Talent Matters to All Stakeholders, As Does Organization
by Dave Ulrich
Talent has been a primary agenda, if not obsession, for many general managers and human resource professionals for the last 20 years. In this chapter, we want to pivot and anticipate where talent attention might focus going forward in two areas:  offering new insights on why talent matters and  arguing that the focus on talent activities should morph to creating sustained organization cultures.
1.0 Talent Matters
There is no question that talent matters to an organization’s success. Talent (sometimes called workforce, people, competence, skills) has been captured in the maxim, “war for talent.” This talent emphasis has led to innumerable innovations in how firms bring people into the organization, move them through the organization, and appropriately move them out of the organization. We have chronicled a number of these talent innovations as summarized in Table 1.
Examples of Talent Choices in the War for Talent
|Talent practice||Example of talent innovation|
Bringing the right people into the organization
What are the skills we need for new employees?
|· Focus on future customer and investor requirements
· Hire for culture, train for technical skills
How do we source new candidates?
|· Create positive employee brand social media
· Use contingent workers
· Blend people and robotics for jobs
How do we know if this is the right candidate?
|· Use behavioral event interviewing
· Involve multiple interviewers
How do we create an employee value proposition?
|· Create customized job offer
· Involve senior executives in making offers
How do we help new hire succeed?
|· Have mentoring programs
· Manage early assignments
Moving people through the organization
How well do we have a workforce plan for our employees?
|· Turn strategic goals into desired competencies
· Focus on key positions
· Emphasize work task plan
|Training and development
How do we help existing employees improve?
|· Learn from work experience, training, and life experience
· Make training a guest experience
How do we invest in high potentials?
|· Set criteria for high potentials (usually 5 to 15% of workforce)
· Create individual development plan for high potentials
|Career and promotion
How can we help employees manage their career opportunities?
|· Offer employees tailored career path
· Build succession based on business more than person
How can we build positive accountability for employees?
|· Simplify performance process and emphasize positive conversations
· Help managers coach and communicate more than command and control
How do we use rewards to reinforce the right behaviors?
|· Use financial rewards to send signals of what matters
· Use non financial rewards to capture employee commitment
|Engage employees (experience)
How do we capture the hearts and minds of our employees?
|· Help employees find personal meaning from their work by creating a positive employee experience
· Create tailored employee value propositions for key employees
Removing appropriate people from organization
|Retain key people
How do we keep our best employees?
|· Find ways for key employees to behave as if they are committed
· Rehire former employees (boomerang hiring)
· Do a “stay” interview to listen to key employees
|Remove appropriate people
How do we take out people in a positive way?
|· Do strategic downsizing, not across the board cuts
· Move quickly and fairly for those who leave
Whew!!! Table 1 is just a sampling of advances in talent. And clearly, there is a LOT of innovation and creativity going on in talent management today (as evidenced in this special issue and other quarterly issues of this magazine).
But, inventing new talent management practices is not enough for talent to have sustainable business impact. It is important to recognize the impact of these talent advances on key stakeholders. Without defining what it means to win, the war for talent is aimless. Talent is not just about doing a best practice, but how that practice delivers value to others. Hiring or training someone who fails to deliver value to key stakeholders is like preparing a meal without knowing what the patron wants to eat or playing a sport without keeping score.
For general managers and HR professionals move beyond fighting the talent war to winning it requires a clarity on talent outcomes that deliver value to the right recipients. For example, it is not enough to build on strengths, but individuals must use strengths to strengthen others. Measuring the amount of training or staffing is not enough; one must measure the impact of training or staffing on key organization outcomes. Competencies matter to the extent that they affect key business outcomes. In our HR workshops, we often ask people to identify what they want to learn and they list many of the talent innovations in Table 1. We then invite them to answer the “so that” query for their learning objective. I want to learn about mentoring, coaching, or positive accountability so that ….. The so that query focuses on the primary outcomes and stakeholders of talent practices.
