The War for Talent, Part 1

Finding the best workers for highly skilled positions still isn't easy. This book excerpt has plenty of advice on how do it now

With unemployment at a six-year high of 5.7%, it would seem that companies would once again have their pick of the recruiting litter after struggling to find good people in the go-go economy of the late 1990s. Not necessarily, it turns out.

A surprising 88% of U.S. corporate managers believe that it's as hard as ever -- maybe harder -- to attract and retain talented employees compared with better times, according to a recent study by Towers Perrin, a global human resources consulting firm. (That study, which polled some 4,051 managers, was issued in early September -- before the terrorist attacks but after the U.S. slipped into a recession sometime in March.) Still more managers -- 92% -- say it's at least as difficult to motivate employees as it was during the boom years, the study found.

So if the quest for talent is still so trying, how do the best companies attract the best people? A new book aptly titled The War For Talent (Harvard Business School Press, 2001) provides some answers. The authors, McKinsey & Co. consultants Ed Michaels, Helen Handfield-Jones, and Beth Axelrod, drew from research on management practices at dozens of top companies including General Electric, Home Depot, and Nabisco. Although the authors found that better talent indeed leads to better corporate performance, "only one in four companies actually made strengthening its talent pool a top priority," the books says.

In Chapter Four, "Rebuild Your Recruiting Strategy," the authors argue that managers must find new ways to recruit quality execs, as companies can no longer afford to limit their search to just people who are looking for new jobs. What's more, the hiring process can't be left to a company's human resources department alone, the book declares. To persuade the very best outsiders to come aboard, a company's highest performers should lead the recruiting strategy, the authors proclaim. In fact, line managers should spend a day or two every month recruiting, the book argues. Following is the first part of an edited excerpt of Chapter Four, in which the authors detail their recruiting strategies for gaining a talent edge. Check back soon to read part two.

Chapter 4

Rebuild Your Recruiting Strategy

When Henry Ford decided to double the salaries at his Highland Park (Mich.), assembly plant in 1914 -- from about $2.50 to a fabulous $5 a day -- the news made headlines in Detroit and across the country. It was hardly necessary, though. Word had already spread around town that the upstart car manufacturer would be hiring at that wage.

Overnight, thousands of people began to line up at the factory gates. At dawn they began filing through the hiring department, hats in hand. On the other side of the desks were leagues of employment agents, who interviewed the men and stamped their papers. The lucky ones were chosen, and those not selected went looking for work elsewhere.

For generations, that's the way recruiting worked at most companies. The hiring department would put out the word, and people hungry for work flocked to the gates. The company had the power and made the selection. The employees had precious little power.

Today, of course, it's a whole different game. The balance of power has shifted to talented people. The tipping point came a few years ago when the economic expansion absorbed all the available talent. For the first time since the Industrial Revolution, companies were finding no one lining up at their gates. The initial response was to run some help-wanted ads, but that didn't bring a flood of résumés anymore.

What made it worse for companies was that this happened precisely when they needed not just more people but more talented people than ever before.

Companies jumped to pursue a host of aggressive hiring tactics: bounties or tropical vacations for employees who suggested the most new hires, "flipping" company Web sites to get access to other companies' employee directories, and so on. But hiring gimmicks alone -- regardless of how good they are -- aren't enough to win the war for talent. To really win on the recruiting front, you have to do much more. You must rebuild every part of your hiring strategy. In this chapter, we show you how to do this by pumping talent in at all levels, by hunting for talent all the time, by tapping many diverse pools of talent, by finding passive job seekers, and more.

The frenzied pitch of the talent market in the late 1990s woke companies up to the need to rebuild their recruiting strategies and stimulated many creative new recruiting approaches. From time to time the economy will soften and recruiting may not seem like the crisis it once was. But wise companies will use any lulls in the talent wars to strengthen their talent pipeline and to opportunistically gain share in the talent market. Though you may want to reduce the quantity of people you hire during cooler periods, don't stop hiring high-quality talent-people who will be harder to win when the competition heats up again. The new recruiting strategies we recommend make good business sense in any economic environment and will be required to keep up with the competition for talent over the next couple of decades.

