The talent-growth dynamic

Talent-dependent companies should be able to nurture enough high-flying managers internally to meet ambitious growth targets. An approach called the dynamic-resource view shows how.

ANDREW DOMAN, MAURICE A. GLUCKSMAN, NHUOC-LAN TU, AND KIM WARREN
2000 Number 1

Business leaders increasingly acknowledge that talent really matters.1 The trouble is that it is hard to know precisely how valuable it is. In what way, moreover, do a company’s development processes increase its value, and what is the proper way of enhancing the intangible assets, such as corporate culture, that help nurture it?

The dynamic-resource view (DRV)2 can give chief executive officers a powerful understanding of the role talent plays in their companies and the way it combines with business processes to expand or shrink shareholder value. The DRV characterizes the "talent pool" as a set of resources—tangible and intangible—that are in constant flux. People come and go, culture shifts, knowledge accumulates, skills develop, relationships wax and wane. The DRV maps such resources and the links among them. The resulting model reveals the impact of changes in resource levels on a company’s performance. Crucially, it also shows what causes these levels to change. Once the managers of a company understand the relationships between its resources and its success, they can focus on rebalancing resources to bring them in line with changing circumstances. (See sidebar, "Do you need to understand people better?")

This approach has proved especially useful for talent-dependent organizations in sectors such as financial services, high technology, health care, government, pharmaceuticals, and professional services. In this article, we look at how the DRV revolutionized a single financial-services firm. Before it used these techniques, talent management policies were an afterthought to its strategy. Afterward, they became the centerpiece of that strategy.

Keep on growing
In more than a decade of astonishing performance, this firm had increased its shareholder value by more than 30 percent a year. The CEO had just announced more of the same to shareholders. Despite that track record, the CEO felt uneasy.
Junior staff members who came in with acquired firms departed in large numbers for rivals
The firm had expanded organically in the past, but developing enough people to sustain high growth—especially the kinds of executives who could win new business—was taking too long. So the firm proceeded to make a series of small acquisitions and hired senior people from the outside. These steps boosted growth at first but eventually seemed to create trouble. Junior staff members who came in with the acquired companies departed in large numbers for rival firms, thus shrinking the pool of future directors. Worse still, directors began to quit. The company attempted to keep them by offering deferred stock options, but as a result every blip in the share price sent tremors through the boardroom.

Senior managers thus thought about once again developing human resources internally. The prospect wasn’t thrilling: "long term’’ was six months to these managers, and they knew that bringing on talent would inevitably take much longer. Only the firm’s stock price and cash assets really held their attention. Until this point, like many professional-services firms, this one had "managed" capacity by waiting until everyone was working flat out and then hiring another handful of people. In a downturn, the firm got rid of those employees who had nothing to do. If this approach sounds crude, remember that it had worked brilliantly in the past.

Any return to planned growth and organic development raised a simple question: how many people should the firm recruit to increase the number of directors by its target of 10 percent a year? The human-resources director was shocked when he calculated the answer.3 Under the current hire-and-acquire policy, the firm could meet the target by promoting nine current employees a year to director and acquiring about 15 directors from outside. But increasing the head count of directors by 10 percent a year using only homegrown talent was a different matter. To hit the target, the firm would need to appoint an additional 16 directors from within, for a total of 24 new directors a year—nearly three times as many as before. This meant that the head count of trainees, assistants, and senior managers in the pipeline would also have to triple (Exhibit 1).

How would the firm develop so many recruits? It took, on average, 50 worker-hours—including several director-hours—to hire one professional employee. As things stood then, each director worked with one new junior hire, but under a "grow-your-own" regime each director would have to coach three. How would directors have any time left for clients?
In the search for an answer, the firm’s management team became locked into circular debates—circular because decisions made in one area affected what happened in others. As recruiting took up more of the directors’ time, for example, it would be necessary to change their performance incentives. Managers began to worry that the firm’s growth target wasn’t really achievable.

A clearer view
The DRV helped the firm break out of the deadlock by showing how management could build up the strategic resources—both tangible and intangible, internal and external—needed to sustain a high rate of growth in shareholder value. First, the managers needed to understand how the firm’s resources worked together to encourage or discourage growth. The managers did so by mapping all of the firm’s growth resources, as well as the factors that built up or depleted each of them (Exhibit 2). Tangible resources included the number of directors and clients. Intangible resources—at least as important but harder to measure—included director capacity and client satisfaction.