The primary stakeholders for talent outcomes have traditionally been inside the organization; investments in talent resulted in greater employee productivity and well-being as well as organization strategic success. Going forward, the value of talent will also come from how talent choices affect those outside the organization, not just inside. Let me suggest three emerging stakeholders to focus on in shifting talent from being primarily an internal activity to one that provides valued outcomes outside the organization.
1.1 Talent matters to boards of directors. Boards are the boundary spanners between what happens inside and outside an organization. They are elected by shareholders to represent their interests as they select the CEO and oversee management. Most board governance responds to regulation that encourages transparency and consistency. Much of the board work is done in committees: an audit committee to review the financial decisions, a governance committee to oversee policies, and a compensation committee to review the reward philosophy and choices. In a recent meeting of the National Academy of Corporate Directors conference, a group proposed that the compensation committee be expanded and changed to become the talent, leadership, and culture committee. This committee would have a charter to evaluate the organization’s processes around: leadership, succession, compensation, talent review, culture, and talent risk management. Today, the compensation committee responds to the following proxy charter:
In the annual proxy statement, a company must disclose information concerning the amount and type of compensation …and the criteria used in reaching executive compensation decisions and the relationship between the company’s executive compensation practices and corporate performance.
The Summary Compensation Table is the cornerstone of the SEC’s required disclosure on executive compensation. The Summary Compensation Table provides, in a single location, a comprehensive overview of a company’s executive pay practices….
In addition, the Compensation Discussion and Analysis (“CD&A”) section provides narrative disclosure explaining all material elements of the company’s executive compensation programs.
In the future, a talent, leadership, and culture committee would provide the board a broader perspective on all the issues listed above. Thus compensation becomes a part of an overall talent, leadership, and culture assessment rather than the only reported items. By focusing boards on public disclosure of talent, leadership, and culture, the board can better monitor the antecedents of future performance and mitigate talent risk.
1.2 Talent matters to customers. In the past few years, we have argued that leaders are most effective when their behaviours reflect customer promises. When a firm brand translates to a leadership brand, leaders create more value for targeted customers as well as employees. The essence of a customer focus is that employee sentiment is a lead indicator of customer sentiment. Customer net promoter scores are likely correlated with employee commitment scores.
Because employee attitude shapes customer attitude, talent practices listed above in Table 1 should be designed and delivered with customers both in mind and in practice. For example, customers can be involved in setting standards for who is hired and they can be invited to refer potential candidates as well as be part of the screening process. Customers can also be involved in designing, delivering, and attending training programs. Customers can also participate in reward systems. An airline gives their most frequent fliers ten $100 coupons to give to airline employees who offer these frequent fliers great service. Essentially, the airline is opening its performance system and bonus to key customers. This does not cost the airline more money since it is only a small percent of the overall bonus pool, but it bonds key customers to service oriented employees. In some of the emerging organization design work, customer focused teams are being used to create rapid innovation. In each of these cases, talent choices and actions include real customers so that employees are not just the “employees of choice” but the “employees who customers would choose.”
1.3 Talent matters to investors. Many investors are increasingly looking to predict and capture long term value from a company. To do so requires going beyond looking at financial results (e.g., earnings, EBIDTA) to intangibles (like strategy, brand, technology and systems) to talent, leadership, and culture. In our research we found that about 35 to 40% of a firm’s market value was tied to financial results; 30 to 35% tied to intangibles (like strategy, brand, supply chain); and 25 to 30 related to quality of leadership (surrogate for talent). The quality of talent should show up in investor confidence to deliver intangibles and to consistently create financial results. In the book Leadership Capital Index, we offer a framework and tool that investors can use to measure the quality of an organization’s leadership.
To demonstrate the impact of non financials on firm market value, talent managers can prepare a graph of how their firm’s price/earnings (or price to book) ratio compares to their top competitors over a significant period of time. Price/earnings (PE) shows the market value of earnings. Talent managers can prepare this chart to show the intangible value of their firm versus competitors
For example, in Table 2, we show that Apple’s PE ratio over a decade was 22.0 versus the companies top four competitors which had an average of 14.6. This means that about 50% (22-14.6 = 7.4/14.6 = 50%) of Apple’s $750B ($375B) market cap is due to the intangibles. If leadership, or talent, is about 30% of this intangible value, then the value of talent to Apple is about $110B (30% of $375b). Table 2 is particularly interesting in terms of Steven Jobs’ health issues and impact on price/earnings, showing that the years of his illness reduced Apple’s P/E premium over competitors by a sizeable margin.