Pump Talent in at All Levels

For several generations, the corporate ladder was the dominant image for the way people moved through companies. People entered at the bottom, and if they were successful, climbed to the top. This was the contract between the company and the employee, one where the payoff came after fifteen or twenty years of service. Under this system, it was rare that an experienced manager was brought in from the outside and put in a position above a twenty-year veteran. Just ten years ago, it would have caused a heated stir, and certainly it would have appeared to the outside world as an admission that the company's development system had failed.

Yet in the last several years, that old paradigm has been shattered. It began to break in the early 1990s, when companies realized that they didn't have enough talented managers in their ranks to pursue all the opportunities and challenges they were facing. It crumbled further when they started losing large numbers of their managers to "new economy" start-ups and other companies. It was simply not possible to fill all those positions from within; companies began to raid competitors' talent to fill their vacancies. By the end of the decade, promoting exclusively from within, the cultural model that had existed since the beginning of the Industrial Revolution, was disappearing.

Hiring in at senior levels has advantages

For these reasons, some companies have begun to see the advantages of bringing talent in at more senior levels. Regularly bringing new people in is a good way to constantly calibrate-and even raise-the company's standards for talent. Of course, new people also bring fresh attitudes, new perspectives, and new ideas to the company.

Because they are committed to providing development and promotion opportunities for their own people, some companies have been reluctant to hire outsiders. It's easy to assume that hiring from the outside is inconsistent with development, but it isn't. Filling 10 percent to 25 percent of vacancies with outsiders will decrease the number of advancement opportunities for insiders a little bit, but not substantially. In fact, bringing first-rate leaders into midlevel and senior positions can provide admired role models for the more junior people.

GE, for instance, is regarded as one of the great developers of its own executive talent and continues to be primarily a "promote from within" company. Yet GE still brings in external hires at middle and senior levels. GE recognizes that external hiring, especially at the higher corporate levels, carries some risk, but the company is willing to assume that risk to expand its corporate gene pool. In fact, of the roughly 75 positions in the top 500 that become vacant each year, GE regularly fills about 20 percent from outside the organization.

Some executives worry that outside hires will destroy their company's culture. Bringing in a large number of outsiders all at once will probably change the culture, and in some cases this may be beneficial. But we believe that filling only 20 percent of non-CEO vacancies from the outside will not substantially change the corporate culture, and it could be just the breath of fresh air-and expertise-the company needs.

The Home Depot is an example of a company that has recently begun hiring from the outside-after years of strictly bringing its leaders up through the ranks. The Home Depot opened its doors in Atlanta in 1979. Ten years later, with about 145 stores nationwide, some of the first managers hired had climbed up to the top managerial ranks. This was consistent with the promise of founders Bernie Marcus and Arthur Blank: Join us, do well in the stores, and rise as far as your abilities will take you.

By 1996, however, Blank realized that there was only room for so many 100,000-square-foot orange boxes dotting the United States. He and his top team developed a growth strategy to launch five major new initiatives: international, convenience stores, home design centers, Internet/direct, and greater emphasis on professional contractors. In a major change of policy, Blank vowed to hire "the best person in the world" to lead each of these initiatives-even if that person had to come from the outside.

He recognized that outsiders might be viewed as interlopers, not having paid their dues by wearing The Home Depot's orange aprons in the aisles for years. However, Blank reasoned that the existing managers were needed to keep growing the traditional Home Depot business by 200 or so stores a year, and he believed that new skill sets were needed for the new businesses.

In 1997 and 1998, Blank searched the world for the top talent he needed. He hired the COO of Ikea, the Swedish furniture chain, to head International; the number three executive at Macy's to lead Diversified Businesses including Expo, the home design center; the COO of Orchard Supply, a successful California hardware convenience store chain to lead Convenience; a top manager from Disney to head up their Internet and direct business; and the CFO from one of GE's businesses to be their new CFO. He wasn't kidding when he said the best in the world.