These managers had the resource map transformed into a computer model—in many cases, paper maps and models will do—to simulate the development of their business. They then "asked" the model a number of questions.

1. If we try to increase the number of directors from within by 10 percent a year and don’t change any other policies, how far can we get?

The grim reply: not very. In the short run, the firm would be able to increase its head count of homegrown directors by only 5 percent because of its problems assimilating the senior recruits, with their alien working styles, it had already hired. In no more than five years, as the demands of developing all those people diminished the firm’s capacity to do business, shareholder value would start to fall. In the long run, if the firm relied on promotions from within, it could at most sustain a 2 percent annual increase in the number of directors—a level too low to match its expectations of business growth.

This poor outlook resulted largely from the firm’s failure to manage the most potent of its growth resources: director capacity. Setting the correct number of clients per director triggers a virtuous cycle. Directors have enough time to woo clients and give them good service; the reputation of the firm improves; more clients are attracted to it; its share price grows strongly; more directors, feeling adequately rewarded by income and options, remain with the firm; the skills of the staff improve; higher-caliber people apply to join the firm; it wins still more clients; and so forth. But when directors have too many clients, the performance of the directors falls off; they lose clients; the reputation of the firm suffers; its share price falls; directors start to leave; and the company’s ability to serve clients declines further (Exhibit 3). As the performance records of the firm made clear, the direction of the cycle can turn downward even more quickly if there are too few directors to serve an influx of new clients.

Bringing in directors from the outside didn’t work, because their arrival disrupted the company’s culture. Indeed, the model revealed how fundamentally this intangible resource underlay the growth of the firm, whose culture had always been one of mutual support and fluid communication, especially among directors. Common aims and a common language had made the firm’s people unusually productive. Talented job seekers noticed this and wanted to join; when business was slack for a while, good people didn’t leave immediately. If the culture was diluted, the model showed, defections of directors increased, setting off a vicious cycle.
These cycles were not the only ones at work in the company. In fact, the number of interacting cycles made it hard to think through the problems in a linear way—a difficulty the resource map helped overcome.

2. What "people policies" does the target growth rate require?
The resource map showed managers that they could, in fact, achieve the required growth rate by returning to organic growth, but only if they also avoided swamping revenue-earning business with new staff. The trick would be to recruit and train in anticipation of growth in client demand rather than in response to it. When the forecast level of demand was reached, enough trained people would be in place to give high-quality service. Likewise, the firm needed to hang on to idle staff members during downturns to ensure that it had enough people when business picked up.

Managers of the firm identified some other useful policies, including the idea of developing specialists as well as generalists, thus promoting a more efficient division of labor. Such policies, however, were secondary to the main finding: that organic expansion plus "recruiting to forecast" could produce a sustainable 10 percent growth in the number of the firm’s directors.

3. How quickly will the new policies show results?
Obviously, the firm couldn’t reach its target immediately. It had to make several trade-offs—between, for example, the cost of intensive training and the cost of mistakes that inadequately trained staff might make (Exhibit 4). The model helped managers decide how to optimize each such trade-off. They could then design a phased growth plan for reaching the 10 percent target in three to four years, without making the firm significantly more vulnerable to risk.

Decisions based on the DRV often take time to bear fruit. A management team therefore needs courage to stake its strategy on these results, but the payoff can be great, for once a virtuous cycle is established, it can spiral upward indefinitely.

4. How much time should directors spend coaching apprentices?
The surprising answer: none at all. The earning power of the directors was so great that the marginal minutes they spent on client work rather than coaching juniors had the cumulative effect of sustaining the financial performance of the firm and the collateral effect of enhancing its reputation and attracting better recruits, who could quickly learn the basics of their trade through internal training courses. Meanwhile, though, other professional-services firms were increasing the number of hours their senior people spent coaching junior staff members. This discovery brought home an important lesson: resource systems are complex, and what might be best practice in one high-performing organization could prove unproductive in another.

Future shocks
In a series of simple experiments using the DRV, the management team of the financial-services firm tested the robustness4 of the business when subjected to sudden shocks. Each experiment suddenly depleted one or more key resources to see what would happen to the business. The firm learned three lessons unequivocally.

