Episode Transcript
[00:00:00] You.
[00:00:04] Good morning, everyone. Today I want to talk about a really interesting topic to me, hopefully to you, that's come up from our dynamic organization, research and the job numbers this week. And it's essentially the topic of why do companies over hire? So I'm going to take a slightly economic and philosophical tone on this, but let's just start with a context. We had another jobs report of 353,000 or so jobs created. The unemployment rate in the United States is 3.7% again.
[00:00:39] And as you've seen from our research and the predictions report and other sources, we believe that this is a long term secular change in the job market. I have research, and I can show it to you in a chart, that over the last 50 years, despite the ups and downs of the unemployment rate, during recessions and booms, the long term trend is down. The number of working people in the United States and other developed economies is going to flatten. It has flattened in Japan and Germany and the UK. It's going to flatten in the United States if we don't fix our immigration issues. And so the labor market is becoming more and more competitive. Not all the time, not for every job, and it's obviously very localized. But generally speaking, we're going to be living through several decades of labor shortages. And we also have AI, of course, which is automating white collar work and lots and lots of automation of blue collar work and technologies of many, many kinds, visual and otherwise. So we're going to change the way we think about hiring and growth. And so what I want to talk about today is some big philosophical issues that affect you in HR and how we structure HR and how we advise our business counterparts. Number one, there is a management mindset which goes back hundreds of years, that in order to grow a company, you need to hire more people. And in fact, I call this the hire to grow mentality. If we want to double the size of the company, let's double the number of salespeople and give them all a quota. If we want to speed up the product, let's hire more engineers. If we want to get more research and drugs doing, let's hire more scientists. If we want to improve customer service, let's hire more customer service agents. Now that all sounds logical, and this is exactly what happens in companies as they grow. But there's a downside, and I call this the law of diminishing returns or reducing productivity as we hire. The more people you hire and the faster you hire them, of course, the more unproductive the next person becomes and the more unproductive the whole team becomes. Unless you have the magic ability to split teams into small groups and onboard people very, very quickly, which is virtually impossible because it takes time for people to get to know your company and their jobs and the systems around them. The more you hire, the less efficient your company gets on a headcount basis and you have to hire more managers. So if you hire ten individual contributors or five, you're probably going to hire one manager. The manager is probably going to think, oh, well, I'm the boss, so I don't want to do any work anymore. I'm just going to manage what everybody else does. And sure enough, the output per human being goes down. And you can see this in revenue per employee. I do a lot of looking at companies and comparing companies and you can usually tell in a given industry which company is going through some form of stress either internally or product wise, because their revenue per employee is far below their competitors. If you look at revenue per employee from the tech industry, you can see a massive difference between Facebook, Google, Microsoft, and companies like Workday, SAP, Oracle. Radically different, because the bigger companies, the erps, frankly, have too many people, to be honest, but they're trying to grow and they believe, and they have learned that if they keep hiring more people, they'll grow more and more and more. But actually the opposite happens. They get to go slower and slower and slower. And if you've read the mythical man month by IBM, studied networked teams and small teams versus big teams, you will understand this. And what that does is puts all sorts of pressure on us because we're the ones that are supposed to onboard those people and make sure that they all get assimilated in the company, which obviously we can't do. The line leaders need to do this. Okay, that's, number one, we need to change that mentality. Number two, HR has to operate differently. Now I've been talking about systemic HR for a couple of months and we're going to hear about it all year because Kathy's putting together a whole agenda on this. But the typical process that most companies use, and I mean like almost everybody I know, is headcount is allocated once a year, once a quarter, or once a period. It gets delegated to hiring managers in the groups that the company believes should be growing and they open requisitions with their HR business partner and they get sent over to the recruiting team. And the recruiting team functions like an order taking process and they go into the recruiting machine and 42 days later on average, somebody shows up, by the way, it is going up. The time to hire is going up. In some roles, it's 60 to 70 days, but on average it went up by about 5% last year. And that's because the job market is more competitive. And of course, those recs get distributed and the hiring managers have very high expectations. We want specialized skills. We want people that know all the new stuff. We want people with experience. We want people with college degrees. We give them tests. And what we end up with is another bureaucratic process, which is the hiring process. And, I mean, we've done a