Within two years, one of the five new executives had left the company, but the other four remained, and The Home Depot had forever changed its approach to hiring. In fact, in late 2000 the company hired GE executive Bob Nardelli, who had run GE's locomotive and turbine divisions, and was one of the two senior executives at GE who was not chosen to succeed CEO Jack Welch.

Although Nardelli had little consumer or retail experience, he is known as a hard negotiator with suppliers and a very hard worker himself, requisites for The Home Depot's culture. Blank vacated his position, first to become co-chair of the company with Bernie Marcus and subsequently to retire, so that Nardelli could have the CEO job. "Realizing that we had a terrific opportunity to add a business superstar to The Home Depot," Blank said, "we moved quickly."

Similarly, as discussed in chapter 2, when SunTrust Banks decided in 1996 that it needed 600 new relationship managers to boost its growth, it decided to break with its traditional hire-from-within policy. The move was a shock to a culture that traditionally hired only at entry levels: They hired bright college graduates and grew them over three to seven years into midlevel managers. However, the bank had come to the conclusion that it couldn't meet its goals-which included double-digit growth-without adding more and even better managers to the mix.

Bill Rogers, then the Executive Vice President of Corporate Banking in the Atlanta bank, was one of the pioneers of this change. He began by trying to determine what kinds of people currently employed by the bank could serve as models for new hires. "I asked myself, 'Who are the best salespeople we have?'" To answer this question, he and his senior executive team quintiled their account executives based on their performance. Then, with the help of an industrial psychologist, the top-quintile people were assessed on their quantitative skills, selling characteristics, experience, and leadership style. "This profile," he explains, "became the bar by which we judged future hires. It gave us the confidence we needed."

Armed with this profile, Rogers and his team began to look outside the bank for the candidates they needed-relationship managers with five to ten years of experience. He encouraged his managers to come up with names of candidates. He also asked the bank's clients, "Who is the best competitor of ours that calls on you?" For very specific and specialized hiring needs, they engaged the help of search firms. When candidates were discovered, Rogers invited them in for interviews.

Eventually an industrial psychologist administered standardized tests to assess each candidate's quantitative, verbal, and selling skills. They were similarly reviewed to determine how they would fit into SunTrust's culture. "We asked tough questions," Rogers recalls. "We concentrated on finding applicants whose work ethic, interpersonal skills, and values would indicate that they could assimilate easily and be successful." Over the next eighteen months, Rogers and his five key managers spent 50 percent of their time recruiting, screening, cultivating, and assimilating new people.

Their persistence paid off. Within two years, Rogers's division had doubled the size of its sales force from forty to eighty people. Because the new hires had much more experience than the average existing salespeople, the infusion raised the bar for the entire sales force. Before long, profitability for Rogers's corporate banking unit increased substantially, and the number of new clients doubled. Even the best of the existing account executives raised their sales productivity significantly. "Of the top people we hired into key positions," Rogers boasts, "almost 100 percent have stayed with us. More than half of our top-quintile account executives are now newcomers. In fact three of our top five relationship managers weren't here two years ago."

Managers across SunTrust's twenty-four banks were having similar success. In the first year, SunTrust hired 600 new relationship managers, increasing the overall sales force by 20 percent. This allowed them to more than double their growth rate from 1996 through 1999.

Mitigating the risks of mid- and senior-level hiring

Hiring people from the outside does involve some risk. Failure rates of senior external hires can typically be around 30 percent. However, that shouldn't stop you from employing this powerful talent-building lever. When you consider the benefits, having 70 percent of these new hires succeed is far better than not trying at all. Rather than forego hiring from the outside, we urge you to get better at it. Learn how to reduce the failure rate.

Easier said than done, you might be thinking, but there are steps you can take to increase the success rate of outside hires:

First, screen for cultural fit to reduce the strength of the organization's antibody rejection. Studies have shown that poor cultural fit is a major cause of turnover for new hires. Cultural fit doesn't mean hires have to come from the same industry-after all, one of the benefits of outside hiring is bringing in people with new perspectives. But it does mean their leadership style and values have to be compatible with the company's culture. Insist that cultural fit be explicitly assessed and discussed as part of the recruiting process. That said, assessing fit isn't easy to do, so you might consider engaging the services of an industrial psychologist to help with this, as Bill Rogers did.

