The Big Decisions – by David Brooks

Let’s say you had the chance to become a vampire. With one magical bite you would gain immortality, superhuman strength and a life of glamorous intensity. Your friends who have undergone the transformation say the experience is incredible. They drink animal blood, not human blood, and say everything about their new existence provides them with fun, companionship and meaning.

Would you do it? Would you consent to receive the life-altering bite, even knowing that once changed you could never go back?

The difficulty of the choice is that you’d have to use your human self and preferences to try to guess whether you’d enjoy having a vampire self and preferences. Becoming a vampire is transformational. You would literally become a different self. How can you possibly know what it would feel like to be this different version of you or whether you would like it?

In each of these cases the current you is trying to make an important decision, without having the chance to know what it will feel like to be the future you.

Paul’s point is that we’re fundamentally ignorant about many of the biggest choices of our lives and that it’s not possible to make purely rational decisions. “You shouldn’t fool yourself,” she writes. “You have no idea what you are getting into.”

The decision to have a child is the purest version of this choice. On average, people who have a child suffer a loss of reported well-being. They’re more exhausted and report lower life satisfaction. And yet few parents can imagine going back and being their old pre-parental selves. Parents are like self-fulfilled vampires. Their rich new lives would have seemed incomprehensible to their old childless selves.

So how do you make transformational decisions? You have to ask the right questions, Paul argues. Don’t ask, Will I like parenting? You can’t know. Instead, acknowledge that you, like all people, are born with an intense desire to know. Ask, Do I have a profound desire to discover what it would be like to be this new me, to experience this new mode of living?

As she puts it, “The best response to this situation is to choose based on whether we want to discover who we’ll become.”

Live life as a series of revelations.

Personally, I think Paul’s description of the problem is ingenious but her solution is incomplete. Would you really trust yourself to raise and nurture a child simply on the basis of self-revelation? Curiosity is too thin, relativistic and ephemeral.

I’d say to really make these decisions well you need to step outside the modern conception of ourselves as cognitive creatures who are most sophisticated when we rely on rationality.

The most reliable decision-making guides are more “primitive.” We’re historical creatures. We have inherited certain life scripts from evolution and culture, and there’s often a lot of wisdom in following those life scripts. We’re social creatures. Often we undertake big transformational challenges not because it fulfills our desires, but because it is good for our kind.

We’re mystical creatures. Often when people make a transformational choice they feel it less as a choice and more as a calling. They feel there was something that destined them to be with this spouse or in that vocation.

Most important, we’re moral creatures. When faced with a transformational choice the weakest question may be, What do I desire? Our desires change all the time. The strongest questions may be: Which path will make me a better person? Will joining the military give me more courage? Will becoming a parent make me more capable of selfless love?

Our moral intuitions are more durable than our desires, based on a universal standard of right and wrong. The person who shoots for virtue will more reliably be happy with her new self, and will at least have a nice quality to help her cope with whatever comes.

Which brings us to the core social point. These days we think of a lot of decisions as if they were shopping choices. When we’re shopping for something, we act as autonomous creatures who are looking for the product that will produce the most pleasure or utility. But choosing to have a child or selecting a spouse, faith or life course is not like that. It’s probably safer to ask “What do I admire?” than “What do I want?”

In Praise of Small Miracles – by David Brooks

Too many people die in auto accidents. When governments try to reduce highway deaths, they generally increase safety regulations. But, also in Kenya, stickers were placed inside buses and vans urging passengers to scream at automobile drivers they saw driving dangerously.

The heckling discouraged dangerous driving by an awesome amount. Insurance claims involving injury or death fell to half of their previous levels.

These are examples of a new kind of policy-making that is sweeping the world. The old style was based on the notion that human beings are rational actors who respond in straightforward ways to incentives. The new style, which supplements but does not replace the old style, is based on the obvious point that human beings are not always rational actors. Sometimes we’re mentally lazy, or stressed, or we’re influenced by social pressure and unconscious biases. It’s possible to take advantage of these features to enact change.

For example, people hate losing things more than they like getting things, a phenomenon known as loss aversion. In some schools, teachers were offered a bonus at the end of their year if they could improve student performance. This kind of merit pay didn’t improve test scores. But, in other schools, teachers were given a bonus at the beginning of the year, which would effectively be taken away if their students didn’t improve. This loss-framed bonus had a big effect.

People are also guided by decision-making formats. The people who administer the ACT college admissions test used to allow students to send free score reports to three colleges. Many people thus applied to three colleges. But then the ACT folks changed the form so there were four lines where you could write down prospective colleges. That tiny change meant that many people applied to four colleges instead of three. Some got into more prestigious schools they wouldn’t have otherwise. This improved the expected earnings of low-income students by about $10,000.

The World Bank has just issued an amazingly good report called “Mind, Society and Behavior” on how the insights of behavioral economics can be applied to global development and global health. The report, written by a team led by Karla Hoff and Varun Gauri, lists many policies that have already been tried and points the way to many more.

Sugar cane farmers in India receive most of their income once a year, at harvest time. In the weeks before harvest, when they are poor and stressed, they score 10 points lower on I.Q. tests than in the weeks after. If you schedule fertilizer purchase decisions and their children’s school enrollment decisions during the weeks after harvest, they will make more farsighted choices than at other times of the year. This simple policy change is based on an understanding of how poverty depletes mental resources.

In Zambia, hairdressers were asked to sell female condoms to their clients. Some were offered financial incentives to do so, but these produced no results. In other salons, top condom sellers had a gold star placed next to their names on a poster that all could see. More than twice as many condoms were sold. This simple change was based on an understanding of the human desire for status and admiration.

The policies informed by behavioral economics are delicious because they show how cheap changes can produce big effects. Policy makers in this mode focus on discrete opportunities to exploit, not vast problems to solve.

This corrects for a bias in the way governments often work. They tend to gravitate toward the grand and the abstract. For example the United Nations is now replacing the Millennium Development Goals, which expire in 2015, with the Sustainable Development Goals.

“The Millennium Development Goals are concrete, measurable and have an end-date, so they could serve as a rallying point,” says Suprotik Basu, the chief executive of the MDG Health Alliance. “One good thing about the Sustainable Development Goals is that they’re being written through a bottom-up consensus process. But sometimes the search for consensus leads you higher and higher into the clouds. The jury is out on whether we will wind up with goals concrete enough to help ministers make decisions and decide priorities.”

Behavioral economics policies are beautiful because they are small and concrete but powerful. They remind us that when policies are rooted in actual human behavior and specific day-to-day circumstances, even governments can produce small miracles.

One Company’s New Minimum Wage: $70,000 a Year – by Patricia Cohen

The idea began percolating, said Dan Price, the founder of Gravity Payments, after he read an article on happiness. It showed that, for people who earn less than about $70,000, extra money makes a big difference in their lives.

His idea bubbled into reality on Monday afternoon, when Mr. Pricesurprised his 120-person staff by announcing that he planned over the next three years to raise the salary of even the lowest-paid clerk, customer service representative and salesman to a minimum of $70,000.

“Is anyone else freaking out right now?” Mr. Price asked after the clapping and whooping died down into a few moments of stunned silence. “I’m kind of freaking out.”

Employees reacting to the news. The average salary at Gravity Payments had been $48,000 a year. CreditMatthew Ryan Williams for The New York Times

The paychecks of about 70 employees will grow, with 30 ultimately doubling their salaries, according to Ryan Pirkle, a company spokesman. The average salary at Gravity is $48,000 a year.

Mr. Price’s small, privately owned company is by no means a bellwether, but his unusual proposal does speak to an economic issue that has captured national attention: The disparity between the soaring pay of chief executives and that of their employees.

The United States has one of the world’s largest pay gaps, with chief executives earning nearly 300 times what the average worker makes, according to some economists’ estimates. That is much higher than the 20-to-1 ratio recommended by Gilded Age magnates like J. Pierpont Morgan and the 20th century management visionary Peter Drucker.

“The market rate for me as a C.E.O. compared to a regular person is ridiculous, it’s absurd,” said Mr. Price, who said his main extravagances were snowboarding and picking up the bar bill. He drives a 12-year-old Audi, which he received in a barter for service from the local dealer.

“As much as I’m a capitalist, there is nothing in the market that is making me do it,” he said, referring to paying wages that make it possible for his employees to go after the American dream, buy a house and pay for their children’s education.

Under a financial overhaul passed by Congress in 2010, the Securities and Exchange Commission was supposed to require all publicly held companies to disclose the ratio of C.E.O. pay to the median pay of all other employees, but it has so far failed to put it in effect. Corporate executives have vigorously opposed the idea, complaining it would be cumbersome and costly to implement.