lot of work this year and last year on hiring, streamlining hiring, working with paradox and others, that most companies take way too long to hire people and have way too many steps involved. And it's very bureaucratic to schedule interviews and assess people and have discussions. In fact, the PwC CEO survey that just came out two weeks ago, there's just so much stuff in there that blew my mind. Ceos believe that 40% of the time spent in their companies is bureaucratic waste. And the number three process that bugs them is recruiting. Number one is emails. Number two is meetings. Number three is recruiting. So one more time, we've introduced a non productive slowdown process to hire people that we may not need. Now, I'm not blaming you guys in HR. I mean, we've done the best we could over the years to make recruiting better and better and better. But really what needs to happen is there needs to be a talent advisor role. That might be the new role of the recruiter who talks to the hiring manager and has a serious conversation about who are you trying to hire? What skills do you need? What role is it? Is there an internal candidate? Maybe we should post this job internally for a couple of weeks or a month before we post it externally. Maybe you should redesign the group. Maybe we should train somebody who's already on the team to take on more responsibility. Maybe we need, it's time to use AI or automation. Now, of course, the HR person isn't going to be able to push back on a senior leader and say that, but we've got to build a process that works like that. Otherwise we're going to end up with this constant hiring. And then, of course, there's a layoff when things don't go exactly as planned. And by the way, this leads me to item three, too many managers. So if you, you know, I've worked for a lot of companies that have overhired, and sure enough, as soon as that happens, everybody wants to be a manager. Oh, we're hiring five more people. Can I be their boss? I'd like to be the leader of that group. And you have this semipolitical process where people want to get promoted. We have lots of middle managers, and there's middle managers managing middle managers. And then every team that has a manager has to have a staff meeting, and there has to be staff meetings so that the teams can get to know what each other are doing. You know what I'm talking about? I mean, we built bureaucracy almost automatically when we hire lots of people. And honestly, you don't have to do that, because the way work actually gets done is small teams are more productive than large teams. You've seen the two pizza rule from Jeff Bezos, and lots of research on this. Leaders need to be working leaders, not sitting behind a desk. And there's this thing that I call the power curve of performance. I wrote a very interesting article that was very, very popular, and we put it into Galileo, and I'll link to it in this podcast about the Bell curve. We have this belief system in HR and in companies and business in general, that people opt that the organization works on a bell curve and that there's some really high performers on the right and really low performers on the left. And if we keep whittling off the people on the left and maybe lay off 10% of the people every year, based on our wonderful performance management process, our curve will move to the right, which is somewhat obsolete. But that's been the thinking for many, many decades on why we have forced ranking. And that's the reason we have performance ratings at all, by the way, is to figure out who the number five s are, so we can sort of give them a plan. Well, if you really look at work output, and I have talked to a lot of people about this in different domains, what really happens is more of what is called a power curve, where some individuals are ten to 20 to 50 times more productive than others. They're super duper good engineers, super good software engineers, great, great salespeople, brilliant marketing people, wonderful, excellent, magnificent writers, creative people. I mean, you know who these people are. They're around, and they're just made for the job. They somehow, in their life, found their calling, and they're doing things that they're exceptionally, exceptionally good at, and maybe they're very senior, and they've just been around a long time, or maybe they just are given this gift that they can do certain things extremely, extremely well. Well, those people are really driving sometimes a significant amount of the output that happens in a business area. So when we clutter the business up with more and more and more people, we don't necessarily have the ability to find and hire and focus on the very high performers. And of course, when you give the recruiting department more and more people to hire and you say to talent acquisition, you're falling behind, they speed up and the quality of candidates goes down, and managers have to be involved in that, and that has to be really done carefully. The fourth thing I want to talk about is internal mobility and growth mindset and learning culture. Now, it seems to me almost all the companies I've talked to in the last few months have decided that better internal mobility is a really important strategy. I don't need to explain why, but there's many reasons, and this is another real dimension to the dynamic organization research. It's good for many reasons. It's good to build general managers. It allows you to build deeper skills without having to hire. It increases the agility and the problem solving nature of the company. It allows the company to adapt more quickly to change because people can move more easily. It creates a better culture, it creates more innovation, because you have new people entering different domains with new