The Covid-19 pandemic has caused much soul-searching among business leaders, especially when it comes to future ways of working. Since the beginning of the year, web searches for the phrase “work from home” have more than doubled. We’ve seen an explosion of opinion pieces arguing that Covid-19 will lead companies to throw out the rulebook and zero-base how they manage their talent.
The crisis has, in fact, produced massive experimentation, and many business leaders tell us they find it intensely energizing. They’re seizing the opportunity to borrow from insurgent firms by prioritizing speed over bureaucracy. Yet maintaining speed over the long term will inevitably be a major challenge. From our work with founders, we know that even insurgents find it difficult to sustain speed as they scale.
To be big and fast is hard. The firms that do this successfully—we call them scale insurgents—are distinctive in how they recruit, develop and retain their people, having embraced what amounts to a “new deal” for talent. Many of the current experiments are working in the right direction, but some are unsustainable. At this extreme moment, as business leaders look to maintain their current dynamism into the postpandemic world, the time is right to identify which shifts in talent management should persist as enduring sources of competitive advantage.
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What we’re leaving behind
Well before the current crisis, the old deal for talent clearly wasn't cutting it anymore. Received ideas about talent management traced back to the professional management system pioneered by Alfred P. Sloan at General Motors. Sloan envisioned a firm run by cadres of professional managers with a clear set of business skills. Since their core skill was “managing,” they could be moved from one business to another. They were dispassionate (just follow the metrics to success), and they were interchangeable.
With continued decent performance, employees could reasonably expect:
- Job stability
- Deep generalist skill development
- A clear pathway up the organization
- Predictable pay increases (along with bigger titles and roles)
- Status symbols (the corner office, recognition awards)
The professional management system enabled companies to capture scale benefits through standardization, routines and process discipline. It increased transparency and fairness, reduced the variability attached to a dominant founder, and managed enterprise risk. It drove unprecedented levels of growth, innovation and value creation. It gave generations of workers bright streetlamps to illuminate their career paths.
Yet in some cases, professional management encouraged an energy-sapping, bureaucratic complexity that subsumed the individual to the firm. Consider a few excerpts from a 1961 General Motors personnel pamphlet called The Secret of Getting Ahead:
“Would you like to get ahead in this world? Then learn to please your boss. It is the only way you can possibly succeed at anything.”
“The first requirement of any job is that a man be helpful to his boss. That’s why he was hired—to help his boss carry out the duties for which his boss is responsible. And who is in a better position to judge whether he has done this successfully than the boss himself?”
“Take a look at the people you know who are doing well and getting ahead. Each of them, regardless of his position, is seriously concerned about one thing: satisfying his boss.”
The original form of the professional management system began to come into question in 1976, when Harvard University economist Michael C. Jensen published Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure. Through this and other research, Jensen developed the theory that professional managers were inadequately aligned with the firm’s owners. They had no stake in the value they created and bore no personal responsibility if the decisions they made turned out to be wrong.
This sparked a revolution in business. Firms now made important adjustments in how managers were evaluated and rewarded to better align their interests with shareholders. Job stability was no longer a guarantee. Layoffs and restructuring became more common. The private equity industry came into being, as investors sought to capitalize on the rewards that come from aligning management and owner interests. A new era—the shareholder primacy era—began to come into focus. Yet for the most part—and after some important adjustments in how managers were measured and rewarded—the talent norms of the professional management era persisted.
Transitioning to a new era
Transitions between eras are periods of experimentation, and this time is no different. Recent years have brought a surge of innovation in talent management, spurred on by heavy demand for the best people and shifting expectations among employees.
The defining skill of winning firms in the era of scale insurgency is business building. It’s a complex recipe of speed, innovation, customer intimacy, networks, partnerships, flexible capital structures and scale. Talent is the essential bonding agent. When we interviewed 200 founders, CEOs, senior executives and board members in 2019, they told us that lack of talent was by far the most important barrier to business building in their organizations.
To find and retain the right talent, companies are breaking free of old models. Younger firms like Zappos and Valve have tried jettisoning all professional management conventions, including titles, hierarchies, job leveling and even reporting structures. Firms like Netflix and Glassdoor have substituted “control” with “context,” slimming down the rulebook and empowering employees to make more decisions (about how much vacation to take, for example).
Large incumbents like General Electric and IBM have replaced traditional performance management systems with new ones designed around nearer-term goals, more frequent feedback and less focus on calibrating talent. Many firms are trying to break the stranglehold of functional silos with cross-functional teaming. Others, like Starbucks with its college sponsorship program or SAP with team bonus incentives, are creatively reshaping their compensation systems.