Mr. Price started the company, which processed $6.5 billion in transactions for more than 12,000 businesses last year, in his dorm room at Seattle Pacific University with seed money from his older brother. The idea struck him a few years earlier when he was playing in a rock band at a local coffee shop. The owner started having trouble with the company that was processing credit card payments and felt ground down by the large fees charged.

The entrepreneurial spirit was omnipresent where he grew up in rural southwestern Idaho, where his family lived 30 miles from the closest grocery store and he was home-schooled until the age of 12. When one of Mr. Price’s four brothers started a make-your-own baseball card business, 9-year-old Dan went on a local radio station to make a pitch: “Hi. I’m Dan Price. I’d like to tell you about my brother’s business, Personality Plus.”

His father, Ron Price, is a consultant and motivational speaker who has written his own book on business leadership.

Dan Price came close to closing up shop himself in 2008 when the recession sent two of his biggest clients into bankruptcy, eliminating 20 percent of his revenue in the space of two weeks. He said the firm managed to struggle through without layoffs or raising prices. His staff, most of them young, stuck with him.

Aryn Higgins at work at Gravity Payments in Seattle. She and her co-workers are going to receive significant pay raises.CreditMatthew Ryan Williams for The New York Times

Mr. Price said he wasn’t seeking to score political points with his plan. From his friends, he heard stories of how tough it was to make ends meet even on salaries that were still well-above the federal minimum of $7.25 an hour.

“They were walking me through the math of making 40 grand a year,” he said, then describing a surprise rent increase or nagging credit card debt.

“I hear that every single week,” he added. “That just eats at me inside.”

Mr. Price said he wanted to do something to address the issue of inequality, although his proposal “made me really nervous” because he wanted to do it without raising prices for his customers or cutting back on service.

Of all the social issues that he felt he was in a position to do something about as a business leader, “that one seemed like a more worthy issue to go after.”

He said he planned to keep his own salary low until the company earned back the profit it had before the new wage scale went into effect.

Hayley Vogt, a 24-year-old communications coordinator at Gravity who earns $45,000, said, “I’m completely blown away right now.” She said she has worried about covering rent increases and a recent emergency room bill.

“Everyone is talking about this $15 minimum wage in Seattle and it’s nice to work someplace where someone is actually doing something about it and not just talking about it,” she said.

The happiness research behind Mr. Price’s announcement on Monday came from Angus Deaton and Daniel Kahneman, a Nobel Prize-winning psychologist. They found that what they called emotional well-being — defined as “the emotional quality of an individual’s everyday experience, the frequency and intensity of experiences of joy, stress, sadness, anger, and affection that make one’s life pleasant or unpleasant” — rises with income, but only to a point. And that point turns out to be about $75,000 a year.

Of course, money above that level brings pleasures — there’s no denying the delights of a Caribbean cruise or a pair of diamond earrings — but no further gains on the emotional well-being scale.

As Mr. Kahneman has explained it, income above the threshold doesn’t buy happiness, but a lack of money can deprive you of it.

Phillip Akhavan, 29, earns $43,000 working on the company’s merchant relations team. “My jaw just dropped,” he said. “This is going to make a difference to everyone around me.”

At that moment, no Princeton researchers were needed to figure out he was feeling very happy.

The Numbers in Jeff Bezos’s Head – by Daniel McGinn

On a Friday afternoon in 2004, Amazon manager Vijay Ravindran received an unusual invitation—to a Saturday morning meeting with Jeff Bezos at the boathouse adjoining the CEO’s lakefront home. When the attendees arrived, Bezos told them he’d received an employee suggestion that Amazon supplement its existing shipping policy—free shipping on orders over $25—with a new offer. Customers would pay an annual fee for free shipping on most products, regardless of order size. “Jeff was extremely energetic—he felt this was an opportunity to build something that was going to be very important,” Ravindran recalls. Hence the urgent weekend meeting at the lake.

The proposal sparked hushed concerns and consternation. Amazon’s finance team worried that waiving shipping charges would gut margins. “There were people who thought it was an extremely bad idea—the spreadsheets uniformly painted pictures of losses,” Ravindran says. Bezos ignored the objections, convinced that the offer would spur more orders. That intuition proved correct just weeks later, when the program, Prime, launched. Customers who’d previously made a few purchases a year were suddenly ordering multiple times a month. “Instead of looking to protect the current business, Jeff saw the upside,” says Ravindran, now chief digital officer at Graham Holdings. “It was the most impressive display of business leadership I’ve seen in my career.” Today tens of millions of customers pay $99 a year for Prime, which generates more than $1 billion in membership fees and incalculable incremental sales.

He’s invented a new philosophy for running a business. Even as Amazon grows, he’s reinvesting to make it even bigger.

Disregard for orthodox approaches is not unusual for Bezos. Amazon’s culture famously forbids the use of PowerPoint, for instance. But the frequency with which he rejects spreadsheet-driven decision making has probably played a larger role in Amazon’s growth. With 132,000 employees and $75 billion in annual revenue, Amazon is a 20-year-old corporation that routinely posts losses. (Its operating loss may top $800 million in the third quarter.) Unlike Apple, which boasts precisely how many iPhones it’s selling, Amazon steadfastly refuses to give Wall Street basic data, such as how many Kindles it has sold—an opaqueness that even Bezos fans say hurts the stock price. Like every CEO, Bezos talks about managing for the long term—but he walks the talk, shrugging off investor concerns even as Amazon’s stock dropped from a high of $407 in January 2014 to $307 in August. Over the long haul, however, there’s no disputing his ability to generate shareholder returns: The company’s stock performance since its 1997 initial public offering has been so strong that its share price could have dropped to $250, and Bezos would still rank as HBR’s best-performing CEO.

He and his team have achieved that feat by sticking steadfastly—even boringly—to a few key principles (outlined in his 1997 shareholder letter, which he still sends to investors every year). Instead of focusing on competitors or technology shifts, they continually invest in getting a little bit better. In their core retail business, they grind out incremental improvements in delivery speed and product offerings while chipping away at prices. As Amazon continues to move into completely new industries—it’s now a serious player in cloud computing, online video, e-readers, and other devices—some see a company that’s pioneering a new model. “In some ways he’s invented a new philosophy for running a business,” says Brad Stone, author of The Everything Store, a best-selling Bezos biography. “Even as Amazon grows, he’s focused on reinvesting to make it even bigger—and because that means it shows no profits, he avoids paying dividends or corporate taxes.”

While Amazon is younger than Walmart or Apple, its creation story is becoming equally familiar. After graduating from Princeton with a computer science degree in 1986, Bezos spent eight years on Wall Street. In 1994 he and his wife, MacKenzie—a Princeton grad and his former coworker—left New York for Seattle, setting up shop in their garage. Jeff and a few employees began building a website that would sell books. Amazon went live in July 1995 and, in its first month, sold books to customers in 50 states and in 45 countries. It quickly expanded into CDs and other goods.

His willingness to go through the valley of death and come out the other side makes Wall Street give him the benefit of the doubt.

While consumers gravitated to Amazon, some investors remained skeptical. Henry Blodget, then a Merrill Lynch analyst, recalls an investor conference in the late 1990s at which Bezos patiently explained why Amazon allowed customers to return huge flat-screen TVs for a full refund with no questions asked—a costly policy meant to drive customer satisfaction. “Almost no one understood the potential for the company, its business model, and its stock,” says Blodget, who rose to fame for his seemingly outlandish 1998 prediction that Amazon shares, which were trading around $200, would hit $400—which they did, three weeks later. (Blodget now runs Business Insider, a website in which Bezos is an investor.)

Today Amazon is so successful that people often assume it has enjoyed a linear rise—like a dominant sports team cruising, as expected, to the championship. But for several years, Wall Street questioned Amazon’s viability. “At analyst conferences during the early 2000s, I saw fund managers openly laughing at him,” recalls Marc Andreessen, the entrepreneur-turned-venture-capitalist. “They’d say, ‘That guy is nuts, and that company is going to go bankrupt.’ That’s one of the things I really admire about him, and it’s what I talk to our founders about. It’s very easy to say you want to be Jeff Bezos today. It’s a lot harder to be Jeff Bezos during that ‘valley of death’ period. It was his willingness to go through that valley and to come out the other side that makes Wall Street give him the benefit of the doubt. A lot of people would have given up, but he didn’t. That’s what I admire most about his story.”