Defecting directors hurt the firm much more than defecting clients, for losing one client lets a director spend more time on the rest

First, hang on to your colleagues. Directors had previously been more concerned with keeping their clients—not a surprising choice, since their compensation was related in part to the size of their personal client bases. But the model showed clearly that losing a group of top directors would probably push the firm into a tailspin. The firm was actually far more resilient in the face of client defections, since losing one client permitted a director to spend more time on the remainder, which in turn improved the reputation of the firm and won it new clients.

Second, don’t count on stock options, for if the stock crashes, several directors leave at once, waving their worthless options and finishing off the firm. Although this form of performance-based compensation works well when the firm grows, people also need less tangible reasons—an attractive culture, for example—to sit tight while their options are out of the money.

Third, finding the management levers that keep such intangibles as culture at the right level—in this case, by returning to organic growth and by hiring in advance of need—is pivotal for protecting a company from shocks.

Using dynamic-resource maps to manage growth
The firm’s managers could choose the right growth resources in the right quantities at the right time thanks to a dynamic-resource map. By examining the upstream factors driving the accumulation or depletion of a strategic resource, the managers could anticipate the downstream effects of these factors and plan accordingly.

To give just one example, the firm had formerly adjusted its strategy when the number of its clients fell. But the resource map showed that a decline in the director capacity of the firm was an accurate herald of a declining client base, and this insight gave managers enough time to correct the problem before clients began to leave. The flow of companies in to and out of the client base was a yet more sensitive leading indicator. Even if the number of clients did not change at all over the course of a year, it was much better for the firm to gain and lose 10 clients (rather than, say, 70) in those 12 months.

Leading indicators should be used to measure not only tangible stocks and flows but also, despite the greater difficulty of measurement, intangible ones. In this financial-services firm, growth depended on the strength of the culture. But how can such an amorphous asset be measured? The firm found a simple yet effective proxy: the ratio of the sum of years its current staff members had spent at the firm to the sum of their total years in the industry. Management used a decrease in the ratio as a warning to build the firm’s culture. Taking cultural measurement seriously, and choosing to grow organically as a result, has been central to the success of the firm’s growth strategy.

The DRV approach gave the managers of the firm an integrated picture of how its business processes, combined with its talent, increased shareholder value. The exercise also changed the managers’ minds about how to run the firm. Previously, the people who wielded the most power in it were the directors with the largest number of big clients. Subsequently, the people who had led the DRV effort became leaders in the firm even though some had no clients at all. They knew how to manage the firm’s talent, and that gave them the edge.

Do you need to understand people better?

Management teams seeking answers to some of the following questions might find the dynamic-resource view a useful tool:

1. How do our people affect the value of the business?
What effect would losing one high performer have on our share price? What if we lost ten?
How much value do we forgo by hanging on to poor performers?

2. How much value do our processes for developing people add to the company?
Can we make a business case for all of our development programs?
What balance should we attempt to strike between developing our own talent internally and bringing in talent from the outside?
How does the shape of our promotion pyramid affect our growth prospects? Do we have too many people at the top?
Should we train anyone at all?

3. How should we manage the intangible assets vested in our people?
Can we measure the trade-off between an investment in our culture and an investment in new products or services?
How should we balance cultural continuity against the need to adopt fresh ideas and practices?
How can we build a "talent brand" to attract the best people?

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About the Authors
Andrew Doman is a director in McKinsey’s London office, where Maurice Glucksman and Lan Tu are consultants. Kim Warren is a teaching fellow in strategic and international management at the London Business School.

Notes
1See Elizabeth G. Chambers, Mark Foulon, Helen Handfield-Jones, Steven M. Hankin, and Edward G. Michaels III, "The war for talent," The McKinsey Quarterly, 1998 Number 3, pp. 44–57; and Charles Fishman, "The war for talent," Fast Company, August 1998.

2See K. D. Warren, "The dynamics of strategy," Business Strategy Review, 1999, Volume 10, Number 3, pp. 1–16.

3To make the calculation simple, the human-resources director assumed that any surplus of staff at the outset would be offset by the lower productivity of the new recruits and the additional work needed to coordinate them.

4Here "robustness" reflects the volatility of profits in the face of internal or external shocks.