Second, provide a thoughtful assimilation process for each new senior hire. This should include an orientation to the formal aspects of the company such as its operating plans, strategic plans, and organization charts, but it should also include insights on the informal aspects, such as how decisions are made and how to gain support for initiatives. Early agreement on performance expectations and time frames should also be part of the process.

Finally -- and this step is all too often overlooked -- the new executive should get assistance building his or her internal network and understanding the cultural idiosyncrasies of the organization.

The Limited has instituted a deliberate process to help its senior hires get a good start. In 1997, CEO Les Wexner began an aggressive hiring campaign to bring in a number of superstars from inside and outside the retailing industry. These new hires included new leaders for half of The Limited's businesses. He also brought in senior people as function heads-marketing, HR, finance, and planning. This was just the beginning of an aggressive hiring campaign.

At first, the new people went straight into their jobs-with little help in getting acclimated to the company. "It was like throwing people into the deep end of the pool with a fifty-pound block tied to their leg," concedes Len Schlesinger, COO and Executive Vice President of Organization, Leadership, and HR. Needless to say, a large number of them didn't assimilate and ended up leaving. Shaken by these failed attempts, Wexner started to question the aggressive hiring program.

Instead of abandoning the hiring push, however, The Limited set out to make it work by starting an ambitious assimilation program. New senior hires now spend their first two months in the company's "On Boarding" program. During this time they meet with each of the company's thirty top leaders, listening to their thoughts on strategy, performance, and challenges; and they shadow their counterpart in another business unit. They are handed a stack of the company's most important speeches, presentations, and articles to read to gain a historical understanding of the company. They get a primer on retail math and a guide to company acronyms and buzzwords.

Later, they spend several days in the stores, the distribution center, and the design office, after which they are required to present a report on what they learned and what suggestions they might have for improving those areas. By the time the recruits start their jobs, they are connected with the company, their business unit, their function, and the community. The "On-Boarding" program at The Limited is a good example of outside hires being given the support they need to make the transition as smooth and successful as possible.

Entry-level hiring is good fuel for the system

Just as it is important to pump talent in at middle and senior levels, it is also important to pump in talent at entry levels. Bringing a strong pipeline of young talent into the company fuels the system for years to come. It also allows you to instill, early on, the culture, values, and skills of the organization. Most companies hire at the entry level, of course, but they don't do it as well as they should.

When Jeff Skilling joined Enron in 1980 to start Enron Capital and Trade, he immediately hired a large number of experienced investment bankers, traders, and executives from the outside. Skilling also decided to bring in a steady stream of the very best college and M.B.A. graduates he could find to stock the company with talent. To do this, Skilling started the Analyst and Associate Program, which offers entry-level hires a great opportunity. For their first two years, the recruits are rotated through Enron's business units so they can learn the essentials of risk management and trading. Following that training, the recruits move on to one of Enron's business units or go back to school to gain further education. The most impressive thing about Enron's Analyst and Associate Program is its scale. Every year this program brings in 500 recruits.

To be sure, not every company can handle 500 new entry-level recruits annually, but most companies could do more entry-level hiring of leadership talent than they currently are. If your company isn't bringing in a significant number of highly talented young people each year, it is giving up an important talent-building tool.

Hunt for Talent All the Time

In the past, companies recruited people to fill vacant positions. When a position became vacant, the hiring manager wrote up a requisition, specified the exact requirements the candidate would need for this particular job, and then went looking. "I happen to need a basketball player today. Did Michael Jordan happen to just quit his job?" is how Professor John Sullivan, head of the HR Management program at San Francisco University, describes the traditional approach to hiring. As he points out, the chances of landing a superstar using this approach are not very good.

This position-centric approach worked fine in a loose talent market, but in a tight market for managerial talent, companies must adopt a new strategy. Companies need to hunt for talent continuously so as to capture people when they are ready to make a move.