The other big misconception: that Bezos doesn’t care about profitability. By all accounts Amazon’s mature businesses (such as online retail) are profitable; it’s his deep investments in new businesses that create accounting losses, which he regards as a false measure of performance. “He’s really focused on cash flow and what kind of return on invested capital is being created,” says Warren Jenson, Amazon’s chief financial officer from 1999 to 2002. Bill Miller, a fund manager at Legg Mason who has held shares in Amazon since it went public, says Bezos shows deep understanding of the point Clay Christensen made in his recent HBR article “The Capitalist’s Dilemma,” which argued that most managers focus on the wrong financial metrics. “Jeff really takes theory seriously—he started out wanting to be a theoretical physicist,” Miller says. “In terms of financial theory, he’s trying to get away from the behavioral problems that afflict other companies” that try to maximize the wrong numbers. Other Bezos watchers go even further: At a time when many large companies (most notably Apple) are hoarding idle cash, shouldn’t we be lauding Amazon’s ability to continually find entirely new industries to reinvest and innovate in, rather than criticizing the losses driven by those outlays?

Bezos is unperturbed by criticisms of his financial management. He says he’s always been transparent about Amazon’s focus on long-term cash flow (instead of net profit). “As far as investors go, our job is to be superclear about our approach, and then investors get to self-select,” he says. He insists Amazon discloses far more data about its business than is legally required and is silent only about numbers that could help competitors.

Some criticism goes beyond his financial theories, however. Like Walmart, Amazon has been condemned for upending the economics of industries in ways that destroy competitors and vaporize jobs. Since 2007, when its Kindle ignited the e-book business, Amazon has been at war with publishers for using its leverage to price e-books at discount levels. Over the past two years the company has drawn fire for its treatment of distribution-center workers and the hyperaggressive steps taken to weaken rival e-commerce players such as Zappos and Diapers.com. (It eventually acquired both.) Bezos’s personal management style, which by some reports can be abusive and demeaning, has also been reproached. But Stone believes Bezos has mellowed with age. “In fairness, a lot of the examples in the book of him behaving that way are older ones, and I think he’s gotten better over time,” Stone says.

Even critics admit that Bezos has an unusually ambitious imagination—one likely to have an impact far beyond online retailing. He founded Blue Origin, a company experimenting with space travel, and last year purchased the Washington Post, where he spends one day a month in hopes of finding a viable financial model for journalism. And at Amazon, his strategy of making bold moves into adjacent industries could become a model for other managers. Scott Cook, the Intuit founder and former Amazon director, compares Amazon to companies such as P&G (which invented brand management) and Toyota (which invented lean manufacturing). “I think Amazon is one of those—what they’re doing is inventing better ways for companies to operate,” Cook says.

That spirit could continue for some time. Bezos is 50—about the same age Bill Gates was when he retired from Microsoft to pursue philanthropy at the Gates Foundation, whose offices are visible from the roof deck at Amazon’s headquarters. But Bezos seems unlikely to make that kind of transition. “I’ve never gotten any vibe off of him that he wants to do anything else,” says Andreessen. “He’s monomaniacally focused on Amazon. My sense is he’s going to be running it another 30 years—and shareholders will be lucky if he does.”

Jeff Bezos in His Own Words

In early August Amazon’s founder and CEO spoke with HBR’s Adi Ignatius and Daniel McGinn at the company’s Seattle headquarters. Here are edited excerpts from that conversation:

HBR: How do you balance the long term versus the short term when thinking about innovation?

Bezos: I bet 70% of the invention we do focuses on slightly improving a process. That incremental invention is a huge part of what makes Amazon tick. There’s a second kind of invention, which is more clean-sheet and larger scale—things like the Kindle or Amazon Web Services. We have a culture that supports the risk taking and time frames required for that.

Your stock has taken some hits this year. Does that affect the way you manage?

Amazon’s stock has always been somewhat volatile. Even though we have significant revenues, we invest in so many new initiatives that in some ways we’re still a start-up. Volatility is part and parcel of being a start-up.

You say you focus on customers, not competitors. But how do you react to Google’s teaming up with Barnes & Noble to offer same-day delivery?

You can’t insulate yourself from competition by being customer-obsessed. But if that obsession leads to invention on behalf of customers, it helps you stay ahead.

You’re now making your own big investments in same-day delivery. How do you know customers want it?

In our retail business, there are three big ideas: Low prices, vast selection, and fast, reliable delivery. We continually work on all three. We don’t know what technologies might be invented or who our competitors will be, so it’s hard to build strategies around those uncertainties. But I do know that 10 years from now, nobody is going to say, “I love Amazon, but I wish the prices were a little higher.” It’s the same thing with fast delivery.

Has the backlash over your dispute with Hachette about e-book pricing surprised you?

The publishing industry changes very slowly. The paperback, which was developed before World War II, was the last radical invention before the e-book. All the arguments that the literary establishment made against paperbacks—they’re devaluing books, publishers are not going to be able to invest in literature—are being made about e-books, too. Today we know the arguments about paperbacks were wrong, and they’re equally wrong about e-books. It will take a while for the incumbents to come to terms with e-books, but we’re determined to get e-books to be less expensive.

What other CEOs do you admire?

I’m a huge fan of Jamie Dimon, Jeff Immelt, and Bob Iger. They all have deep keels. They have conviction around certain business ideas. Warren Buffett is another one. They can’t be blown around, and I think that’s pretty rare.

 

Why Recruiting Isn’t Over When an Employee Accepts Your Offer – by Mark Suster

Recruiting. It is the bane of every startups existence because it takes up so much time, it is so competitive to sign people and it feels like unproductive time because it’s not moving the ball forward on product, engineering, sales, marketing, biz dev, fund raising. It consumes time and energy and the payoff doesn’t come for a long time.

But of course great teams build great companies and great startup leaders know that they must always be recruiting.

Yet most startup companies I’ve ever worked with or observed make one crucial mistake: They assume that their recruitment process for a candidate is over when that person accepts his or her offer. The truth is the process isn’t over until after the employee starts with the company, updates her LinkedIn profile and emails all her friends.

In fact, it’s worse than that. The moment your future head of sales, marketing, product or even junior developer says “yes” is the moment you’re most vulnerable of losing them. I’ve written about this before relating to any sales process – You’re Most Vulnerable After You’ve Won a Deal – and the same is true in recruiting.

Recruitment is war and the enemy (people competing for talent) won’t accept defeat easily. Don’t fight 90% of the war. You must win.

Here’s specifically what happens:

  • The employee gives you a verbal commitment, an email accept or in some cases even a signed offer letter
  • You high-five your team for all the hard work, the hard fought persuasion and the new superstar that will soon come help solve your problems
  • If they are as good as you think it is highly likely her existing employer will work hard to keep her. So the moment she notifies her boss is the moment that the other side is pursuing a full-court press while you are celebrating and getting back to work.
  • If the person knew she was going to leave her employer and was talking to multiple companies to be sure the next company was the right fit, the moment she notifies the other companies that she’s not accepting their offer they, too, will begin an assault of persuasion
  • So ironically at the moment it seems everything is all sunshine for you is the moment you’re completely vulnerable

So what to do?

1. Acknowledge that recruiting doesn’t stop until the employee has joined your company

2. The moment you get an “accept” you should have all of your key employees email, call or even grab lunch/drinks/coffee with the new recruit to welcome her to the team. Your goal is to create emotional bonds with the company and also to think twice about the perception that will be formed of her for accepting and then backing out (which in case you didn’t know is more common than it should be)

3. I like to create an even stronger emotional tie by making public announcements where possible. I’d want to secure permission from the employee to issue a press release. It’s a combination of the pride you take in this new recruit and it’s a way to lower the odds that they bail on you. Yes, you could get egg on your face if she still backs out afterwards but you’ve now massively lowered the risk she backs out. The candidate will look worse for backing out than you will. Obviously press releases only work if the employee isn’t junior. But it doesn’t really matter if the press wasn’t big enough for TechCrunch – it just matters that it’s in the public sphere and gets amplified through social channels.

4. I also like to give some evening homework to the new employees. To the extent she starts problem solving on your behalf and working as part of your team she will feel more commitment to you, more excitement about the new role and, again, a stronger emotional bond to not backing out.

5. Finally, if possible get your investors involved if it’s a reasonably senior position. Set up calls for VCs to welcome her to the team. The more people she has spoken with about joining the more emotional bond and the less likely of her backing out.

Summary

Recruiting is brutal. If you put in a Herculean effort to get employees and then lose them after you’ve crossed the finish line you will waste enormous energy. It’s a shame that you have to launch a welcoming committee to bear hug your incoming hire and to run an external communication plan because an acceptance should be final but reality is reality. Trust me – I’ve seen it happen time again.

You’re never done til you’re done.