ideas, and you don't get stuck in sort of old ways of thinking. And it's really good for the employee engagement and retention because people love to work there because they can do a lot of things and there's more flexibility in their lives and their careers and their jobs and their day to day life. But it doesn't happen just because you say it's going to happen. There's a lot of cultural issues around it, you can go out and buy a talent marketplace and open up all sorts of opportunities internally. But if managers don't let people go, if people have all sorts of individual goals and their goals are tied to their pay and they don't want to miss out on their goals. If you have 72 levels in the job hierarchy and people won't take a new position unless they want to get promoted, if the managers are being highly paid on output and not on developing people, they'll hold people back. If there's a lot of diversity and inclusion problems where one business unit just doesn't like the other one and they don't trust each other because they came from a merger and they don't know each other, and if you don't have like career coaches and on the job training and mentoring and good sort of learning experiences inside the company, this stuff doesn't happen by itself. And we have talked to companies over the years that have very high internal hiring ratios. It's called an internal hiring ratio. What percentage of your hires are done internally? And there are companies that have almost zero. And many, many companies, most of them have all sorts of silos between business units, geographies, product groups and job functions for historic reasons, because the business unit leaders don't really understand the adjacencies of skills that people have and so forth. That's got to get broken down and that's not going to happen in one year. But I predict that over the next multiple years, companies are going to get better and better at better at this, which leads to the issue of leadership. And that's maybe the fifth know. Leadership has to essentially not just say we want to be more. By the way, just an example of this Facebook meta whose stock went up by, I don't know, 20% yesterday, laid off or reduced the expenses in the company by 25% over the last year. I don't know how many people that is or exactly what they did, but their stock is skyrocketing and their revenues went up maybe the highest that we've seen in maybe many quarters. So you don't need so many people to be a great company. You'll see these in the numbers if you study them. And I think a lot of the leadership issues is old fashioned industrial style management and leadership thinking, where the bigger the organization, the more power I have, the more scale I have. I look better as a leader. We look better to our customers because we're really big. I mean, we're going to have to get past that. And I actually believe small companies are going to continue to outperform big companies. And the bigger companies get relative, and I'm talking about big relative to staff, not revenue. The slower they're going to operate. And there's a few exceptions. Microsoft obviously has really turned itself around in terms of its speed and you can delegate authority to smaller groups, and Amazon's actually very good at this too. But generally speaking, when I see these cycles of layoffs and we're going through one now in the tech industry, it's because people overhired and they just weren't thinking about these things. Now, a couple of more sort of things to think about as we enter this new era of constrained labor and labor shortages and difficulty to hire and so forth. The other thing that I think goes on in HR that we're going to have to really spend some time on is pay. Last year we did two very large studies on pay. We haven't spent enough time on that. I think we need to spend more time talking about it with you guys. One was on pay equity and the other one was on general pay practices. And pay equity essentially means that if I'm making x amount of money and the person sitting next to me is making y, I feel comfortable that I understand. If I find out how much they're making, and they do tend to tell people each other how much they're making, I understand why that is, and I feel that it's fair. In other words, it's based on merit, it's based on outcomes, it's based on results, it's not based on politics, it's not based on age, it's not based on tenure, it's not based on gender, it's not based on race, et cetera. And statistically, there are now lots of tools that will show you if pay variations existing today are not based on merit, because what they'll do is they'll show you the statistical relationships between the different factors, and they will show to you through multicorelated statistics, that you have a problem that some groups are overpaid based on non performance metrics. Well, in a company where we have more internal mobility and more collaboration and more focus on productivity, this is an issue. If I'm sitting next to somebody who's got a really good political position in the company, and they've been promoted six times and they're making a lot more than me, I'm not bringing myself to workfold completely. I'm definitely not. And there's many reasons for this, but one of the reasons this happens is we have this semi old idea that every year we're going to give people a focal review, and if they have a good strong performance rating, we're going to give them a bigger raise than the person sitting next to them. And of course, what happens when you do that is this first person is starting to distance themselves year after year from the second person, even though their output might be very similar and they never ever catch up. So the solution to this is to equalize base pay across job