It’s remarkable how quickly many of these new weapons in the war for talent appear to have become established norms. Imagine, today, a corporate recruiter pitching:
- “We’re not that focused on purpose; we need to make money for our owners, and the rest is up to you personally.”
- “We expect to see you in the office every single day. But don’t worry, we switch email off between 6 pm and 9 am.”
- “Once a year, your supervisor will give you written, backward-looking feedback about your performance relative to our expectations.”
- “Periodically, we’ll provide training in skills we think you need at the time.”
Amid all this experimentation, we see four themes shaping the new deal for talent:
Mission-critical roles don’t always appear in the org chart, and if they do, they’re often not at the top. Rather, they’re the roles that deliver the firm’s promise to its customers. Firms like Brazilian retailer Magazine Luiza celebrate the front line as their heroes. “I know we must continue to be more professional as we grow. That is important,” says the company’s chairwoman, Luiza Helena Trajano, “but I also know that we must keep the store manager as ‘king’ or ‘queen’ of the company, with all of us working to serve their needs. We cannot lose focus on who’s the real boss: It is our store manager.”
Store managers, customer service reps, procurement teams buying critical inputs, local sales leaders, designers—in every firm, there are a few activities that disproportionately define whether or not customers are getting the product, service or experience the company promised them. Lockdowns have made it clearer than ever which roles are mission critical, and which are not. Scale insurgents tilt their resources to support these roles and remove obstacles that stand in the way of success.
By contrast, the professional management system ends up distancing its best employees from the customer. Why? Because the system has two primary rewards: spans and layers. Employees strive to control either more people or more resources as they move closer to the C-suite—and further away from customers. Learning dissolves into compliance, with functional leaders checking how well employees adhere to guidelines.
The guidelines have a purpose: to eliminate the capriciousness of individuals (especially the founder) and to enforce fairness and transparency in decision making. But they can also kill initiative and energy because the systems inevitably become more important than the heroes they were designed to support. How do you know if you have a problem? Take note in your next HR meeting, when one of your leaders tries to reward a true star with a double bonus. The HR professionals will respond, “Yes, she is a great talent. But we can’t do that because it would erode the integrity of our systems.” When systems trump heroes, the heroes eventually find their way to the door.
Professional managers tend to be well-rounded because the system has reared them to be that way. The highest praise for an up-and-comer in a professional management organization is that he or she has “general manager potential.” Scale insurgents see things differently. They focus intently on their “spiky” capabilities, those two or three core capabilities that ensure their competitive advantage and provide the foundation for new growth initiatives. They also recognize that to build spiky capabilities you need spiky leaders, those whose strengths spike in areas that deliver the insurgent mission.
Riot Games, an insurgent online gaming company, operates like a professional soccer team. Each leader has a different skill set and everyone knows his or her role on the field. The company’s chief of staff and head of business agility, Ahmed Sidky, explains how teams tackle strategic initiatives: “It is totally delegated to the teams to figure out what they need to build and how they need to build it.… We broke down leadership into multiple leadership hats and these hats hold certain accountabilities.” The team captain leads the effort. The product lead develops product strategies to meet customer need. The craft lead manages the community of experts brought in to provide services, such as design, artwork or engineering. The delivery lead is responsible for execution. “Every Rioter is part of a discipline,” Sidky notes. “Engineers are part of the engineering discipline, the product manager is part of the product management discipline, etc.”
Stryker, a Fortune 500 medical technologies firm, has woven strength-based psychology into its hiring, performance management and even its culture. The company uses a third party to screen for personality traits statistically shown to correlate with strong performance at Stryker. Inside the firm, employees openly address their individual personality spikes, and roles are adapted to particular strengths.
Scale insurgents want employees to take full advantage of their talents and reject the notion of perfectly fungible managers. They encourage spiky leaders and mobilize teams that achieve the balance required to solve a specific problem.
Professional management companies manage scale by adding layers. Scale insurgents do it with teams. They mobilize teams to pursue priority initiatives and then demobilize them to focus on the next challenge. Audible’s founder, Don Katz, deploys what he calls “Firestarter teams” to tackle the firm’s most important issues. “We can’t allow our priorities to lose vision and ownership as they become overly operationalized,” he explains. “So we empower small, dedicated Firestarter teams to deliver with agility, clarity and inventiveness.”
These insurgents have mastered what we call micro-battles: small, cross-functional teams that take a bold strategic initiative and translate it into a prototype that can be tested in the market. They then turn the winning prototype into a repeatable model that can be scaled across the organization. Senior leaders, who manage the portfolio of battles, work to amplify the impact of individual teams and recognize patterns across the firm.