And follow on reading. You’re really not even done then. If you don’t look out for your top people they, too, stay in jeopardy. It’s why I remind people – never roll out the red carpet when your best employees are on their way out the door.

What tactics do you use to make sure employees don’t bail after the offer?

How Google Sold Its Engineers on Management – by David A. Garvin

A few years into the company’s life, founders Larry Page and Sergey Brin actually wondered whether Google needed any managers at all. In 2002 they experimented with a completely flat organization, eliminating engineering managers in an effort to break down barriers to rapid idea development and to replicate the collegial environment they’d enjoyed in graduate school. That experiment lasted only a few months: They relented when too many people went directly to Page with questions about expense reports, interpersonal conflicts, and other nitty-gritty issues. And as the company grew, the founders soon realized that managers contributed in many other, important ways—for instance, by communicating strategy, helping employees prioritize projects, facilitating collaboration, supporting career development, and ensuring that processes and systems aligned with company goals.

Google now has some layers but not as many as you might expect in an organization with more than 37,000 employees: just 5,000 managers, 1,000 directors, and 100 vice presidents. It’s not uncommon to find engineering managers with 30 direct reports. Flatt says that’s by design, to prevent micromanaging. “There is only so much you can meddle when you have 30 people on your team, so you have to focus on creating the best environment for engineers to make things happen,” he notes. Google gives its rank and file room to make decisions and innovate. Along with that freedom comes a greater respect for technical expertise, skillful problem solving, and good ideas than for titles and formal authority. Given the overall indifference to pecking order, anyone making a case for change at the company needs to provide compelling logic and rich supporting data. Seldom do employees accept top-down directives without question.

Google downplays hierarchy and emphasizes the power of the individual in its recruitment efforts, as well, to achieve the right cultural fit. Using a rigorous, data-driven hiring process, the company goes to great lengths to attract young, ambitious self-starters and original thinkers. It screens candidates’ résumés for markers that indicate potential to excel there—especially general cognitive ability. People who make that first cut are then carefully assessed for initiative, flexibility, collaborative spirit, evidence of being well-rounded, and other factors that make a candidate “Googley.”

So here’s the challenge Google faced: If your highly skilled, handpicked hires don’t value management, how can you run the place effectively? How do you turn doubters into believers, persuading them to spend time managing others? As it turns out, by applying the same analytical rigor and tools that you used to hire them in the first place—and that they set such store by in their own work. You use data to test your assumptions about management’s merits and then make your case.

To understand how Google set out to prove managers’ worth, let’s go back to 2006, when Page and Brin brought in Laszlo Bock to head up the human resources function—appropriately called people operations, or people ops. From the start, people ops managed performance reviews, which included annual 360-degree assessments. It also helped conduct and interpret the Googlegeist employee survey on career development goals, perks, benefits, and company culture. A year later, with that foundation in place, Bock hired Prasad Setty from Capital One to lead a people analytics group. He challenged Setty to approach HR with the same empirical discipline Google applied to its business operations.

Setty took him at his word, recruiting several PhDs with serious research chops. This new team was committed to leading organizational change. “I didn’t want our group to be simply a reporting house,” Setty recalls. “Organizations can get bogged down in all that data. Instead, I wanted us to be hypothesis-driven and help solve company problems and questions with data.”

People analytics then pulled together a small team to tackle issues relating to employee well-being and productivity. In early 2009 it presented its initial set of research questions to Setty. One question stood out, because it had come up again and again since the company’s founding: Do managers matter?

To find the answer, Google launched Project Oxygen, a multiyear research initiative. It has since grown into a comprehensive program that measures key management behaviors and cultivates them through communication and training. By November 2012, employees had widely adopted the program—and the company had shown statistically significant improvements in multiple areas of managerial effectiveness and performance.

Google is one of several companies that are applying analytics in new ways. Until recently, organizations used data-driven decision making mainly in product development, marketing, and pricing. But these days, Google, Procter & Gamble, Harrah’s, and others take that same approach in addressing human resources needs. (See “Competing on Talent Analytics,” by Thomas H. Davenport, Jeanne Harris, and Jeremy Shapiro, HBR October 2010.)

Unfortunately, scholars haven’t done enough to help these organizations understand and improve day-to-day management practice. Compared with leadership, managing remains understudied and undertaught—largely because it’s so difficult to describe, precisely and concretely, what managers actually do. We often say that they get things done through other people, yet we don’t usually spell out how in any detail. Project Oxygen, in contrast, was designed to offer granular, hands-on guidance. It didn’t just identify desirable management traits in the abstract; it pinpointed specific, measurable behaviors that brought those traits to life.

That’s why Google employees let go of their skepticism and got with the program. Project Oxygen mirrored their decision-making criteria, respected their need for rigorous analysis, and made it a priority to measure impact. Data-driven cultures, Google discovered, respond well to data-driven change.

Making the CaseProject Oxygen colead Neal Patel recalls, “We knew the team had to be careful. Google has high standards of proof, even for what, at other places, might be considered obvious truths. Simple correlations weren’t going to be enough. So we actually ended up trying to prove the opposite case—that managers don’t matter. Luckily, we failed.”

To begin, Patel and his team reviewed exit-interview data to see if employees cited management issues as a reason for leaving Google. Though they found some connections between turnover rates and low satisfaction with managers, those didn’t apply to the company more broadly, given the low turnover rates overall. Nor did the findings prove that managers caused attrition.

As a next step, Patel examined Googlegeist ratings and semiannual reviews, comparing managers on both satisfaction and performance. For both dimensions, he looked at the highest and lowest scorers (the top and bottom quartiles).

“At first,” he says, “the numbers were not encouraging. Even the low-scoring managers were doing pretty well. How could we find evidence that better management mattered when all managers seemed so similar?” The solution came from applying sophisticated multivariate statistical techniques, which showed that even “the smallest incremental increases in manager quality were quite powerful.”

For example, in 2008, the high-scoring managers saw less turnover on their teams than the others did—and retention was related more strongly to manager quality than to seniority, performance, tenure, or promotions. The data also showed a tight connection between managers’ quality and workers’ happiness: Employees with high-scoring bosses consistently reported greater satisfaction in multiple areas, including innovation, work-life balance, and career development.

In light of this research, the Project Oxygen team concluded that managers indeed mattered. But to act on that finding, Google first had to figure out what its best managers did. So the researchers followed up with double-blind qualitative interviews, asking the high- and low-scoring managers questions such as “How often do you have career development discussions with your direct reports?” and “What do you do to develop a vision for your team?” Managers from Google’s three major functions (engineering, global business, and general and administrative) participated; they came from all levels and geographies. The team also studied thousands of qualitative comments from Googlegeist surveys, performance reviews, and submissions for the company’s Great Manager Award. (Each year, Google selects about 20 managers for this distinction, on the basis of employees’ nominations.) It took several months to code and process all this information.

After much review, Oxygen identified eight behaviors shared by high-scoring managers. (See the sidebar “What Google’s Best Managers Do” for the complete list.) Even though the behaviors weren’t terribly surprising, Patel’s colead, Michelle Donovan, says, “we hoped that the list would resonate because it was based on Google data. The attributes were about us, by us, and for us.”

The key behaviors primarily describe leaders of small and medium-sized groups and teams and are especially relevant to first- and second-level managers. They involve developing and motivating direct reports, as well as communicating strategy and eliminating roadblocks—all vital activities that people tend to overlook in the press of their day-to-day responsibilities.

Putting the Findings into PracticeThe list of behaviors has served three important functions at Google: giving employees a shared vocabulary for discussing management, offering them straightforward guidelines for improving it, and encapsulating the full range of management responsibilities. Though the list is simple and straightforward, it’s enriched by examples and descriptions of best practices—in survey participants’ own words. These details make the overarching principles, such as “empowers the team and does not micromanage,” more concrete and show managers different ways of enacting them. (See the exhibit “How Google Defines One Key Behavior.”)

The descriptions of the eight behaviors also allow considerable tailoring. They’re inclusive guidelines, not rigid formulas. That said, it was clear early on that managers would need help adopting the new standards, so people ops built assessments and a training program around the Oxygen findings.

To improve the odds of acceptance, the group customized the survey instrument, creating an upward feedback survey (UFS) for employees in administrative and global business functions and a tech managers survey (TMS) for the engineers. Both assessments asked employees to evaluate their managers (using a five-point scale) on a core set of activities—such as giving actionable feedback regularly and communicating team goals clearly—all of which related directly to the key management behaviors.

