance is highly portable, is driving up compensation, and he suggests that companies rethink these beliefs given the highly speculative market for human capital that has developed. He also shows how these assumptions have made it more difficult for organizations and their leaders to undertake the hard work needed to skillfully integrate exceptional talent into a larger whole.

Finally, Groysberg makes the case that the cult of individualism that has long been operative in the West — an ideology that is only becoming more entrenched on Wall Street — has led us to misunderstand how talent gets translated into achievement. He posits that the growing influence of Asia’s more communal cultures will inevitably begin to change this, leading us to a more refined understanding of the factors that foster exceptional performance.

Talent Everywhere

Jody Heymann, in her meticulously detailed Profit at the Bottom of the Ladder: Creating Value by Investing in Your Workforce, also asks us to rethink how we perceive and define talent. She notes that in the past two decades, companies have tended to view employees as representing two highly contrasting camps.

In one camp are well educated, professional knowledge workers: the clevers, the high potentials, the stars. Companies tend to court this cohort, try to engage their deepest motivators, and pay them well to keep them performing. Most literature about talent focuses on these employees and, as Heymann points out, most of the firms that appear on “best companies to work for” lists tend to restrict their employee-friendly policies to those at the high end of the ladder.

In the other camp are “bottom-of-the-ladder” workers, who are widely assumed to be interchangeable in the old industrial mold. These employees — assembly-line workers, call center operators, retail clerks — are typically regarded as a cost that must be continually reduced if the organization is to achieve a competitive advantage. Even managers who don’t entirely buy this line of reasoning feel pressure to adopt it because analysts routinely upgrade their valuations of companies that cut costs on bottom-tier labor, which is simply not viewed as an asset.

Heymann makes the case that this rigid division between those who are assumed to add essential value and everyone else is itself a manifestation of an industrial mind-set, with its stark divisions between the heads and the hands. Whereas Clever and Chasing Stars ask companies to reexamine their often exaggerated presumptions about the stand-alone value of the heads, and place their value in a broader organizational context, Profit at the Bottom of the Ladder asks them to rethink their presumptions about the potential of the hands, and to develop new ways of understanding, measuring, and supporting the value they can provide.

Like Chasing Stars, Heymann’s book is the result of a wide-ranging multiyear study, though her population is the polar opposite of the high-performing analysts whom Groysberg examined. Heymann’s team researched the relationship between profitability in the marketplace and good working conditions for bottom-tier employees in small, midsized, and large firms in a mix of sectors around the world, some publicly traded and others privately held. She interviewed and observed workers employed by an Alabama brick manufacturer, a Norwegian roofing supplier, an Australian auto parts manufacturer, a South African scrap metal dealer, a Peruvian social services provider, and an Indian cement maker, among many others.

In the course of her investigations, Heymann “went from believing that it was possible for companies to improve working conditions while being profitable…to realizing that the majority of the companies we studied had increased their profitability by investing in their employees at the bottom of the ladder.” Her findings call into question the conventional wisdom held by firms, and the analysts they seek to impress. She also debunks the widespread belief that profitability is better served by providing incentives at the top of the ladder than by providing them at the bottom.

The book is organized as an integrated series of case studies. Each case shows how at least one company achieved remarkable financial results while addressing a specific element of frontline working conditions: wages, flexibility, healthcare, training, the establishment of career tracks, profit sharing, etc. The cases help readers better understand the measurable value that well-trained, motivated, engaged, and healthy frontline workers can bring to organizations. Taken together, they provide strong evidence that profitability is dramatically increased when companies improve the quality of life of their bottom-tier workers.

Heymann finds that many executives undervalue the potential of this approach because they have little understanding of what bottom-tier workers actually know and do. They therefore have no way to measure how improving performance in the lower ranks might benefit the larger organization. Conversely, she finds that organizations in which senior managers have bottom-tier experience do a much better job of leveraging the economies of knowledge available on the front lines.

Heymann offers Costco as an example. Because the company promotes from within (a policy it views as a competitive response to a shortage of talent) and because internal data suggests that those who have worked their way up the ladder make better leaders, Costco’s senior managers are intimately aware of the value that skilled and experienced bottom-tier employees can provide. Costco CFO Richard Galanti, for instance, who explicitly condemns the pressure that Wall Street exerts on the company to cut frontline costs, argues that profitability in the big-box sector is highly dependent on volume per square foot, which in turn is affected by the productivity of the front rank of employees. He also notes that costly turnover, frequent absenteeism, community resistance (which has proven expensive for Walmart), employee class action suits, and inventory shrink (some of which is due to employee theft) are routine short-term costs that analysts and most senior managers rarely take into account, and that these measures skyrocket when frontline employees are treated purely as an expense. As another Costco executive observes, “When employees feel aggrieved and shortchanged, you are always going to pay a price.”

Heymann shows that careful planning is required to build the right incentive structure for bottom-tier workers, who are highly sensitive to small spurs that enable them to be more productive. She gives examples of companies that have done a good job of calculating these structures to support goals such as better teamwork, fewer defects, and more effective cross-training. She traces the development of virtuous circles of skill improvement that can occur when companies take the time to understand the nature of bottom-tier work. And she shows how resistance to valuing and supporting these employees can be overcome at the supervisory level.

Heymann and all the other authors of this year’s best business books on human capital are explicit in challenging widespread assumptions about talent, knowledge, and value creation. They describe in detail what leadership in a knowledge economy really requires, adding insights to Drucker’s famous formulation. In doing so, these authors shift the focus on talent from an overemphasis on stars to a richer, broader, and more contextual view of how people add value to organizations.

Author profile:

  • Sally Helgesen is a contributing editor of strategy+business. She is an author, speaker, and leadership development consultant whose books include The Web of Inclusion: A New Architecture for Building Great Organizations (Doubleday, 1995) and, most recently, The Female Vision: Women’s Real Power at Work (with Julie Johnson; Berrett-Koehler, 2010).
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