Friday, June 09, 2006

People Are Our Most Important Fungible Commodity

I had lunch a couple of weeks ago with the department head from the R&D arm of a large multinational corporation. In the course of conversation over our rice bowls I remarked that his company's employee retention strategy seemed to depend upon the high-technology job market not improving. We both came up with several examples of the company's upper management doing stuff that just downright pissed people off.

My favorite example that he brought up: the company encouraged their engineering staff to forego vacations in order to make dates. Then they instituted a policy that forbad carrying over vacation into the next year. Then they generously offered to pay fifty cents on the dollar for any unused vacation. Then, to add insult to injury, they remarked that this policy was illegal in California, so those lucky bastards would be reimbursed at full price. Brilliant!

Completely coincidentally, I was poking around in the HR Policy Manual of this same company just a few days later and I noticed a section entitled "Retention Policy". The section had a single line which basically said "under review". Geeze, I didn't realize until then that what I had said was literally true. I was just being my usual smart ass Chip Overclock-self at the time.

There are lots of obvious reasons why this is a Really Bad Idea. Like: if your business is developing high technology products, and if you have no manufacturing or you have outsourced it (as this company had), then most of your capital is intellectual capital. That is, the knowledge and experience inside your employees' heads. Most of this knowledge is domain specific stuff that you can't hire off the street, but can only acquire from your competitors or create anew, either at relatively high expense. And when I say "capital", I really mean it. The accounting trend appears to be to capitalize the cost of software development so that it appears in the financial report as an asset instead of an expense. Watching intellectual capital walk out the door should be like watching part of your factory burn down, from the point of view of your financials.

I had seen some talented people walk out the door of this company in the past year. Bad enough that four engineers that I knew personally had recently left, but just a few months before the company's chief product-line architect had walked out the door to work at their biggest competitor. His parting email said they had made him an offer he couldn't refuse. The rumor mill said he had felt marginalized and unappreciated by upper management, who had probably been too busy flying customers around in one of their corporate jets to realize that the guy with their entire product-line roadmap in his head was about to defect.

No one probably really knows the true cost of these defections, but for the engineers you can at least estimate the cost of replacing them. In the second edition of their book Peopleware, Tom DeMarco and Timothy Lister write about "assessing the investment in human capital". There is the cost of interviewing and selecting a candidate. There is the lost productivity of other employees as they valiantly try to temporarily cover the workload. There is the ramp-up cost of the new employee during the time they are relatively unproductive and they require a lot of mentoring and hand-holding. Figuring a six month ramp-up time, this 1999 book figured the cost at around $150,000. The ramp-up time may be worse; another manager at this same company estimated it at about two years for some product areas. Note that none of this covers the cost of having your architects and engineers working for your competitor. We're talking probably at least a few hundred thousand dollars. Makes cutting back on office supplies seem kind of pointless.

Let me says this as simply as I can: whether or not you have an employee retention strategy, for sure your competitors all have an employee acquisition strategy targeted at you.

In the high-technology job market, your competitors include a lot of companies outside of your market domain, most of whom you have probably never heard of, although some of them may be your biggest customers. Think outsourcing overseas is going to solve this? Sorry, your competitors for intellectual capital have already thought of that too, and are right this very instant hiring the best that Bangalore, Prague, and Dublin have to offer. Or they'll wait until you train them, then they'll hire them away from you. Right now, IBM is hiring all the best tech talent in India to the tune of six billion dollars over the next three years. So long, and thanks for all the fish!

Of course, if you really are banking on the job market not improving, then what you're really saying is that you hope the economy surrounding your pool of current and potential employees doesn't improve. If this is the same economy into which you sell your goods and services, this is probably not a growth strategy. Rule of thumb: success should not hinge on two mutually exclusive conditions. Just my opinion.

Relax. It could be worse.

Back in 1995 I was privileged to spent a month working, lecturing, and traveling around mainland China. I remember vividly the director of a laboratory in Beijing, funded by the PRC's equivalent of the National Science Foundation, showing me a bar chart that displayed the age distribution of the researchers at the lab. There was this huge hole in the chart. It slowly dawned on me that this was the impact of Mao's Cultural Revolution. For about a decade, the PRC's production of scientists fell to zero. (The director himself gave a group of us a tour of the farmland he once worked as part of his reeducation as a freshly minted Ph.D.) The director knew that eventually the most senior researchers would retire and there would be no next tier to take their place, to lead the younger Ph.D.s, to fill the mentoring and research needs of the lab.

Want to achieve a similar effect? Freeze hiring in R&D for several years while times are lean. Then wonder what upper management is going to do when all the fifty-and-older baby boomers burn out and there aren't enough senior people left to provide the leadership you need for the younger folk.