The first surveys went out in June 2010—deliberately out of sync with performance reviews, which took place in April and September. (Google had initially considered linking the scores with performance reviews but decided that would increase resistance to the Oxygen program because employees would view it as a top-down imposition of standards.) People ops emphasized confidentiality and issued frequent reminders that the surveys were strictly for self-improvement. “Project Oxygen was always meant to be a developmental tool, not a performance metric,” says Mary Kate Stimmler, an analyst in the department. “We realized that anonymous surveys are not always fair, and there is often a context behind low scores.”

Though the surveys weren’t mandatory, the vast majority of employees completed them. Soon afterward, managers received reports with numerical scores and individual comments—feedback they were urged to share with their teams. (See the exhibit “One Manager’s Feedback” for a representative sample.) The reports explicitly tied individuals’ scores to the eight behaviors, included links to more information about best practices, and suggested actions each manager could take to improve. Someone with, say, unfavorable scores in coaching might get a recommendation to take a class on how to deliver personalized, balanced feedback.

People ops designed the training to be hands-on and immediately useful. In “vision” classes, for example, participants practiced writing vision statements for their departments or teams and bringing the ideas to life with compelling stories. In 2011, Google added Start Right, a two-hour workshop for new managers, and Manager Flagship courses on popular topics such as managing change, which were offered in three two-day modules over six months. “We have a team of instructors,” says people-development manager Kathrin O’Sullivan, “and we are piloting online Google Hangout classes so managers from around the world can participate.”

Managers have expressed few concerns about signing up for the courses and going public with the changes they need to make. Eric Clayberg, for one, has found his training invaluable. A seasoned software-engineering manager and serial entrepreneur, Clayberg had led teams for 18 years before Google bought his latest start-up. But he feels he learned more about management in six months of Oxygen surveys and people ops courses than in the previous two decades. “For instance,” he says, “I was worried about the flat organizational structure at Google; I knew it would be hard to help people on my team get promoted. I learned in the classes about how to provide career development beyond promotions. I now spend a third to half my time looking for ways to help my team members grow.” And to his surprise, his reports have welcomed his advice. “Engineers hate being micromanaged on the technical side,” he observes, “but they love being closely managed on the career side.”

To complement the training, the development team sets up panel discussions featuring high-scoring managers from each function. That way, employees get advice from colleagues they respect, not just from HR. People ops also sends new managers automated e-mail reminders with tips on how to succeed at Google, links to relevant Oxygen findings, and information about courses they haven’t taken.

And Google rewards the behaviors it’s working so hard to promote. The company has revamped its selection criteria for the Great Manager Award to reflect the eight Oxygen behaviors. Employees refer to the behaviors and cite specific examples when submitting nominations. Clayberg has received the award, and he believes it was largely because of the skills he acquired through his Oxygen training. The prize includes a weeklong trip to a destination such as Hawaii, where winners get to spend time with senior executives. Recipients go places in the company, too. “In the last round of promotions to vice president,” Laszlo Bock says, “10% of the directors promoted were winners of the Great Manager Award.”

Measuring ResultsThe people ops team has analyzed Oxygen’s impact by examining aggregate survey data and qualitative input from individuals. From 2010 through 2012, UFS and TMS median favorability scores rose from 83% to 88%. The lowest-scoring managers improved the most, particularly in the areas of coaching and career development. The improvements were consistent across functions, survey categories, management levels, spans of control, and geographic regions.

In an environment of top achievers, people take low scores seriously. Consider vice president Sebastien Marotte, who came to Google in 2011 from a senior sales role at Oracle. During his first six months at Google, Marotte focused on meeting his sales numbers (and did so successfully) while managing a global team of 150 people. Then he received his first UFS scores, which came as a shock. “I asked myself, ‘Am I right for this company? Should I go back to Oracle?’ There seemed to be a disconnect,” he says, “because my manager had rated me favorably in my first performance review, yet my UFS scores were terrible.” Then, with help from a people ops colleague, Marotte took a step back and thought about what changes he could make. He recalls, “We went through all the comments and came up with a plan. I fixed how I communicated with my team and provided more visibility on our long-term strategy. Within two survey cycles, I raised my favorability ratings from 46% to 86%. It’s been tough but very rewarding. I came here as a senior sales guy, but now I feel like a general manager.”

Overall, other managers took the feedback as constructively as Marotte did—and were especially grateful for its specificity. Here’s what Stephanie Davis, director of large-company sales and another winner of the Great Manager Award, says she learned from her first feedback report: “I was surprised that one person on my team didn’t think I had regularly scheduled one-on-one meetings. I saw this person every day, but the survey helped me realize that just seeing this person was different from having regularly scheduled individual meetings. My team also wanted me to spend more time sharing my vision. Personally, I have always been inspired by Eric [Schmidt], Larry, and Sergey; I thought my team was also getting a sense of the company’s vision from them. But this survey gave my team the opportunity to explain that they wanted me to interpret the higher-level vision for them. So I started listening to the company’s earnings call with a different ear. I didn’t just come back to my team with what was said; I also shared what it meant for them.”

Chris Loux, head of global enterprise renewals, remembers feeling frustrated with his low UFS scores. “I had received a performance review indicating that I was exceeding expectations,” he says, “yet one of my direct reports said on the UFS that he would not recommend me as a manager. That struck me, because people don’t quit companies—they quit managers.” At the same time, Loux struggled with the question of just how much to push the lower performers on his team. “It’s hard to give negative feedback to a type-A person who has never received bad feedback in his or her life,” he explains. “If someone gets 95% favorable on the UFS, I wonder if that manager is avoiding problems by not having tough conversations with reports on how they can get better.”

Loux isn’t the only Google executive to speculate about the connection between employees’ performance reviews and their managers’ feedback scores. That question came up multiple times during Oxygen’s rollout. To address it, the people analytics group fell back on a time-tested technique—going back to the data and conducting a formal analysis to determine whether a manager who gave someone a negative performance review would then receive a low feedback rating from that employee. After looking at two quarters’ worth of survey data from 2011, the group found that changes in employee performance ratings (both upward and downward) accounted for less than 1% of variability in corresponding manager ratings across all functions at Google.

“Managing to the test” doesn’t appear to be a big risk, either. Because the eight behaviors are rooted in action, it’s difficult for managers to fake them in pursuit of higher ratings. In the surveys, employees don’t assess their managers’ motivations, values, or beliefs; rather, they evaluate the extent to which their managers demonstrate each behavior. Either the manager has acted in the ways recommended—consistently and credibly—or she has not. There is very little room for grandstanding or dissembling.

“We are not trying to change the nature of people who work at Google,” says Bock. “That would be presumptuous and dangerous. Instead, we are saying, ‘Here are a few things that will lead you to be perceived as a better manager.’ Our managers may not completely believe in the suggestions, but after they act on them and get better UFS and TMS scores, they may eventually internalize the behavior.”

Project Oxygen does have its limits. A commitment to managerial excellence can be hard to maintain over the long haul. One threat to sustainability is “evaluation overload.” The UFS and the TMS depend on employees’ goodwill. Googlers voluntarily respond on a semiannual basis, but they’re asked to complete many other surveys as well. What if they decide that they’re tired of filling out surveys? Will response rates bottom out? Sustainability also depends on the continued effectiveness of managers who excel at the eight behaviors, as well as those behaviors’ relevance to senior executive positions. A disproportionate number of recently promoted vice presidents had won the Great Manager Award, a reflection of how well they’d followed Oxygen’s guidelines. But what if other behaviors—those associated with leadership skills—matter more in senior positions?

Further, while survey scores gauge employees’ satisfaction and perceptions of the work environment, it’s unclear exactly what impact those intangibles have on such bottom-line measures as sales, productivity, and profitability. (Even for Google’s high-powered statisticians, those causal relationships are difficult to establish.) And if the eight behaviors do actually benefit organizational performance, they still might not give Google a lasting edge. Companies with similar competitive profiles—high-tech firms, for example, that are equally data-driven—can mimic Google’s approach, since the eight behaviors aren’t proprietary.

Still, Project Oxygen has accomplished what it set out to do: It not only convinced its skeptical audience of Googlers that managers mattered but also identified, described, and institutionalized their most essential behaviors. Oxygen applied the concept of data-driven continuous improvement directly—and successfully—to the soft skills of management. Widespread adoption has had a significant impact on how employees perceive life at Google—particularly on how they rate the degree of collaboration, the transparency of performance evaluations, and their groups’ commitment to innovation and risk taking.

