Wednesday, January 15, 2014

Lab Notebook: A revolution in Human Resources.

Since the early days of Silicon Valley, venture capitalists (VCs) consider team quality to be a major factor predicting success of a startup. In the US, successful entrepreneurial teams typically emerge from universities and high-tech companies. In Israel, startup team formation often happens in the army, including, its high-tech units. Innovative, risk-tolerant, hard-working, highly-skilled people who can work together effectively are usually called "the A team." Startups succeed when the team discovers and takes advantage of a new, profitable business model, e.g. based on the latest and greatest technology. (Examples: Fairchild Semiconductors, Atari, Apple, Sun Microsystems, Netscape, PayPal, Yahoo, Google, Netflix, Facebook, Twitter, Wase, etc.)

Now, mature companies are trying to use the startup model to get employees to work as teams on specific projects, rather than functional departments in charge of internal processes. Netflix pioneered this approach and its former head of talent acquisition, Patty McCord, actively promotes it today. (See the HBR article for more detail). LinkedIn and Facebook use internal hackatons to identify new potential products and teams that can deliver them.

Another model is acqui-hiring, when an established company acquires a successful startup, so that they can work as an internal entrepreneurial team. Google and Facebook practice this model extensively. For example, many consider the recent acquisition of Nest GSV as an acqui-hire play by Google to get on board a team that can create a successful consumer device.

These approaches take into account that the startup-based innovation model created in Silicon Valley differs dramatically from the successful industrial innovation model pioneered by Henry Ford. He invented not only the mass-production logistics and manufacturing system, but also revolutionized labor hiring. Instead of an ethnically-based team of low-skilled workers hired to build a railroad or unload a ship, Ford wanted to see an English-speaking specialist who could fit into his production process. Similar to the quality control process in parts manufacturing, Ford tasked his newly-invented human resources (HR) department with selecting persons that fit a specific job criteria: work skills, education level, family history, ethnicity, etc. Elements of his approach were based on the popular at the time theory of eugenics, which advocated selecting people based on certain inherent traits. (Today, eugenics is broadly associated with racism and bigotry). Ford's HR system proved to be highly successful for the American industry because it allowed companies to plug individuals into well-defined work and social roles. (For example, when hiring engineers GE routinely interviewed wives of the candidates to make sure they possessed proper moral values.) 

After the World War II when educational and social roles started to shift, the new idea of the Human Capital eventually took hold. Large companies started treating their employees (often with an implied life-time job guarantee, e.g. a trade-union contract) as capital. As workplace requirements changed, the employees were provided with on-the-job educational and training opportunities to maintain or improve their skills. To manage the workforce and comply with labor laws, HR departments set up performance evaluation processes, with regular manager feedback, promotions, and incentives structures. Nevertheless, at the core of it was the old Henry Ford's idea that an individual had to fit into a pre-defined corporate production process. 

Of course, this model doesn't work in an environment where breakthrough innovations are required for company growth. Fist, startups simply can't afford the overhead. Second, large corporations, despite their incredible R&D capabilities, proved to be unable to accommodate innovations from within. Clayton Christensen described this problem in his seminal book "The Innovator's Dilemma." Unfortunately, the solutions that he offered don't seem to work despite people trying hard to implement them. Research in Motion, the maker of Blackberry phone, would be a great failure example (see the ft article). The company did everything by the book, but eventually could not compete with Apple's iPhone.

The current revolution in HR promises to solve the Innovator's Dilemma by giving internal entrepreneurs enough freedom inside the company to create innovations. It also lets companies get rid of employees that don't fit into their culture or have outdated skills. As a result, they get a mobile, active, motivated workforce that can move quickly and carry innovation risks/rewards, rather than offloading it to the parent company. Of course, traditional companies and their HR departments will lag behind in implementing the new model. Most likely, it will continue to spread through new successful startups capable of scaling their initial business into new technology markets.

tags: invention, innovation, control

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