It has been almost a decade since Michael Lewis’ Moneyball: The Art of Winning an Unfair Game was published, illustrating the power of analytics in developing a successful major league baseball team despite severely limited financial resources. HR has since taken keen interest, as analytics such as Moneyball demonstrated holds great promise to transform organizations, especially as data about everything is becoming plentiful and cheap to collect and maintain. Even as HR struggles to become a strategic partner, analytic techniques like those described in Moneyball represent a significant source of competitive advantage.
What would HCM really look like if business organizations were able to gain insights from their data that analytics promises? Moneyball gives us both a good idea, and an admonition to be careful what we wish for.
We will likely discover that the labor market is appallingly inefficient, and HR is a big part of the problem. We will find that talent is terribly mispriced and mismeasured. We will find our “tried and true” performance metrics contain little information about what individual contributions put points on the scoreboard, and are no more valid than the venerable though errant figures that have been reported in box scores for over a century.
Not what you were expecting? Read on.
Pay is disconnected from productivity
Talent management assumes that talent is scarce, particularly at the managerial level and in specialized skills. As with many of today’s big payroll teams, whether in baseball or business, compensation policies for such talent reflect these assumptions.
However, the first and most obvious lesson from Moneyball is that pay and productivity are not highly positively correlated. Like the New York Yankees or Texas Rangers in Moneyball, having a lot of big money stars in the heart of the lineup will not drive increased win productivity. In addition star performance is not likely to be replicable or portable, and so paying big money for star performance turned in at another firm can be highly risky.
Analytics is helping us discover that truly valuable human capital is indeed firm-specific, and worth the price of investing in its development. Yet just like baseball scouts, baseball managers (field managers responsible for rosters, player substitution and daily performance), and baseball general managers (executive level managers responsible for talent acquisition, trades, compensation, and player development), HR departments are frequently poor assessors of human capital, and do not evaluate it properly or at all during selection. In a Moneyball world, analytics will illuminate what aspects of human capital we should be measuring, and determine what we should be paying for.
Talent and skills are mispriced
Economic theory practically guarantees that talent will be mispriced due to the information asymmetry between companies and persons on the labor market. Moneyball shows us that a truly transformed analytics function will reveal by how much. Regularly accessed salary benchmarking databases will likely be found to be full of meticulously kept, but flawed data, revealing little information about which job categories drive business performance. There will likely be many surprises about which roles are overvalued, and which roles create great value but accrue very little of it to the employee.
Interestingly, some highly visible executives and performers in the organization whose compensation packages are contractually determined might actually be more fairly priced than assumed, as their performance is subject to greater internal scrutiny, their performance metrics more holistic, and compensation subject to greater market discipline.
In a Moneyball world, the assumption of talent scarcity will also be challenged. An analytically transformed HR function will likely find that some types of talent may not be all that scarce, and that artificially induced scarcity such as forced ranking, “up-or out” systems of performance management, or delayering really benefited no one, despite their decades-old practice.
Standard and valid metrics will change the labor market, and HCM practices
As with professional baseball, analytics will give rise to new or recombined performance metrics that will eliminate inefficiency within the organization, an area where HR has become particularly adept since the economic recession of 2007-2008. Yet the other side of gaining a whole new set of metrics is that inefficiencies that had been previously exploited will offer few such opportunities in the future, as the true drivers of business performance become more widely known and measured. Analytics will kill as many opportunities as it discovers.
For example, it is unclear right now who benefits from the labor market information asymmetry, but it is clear that someone is paying too much. As the value of individuals and the pay they receive becomes more a matter of fact than speculation, some job categories may demand a greater portion if the gap appears too wide in favor of the company.
For the last twenty years strategic human resource management has sought the missing link between HR and tangible business results, and has found dozens of measurable business inputs that are correlated with hard business and financial outcomes. However we still do not know why these input behaviors drive business value, although we are fairly sure they are not direct inputs of financial performance. Analytics will be sought out less for determining what HCM investments drive performance, and more for determining the behaviors HCM influences, which in turn drive business performance. That is much more difficult to do, but will become the hallmark of a truly analytically-transformed HR function.