At a company like Google, where the staff consists almost entirely of “A” players, managers have a complex, demanding role to play. They must go beyond overseeing the day-to-day work and support their employees’ personal needs, development, and career planning. That means providing smart, steady feedback to guide people to greater levels of achievement—but intervening judiciously and with a light touch, since high-performing knowledge workers place a premium on autonomy. It’s a delicate balancing act to keep employees happy and motivated through enthusiastic cheerleading while helping them grow through stretch assignments and carefully modulated feedback. When the process works well, it can yield extraordinary results.That’s why Prasad Setty wants to keep building on Oxygen’s findings about effective management practice. “We will have to start thinking about what else drives people to go from good to great,” he says. His team has begun analyzing managers’ assessment scores by personality type, looking for patterns. “With Project Oxygen, we didn’t have these endogenous variables available to us,” he adds. “Now we can start to tease them out, using more of an ethnographic approach. It’s really about observations—staying with people and studying their interactions. We’re not going to have the capacity to follow tons of people, but what we’ll lose in terms of numbers, we’ll gain in a deeper understanding of what managers and their teams experience.”

That, in a nutshell, is the principle at the heart of Google’s approach: deploying disciplined data collection and rigorous analysis—the tools of science—to uncover deeper insights into the art and craft of management.

David A. Garvin is the C. Roland Christensen Professor of Business Administration at Harvard Business School. This article draws on material in the HBS case study “Google’s Project Oxygen: Do Managers Matter?” (case number 9-313-110, published April 2013).

Is Germany’s World Cup Triumph, a Triumph of Management? – By David Bach

 Yale SOM’s David Bach finds five key factors behind Germany’s victory at the 2014 World Cup in Brazil—and they’re all about smart management.

“Portugal has Ronaldo, Brazil has Neymar, Argentina has Messi, but Germany has a team!”This tweet made the rounds after Germany’s unprecedented 7:1 thrashing of host country Brazil in the 2014 World Cup semifinals. Indeed, the narrative that quickly gained hold-even more so after Germany beat Argentina 1-0 in the final and lifted the cup for the fourth time in the tournament’s history-is that “Die Mannschaft” triumphed thanks to extraordinary team spirit, a triumph of the collective over individual stars.

Yet this narrative is wrong. Germany’s squad was studded with stars. Granted, Ronaldo, Messi, and Neymar are, respectively, the first-, second-, and sixth-best-paid soccer stars in the world, and Germany’s top-ranked player on the list, Mesut Özil, ranks a relatively paltry 13th1 but Germany had the world’s best goal keeper, Manuel Neuer; eight players who played in the 2013 Champions League final; and four players who ended up among the 10 nominees for the tournament’s best player award. All of them are multimillionaires and many anchor some of the world’s most prestigious club lines.

Germany’s win was instead a triumph of management. Sound management cultivated a deep and broad pool of stars. And sound management forged them into a team with a mission and a plan. Peter Drucker reminds us that the task of management is to “make people capable of joint performance.”2 A key to this, according to Drucker, is a “commitment to common goals and shared values.” “The mission of the organization,” he explains, “has to be clear enough and big enough to provide common vision.” Since “[e]very enterprise is composed of people with different skills and knowledge…[i]t must be built on communication and on individual responsibility…. All [members] have to think through what they owe to others-and make sure that others understand.” Equally importantly, “management must also enable the enterprise and each of its members to grow and develop as needs and opportunities change. Every enterprise is a learning and teaching institution. Training and development must be built into it on all levels- training and development that never stops.”

The mission-to become world champion-was certainly clear enough and big enough. But it was hardly unique. It motivated all teams, or at the very least the ones with a realistic shot at going all the way. For instance, no other team seemed more driven by the goal of winning the cup than Brazil. One might even say that it became an obsession that ultimately did the team in as the players crumbled under immense public pressure. Important as the mission was, it did not set Germany apart. What distinguished “Die Mannschaft” was a combination of five factors: long-term capability development, meticulous planning, an inclusive culture based on open communication and individual responsibility, competitive intelligence, and the confidence to deviate from the plan when circumstances required it.

Long-term capability development. The seeds for Germany’s World Cup victory were planted a decade ago. In 2004, a mere two years after losing the World Cup final to Brazil, German soccer stared into an abyss when the team was eliminated during group stages of the Euro Cup, having scored only two goals and failed to win a single match. Two years later loomed the World Cup in Germany and the risk of humiliation at home. It was what change management scholars call a “burning platform” moment that enabled sweeping change. A new coach, Jürgen Klinsmann, and his assistant, Jogi Löw, brought in fresh players, modernized preparation methods to stress physical fitness and mental strength, and emphasized youth and skill over experience. “[Klinsmann] risked alienating fans and players alike by turning aside the more experienced players of generations past in exchange for going younger and faster in a competition with a large amount of pressure,” noted one observer. (Incidentally, Klinsmann did the same in the 2014 World Cup as U.S. coach by leaving popular veteran Landon Donovan at home).3 Löw stuck to this formula after taking over as German head coach in 2006. His 2010 squad was the third youngest of the competition at 25.0 years and this year’s championship team came in at 26.31 years, making it the sixth youngest among the 32 teams-Argentina, incidentally, was the oldest at 28.92 years. The ability to repeatedly replenish and rejuvenate the team was made possible by systemic talent development across the country over the past decade led by the country’s soccer federation. Six of Germany’s starters against Brazil were part of the starting lineup that won the European under-21 championship in 2009 (another player on that team, incidentally, was Fabian Johnson, who played for Klinsmann’s U.S. squad in the World Cup). Capability development has not been limited to players, however. Under Klinsmann’s leadership, the team also developed a second-to-none scouting capability that provides competitive intelligence on opponents (see below), a coaching staff that includes several sports psychologists, and a separate management arm in charge of planning.

Meticulous Planning. Oliver Bierhoff assumed the newly created job of manager for the national team in 2004 as part of the Klinsmann revolution. A former German standout forward who scored the winning goal of the 1996 Euro Cup, Germany’s last triumph prior to this World Cup, Bierhoff not only manages sponsorships and PR, but was also the source of perhaps the most visible manifestation of the team’s ambition in Brazil: the team base, “Campo Bahia.” Germany’s soccer federation and private investors invested about $42 million to build a sports resort specifically for the use of Germany’s national team during the World Cup, a facility that will now become a luxury holiday resort. “The Germans just came in and did their own thing,” explained Guto Jones of the Bahia tourist board.4 With a location chosen to be “within two hours flight of the team’s group games to minimize travel” as well as to “allow acclimatization to the weather,5 the resort has a soccer pitch with the exact 22 mm World Cup pitch grass length and within walking distance of the luxury villas that housed the players.6 In contrast, “teams such as England simply checked themselves into a hotel in Rio-and then faced a daily battle through traffic for training.”7 Fitting every stereotype about German meticulousness, the soccer federation “shipped 23 tons of luggage and equipment for Germany’s stay in Brazil, including mountain bikes, billiards and table-tennis tables, and even dartboards.”8

An inclusive culture based on open communication and individual responsibility. The purpose-built facility not only provided ideal training conditions, it also cultivated the much-lauded team spirit. According to left-back Benedikt Höwedes, “[t]his village has been a major factor in building up the special team spirit in the group today.”9 As a German soccer observer pointed out, “The idea of living together in this way has been very good for team spirit. You have your own space but the players are always bumping into each around the resort. It’s different to a hotel where you just have a room.”10 It was in this open environment, conducive to communication and exchange, that the team grew together. The team itself was of course already inclusive in many ways. It included players of Polish, Turkish, Moroccan, and Ghanaian origin and thereby reflected a modern and much more diverse Germany. The players’ families and partners were part of the team and traveled to Brazil courtesy of the German soccer federation. And when the team learned that the Brazilian hosts would supply buses and drivers, the squad quickly made its longtime bus driver a member of the equipment staff so he could come along. However, all the emphasis on community never replaced individual responsibility and accountability. Goalkeeper Manuel Neuer’s post-game interview after the quarterfinal match with France was one visible manifestation. Congratulated by a reporter on a stunning save in stoppage time that prevented a goal that could have sent the game to overtime, Neuer first credited his defense with taking away Karim Benzema’s passing options, adding that this forced the French striker to aim for the near post-“and if it goes in there it’s a goalkeeper error,” he concluded with a smile.

