Capacity versus Leverage

IN the quest for market dominance, companies often engage in a war for talent. They seek out new recruits with outstanding capacity, the chosen few who are able to demonstrate a track record of success, and an ability to solve new problems quickly and easily.

Management consulting firms are the flag bearers in this war. In a clear and methodical way, they invite the strongest applicants to come and joust in a competitive case interview tournament, which emulates the complexity and ambiguity of real business situations.

Only the strongest are awarded the prize of employment.

Underlying this behaviour is a belief that high capacity individuals are crucial for organisational success.

We beg to disagree, at least in part.

If an organisation were to wake up each Monday morning and forget everything it had ever learned, then it would obviously be important to employ only the very smartest individuals. Every week would bring new problems, and people with exceptional talent would be needed to solve them.

Fortunately, however, this rarely happens. Organisations and the individuals who work in them have memory which accumulates over time, captured in the form of skills, know-how, products, technology and culture.

Customers bring their problems, and companies have a choice in how to serve them. One option is to employ the brightest individuals so that new problems can be solved quickly and easily. In this case, customers benefit from expensive bespoke solutions based on entirely novel thinking. Another option, though, is to do the hard work of building institutional capital that can be leveraged and enhanced on each occasion in order to provide consistently more value at lower cost than ever before.

Every employee will sooner or later leave their employer, one way or another, and so in the long run capital accumulation is key.

A problem can arise though when companies believe that they have to choose: should we hire top talent to be competitive now or invest in building capital to be competitive down the road?

The options are not in conflict, or at least they don’t need to be, and you only have to look at the way McKinsey handles its talent pool to realise this. The firm hires the best and brightest minds in the countries in which it operates. It combines this with an “up or out” policy and a strong alumni relations program that allows it to benefit from the thinking, patronage and cooperation of its former employees long after it has ceased to pay them. In this way, the firm transforms former employees into an enduring asset.

And so, dear reader, you are faced with a choice. You can solve problems by simply using available capacity, your own or that of others, or you can work to build something remarkable and enduring that will enable you to solve more problems with less effort over time.

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