PlayersPositions?

THE STRATEGIC LOGIC OF WORKFORCE MANAGEMENTby Mark A. Huselid, Richard W. Beatty, and Brian E. Becker

A single-minded focus on finding anddeveloping A players misses the point.A better approach is first to identifystrategically critical jobs, then to investdisproportionately to ensure that theright people-doing the right things-are in those positions.

A GREAT WORKFORCE is made up of greatpeople. What could be more intuitivelyobvious? Is it any wonder, then, that somany companies have devoted so muchenergy in recent years to identifying, de-veloping, and retaining what have cometo be known as "A players"? Firms like GE,IBM, and Microsoft all have well-developedsystems for managing and motivatingtheir high-performance and high-potentialemployees - and for getting rid of theirmediocre ones. Management thinkers havewidely endorsed this approach: Larry Bos-sidy, in the best-selling book Execution, forexample, calls this sort of differentiationamong employees "the mother's milk ofbuilding a performance culture."

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But focusing exclusively on A players puts, well, thehorse before the cart. High performers aren't going toadd much value to an organization if they're smoothlyand rapidly pulling carts that aren't going to market.They're going to be effective only when they're harnessedto the right cart-that is, engaged in work that's essentialto company strategy. This, too, may seem obvious. But it'ssurprising how few companies systematically identifytheir strategically important A positions - and then focuson the A players who should fill them. Even fewer compa-nies manage their A positions in such a way that the Aplayers are able to deliver the A performance needed inthese crucial roles.

While conventional wisdom might argue that the firmswith the most talent win, we believe that, given the finan-cial and managerial resources needed to attract, select, de-velop, and retain high performers, companies simply can'tafford to have A players in all positions. Rather, we believethat the firms with the right talent win. Businesses need toadopt a portfolio approach to workforce management,placing the very best employees in strategic positions,good performers in support positions, and eliminatingnonperforming employees and jobs that don't add value.

We offer here a method for doing just that, drawingon the experience of several companies that are success-fully adopting this approach to workforce management,some of which we have worked with in our research oras consultants. One thing to keep in mind: Effective man-agement of your A positions requires intelligent manage-ment of your B and C positions, as well.

Identifying Your A PositionsPeople traditionally have assessed the relative value ofjobs in an organization in one of two ways. Human re-source professionals typically focus on the level of skill,effort, and responsibility a job entails, together withworking conditions. From this point of view, the most im-portant positions are those held hy the most highlyskilled, hardest-working employees, exercising the mostresponsibility and operating in the most challengingenvironments.

Economists, by contrast, generally believe that people'swages reflect the value they create for the company andthe relative scarcity of their skills in the labor market.Thus, the most important jobs are those held by the mosthighly paid employees. The trouble with both of these ap-proaches is that they merely identify which jobs the com-pany is currently treating as most important, not the ones

that actually are. To do that, one must not work back-ward from organization charts or compensation systemsbut forward from strategy.

That's why we believe the two defining characteristicsof an A position are first, as you might expect, its dispro-portionate importance to a company's ability to executesome part of its strategy and second-and this is not nearlyas obvious-the wide variability in the quality ofthe workdisplayed among the employees in the position.

Plainly, then, to determine a position's strategic signi-ficance, you must be clear about your company's strat-egy: Do you compete on the basis of price? On quality?Through mass customization? Then you need to identifyyour strategic capabilities-the technologies, informa-tion, and skills required to create the intended competi-tive advantage. Wal-Mart's low-cost strategy, for instance,requires state-of-the-art logistics, information systems,and a relentless managerial focus on efficiency and costreduction. Finally, you must ask: What jobs are criticalto employing those capabilities in the execution of thestrategy?

Such positions are as variable as the strategies they pro-mote. Consider the retailers Nordstrom and Costco. Bothrely on customer satisfaction to drive growth and share-holder value, but what different forms that satisfactiontakes: At Nordstrom it involves personalized service andadvice, whereas at Costco low prices and product avail-ability are key. So the jobs critical to creating strategic ad-vantage at the two companies will be different. Frontlinesales associates are vital to Nordstrom but hardly to befound at Costco, where purchasing managers are ab-solutely central to success.

The point is, there are no inherently strategic positions.Furthermore,they're relatively rare-less than 20% oftheworkforce-and are likely to be scattered around the or-ganization. They could include the biochemist in R&D orthe field sales representative in marketing.

