Posts Tagged With: Management

Why firms don’t experiment – they want to hire consultants!

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Photo Credit: Marooned on Flickr, link:http://www.flickr.com/photos/marooned/235289077/Dan Ariely has a thought-provoking piece in the Harvard Business Review about firms that don’t want to experiment, and change. Based on his description and my experience I think that his assessment of the situation is accurate. Here’s a bit from the article:

This is a typical case, I’ve found. I’ve often tried to help companies do experiments, and usually I fail spectacularly. I remember one company that was having trouble getting its bonuses right. I suggested they do some experiments, or at least a survey. The HR staff said no, it was a miserable time in the company. Everyone was unhappy, and management didn’t want to add to the trouble by messing with people’s bonuses merely for the sake of learning. But the employees are already unhappy, I thought, and the experiments would have provided evidence for how to make them less so in the years to come. How is that a bad idea?

Experimentation and consulting are substitute goods, in terms of providing firms with useful information about how they can grow. However, getting advice from consultants is high status, whereas experiments are low status (like Steven Levitt, who became popular by running experiments that other economists thought were below them). It’s important to note that we should expect consultants to recommend less experimentation than actually makes sense, because experimentation is a substitute of advice-giving.

It’s well known that experimentation and change are necessary if a firm is going to prosper in the long run. In From Poverty to Prosperity Arnold Kling and Nick Schulz make the eye-opening observation that only one firm that was in the Dow Jones in the 1930’s is still there today, and that firm’s product is now completely different. As firms grow, entrenched divisions hold more sway and change becomes less popular.

At the same time, it may be hard for shareholders or board members to measure the amount of experimentation that goes on within a firm, on things like price points or marketing strategies. Furthermore, it’s pretty clear that individuals have an incentive to minimize the amount of experimentation that goes on.

Ariely’s guess is that the tradeoff between short-term costs and losses and long term gains, and the false sense of security provided by experts, are the reasons why firms don’t experiment as often as they should. I would add that in a firm where data is not king, managers believe that experimentation can undermine other workers’ confidence in their ability level. Sure, the firm might lose out in the long run, but they will maintain their status by hanging on to the status quo.

Ariely’s frustration is one that I often share. I always want to try out new things; the upside’s high and the downside is fairly limited (you can always end a new initiative if it doesn’t pan out). Unfortunately this isn’t really met with enthusiasm by many people I’ve worked with, so I resort to experimenting in my personal life, or getting really good at something even if it’ll never get implemented.

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Is it true that to do the best work, you need to hire the best people?

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I’ve read a few posts by prominent Silicon Valley people that say this.

Here’s a quote about hiring from Slava Akhmechet at RethinkDB:

I look to Bell Labs for inspiration. At its peak, the folks at Bell Labs developed radio astronomy, the transistor, the laser, information theory, the C programming language, and the UNIX operating system. These are the kinds of people you should be trying to hire. Think Dennis Ritchie before he developed the C language. Think Claude Shannon before he invented information theory. When in doubt, ask yourself: “would this person have been good enough to be hired for a junior position at Bell Labs during its peak?” If the answer isn’t a resounding yes, it’s a No Hire.

Joel Spolsky also stresses the importance of hiring good people. Similarly, HR consultants often stress the importance of hiring only the best. As the Boston Consulting Group puts it, A players hire other A players, B players hire C players and C players hire F’s. Are they right to focus so much attention on hiring only outstanding people?

It’s clear that if you are trying to sort through an applicant pool, you need to get the best possible sense of what an applicant will look like once they’re hired. It’s not good to make mistakes in your interviews, or fail to interview candidates thoroughly enough. Two, it’s possible that people will be biased toward hiring too low quality employees, and emphasizing hiring good people will help HR raise hiring standards.

It’s also true that in a startup, any one individual has a much greater effect on the final shape of the company than at Wells Fargo. So startups and small firms might be right to exercise lots of caution in hiring. Furthermore, the best programmers can be five times as productive as average programmers.

But as Bob Sutton and Jeffrey Pfeffer point out, it’s a myth that the best companies are best because they have the best people. Usually the best companies have great systems that bring out the best in people.

Take a look at urban poor schools that dramatically outperform their peers and even richer schools, like the KIPP schools, or Jaime Escalante’s calculus program, which brought a bunch of kids from inner city LA through Calc BC and sent many onto the nation’s most prestigious colleges. Where so many others have seen kids who were unwilling to learn, they have succeeded and turned ordinary street kids into superstars. Escalante and KIPP don’t have the luxury of hiring the best people, like Philips Exeter, Wharton, or RethinkDB. Instead they built a great system that brings out the best in their students, which is far more impressive than doing great things with people who are already great.

Another example is Toyota, which has such a great production system that the upper management’s role is largely to simply support the system. Sutton and Pfeffer write, “One study showed that Toyota was the only major automobile company where a change in CEO had no effect on performance. The system is so robust that changing CEOs at Toyota is a lot like changing lightbulbs; there is little noticeable effect between the old one and the new one.

The supply of talented people isn’t fixed. Furthermore, our ability to measure talent is limited at best; people have off days, or bloom late, like Kurt Warner, for example.

Furthermore, if you’re a firm that can’t afford to hire the top 10%, implying to your staff that their ability level is fixed would be disastrous. As Columbia University researcher Carol Dweck has shown, mindset is extremely important; people who believe intelligence is fixed become worried about hiding their true level of cleverness, where those who believe it’s malleable work on their skills and continuously improve. If your staff became too enamored of the first mindset, they wouldn’t be doing their best work.

In summary, bad systems are more damaging than bad people, and good systems can turn average workers into stars. Like anything else, hiring workers has tradeoffs; with the best staff come long periods of unfilled positions, increased search costs, and high salary, etc. The importance of hiring “only the best” is probably overstated; clearly hiring good staff is important but it may not be crucial.

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