Micro-battle teams have two mandates: They must be masters of disruption and excel at scalable execution. Since these goals are often at odds, effective organizations resolve the conflict by developing three communities of talent that work together. The disruptor community comprises those skilled at disrupting current products, services and business processes—even the company’s business model—in search of new value. The execution community carries out ideas and strategic initiatives flawlessly, using playbooks, fixed routines and common behaviors. The Scaling CommunitySM bridges the gap between innovation and execution. These people translate big ideas into regular ways of working that can be scaled across the organization. They exist within every organization but have to be identified and mobilized.
A persistent brand of water cooler wisdom has it that “special projects” or “SWAT teams” are where good careers go to die. Not anymore. In the firm of the future, self-managing teams, doing mission-critical work, will be a fundamental organizational unit. They’ll be just as important as individual functions and, in some cases, will replace them. The Chinese appliance manufacturer Haier organizes its tens of thousands of employees into a constellation of micro-enterprise teams—each 10 to 15 people strong—with little hierarchy among them, just immense amounts of collaboration.
Unilever has deployed teams that combine category leads and brand managers with experts in finance, channel and category development, media, supply chain, R&D and consumer intelligence. Called Country Category Business Teams, these groups act as “mini operating boards” in search of more speed and accountability closer to the customer. “Frankly, our traditional organization of rigid hierarchies, fixed boxes, reporting lines and inflexible resourcing … is reaching the end of its useful life,” Unilever CEO Alan Jope told the Deutsche Bank Global Consumer Conference in 2019. “What we want to do is assemble the right network of people with the right skills to work on an opportunity. When the opportunity is realized, they will disband and move on to the next assignment.”
Talent inside out
Contrary to what some pundits believe, not all firms have to become the Uber of their industry to survive. In our view, the landscape of the future will be populated with three types of firms:
- Platforms. These companies use network effects and curation economics to create tidal waves in a traditional profit pool, opening up new ways to win (and lose).
- Outsourced service providers. From focused beginnings in global labor arbitrage, outsourcing is now an option for every step of every value chain. Future economic growth is unimaginable without these firms.
- Product and service firms. This is where most of us will still work.
Some firms will be all three types at once (Alibaba, Ping An); others will focus on being just one. But all firms will have to decide where they belong and learn to manage new relationships across a business landscape where traditional boundaries are less relevant.
The implications of this shift are profound. If you choose to deliver your promise to your customers using someone outside your own firm (because they’re better or cheaper or faster), then managing the relationship with that third party becomes its own important source of competitive advantage.
From the firm’s point of view, outsourcing has obvious benefits, but adds complexity. Those micro-enterprise teams at the heart of Haier’s success routinely include team members who aren’t Haier employees. As one CEO said to us recently, “We have 100,000 employees, but when you think about all our various partners, there are around 2 million people we have to be constantly thinking about.”
For some individuals, this might enable a dream career. They can sign up for what Reid Hoffman has called “tours of duty.” They add value to a firm for a defined period, expand their learning, then move onto something else entirely, no strings attached. For others, this picture of the firm as Linux or Wikipedia will be less appealing. They may feel disconnected and lack a clear mission or purpose that captures their discretionary energy. We know from Gallup that employees are much more engaged when they have a best friend at work.
However it makes employees feel, companies are quickly drifting away from having all capabilities in-house and moving toward a more open architecture for capabilities. The spiky capabilities will typically stay in-house. For the rest, there are many market options. The capability of turning those choices into customer solutions is becoming one of the most highly prized of all.
When it comes to the new deal for talent, we can say some things with a fair degree of certainty.
First, with more automation, more outsourcing and more self-managing teams, headcount at the typical firm will fall, all other things being equal. Just as measures of asset efficiency like return on investment became less meaningful in a world of outsourced manufacturing, traditional measures of overhead efficiency are losing relevance in the era of scale insurgency. This turns traditional ideas about appropriate spans and layers upside down. In the parts of the business using self-managing teams, for instance, the proper span might not be the usual 6 or 7, but 30, or why not 40? We need new metrics—return on salaried employee, perhaps—to assess the true impact of this headcount shrinkage.
Second, an insurgent mission is central to the firm of the future. The millennial generation is credited with discovering “purpose-driven capitalism,” but firms with a clearly defined purpose aren’t new. Lever Brothers, after all, was talking about making cleanliness commonplace and reducing work for women back in 1890. Indeed, we may well look back on the last 40 years (the shareholder primacy era) and consider it the outlier period for its exclusive emphasis on a single type of stakeholder.