So far, our argument is straightforward. But why wouldvariability in the performance ofthe people currently ina job be so important? Because, as in other portfolios, vari-ation in job performance represents upside potential -raising the average performance of individuals in thesecritical roles will pay huge dividends in corporate value.Furthermore, if that variance exists across companies, itmay also be a source of competitive advantage for a par-ticular firm, making the position strategically important.

Sales positions, fundamental to the success of many acompany's strategy, are a good case in point: A salesper-son whose performance is in the 85th percentile of a com-

Mark A. Huselid (huselid@smlr.rutgers.edu) and Richard W. Beatty (dickbeatty@patmeclia.net) are professors of humanresource management in the School of Management and Labor Relations at Rutgers University in New Brunswick, NewJersey. Brian E. Becker (bbecker@buffalo.edu) is a professor of human resources in the School of Management at SUNYBuffalo in New York. They are the authors of The Workforce Scorecard: Managing Human Capital to Execute Strategy(Harvard Business School Press, 2005)-

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pany's sales staff frequently generates five to ten times therevenue of someone in the 50th percentile. But we're notjust talking about greater or lesser value creation - we'realso talking about the potential for value creation versusvalue destruction. The Gallup organization, for instance,surveyed 45.000 customers of a company known for cus-tomer service to evaluate its 4,600 customer service rep-resentatives. The reps' performance ranged widely: Thetop quartile of workers had a posi-tive effect on 61% of the customersthey talked to, the second quartilehad a positive effect on only 40%,the third quartile had a positive ef-fect on just 27% - and the bottomquartile actually had, as a group, anegative effect on customers. Thesepeople - at the not insignificant cost to the company ofroughly $40 million a year (assuming average total com-pensation of $35,000 per person) - were collectively de-stroying value by alienating customers and, presumably,driving many of them away.

Although the $40 million in wasted resources is jaw-dropping, the real significance of this situation is thehuge difference that replacing or improving the per-formance ofthe subpar reps would make. If managersfocused disproportionately on this position, whetherthrough intensive training or more careful screeningofthe people hired for it, company performance wouldimprove tremendously.

The strategic job that doesn't display a great deal ofvariability in performance is relatively rare, even for thoseconsidered entry-level. That's because performance inthese jobs involves more than proficiency in carrying outa task. Consider the job of cashier. The generic mechanicsaren't difficult. But if the position is part of a retail strat-egy emphasizing the customers' buying experience, thejob will certainly involve more than scanning products

and collecting money with a friendly smile. Cashiersmight, for example, be required to take a look at what acustomer is buying and then suggest other products thatthe person might want to consider on a return visit. Insuch cases, there is likely to be a wide range in people'sperformance.

Some jobs may exhibit high levels of variability (thesales staff on the floor at a big-box store like Costco, for

Companies simply can't affordto have A players in all positions.

example) but have little strategic impact (because, as wehave noted, Costco's strategy does not depend on salesstaff to ensure customer satisfaction). Neither dramati-cally improving the overall level of performance in thesejobs nor narrowing the variance would present an oppor-tunity for improving competitive advantage.

Alternatively, some jobs may be potentially importantstrategically but currently represent little opportunity forcompetitive advantage since everyone's performance isalready at a high level. That may either be because ofthestandardized nature ofthe job or because a company orindustry has, through training or careful hiring, reducedthe variability and increased the mean performance ofworkers to a point where further investment isn't merited.A pilot, for example, is a key contributor to most air-lines' strategic goal of safety, but owing to regular train-ing throughout pilots' careers and government regula-tions, most pilots perform well. Although there definitelyis a strategic downside if the performance of some pilotswere to fall into the unsafe category, improving pilot per-formance in the area of safety is unlikely and, even if

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marginal gains are possible, unlikely to provide an oppor-tunity for competitive advantage.

So a job must meet the dual criteria of strategic impactand performance variability if it is to qualify as an A posi-tion. From these two defining characteristics flow a num-ber of others-for example, a position's potential to sub-stantially increase revenue or reduce costs-that markan A position and distinguish it from B and C positions.B positions are those that are either indirectly strategicthrough their support of A positions or are potentially

There are no inherently strategicpositions. What's more, they're relativelyrare-less than 2O% of the ivorkforce.

strategic but currently exhibit little performance vari-ability and therefore offer little opportunity for competi-tive advantage. Although B positions are unlikely to cre-ate value, they are often important in maintaining it. Cpositions are those that play no role in furthering a com-pany's strategy, have little effect on the creation or main-tenance of value - and may, in fact, not be needed at all.(For a comparison of some attributes of these three typesof positions, see the exhibit "Which Jobs Make the MostDifference?")

