Watch this Wall Street Journal interview by Francesca Donner with Wharton Professor Peter Cappelli to learn “Why Jobseekers Don’t Land Jobs”. Peter Cappelli explains why the hiring process is frustrating for employers and job seekers and how to fix the problem. Click here for the video.
In ROKC, Leadership built on the Return On Key Component, we identify the same issues but drill down to a finer level of analysis by positing that employers – fundamentally in the United States but also elsewhere – have achieved significant productivity gains by treating corporate functions as if they were services bought in from outside. Here is a passage from ROKC explaining this analysis:
“As you may have already discerned, as important as it may be to have talented people working with the business on the transformative process, it is in risk management where truly talented people are required. If you remember that the transformative process is where value creation occurs then you will quickly understand the company can accept small imperfections here. Likewise, if your recall that risk management predominantly destroys the value created by the transformative then you can imagine that any small imperfection here can have a potentially exponentially destructive impact on the ROKC. Consequently, the risk of having the most talented person in a risk management role is far more important for the business to succeed.
The first way to manage talent risk is to hire people with the assets that match the company’s assets. In this case, a hire is comparable to an external professional who possesses their own key component. The only difference is the amount of time this person is required by the company, making it more economical to employ them directly. This one-person business partner helps the business succeed by using their own key component exclusively for the benefit of one client, an in-house client.
Accordingly, a company using Great Plains accounting software will seek to hire an “Accounting Expert in Great Plains.” Similarly, a business using Magento e-Commerce Suite will not seek any old e-commerce specialist but one having “Experience with Magento.” Or, a company using SAP will hire an expert in SAP, another using Six Sigma will want a black belt and so on and so forth. But it doesn’t stop here, an apparel company will want a hire with industry or even sector experience: “Must have apparel industry experience.” or “Must have 5 years in luxury women’s footwear.”, respectively.
As much as this approach tries to increase the chances that the hire knows how to use the company’s assets when they walk in the door it, which reduces talent risk, it increases the risk of group think. The circulation of human resources within the same industry over time will blind everyone to systemic risks like those that brought the financial system in 2008. Back then, analysts priced financial products using a 40% recovery rate because it was considered the industry standard instead of questioning this one very important assumption which might have avoided the crash altogether, according to some industry experts. Bringing in a fresh set of eyes who contributes non-industry standard views can actually be more important for risk management than recruiters think.
In-house functions that cannot be manage risks with ease may be better done by outside specialist. These are companies who built their business on their key components and now sell them to help manage their client’s risk. Traditionally, experts like doctors, lawyers, auditors, architects, psychologists, scholars fulfilled this role. Nowadays, there are whole battalions of local, national and international companies to whom a business can outsource their risks: warehousing, transportation, supply chain specialists, website hosting, cloud hosting, Saas, Iaas, App developers, ecommerce management services, order fulfillment, payment gateways, digital marketing agencies, engineering firms, security firms, shared services and so on.
Compared with the past when businesses did almost everything in-house, today companies are essentially flat. Or, as I like to say, an upside down banana peel; flat with a small rise in the middle. Today’s modern businesses, especially the big ones, have become a swarm of businesses where each worker bee is specialized in its task. One business may buy the inputs for a product while another manages the supply chain that gets the inputs to where they need to be used, a shipping company gets the inputs there, and a contract manufacturer builds the product. Meanwhile, an IT company provides the software that allows everyone in the process to see what’s going on and an accounting company posts the financial flows to the accounts of multiple legal entities above. While this is going on orders are being taken, advertising is being conceived of and produced, social media experts are tweeting, and so on. Each of these companies absorb a part of the risk traditionally held by the big company.
As we have argued throughout this book, the ROKC method focuses the business on its competitive advantage in order to maximize shareholder returns. But it can also maximizes stakeholder satisfaction. The decision to maintain a process and/or its risk management in-house, like the decision to externalize it, means that those talented people who work with the company on the ROKC will feel that they are providing real value. This brings real satisfaction to everyone.”
It is also interesting to note how the lion’s share of productivity gains occur in the U.S. and other “economically liberal” countries. Often this has been attributed to the speed with which information technology has been adopted by a country in general and businesses in the specific but this is not all the story because every country uses information technology. The most significant productivity gains have been in countries where company formation is easy, like the U.S., U.K., and other culturally Protestant nations. Shedding corporate jobs is the easy part. Finding new employment opportunities is more difficult the process of “creative destruction” does not work properly.
During the Great Recession, many European governments were put under extreme pressure to reform their labor markets, which they did. But without the commensurate reduction in the barriers to company formation – administrative, taxation, hiring, access to capital and such – the result has been high unemployment especially amongst the younger segments of the population.
This phenomenon serves to illustrate the misconception many business people hold that Europeans are inherently lazy: the siesta, long vacations, short workweeks, and so on. The fact of the matter is rigid labor legislation is the counterpart the hegemonic economic actors have to pay for quashing competition within their borders. But enough about this subject that could take up a whole book on its own.
Although Peter Cappelli’s points are very close to my own there is a whole structural analysis that is missing but can be found in the politics of each country. In my humble opinion, it is only through legislative action that it will be possible to reverse the tide by placing wages and individual freedoms at the center of the debate. “A fair day’s wage for a fair day’s work.”