Of course, Mao would have told you, there's always farming.


HR Policy Manual of nameless multinational corporation whose products you may be using

Douglas Adams, The Hitchhikers Guide to the Galaxy, Random House, 1981

Tom DeMarco and Timothy Lister, Peopleware: Productive Projects and Teams, 2nd ed., Dorset House, 1999

Barry Karafin, Business Management for Technologists, seminar, 2005

Paul McDougall, "How 6 Billion IBM Dollars Helped Chase Apple Out Of India", InformationWeek, June 6, 2006

Jeffrey Pfeffer and Robert I. Sutton, Hard Facts, Dangerous Half-Truths, & Total Nonsense, Harvard Business School Press, 2006


Aubrey_Maturin said...

HR policies serve several valuable uses - but providing guidelines for real supervisors to use in practice is (IMO) not one of them. For example, I guarantee that 'forego vacations in order to make dates' is not written in any HR policy.

On the other hand, supervisors (and their supervisors - right up to the big enchilada) ultimately have the biggest influence on retention. Salary comes in a close second. (Corporate Leadership Council studies etc). And supervisors certainly can refuse vacation requests (at least in the US) based on business needs, although a supervisor with half-a-brain know that this is not sustainable, not is it a practice likely to be good for 'retention'. Shouldn't need a policy document to know that!

I don't think anyone disagrees that a well-managed company tried to limit the exits of good-great performers. I personally agree that it would be helpful to know not only the generic 'performance' assessed by the supervisor, but also the specific intellectual capital that individuals have. But good luck funding and implementing a solution that captures that amorphous quality in a way that is both useful and accurate.

As the high-tech job market continues to improve, all employees make the decision to stay/go to where they will make the most money and get the most 'satisfaction' (however they define it). If the R&D arm of this large multinational corporation is paying less and/or simply not providing as great opportunities to do interesting work as competitor/customer firms - it will surely lose most of it's intellectual capital.

But you're kidding yourself if you think this can be solved by 'upper management'. And the solution is definitely not in the HR policy manual.

Delivering solutions to that customer that blow the competitor away - doing them again and again at lower and lower cost, and continuously innovating as the market develops - that is the only real way to both increase compensation possibilities and, most importantly for retention, give employees pride and excitement in their work.

Chip Overclock said...

I think part of the problem that I documented was a disconnect between line management and upper management. The line managers encourage engineers to defer vacation to make dates, and it was (probably) just an unhappy coincidence that upper management decided to institute an arcane new vacation policy, and in such a foolish way (like the 50 cents on the dollar except for those employees who happen to live where such an action was illegal). This is part of a larger issue I've observed where the line managers don't appear to actually have any authority to back up their promises, which limits their credibility.

I've read Jim Collin's Good to Great (a book that I believe has been misunderstood by many of the managers who cite it) and I understand the need to retain the great performers. The flaw in only retaining the great performers is that not everything that needs to be done is rocket science, and the great performers understandably don't want to do some of the necessary grunt work. Others will argue that grunt work can and should be outsourced. Even I am fond of saying (usually in an effort to calm people down) "if this problem were easy, we would have outsourced it already". But in truth this is just not that easy, nor cheap, as my own experience as shown.

Having read a lot of books and papers by folks like Robert Austin (Harvard, formerly an executive with Ford) and Nelson Repenning (MIT), I'm becoming increasingly cynical about how and why employees are labelled "great performers" and more and more doubtful as to our ability to sensibly rate employees and properly motivate them in the context of an HR system that employs mechanisms like forced ranking. I see a lot of dysfunction as a result of this.

Somewhat to my surprise, I find myself becoming a fan of Adam Smith and his "invisible hand". Companies have a right to hire and retain their choice of employees, and employees have a right to find the company that fits them best. But, in the spirit of Robert Austin's book Measuring and Managing Performance in Organizations, I don't think you can blame employees for merely responding to the incentives that their employer perhaps unwittingly places before them, even if this drives dysfunction into the organization. And it absolutely is the upper management that decides what these incentives are, and how they are implemented.

Thanks for your comments. You have given me a lot to think about. I appreciate you taking the time from your duties on the high seas to post.

Chip Overclock said...

Recently, nearly a year after writing this article, I was chatting over lattes with a couple of developers from this same organization. One of them remarked that a VP had recently sent everyone email in which he said something to the effect that such crazy ideas like "working from home" and "working part-time" were in his opinion not consistent with the culture of their R&D organization. It was, she said, "like we were back in the 1970s".

I had an idle thought that she was wondering what she could next expect next from her upper management: a little slap and tickle?