It's important to emphasize that A positions have noth-ing to do with a firm's hierarchy-which is the criterionexecutive teams so often use to identify their organiza-tions' critical and opportunity-rich roles. As natural as itmay be for you, as a senior executive, to view your ownjob as among a select group of vital positions in the com-pany, resist this temptation. As we saw in the case of thecashier, A positions can be found throughout an organiza-tion and may be relatively simple jobs that nonethelessneed to be performed creatively and in ways that fit andfurther a company's unique strategy.

A big pharmaceutical firm, for instance, trying to pin-point the jobs that have a high impact on the company'ssuccess, identifies several A positions. Because its ability totest the safety and efficacy of its products is a requiredstrategic capability, the head of clinical trials, as well as anumber of positions in the regulatory affairs office, aredeemed critical. But some top jobs in the company hier-archy, including the director of manufacturing and thecorporate treasurer, are not. Although people in thesejobs are highly compensated, make important decisions,and play key roles in maintaining the company's value,they don't create value through the firm's business model.Consequently, the company chooses not to make the sub-stantial investments (in, say, succession planning) in thesepositions that it does for more strategic jobs.

A positions also aren't defined by how hard they areto fill, even though many managers mistakenly equateworkforce scarcity with workforce value. A tough job tofill may not have that high potential to increase a firm'svalue. At a high-tech manufacturing company, for exam-ple, a quality assurance manager plays a crucial role inmaking certain that the products meet customers' ex-pectations. The job requires skills that may be difficultto find. But, like the airline pilots, the position's impacton company success is asymmetrical. The downside

may indeed be substantial:Quality that falls below SixSigma levels will certainly de-stroy value for the company.But the upside is limited: Amanager able to achieve a NineSigma defect rate won't addmuch value because the differ-ence between Six Sigma and

Nine Sigma won't be great enough to translate into anymajor value creation opportunity (although the differ-ence between Two- and Three-Sigma defect rates maywell be). Thus, while such a position could be hard to fill,it doesn't fit the definition of an A position.

Managing Your A PositionsHaving identified your A positions, you'll need to managethem-both individually and as part of a portfolio of A, B,and C positions-so that they and the people in them infact further your organization's strategic objectives.

A first and crucial step is to explain to your workforceclearly and explicitly the reasons that different jobs andpeople need to be treated differently. Pharmaceuticalcompany GlaxoSmithKline is identifying those posi-tions, at both the corporate and business-unit levels, thatare critical to the company's success in a rapidly chang-ing competitive environment. As part of that initiative,the company developed a statement of its workforce phi-losophy and management guidelines. One of these explic-itly addresses "workforce differentiation" and reads, inpart: "It is essential that we have key talent in critical po-sitions and that the careers of these individuals are man-aged centrally."

But communication is just the beginning. A positionsalso require a disproportionate level of investment. Theperformance of people in these roles needs to be evalu-ated in detail, these individuals must be actively devel-oped, and they need to be generously compensated.Also, a pipeline must be created to ensure that theirsuccessors are among the best people available. IBM is acompany making aggressive investments on each ofthese four fronts.

In recent years, IBM has worked to develop what it callsan "on-demand workforce," made up of people who can

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Which Jobs Make the Most Difference?An A position is defined primarily by its impact on strategy and by the range in the performance

level ofthe people in the position. From these two characteristics flow a number of other attributes

that distinguish A positions from B and C jobs.

DEFININGCHARACTERISTICS

Scope of authority

Primary determinantof compensation

Effect on valuecreation

Consequencesof mistakes

Consequences ofhiring wrong person

A PositionSTRATEGIC

Has a direct strategicimpact

AND

Exhibits high performancevariability among those inthe position, representingupside potential

Autonomous decision making

Performance

Create5 value by substantiallyenhancing revenue or reducingcosts

May be very costly, but missedrevenue opportunities are agreater loss to the firm

Significant expense in termsof iost training investment andrevenue opportunities

B PositionSUPPORT

Has an indirect strategicimpact by supportingstrategic positions andminimizes downside riskby providing a foundationfor strategic efforts.