Opportunistic hiring may seem a little strange, but we've found three ways to make it work. First, identify the kind of job a candidate would fit and court that person until one of those jobs becomes available. Second, hire them with a specific position in mind, even though the slot is not currently open. While they are waiting for that position they can be doing special projects and getting to know the organization.

Third, create or earmark certain jobs that are suitable for mid- to senior-level hires. Strategic planning, business development, audit staff, and assistant plant manager are examples of jobs that could be earmarked as entry points for experienced people. Keep people in these intake jobs only for a short while (six to eighteen months) so they are vacated for the next incoming hire.

PerkinElmer makes opportunistic hiring a regular part of its recruiting strategy. In fact, it has retained a headhunter to constantly look for experienced people who would make good general managers. In PerkinElmer's case, the point of entry for these incoming people is the business development function, where the new recruits work on special projects and learn the business for twelve to eighteen months while they wait for the right line position to become available. This program allows PerkinElmer to hire people with little knowledge of their industry. So far, it has hired four people a year through this program. The first four left the "bullpen" within sixteen months and have been extremely successful.

John Danner, a former nuclear submarine engineer, is an example. Danner had left the Navy and was in consulting when PerkinElmer found him and discovered that he wasn't completely happy. Courting Danner at a distance for a few months, PerkinElmer finally asked Danner to meet with CEO Greg Summe. A few days later, Summe made Danner an offer.

It wasn't an easy sell, though. Danner waffled for two months, until he was assured that his first position with the company would lead quickly to even better opportunities. "They sold me on the promise that I could create opportunities for myself as a business developer that would lead to a second job loaded with ownership," he explained. Indeed, fifteen months after signing on, Danner became general manager of an $80 million biotech business, which he helped acquire for the company.

Rich Walsh, PerkinElmer's head of HR, reports, "Those are ideal situations. We want to bring in high-potential people with the right intrinsics, teach them about our company, grow them in our culture as they grow our business, and eventually when they're ready we hope they'll run a business."

GE, fifty times bigger than PerkinElmer, is a leader in opportunistic hiring. It now brings more than 100 people a year from consulting firms, accounting firms, the military, and other fields into its business development, corporate audit, and other "transition" assignments. Generally speaking, these new hires spend six to eighteen months in their transitional roles, contributing to special initiatives, audits, and other functions while they get to know the business and the organization. If, after eighteen months, the person has not been hired by one of the divisions into a line position, they usually leave. This system, which began at the corporate level, was so successful that it was replicated in each division.

Companies like PerkinElmer and GE -- firms that regularly hire experienced people into these kinds of transition jobs -- develop a good track record in the eyes of candidates. Potential recruits are more willing to make this leap of faith when they can see that others who have taken the same path are now successful in great jobs within the company.

Do you opportunistically search for candidates? Do you scout for recruits whenever you interact with your suppliers and customers? Do you use conferences and trade association meetings as opportunities to scout for talent? Do you keep tabs on the careers of prospective candidates, noticing, for instance, when they may have missed a promotion? Finally, do you watch for favorable macro trends, such as corporate or military downsizings, mergers, and the dot-com implosions, that might offer up good candidates?

Sears, Roebuck and Co., for instance, hired an entire group of twenty-five software engineers who didn't want to leave Boise, Idaho, when their employer, U.S. Bank, merged with First Bank Systems. This group loved living in Boise, had families there, knew they worked well as a team, and wanted to be hired as a group. They held weekly meetings at a food court and systematically passed word of their intentions to personal contacts, including staff at a Chicago bank.

The bank couldn't figure out how to structure the deal. Then someone on the bank staff mentioned the proposal to a friend who worked at Sears. He knew that Sears was planning to locate a technology center outside Chicago and had acquired a site in Austin. In the end, Boise, with a ready-made staff, looked better than Austin, and Sears located its facility there instead. The original group later recruited another 125 people to join them.

Reprinted by permission of Harvard Business School Press. Excerpt of The War for Talent by Ed Michaels, Helen Handfield-Jones, and Beth Axelrod. Copyright © 2001 by McKinsey & Co. Inc.

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