families and across tenure and experiences and levels, and then use bonuses and other forms of reward to recognize people that are doing exceptional performance. Say P operates this way. A lot more companies are doing this now. Actually, Patagonia used to operate this way, where they separate base pay from incentive pay. And this is important when you get into this issue of more internal mobility and asking people to do more new projects and more new work. So that's another one that comes up. I was at a large company last week down in LA, and they're really trying to break down silos between the different business units as an entertainment company, and they really have a really, really interesting idea on how to do it. But there's a lot of pay issues because the pay bands and pay levels in one job function or one business unit are different than others. When people start moving around, it's going to get messed up. The companies that are the best at this are, you know, some of the global manufacturing companies have solved this, etc. So that's another one. I mean, the last thing I'll talk about, because I don't want to go too long, is the tech. Now we are really into AI over here because we're having such an amazing time with Galileo. I believe one of the ways to avoid overhriing is to invest in and experiment with technology and automation. Even things as simple as Microsoft, teams or Zoom have amazing impacts on productivity. For example, the number two issue in the CEO survey that wastes time is meetings. Nobody likes meetings where the first 10 minutes is people introducing themselves to each other and figuring out whose microphone is turned on or turned off. Right? I mean, there's 10 minutes a day for ten people, times the number of meetings per day, times the number of meetings per week, et cetera. Nobody likes meetings where they come, and that was a waste of their time. Nobody likes meetings that are too big, where they can't make a comment unless it's a broadcast, et cetera. Well, we can record those meetings. You don't need to go. What about a policy that says if it's not a meeting you feel like you need to be at, just watch the recording and contact the person who led the meeting later. And if there's an agenda for the meeting, the agenda can be put into the tech and people can come to the meeting when the agenda item comes up. I mean, that's just a very, very simple technology. Second, technologies is generative AI. You look at tools like Galileo and other tools that are coming out right now. We can ask questions and get answers and find data and get examples of problems that have been solved inside of the company using a generative AI tool platform like Galileo. And avoid making 15 phone calls, waiting for a meeting, having a governance review to figure out who's going to take responsibility for what, et cetera. I mean, a third area of productivity that really, really matters is ownership. Who's responsible for what? Somewhere in that CEO survey in the top ten was misalignment of ownership. People not being sure who's responsible for what part of what project, and therefore asking for a meeting to discuss who's going to do what. Now, I don't have anything against meetings. I think meetings are great, and I kind of wish we had more face to face meetings, and I think we're going back to that. But if you can't decide in advance who's responsible for what, and oftentimes that happens because managers are new to their roles, then we waste a lot of time on that. And then there's the issue of individuals learning online, learning, self directed learning in the flow of work, micro learning, putting information online that other people know, taking subject matter experts and giving them the opportunity to share what they know in videos so people can find it and search for it. These are really important technologies that allow your company to operate with fewer and fewer people. So we're sitting on this is five or six big things that facilitate improving the dynamism, the productivity, and the outcomes of your company. And I think you're going to see more and more companies announcing over the next year that their revenues are going up, their profits are improving, and the number of people in the company is shrinking and not growing or perhaps steady. The one example I'll just mention, and then I'll stop, is Netflix. We spent a lot of time with Netflix. Really amazing culture there. Amazing group of people, and a bunch of them are going to be at the conference again this year. And if you look at the number of employees at Netflix, it's somewhere around 13, 12,000 relative to its revenue. Their revenue per employee is about five times higher than their competitors. How do they do that? Well, they have a great business. They have a great product. They're very focused. They understand how to go after their market in a very unique way. But it's not by accident that they're not super big. They are very careful who they hire. They have a very strong meritocracy. They're extremely inclusive. They don't have a lot of hierarchy in the company, very little, from what I can tell. And they embrace a lot of the ideas I talked about earlier. And so it doesn't matter what industry you're in, these ideas are important. And over the next couple of years, and certainly this year, given where we are with the labor market, I think these are going to be essential ideas and management concepts for those of you in HR and for everybody who's a leader or a people leader or a manager in your own company. Thanks a lot for listening today. We'll continue on this topic, but over the next couple of weeks, I'm going to talk more about autonomous learning platforms and what's going on in L and D and some other things coming up soon. Bye for now.
