Chapter 1: Insist on Systems Thinking

Overview

The chief executive officer (CEO) of a global manufacturing company we’ll call ProductCo faced painful, widely known problems. First, new product introductions were running behind schedule, throwing a monkey wrench into the company’s marketing plans and delaying the receipt of hundreds of millions of dollars in new revenues. Second, many products were experiencing quality problems, draining away cash for warranty settlements. Third, and equally alarming, customer satisfaction had taken a dip. There was no denying these problems, each of which was tangible and measurable.

To the casual observer ProductCo should not have been having these troubles. It had strong senior management, its product development teams had years of experience, and it had implemented several state-of-the-art programs to develop the talents of its managers. What was going wrong? Was it poor planning, problems with design, a problem with suppliers? An internal audit was launched to identify the root causes.

The audit indicated that the problems had a common origin on the people side of the business: a lack of mastery of the ability to lead key technical areas. Fast-track managers were moving rapidly from function to function and from one business unit to another. That rapid mobility was producing unanticipated and undesirable consequences; people with responsibilities in new product design, production, and marketing were insufficiently seasoned in the details of their work and unable to execute in accordance with the company’s high standards.

Using the audit findings as a starting point, we dug deeper, analyzing ProductCo’s internal labor market by using the Internal Labor Market (ILM) Analysis^SM tool described in Chapter 5. An internal labor market analysis identifies the causes and consequences of employee movements in, through, and out of the organization. Applied to this case, the goal was to quantify and map the company’s selection, mobility, reward, and developmental patterns for managers. We also focused on the causes and consequences of managerial mobility. The analysis reconstructed the record of the actual events, circumstances, and dynamics that managers experienced by “reading” the facts maintained in the company’s human resources information system (HRIS) and related databases.

The results of that work confirmed earlier suspicions and added new insights. HR data confirmed high rates of movement in key management positions. Managers were jumping from job to job every two years, with the most highly regarded people moving even more frequently. That “time in position” was very low and was not conducive to achieving technical mastery in the product, design, and marketing areas. Indeed, the rapid pace of talent mobility within the company went to the heart of its quality and product delay problems. People were not developing the specialized skills they needed to do their jobs well. The best and brightest were, as a matter of company policy, being trained as generalists, compromising their ability to develop the depth of knowledge needed to ensure product quality.

Furthermore, since some of the new products for which they had responsibility often took a long time to develop and launch, managers, designers, and engineers who were on board at the beginning of a project usually were gone by the time the outcomes of their decisions were tallied. That limited, if not eliminated, accountability for results. It also contributed to frequent course changes as new managers substituted their own decisions for those made by their immediate predecessors.

How had this situation come about? We found three culprits in ProductCo’s talent strategy. In isolation, each was a reasonable practice for developing human capital. In combination, however, they conspired to produce unintended and damaging results.

Generalized Versus Firm-Specific Human Capital

Human capital has two essential forms. One is generalized; that is, employees have attributes and qualities that are of value not only to their current employer but to potential employers as well. Employees bring this form of human capital with them when they are hired. They increase their generalized human capital when, for example, they pursue a new degree or professional credential through part-time study outside the workplace. The value of that credential can enhance their standing with their current employer or a new employer. People with generalized skills can move easily from business unit to business unit and from company to company.

The other form of human capital is firm-specific. This type of human capital reflects the value of employees that is unique to a single firm. It grows with tenure and experience in the firm. Its growth is accelerated by in-house training and structured programs of movement through related jobs. Firm-specific human capital is distinguished by its special value to the employing firm in which it is developed; thus, it is less marketable to other organizations.

Different firms require different combinations of firm-specific and generalized human capital to be successful. Neither one is always best or right. Even within a firm, some jobs may require employees with extensive firm-specific knowledge while other jobs may require a high degree of generalized know-how.

One culprit was a bias toward firm-specific human capital over generalized human capital. The company pursued a policy of filling most open positions with internal candidates. That apparently commonsense fill-from-within policy inadvertently resulted in an unhealthy volume of movement within the company. Every manager’s promotion or lateral move created a vacancy, and that vacancy triggered other personnel movements. A few hires from outside would have neutralized the problem substantially, but hiring from outside was counter to the top management’s belief that employees had to grow up inside the company to be fully productive and “understand the business.” The facts showed otherwise. Careful analysis of employee records demonstrated that the performance of outside hires was not substantially lower than that of individuals who had been promoted from within. Indeed, new hires quickly caught up to the performance levels of longtime employees.

The second culprit was related to incentives. The company’s reward system was closely attuned to where one stood on the hierarchy ladder. In fact, the reward system was a classic example of a “tournament” career model, in which there is a close calibration between opportunity for advancement and financial rewards.^[1] Rewards for moving up a level dwarfed pay increases for performance within a level, no matter how excellent. Thus managers had much greater incentives to move up than to stay put and do outstanding work. However, the probability of promotion was quite low, making an individual’s prospects for reaping financial rewards so low that a “choke point” existed at the lowest leadership levels in the company. Individuals who rose to that level had a very low chance of continuing their rise through the hierarchy.

Faced with that bleak outlook, people looked for ways to improve the odds. They quickly learned that lateral moves would do the trick. Data drawn from internal HR records showed that a lateral move—one that cut across functional areas, for example—was a valuable precursor to a vertical promotion and was far more valuable than a small “in-grade” promotion within one’s current area. Staying in the same position for more than two years also drastically reduced the chances of moving up. Therefore, ambitious managers did whatever they could to bounce around the company. That behavior helped them understand broad dimensions of product development, design, marketing, and the like, but did little to develop deep, specialized expertise in any single area.

Finally, we discovered that the existing talent management advisors were inadvertently acting as agents for individual employees. Review boards composed of HR and line representatives had been set up to spot talented people, assess them vis- -vis open positions, and move them along the career ladder. Over time, however, managers looking for lateral moves and promotions took an increasingly directive role in regard to the review boards, virtually asking them to become their agents. Board members often did just that.

In isolation, none of the practices was unreasonable. Moving talented people around makes sense; it creates a cadre of people with broad knowledge of the company and how it works. Hiring from within also has merit; it provides opportunities for capable and hardworking employees and gives them a reason to stick with the company. Financial rewards for upward mobility encourage people to perform well in their current positions. In some places it is the most efficient, powerful way to encourage high performance and build firm-specific capabilities critical to development, production, and marketing cycles. Also, having HR people act as career facilitators increases employee satisfaction and supports the talent development that every growing company needs. However, taken together in their unique production context, those programs were creating a workforce deficient in specialized knowledge, unaccountable for results, and unable to support goals of product quality and rapid time to market.

^[1]Edward Lazear and S. Rosen, “Rank Order Tournaments as Optimum Labor Contracts.” Journal of Political Economy, October 1981, no. 89, 41–64. See also J.R. Green and N.L. Stokey, “A Comparison of Tournaments and Contracts.” Journal of Political Economy, June 1983, no. 91, 349–365.