The August 2019 Business Roundtable statement on business responsibility was, in many ways, a “Back to the Future” moment. It’s the roundtable’s 1997 statement—that the paramount duty of management and boards is to stockholders—that looks like the aberration, sandwiched between the 2019 announcement and this one, from 1981: “A corporation’s responsibilities include how the whole business is conducted every day. It must be a thoughtful institution which rises above the bottom line to consider the impact of its action on all, from shareholders to the society at large. Its business activities must make social sense just as its social activities must make business sense.”
Firms can’t fake purpose, and they can’t ignore it. Increasingly, a company’s ability to define one will be an important factor in how it attracts and retains talent.
Third, talent management is going to get a lot more personal. We foresee a migration from a career ladder to something more akin to a “career passport.” The ladder metaphor assumes all employees aspire to take the same, sequential (mainly linear) steps upward. But a career passport would be stamped with roles played, capabilities mastered, training completed and certifications achieved. The passport would be owned by the individual, not the firm, and the stamps would testify to the person’s spiky capabilities. This provides a way around job leveling, one of the most debilitating features of the professional management HR playbook. A passport, properly reviewed and calibrated, allows firms to pay the person, not the job.
Passports would also help in another important way. Scale insurgents have far fewer professional managers, so people need alternative career tracks based on specialist expertise. In the old deal for talent, all deep experts eventually were promoted to management, where some flourished, and others did not. In the new deal, we’ll see more firms imitating companies like Boeing and Cisco, which have well-established programs for distinguished and technically expert employees who don’t want managerial responsibility. These are coveted roles; fewer than 1.5% of Boeing’s employees qualify for the “technical fellowship.”
What’s not clear
Despite all the successful talent innovations that companies are experimenting with, we still see unresolved challenges in some important areas. For many business leaders, these unsettled issues have been brought into stark relief by the Covid-19 pandemic.
Citizenship. History repeats. Like the trusts at the turn of the 20th century, some prominent scale insurgents face backlash for their market success. Are they too big? Are they protecting consumer data? Are they environmentally responsible? Not all these companies have clearly established their roles as good citizens in the societies they serve.
Succession. Many successful insurgent firms have yet to imagine life without their founder. A founder’s departure is a moment of truth for all people in the firm. Who will stay, who else will go, who will be the “closer” in tough recruiting battles for top talent? We can point to great successes (Tim Cook at Apple; Daniel Zhang at Alibaba), but just as many near disasters.
Scaling culture. We’ve seen at close range how some firms struggle to scale their cultures. In the early years, everyone absorbs the culture by working day to day with the founding team. They see how the pioneer generation decides, acts, reacts, adapts and celebrates. They hear the war stories. But as the firm gets bigger, fewer and fewer employees have close contact with the original leaders. Scaling culture requires a model many firms haven’t found yet. In an era when more people are working from home, this will prove an even greater challenge.
The middle layer. Insurgents rightly love to show off the top team—the lean, mean, founder machine. They also love to show off their fresh-faced recruits, those sold on the mission and ready to do whatever it takes to win with customers. Even though these firms harness the power of teams, there’s still a layer of professional managers—the 10- to 15-year veterans who are no longer “doers,” but didn’t break into the senior leadership team. These are middle managers, and the emerging scale insurgents haven’t figured out how to manage them any better than the incumbent CEOs of the last two eras. During the current crisis, we’ve observed leaders working around this middle layer, going directly to the front line to accelerate action. This works in the short term, but not in the long term.
Employees vs. algorithms. This isn’t easy to talk about. It can lead to uncomfortable meetings. But it needs to be acknowledged. Read Sam Walton’s “10 Rules for Building a Business” and you’ll find that many of the principles are about a deep commitment to frontline employees—trusting them, respecting them, sharing rewards and listening to their feedback. Walton believed that his employees were crucial to his insurgent mission, and he built his company to support them.
Many insurgents, however, have built their core business model on the power of technology and, for them, a good algorithm can displace a good manager. This can create an awkward relationship with their people. Many brag about their culture and ways of working. Some have irreverent, innovative and inspiring principles on “how we work” and “who we are.” But who’s included in the “we?” Definitely the leaders, but when frontline employees are one algorithm away from being replaced, an unresolved tension hangs in the balance.
At our regular Founders Forums, we always ask if participants have the talent and capabilities they need to achieve their goals. On average, 77% of them say “no.” Incumbent CEOs we’ve surveyed over the years say the same thing in similar percentages. For companies on the journey to scale insurgency, the solution to this problem is becoming increasingly clear: The time is now to deploy a new deal for talent.
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The global Covid-19 pandemic has extracted a terrible human toll and spurred sweeping changes in the world economy. Across industries, executives have begun reassessing their strategies and repositioning their companies to thrive now and in the world beyond coronavirus.