Apple’s Intangible Value
2005 through 2014
|Firm||2005||2006||2007||2008||2009||2010||2011||2012||2013||2014||10-Year Average of these companies||Current Market Cap (in billions)|
|Average of non- Apple||21.1||15.7||18.5||11.6||14.8||13.4||12.4||13.3||11.9||12.2||14.6||100.4|
|Difference of Apple – average||17.6||15.1||25||4.2*||5.8||4.6||(.9)**||(1.2)||2.0||2.8||7.4|
|*Worries about Jobs health become investor concern and many rumors spread. Bloomberg mistakenly publishes Jobs’ obituary.
**Jobs granted medical leave in January and resigns in August for health reasons. He passes away six weeks later.
Talent managers can prepare these charts to communicate the value of the intangibles and talent to the business. We have prepared dozens of these charts, some showing a firm’s talent premium (like Apple) and others showing a firm’s deficit. These charts enable talent managers to link their work to investor value.
Even when investors recognize the variance in market valuation due to talent, they often lack a rigorous way to understand and track talent. Talent managers need to prepare a simple but robust way to discuss talent with investors. When we interviewed investors, they almost uniformly agreed that people matter and that talent management processes should affect their valuation of the firm. Talent managers can rely on what we call the Leadership Capital Index, a quantified measure of quality of the organization’s leadership, to give investors confidence in quality of leadership overall and talent in particular. One firm reports employee productivity and well being indicators to investors; another reports succession data; and another is working to report the leadership capital index. Talent managers might prepare presentations on talent for investors which might be 10 to 15% of investor calls or road shows. This might be talent managers preparing talent metrics as part of the investor calls or it might be working to help investors recognize the quality of leadership within the organization.
To give investors more confidence in future earnings, for example, Buffalo Wild Wings intentionally gives investors exposure to its broader leadership team; as opposed to companies more traditionally limiting exposure to only the CEO, CFO and their investor relations professionals. They host an investors day where the entire leadership team plays a role in sharing direction and strategy, add the COO to the Q & A portion of quarterly earnings calls, and have other C-level leaders (including CHRO) join the CFO on investor visits to show leadership depth. Through this experience, investors have more confidence not just in the CEO as a leader, but in the systems that create future leadership.
Investors who want asymmetrical data on a firm’s future performance will come to rely more on assessments of talent and leadership. General managers and HR professionals who want to win the war for talent will increasingly focus on the value of leadership and organization systems that create a pipeline of talent that can be appreciated and tracked by investors.
Talent Matters Conclusion
Quality of talent clearly impacts employee and organization outcomes. In some cases, unique individual talent (e.g., a scientist, a rainmaker, or an innovator) helps organizations succeed. But, looking ahead, talent will also impact stakeholders outside the organization including boards of directors, customers, and investors and must go beyond individual talent. When talent ideas and tools connect to these stakeholders, more value is created for the stakeholders and the organization.
2.0 Talent is not all that matters.
When focused on the value of talent for organization outcomes, it is quickly apparent that organization outcomes (to customers or investors) do not come just from talent. Winning the war for talent requires moving beyond an individual focus to look more carefully at how individuals come together to form an organization.
A vulnerability of the talent paradigm is that it focuses on optimizing individual contributions. The term talent inherently focuses on ensuring that companies have the individual talent necessary to achieve their purposes. Certainly having individual talent is a critically important agenda for any organization. However, by focusing primarily on individual contributions, the talent movement, by definition, succeeds in making the organizational whole equal to the sum of the parts. This overlooks the central contribution of organization to make the organization whole greater than the sum of the parts. It is this integrating and leveraging function of organization that creates sustained competitiveness.