Competitive intelligence. Beginning with Klinsmann and especially under Löw, Germany transformed traditional scouting into sophisticated competitive intelligence. The scouting team, led since 2005 by Urs Siegenthaler, compiles detailed analyses of Germany’s opponents, develops strategic options, and prepares materials to brief coaches and players ahead of every game. Even though Siegenthaler and his right-hand man Christopher Clemens traveled to São Paulo to watch the second semifinal between the Netherlands and Argentina, the team had long finished compiling detailed dossiers on both teams and how to beat them. According to Siegenthaler, it is a process that takes months and years; the trip to the stadium to watch future opponents live is mostly so people cannot later claim the scouts did not even bother to go function function function function function function function watch.11The raw material for Siegenthaler’s analysis is supplied by 40 students at the Sports University of Cologne and consists of statistics, articles, and video footage of every player and every team the German squad might encounter. American sports fans are of course familiar with such sophisticated analysis and game planning since it is a pillar of American football in the NFL. And at least since Moneyball, the exploitation of large amounts of sports data to gain competitive edge has become an open secret. But in soccer, a game that only this year saw the introduction of goal-line technology and where a referee continues to decide how long 90 minutes actually is, Germany’s embrace of data, analysis, and systematic game planning based on competitive intelligence is radical.

Confidence to deviate from the plan. One of Siegenthaler’s pre-tournament conclusions was that the climatic conditions in Brazil would make it impossible for left- and right-backs to continuously sprint up and down the sideline, playing crosses on offense and then being back on time to thwart opposing wingers. This led to Löw’s unusual and highly controversial strategy to play with four interior defenders in a line while moving Philipp Lahm, arguably the best right-back in the world, into the defensive midfield. After holding firm through the round of 16 despite tremendous criticism, Löw surprised many when he modified the plan and moved Lahm back to right-back for the match against France and the remainder of the tournament. “I am not immune to advice,” he declared and thereby exemplified the role of management in fostering learning and adaptation that Drucker stressed.

Stars? Yes. Team? Also. But the discernible difference appears to have been superior management-developing talent and brining it together around a shared mission, values, and a plan. After all, in Drucker’s phrase, management “makes people capable of joint performance.” This is precisely what Germany did, and the team’s success could become a case study for the difference sound management can make in hypercompetitive settings.

1  “Top 10 Highest Paid Soccer Players 2014,” Sporteology.com, 12 June 2014.Back
2  Peter F. Drucker, “Management as Social Function and Liberal Art,” in Peter F. Drucker, The Essential Drucker (New York: Harper, 2001). Back
3  Matt Lichtenstadter, “How Jürgen Klinsmann’s World Cup Squad Decisions Mirror Germany 2006,” worldsoccertalk.com, 22 May 2014. Back
4  Simon Hart, “World Cup 2014: Germany’s self-built home from home, The Independent, 20 June 2014. Back
5  “Campo Bahia,” wikipedia.org (last accessed 14 July 2014). Back
6  Simon Hart, “World Cup 2014: Germany’s self-built home from home, The Independent, 20 June 2014. Back
7  Jeremy Wilson, “Germany’s purpose-built training camp has given them extra edge,” The Telegraph, 12 July 2014.Back
8  Ibid. Back
9  Ibid. Back
10 Ibid. Back
11 “Urs Siegenthaler: Der Mann, der die deutschen Matchpläne vorbereitet,” Lübecker Nachrichten, 13 July 2014. Back

How Germany’s 14-Year Plan Destroyed Brazil – by Brendan Greeley

Brazil certainly underperformed on Tuesday and throughout the World Cup. Its wins have all been lucky, barely, or both. But Brazil didn’t just fall apart against Germany (although it certainly did fall apart). Germany beat them with the precise and inspiring soccer it’s played all month in Brazil. This is not an accident, a golden blessing of a generation of talented fussballers. It follows a 14-year plan to find all the kids among 80 million Germans who can really play soccer, train them young, and get them attached to a professional team.

All countries do this, kind of. Belgium does it really well. After tonight’s game you could argue that Germany does it best.

In the 2000 European Championship, Germany didn’t make it past the group stage. Imagine the anger and soul-searching in New York if the Yankees finished last in the American League East. So the Deutscher Fussball Bund, the organization responsible for Germany’s national team, came up with a plan. Traditionally in Europe, club teams had been responsible for their own talent development. Some, like Barcelona in Spain and Ajax in the Netherlands, have become known for their youth academies. But the DFB decided that talent was too precious to leave unfound, and so in 2002 launched a national program to find all of it.

The Guardian wrote a great piece on the German program last year, or you can read the DFB’s own chest-thumping self-assessment from 2011 (PDF). Germany’s standardized national program starts teaching the same skills to 6-year-olds all over the country. It’s run in every town by coaches who have to get a license from the DFB. Then by age 8, as training continues, scouts are watching for the kids good enough for the club programs.

This spring I watched my German godson, Paul, play a soccer game with his youth team. He’s 8 years old. German kids at that age don’t play herd ball. They play their roles, make clean passes, and pick their shots. None of this is left to chance. His youth club, TV Rodenkirchen, is part of the national program. And standing on the sidelines—for a league game between 8-year-olds—were professional scouts.

Every professional club team in the first and second division of Germany’s Bundesliga now has to fund its own soccer high school. Between 2002 and 2010, the amount that professional club teams spent on youth development almost doubled, to about 85 million euros a year. We can already see what this spending has helped create. Last year’s Guardian article listed them:

Joachim Löw, Germany’s coach, is blessed with a generation of gifted young players—Julian Draxler (19), Andre Schürrle (22), Sven Bender (24), Thomas Müller (23), Holger Badstuber (24), Mats Hummels (24), Mesut Ozil (24), Ilkay Gündoğan (22), Mario Götze (20), Marco Reus (23), Toni Kroos (23) … the list goes on.

Müller, Kroos, Schürrle. These are the guys who scored five of Germany’s seven goals on Tuesday. And Germany’s talent machine is only now just starting to produce. A 6-year-old German in 2002 is still only 18 now. (My godson is pretty good, actually.)

We love the World Cup, in part, because it offers us a clear contest between nations with winners and losers. Except with an actual war, this clarity is hard to come by in international relations. Some nations get lucky. Did Argentina deserve its Lionel Messi or Portugal its Cristiano Ronaldo? But a national soccer team is a kind of mobilization, the end of a long plan, sustained over decades, with many moving parts, to find and train talent.

Germany was not blessed with Leo or Ronaldo. But sustaining a complex national plan over years, and committing to it as both a metaphorical and literal investment? Perhaps we should not be surprised that Germany has done this very, very well.

Greeley-brendan-190

Greeley is a staff writer for Bloomberg Businessweek in New York.

High Commitment, High Performance Management – by Martha Lagace

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“High commitment, high performance (HCHP) companies are firms designed and led by their founders or by transformational CEOs—those who take charge of a company in a crisis—to achieve sustained high commitment from all stakeholders: employees, customers, investors, and community,” says Beer. “These firms stand out by having achieved long periods of excellence.”

HCHP stalwarts include Southwest, Johnson & Johnson, Hewlett Packard for six decades, Nucor Steel, McKinsey, Goldman Sachs and Toyota, says Beer. Yet any company can change for the better, no matter the industry. GE, Becton Dickinson, Campbell Soup, IBM, and ASDA, a U.K. grocery chain, are examples of companies that were transformed by new CEOs taking charge, usually in times of crisis. These CEOs employed change strategies that focused on both commitment and performance. As ASDA’s CEO, Archie Norman, tells it, the new leader has to set a general direction, but must listen and engage people to identify and solve problems. Top-down leadership, he argues, will not work.

“This list is illustrative and by no means inclusive. The majority of companies do not, however, fall into the HCHP camp. Despite many differences in industry, products, and strategy, the companies and their leaders employ common principles and values,” says Beer.

For our email Q&A he discusses what it takes to build a high commitment, high performance company.

Martha Lagace: What differentiates HCHP firms and their leaders?

Michael Beer: The leaders manage with a multiple stakeholder perspective. Contrary to many CEOs, HCHP leaders—with support from their boards—define firm purpose as much more than shareholder value, though they all understand profit as an essential outcome.

HCHP firms are able to show sustained performance because they achieve the following three paradoxical goals:

  1. Performance alignment: Managing with their head, leaders develop an organizational design, business processes, goals, and measures, and capabilities that are aligned with a focused, winning strategy.
  2. Psychological alignment: Managing with their heart, leaders create a firm that provides employees at all levels with a sense of higher purpose, meaning, challenging work, and the capacity to make a difference, something that people desperately need and want but often do not get in organizational life. To accomplish this, HCHP firms establish and institutionalize human resource management policies and practices that look fairly similar.
  3. Capacity for learning and change: By keeping their egos in check, leaders of HCHP firms are able to avoid defensiveness and resulting blindness. HCHP firms institutionalize what I call Learning and Governance Systems, a means for having honest, collective, and public conversations with key people at lower levels about what stands in the way of success.

Why do firms need a learning and governance system? Performance and psychological alignment that works for a period of time—sometimes many years—can create rigidities that require challenges. In the book I discuss what leaders must do, be, and know to lead a collective process of learning, and I provide specifications for a Learning and Governance System that can help leaders avoid destruction, their own or their firm.

