Culture and Choice

I've been hearing a ton about company culture these days. At first, I thought it was just the latest Silicon Valley innovative way to get the best and brightest to work harder and longer (people scoff at the free food and the laundry service, but it keeps people on campus and talking with each other). But I'm beginning to suspect that this is a bigger trend with a more fundamental cause.  

So, is it a buzzword or is it a thing? The definition of culture is the shared values of a group of people. But I think it's a little more complex. I think it's the playbook that tells everyone how to interact. Some of it is written, some of it you pick up. Think of driving. If you've been in other countries, you know that traffic rules are adhered to differently in different countries. But it works, because everyone knows what to expect from everywhere else. When you have someone following different rules, it slows down traffic and can cause accidents.

The written "rules" are one thing the company can signal to avoid a mismatch. But the thing with the "unwritten rules" is that if they conflict with an employee's core values, they won't be able to fit in. This doesn't mean that there's something wrong with the employee or with the company, but that they're incompatible. 

The Great Man of History Theory gives way

So, why are we talking about this now?

Areas strategic differentiation goes through waves. We had land, means of production, capital, information all as means of differentiation. Recently, the focus has been on ideas as a source of strategic differentiation (often referred to as "innovation"). The means of getting the best ideas was to have the best thinkers. And so, the idea has been the best employees give you strategic differentiation.

But this was akin to the 19th century philosophy that history is "but the biography of great men". The idea that a few extraordinary individuals write the rules and the rest of us just play by them. Over time, this theory gave way to the idea that even the big personalities that sit on top are products of their societies - and it's the ebb and flow of these societies (these cultures) that have shaped history. 

Even if the thinking was correct - in terms of bringing the best minds together as a means of strategic advantage - as with all means of strategic differentiation, eventually, everyone catches up. Attracting top talent is now something that companies are good at across the board. But "top talent" is relative. And the idea isn't the differentiator - the execution of the idea is. To execute ideas, you need a team. ​

A team is comprised of having the best players for each position all executing the same playbook. The playbook is the culture, it's the unwritten rules that make sure you know how all the other players will be playing their position. So, to have the best results, you need the best execution. To have the best execution, you need the best team. To have the best team, you need the best players. To have the best players act as a team, you need a culture to bind them together. 

It's all about results.​

We are right now potentially in the middle of the most profound shift to society since the industrial revolution.  The development of a business used to require significant investments in infrastructure, marketing, distribution, and human capital. This meant that ownership was the purview of a relative few who had access to capital. Over the last ten years, many of those have become possible to implement without significant upfront costs. This is most acutely true in online businesses, where services have arisen to allow companies to operate without having to manage the schlep work for themselves. But food trucks disrupting restaurants and the advent of 3d printing (and the internet itself, in terms of advertising and operations) have made this true for many industries. Even in the case of human capital, certain types of jobs (usually requiring little to no training) have shifted to lower cost locations or are now handled by professional employment operations (like TriNet or WorkDay).

We focus on the idea that this means that employers are arbitraging labor costs. But there's another side to this as well. To me, one of the most interesting aspects of this shift is that companies are now competing for employees based on working conditions. (Now, I am massively biased toward the the tech industry and I know that what I am about to say doesn't hold true everywhere. But I believe that's only a matter of time.)​

• There is a rise in the number of smaller businesses (600K annually, which has been on the rise for last 15 years - according to the small business bureau)
• More businesses gives the option to the employees to move companies (they are less geographically constrained, like drive-thru tellers servicing distant fast food chains, and there are more competitors where they can ply their industry knowledge.
• Labor is becoming not only the main cost element of a company, it is also the key to differentiation
• The expectations of employees is that the line between work and personal has blurred - that work should be judged by outcomes, not by input. (Granted, this is also generational, but I believe the old folks like me will catch on soon enough.)

In other words, for a larger segment of the workforce than ever before, there are now more options. There is still some economy of scale, so we will continue to have big businesses, but the security of the big business is being competed with by smaller companies with strong cultures. And the loyalty effect of a small company is being competed with by big companies that have an emphasis on the shared values of their culture.​

The implication

If you believe the above to be true, there is one clear implication for companies:​ employers need to look at "economic happiness" or "Lifetime Value" of employees*:

• There is the investments in employees to develop the specific knowledge, skills and relationships necessary to be productive, all of which is lost when an employee changes company. It’s important to amortize these costs over as long a period as possible.
• In the case of an acquisition, the talent acquisition is a major component. Understanding the cultural fit will help to lengthen the tenure of the acquired employees.

Given the above trends, employers have been looking at many means of retaining employees. The rise in perks has become commoditized, and are now somewhat expected (level of perks is relative within an industry). Employers are now (and increasingly will be) focusing on dealing with the number one reason for employee churn: the relationship with the manager. Holistically, the only way to address is by creating the feeling of family within an organization, focusing on shared values.

The good news for employers is that employees don’t want to keep changing employers. They do so because it benefits them:

• Staying at one employer too long can shift a person’s skills from Explicit to Tacit. Tacit skills are harder to value on the market.
• The market values their skills more than the company does (this happens when the company misjudges the cultural alignment - ie, the intangible rewards - or when the company’s strategy is not aligned with market trends)
• They do not enjoy their work or their work environment

OR because they don’t have a choice:

• A star employee in one context can be a low performer in another
• A reduction in force does not always remove the weakest performers. It does usually filter out those with the loosest connection to the corporate culture. It also sometime, simply reflects a strategy and says nothing about the person.

Now what?

Given the emphasis on culture, the obvious implication is that the hiring process should be changed. I think that this has been slower coming than might have been expected. But companies are starting to talk a lot about the impact of a bad hire. What they're not talking about is the impact of a long hiring process. But more on that in another post.

* Originally, I wrote "total cost of ownership of employees", but not only did that sound wrong having recently seen "Lincoln", but it also goes against the point of culture as a key element to the future.
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