2.1 What is organization? “Organization” may be defined in many ways. When we ask participants in workshops to draw an organization, they almost always draw some form of hierarchy with boxes for roles and responsibilities. In today’s rapidly changing business world, the challenge of building the right organization complements the talent challenge.
One of challenges to facilitate building the right organization is that there are related concepts, terms, and prescriptions that require clarity. A simplistic view of the evolution of organization thinking is in Table 3. It shows that the most recent metaphor for organization is about organization as capability. Organization capabilities represent what the organization is known for, what it is good at doing, and how it allocates resources to win in its market. Organizations should be defined less by their structure and more by their ability to establish the capabilities required to win—that is, to serve customers in ways that competitors can not readily copy. Organization capabilities might include ability to respond to or serve customers, drive efficiency, manage change, collaborate both inside and outside, innovate on products and business model, access information, and establish the right culture.
Approaches to Creating the Right Organization
|Theme of the organizational movement||Founding or exemplary authors||How to characterize an organization||Focus of organizational improvement||Current applications|
|Efficient||Frederick Taylor||Machine with parts h||Standard operating procedures||Reengineering to drive efficiency
|Morphology and shape by looking at clear roles and specialization||Clear accountability with roles and responsibilities||Multi-divisional firm; strategic business units; matrix; delayering|
|Systems thinking||Bob Katz and Daniel Kahn;
Dave Nadler and Mike Tushman;
|Organization aligned to environment; integrated systems within the organization aligned||Connecting systems to one another (e.g., socio-tech);
organizational diagnosis of systems
|Customer-centric organizations; horizontal organizations;
Bob Kaplan and Dave Norton;
Dave Ulrich and Norm Smallwood
|Capabilities within the organization||Diagnosing and investing in key capabilities||Cultural audits; process improvements
While organizations can have many capabilities, culture is likely to be a key capability for future success. The most common view of culture is that it represents the pattern of shared beliefs and values that affect how people think and act in the organization. In this regard, the image of culture is the roots of the tree or the unseen iceberg below the surface of the water. Pivoting to the right culture focuses what the organization should be known for by key customers and uses this desired/aspirational/idealized external identity to shape internal thought and action. Culture is less the historic roots of the tree and more the fruit and future roots that the tree produces; culture is less that which is hidden under the water, but the direction where the iceberg is headed.
With this logic, managing talent matters, but turning individual competencies into organization capabilities matters even more. Culture, then, becomes a critical capability that shapes what an organization is known for and how it operates in the marketplace. Culture helps make the organization whole greater than the individual parts.
2.2 Why organization matters. The evidence of organizations mattering more than individuals comes from many sources. Historically, about 20% of films winning the Academy Award for Best Picture also win the award for best actor or actress. In the NBA, about 15% of the time, the team with the top scorer also wins the NBA championship (5% without Michael Jordan). And, when Michael Jordan led the league in scoring and his team did not win the NBA championship (4 times), he averaged 34.55 points per game. In the six years that he lead the league in scoring and won the championship, he averaged 30.5 points per game. About 20% of the time the winner of the Golden Boot (best player in soccer’s World Cup tournament) is also the winner of the World Cup. In hockey, the leading scorer wins the Stanley Cup about 25% of the time. So, great individual talent matters, but organization matters more. Individuals can be champions, but teams win championships.
There are relatively few research studies of the impact of organization vs. individuals on firm performance. We recently conducted research on competencies of HR professionals (individuals) and capabilities of HR departments (organizations) and their relative impact on business performance. We found that across 1500 organizations, organization level activities explained about four times much of the variance in business performance than the knowledge and skills of individuals. The value created for key stakeholders from individual competence and organization capabilities was equally profound, with the organization level issues explaining much more stakeholder value than individual competencies (see Table 4).