These three goals are paradoxical. That is, leaders who focus on one often undermine the others. Consider how hardheaded performance alignment can undermine psychological alignment and commitment if the process is too top-down. Or consider how achieving high levels of dedication to the firm (a strong culture) can easily slip into an attitude that resists change. Only if learning and change become an equally valued outcome can the status quo be challenged.

Q: How can companies stand the test of time?

A: Leaders must make conscious, principled choices. Such principled choices define a firm’s character. They are:

  1. Purpose: It defines the firm’s contribution to customers, employees, investors, community, and society, not only increasing stock price.
  2. Strategy: HCHP firms must fashion a distinctive and focused winning strategy to stick with through good times and bad regardless of attractive opportunities outside their field, though clearly adaptations of the strategy will be needed. HCHP firms are clear about who they are and committed to preserving their identity in the eyes of customers and employees. They know who they will not serve, businesses they will not be in, and activities they will not engage. They do not pursue profit for its own sake if it means getting into areas that are outside their defined distinctive capabilities. The disaster on Wall Street in 2008-2009 at firms like Merrill Lynch can in part be explained by the pursuit of profits for their own sake. HCHP firms, by contrast, grow by using their distinctive capabilities to move into adjacent markets, products and services, and geographies.
  3. Risk: HCHP firms avoid undue financial or cultural risk that could destroy the firm, though they do take bold business initiatives. Some firms like Southwest have no long term debt. Southwest self-financed because to grow too quickly would have undermined their ability to hire employees who fit Southwest’s collaborative values and culture. HCHP companies also manage acquisitions carefully. When they do make acquisitions they work hard at integrating the acquired company’s people into their culture. Consider how Hewlett Packard’s 1999 acquisition of Compaq undermined HP’s HCHP culture.
  4. Motivation: How people will be managed has to be a conscious choice. Leaders need to examine their assumptions about people: Do leaders assume employees want to be involved and make a contribution, or are they negative and assume that people only work for money and do the least they can get away with?

Q: If HCHP firms are desirable, why are there so few? What are some of the “undiscussible” fault lines you have identified?

A: Poor leadership and management stands in the way. These may arise because of ineffective leaders and flawed values, but they can also develop when historic leadership and management practices no longer align with newly emerging circumstances.

In the last twenty years my colleagues at TruePoint and I have asked leadership teams to define a strategic direction (business strategy and values) and then commission a task force of their best performers one to two levels below them to interview 100 key people in all parts of the organization about the strengths of and barriers to commitment and performance. These task forces are clearly instructed by the CEO or business unit manager (depending on the level of the organization in which this process is applied) to bring back the truth. Everyone in the organization is told about the inquiry—it is public—and asked to be honest. This process is later adopted by a number of organizations as their ongoing learning and governance process.

Our analysis of what dozens of task forces from underperforming organizations has shown is the same single strength, “our people,” and the same six “silent barriers” or silent killers. We call them silent killers because while everyone knows about them and they are discussed in private where it is safe, they are not discussible publicly with senior management.

The fact that a company’s people are seen as a universal strength suggests that the primary barrier to effectiveness, commitment, and performance is the system and the management, one unable to unleash people’s energy and align them with purpose and strategy.

Q: What are the six barriers?

A: The six silent barriers are:

  1. Unclear strategy, priorities, and values.
  2. A CEO or business unit leader who is too top-down or laissez faire in his or her approach to leading. They do not engage people in a way that allows an honest problem-solving dialogue.
  3. An ineffective leadership team (the team does not work as a unit and spends time on administrative matters and reviewing financial results instead of confronting strategic, organizational, and people issues and priorities.
  4. Poor coordination and collaboration between key value-creating activities, preventing effective execution.
  5. Inadequate leadership development.
  6. Closed vertical communication: Lower levels have not been communicated with about values, strategy, and priorities sufficiently and often in person. And equally important, organizational silence prevails about barriers to effectiveness, commitment, and performance. This barrier makes the silent killers self-sealing and unchangeable.

Q: The economic crisis of 2008-2009 has shown that companies make mistakes that derail and even destroy them. How can companies sustain commitment and performance in this environment?

A: Clearly the 2008-2009 economic crisis has some macroeconomic causes. But it can just as easily be explained by the approach to organizing and managing that many banks and mortgage and automobile companies employed—approaches that are diametrically opposite to those outlined in my book and discussed here. These firms did dumb things because their leaders did not make the principled choices outlined above.

Probably most important, CEOs or their boards did not want to know the truth nor did they develop the type of learning and governance processes that would have enabled truth to speak to power. Journalistic accounts and interviews with current or past employees of companies like Merrill Lynch and Washington Mutual, for example, make it clear that people in the middle and lower levels of these firms knew that bad loans were being made and that these would lead to the defaults we have seen. Some tried to tell upper management but were beaten down and eventually fired.

This does not happen in HCHP firms because the culture is more open. A disciplined, institutionalized process that allows examination of the whole system is essential. Even in HCHP companies, the capacity to learn and change through honest, collective, and public conversations is not as robust as the other pillars, performance alignment and psychological alignment.

Speaking up to CEOs and boards of directors is hard but ultimately the only path to sustained commitment and performance. Human nature is such that we do not want to know the truth, and lower levels are afraid to speak truth to power due to fear, and experiences that tell them nothing will change. Our tendency to be overprotective of people also causes us to avoid giving feedback to top management.

Q: What kind of leadership is necessary for a HCHP firm?

A: Leaders must have HCHP vision and values (empowerment, collaboration, maintaining firm identity, learning, humility, and a non-heroic approach to their job) and must be able to confront conflict. They see their job as stewards of the institution and want to leave a positive legacy.

It is hard work to build a HCHP firm and sustain it over time: Leaders take on the challenge because they see their goal as more than quarterly profits. Yet they understand the importance of profits to long term success.

HCHP leaders embrace the paradox inherent in tough business- and profit-oriented decisions on the one hand and developing an institution that cares about people and allows them to develop and exercise their unique gifts on the other. They inspire people by holding out the potential for creating a better organization and world.

Q: Your vision is very ambitious. What change strategy do you recommend?

A: Transforming an underperforming company into a HCHP organization is a challenge but well worth the prize. It takes will but also a great deal of skill. Here are some essential elements in a change strategy:

  • Embrace “the” and “also.” Leaders must embrace the paradox of people and profits. They must improve profits, of course, yet be consistent with the values and precepts discussed above. The process cannot be top down, though the direction can only come from the top.
  • Develop a leadership team that embraces the values and perspective discussed here. If that means moving people out and replacing them, that must be done. Engage the leadership team in a discussion of purpose, mission, values, strategy, and the approach they will take to motivate people. The top team ideally spends time discussing the legacy they want to leave: This develops the sense of long term purpose required for a successful journey to HCHP.
  • Engage key people below the leadership team. Ask them if the new direction makes sense and about the strengths and barriers in the organization to achieving that direction.
  • Put together a set of corporate change initiatives to transform the company. In my book I identify levers of change that through experience and research I have found are typically addressed by leaders to achieve performance alignment, psychological alignment, and the capacity for ongoing learning and change. These include a learning and governance process discussed earlier; a strategic performance management process by which the senior team sets strategy and goals, develops strategic initiatives, and reallocates human and financial resources as needed; an organizational design that enables coordination; and human resource management policies and practices to enhance competence and commitment and develop a community of purpose. In particular, leadership must enable the development of the next generation of leaders: employees who share the values underlying the transformation and will carry on the journey to HCHP after current leaders have left the scene.
  • Recognize that HCHP transformations are a unit by unit process, and must occur at the corporate as well as the business, regional, and operating unit level.
  • Avoid the fallacy of programmatic change, running tens of thousands of people through education aimed at changing their attitudes and behavior. Change must be led by local leaders and involve people in shaping their own destiny. Corporate staff groups can support it, but it is the act of leading change that both develops leaders and the HCHP culture.

Q: What are you working on now?

A: My colleagues at the TruePoint Center for High Commitment and Performance, a not for profit research and education institute, and I are engaged in a study of HCHP leaders. We want to understand HCHP leadership through their own experience. What is the source of their commitment to building a HCHP company and how do they describe the transformation journey they are leading? We are analyzing the data from these interviews and plan to write a book tentatively titled True Leaders: Lessons from Companies Who Create Both Wealth and Worth. Our article “The Uncompromising Leader” in the July 2008 issue of Harvard Business Review reported our early findings.

ABOUT THE AUTHOR

Martha Lagace is the senior editor of HBS Working Knowledge.