Percentage of Variance in the Value the HR Department Creates for Stakeholders Explained by Different Variable Groups (column totals 100)*
|Business Performance||Stakeholders for HR|
|External Customers||Investors/ Owners||Communities||Regulators||Line Managers||Employees|
|Capabilities/ Activities of HR departments||31||46.5||52.4||52.8||41.7||60.7||59.8|
|Other Variables (e.g. strategy)||61.3||33.7||35.4||29.4||35.9||24||24|
|Multiple Regression R2||45.2||52.5||49.5||39.5||36.9||51.6||57.2|
The results in Table 4 are remarkable. Organization capabilities are 4 times as important as talent in predicting business performance (7.7% to 31.0%) and this same ratio applies pretty much equally when serving different stakeholders. These findings imply that the war for (individual) talent may be less critical than the victory that comes through organization capabilities. Culture is one of the key capabilities of an organization.
2.3 What Culture Means. It is important to be clear about what culture means and how to manage it. One of the challenges of managing culture is that it has become a Rorschach test for those interested in organizations. The concept of culture clearly matters, but it seems impossible to articulate or define with any unified precision.
We propose a three stage evolution of defining what culture means. Phase 1 is culture as seen through symbols, rituals, stories, and other organization events. Employees experience or see these cultural artifacts when they enter or join an organization. Phase 2 is culture as seen through how it shapes how people think, behave, and feel in the organization. Culture shows up in the values, norms, unwritten rules, emotional responses to, or flows of how things are done in a company. This is the prevailing concept of culture today. Phase 3 defines culture as the identity of a company in the mind of key customers (and investors), made real to all employees throughout a company. This means that an outside view of culture (as defined by key customers) shapes the right culture, or the one that creates value for customers. This does not ignore values, but ensures that there is profit/merit in the values because they shape customer expectations and actions. When employee actions are consistent with these external promises and perceptions,, a winning culture follows. A winning culture is when the promises made to customers, that create an identity in the marketplace, shape/transform employee behaviours inside the organization to ensure that customers realize these promises, which reinforces the customer’s comprehension of company culture. Thus, Southwest Airlines wants to be known for low price with a fun experience; Marriott for exceptional service; Apple for design and simplicity; Google for innovation. These firm brands or identities should then become the essence of each company’s culture.
Each of these phases of cultural definition affect employee engagement. In Phase 1 (symbols), employee affect comes from organizational events. In Phase 2 (values, beliefs), employee engagement comes from enacting the organization’s values. In Phase 3 (outside in), employees are engaged in actions that increase customer share by creating culture-based customer bonds. Employees may be engaged in a host of behaviours, but when they are engaged in fulfilling promises made to customers, their engagement has positive business impact.
Going forward, a company’s ideal culture should be defined by its desired external firm brand or identity. The collective way of thinking, behaving, and feeling (employee engagement) within the company is the internal cultural manifestation of external (branding) promises. To leverage culture, it is not enough to have or recognize cultural artifacts (phase 1) or to shape how people feel, think, and act (Phase 2), but to ensure that people feel, think, and act consistent with promises made to customers and other key stakeholders (Phase 3). When these internal employee actions are embedded within the organization systems and processes, culture becomes a key capability that helps organizations win in the marketplace. With an outside-in perspective, general managers and HR professionals make sure that the internal culture and the HR processes through which the ideal culture is created and sustained directly reflect the external brand promise. Thus a marketing manager should become a close confidant of any shrewd talent manager.
Talent becomes one of these key processes because it ensures that each employee fits with the desired culture. This means that talent should reflect the brand or identity of the firm in the marketplace as translated into the right culture and right capabilities. Leadership brand exists when an employee looks at his leaders and sees in their behaviours the promises made to customers. Embedding the leadership brand originates in the selection, development, evaluation and promotion of leaders who reflect the desired culture. Leadership brand leads to an employee brand where employee engagement becomes the norm.
No one denies the importance of talent. A thoughtful mentor grilled into one of the authors that organizations don’t think, people do. But, organizations shape how people think, feel, and act. With this in mind, we envision two emerging talent agendas:  showing the impact of talent on boards, customers, and investors outside the organization and  pivoting from just talent to organization and culture. A robust future talent agenda delivers both internal and external outcomes for both individuals and organizations.