OR

Has a potential strategicimpact, but exhibits littleperformance variabilityamong those in the position

Specific processes or procedurestypically must be follov^̂ ed

Job level

Supports value-creatingpositions

May be very costly and candestroy value

Fairly easily remedied throughhiring of replacement

C PositionSURPLUS

May be required for thefirm to function but haslittle strategic impact

Uttle discretion in vi/ork

Market price

Has little positive economicimpact

Not necessarily costly

Easily remedied through hiringof replacement

quickly put together or become part of a package of hard-ware, software, and consulting services that will meet thespecific needs of an individual customer. As part of this ef-fort, IBM has sought to attract and retain certain individ-uals with what it terms the "hot skills" customers want insuch bundled offerings.

In the past year or so, the company has also focused onidentifying its A positions. The roster of such positionsclearly will change as IBM's business does. But some, suchas the country general manager, are likely to retain theirdisproportionate value. Other strategic roles include mid-

level manager positions, dubbed "deal makers," responsi-ble for the central strategic task of pulling together, fromboth inside and outside the company, the diverse set ofproducts, software, and expertise that a particular clientwill find attractive.

Evaluation. Because of their importance, IBM's keypositions are filled with top-notch people: Obviously,putting A players in these A positions helps to ensure Aperformance. But IBM goes further, taking steps to holdits A players to high standards through an explicit pro-cess-determining the factors that differentiate high and

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low performance in each position and then measuringpeople against those criteria. The company last year de-veloped a series often leadership attributes-such as theabilities to form partnerships with clients and to takestrategic risks-each of which is measured on a four-pointscale delineated with clear behavioral benchmarks. Indi-viduals assess themselves on these attributes and are alsoassessed by others, using 360-degree feedback.

Are We Differentiating Enough?Managers whio know that differentiated strategies are the key to

competitive success all too often fail to differentiate in strategies

for tbeir most important asset-their workforce. This checklist can

help you determine if you are differentiating enougb in tbe treat-

ment of your company's positions and people. If you checkoff any

of tfiese, you have work to do.

POSITIONS

Position descriptions are based on history, not strategic value.

Most positions are paid at about the market midpoint.

Recruitment and retention for all positions involve thesame effort and budget.

The same selection process is used for all positions.

Little developmental rotation occurs.

Few C positions are eliminated or outsourced.

PLAYERS

Performance evaluation forms are completed rarelyor only at salary review.

There is little candor in performance reviews.

Many or most employees are rated the same.

Forced distribution of ratings is used.

Those receiving the middle rating are labeled "proficient"or "successful" and receive regular pay raises despite beingviewed as average or marginal.

Both very tough and very lenient raters operate withoutconsequences.

Poor performers stay yet don't improve.

Top management is not rigorously evaluated.

Development. Such detailed evaluation isn't veryvaluable unless it's backed up by a robust professionaldevelopment system. Drawing on the strengths and weak-nesses revealed in their evaluations and with the helpof tools available on the company's intranet, people inIBM's A positions are required to put together a develop-ment program for themselves in each of the ten leader-ship areas.

This is only one of numerous developmentopportunities offered to people in A positions.In fact, more than $450 million of the $750 mil-lion that IBM spends annually on employee de-velopment is targeted at either fostering hot skills(both today's and those expected to be tomor-row's) or the development of people in key posi-tions. A senior-level executive devotes all of histime to programs designed to develop the exec-utive capabilities of people in these jobs.

Compensation. IBM supports this dispropor-tionate investment in development with an evenmore disproportionate compensation system.Traditionally at IBM, even employees with lowperformance ratings had received regular salaryincreases and bonuses. Today, annual salary in-creases go to only about half the workforce, andthe best-performing employees get raises roughlythree times as high as those received by the sim-ply strong performers.

Succession. Perhaps most important, IBM hasworked to formalize succession planning and tobuild bench strength for each of its key positions,in part by investing heavily in feeder jobs forthose roles. People in these feeder positions areregularly assessed to determine if they are "readynow,""one job away," or "two jobs away" from pro-motion into the strategically important roles."Pass-tbrough" jobs, in which people can developneeded skills, are identified and filled with candi-dates for the key strategic positions. For example,the position of regional sales manager is an im-portant pass-through job on the way to becominga country general manager. In this way, IBM en-sures that its A people will in fact be ready to fillits top positions.

Managing Your Portfolioof PositionsIntelligently managing your A positions can't bedone in isolation. You also need strategies formanaging your B and C positions and an under-standing of bow all three strategies work to-gether. We find it ironic that managers who em-brace a portfolio approach in other areas of thebusiness can be slow to apply this type of think-

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ing to their workforce. All too frequently, for example,companies invest in their best and worst employees inequal measure. The unhappy result is often the departureof A players, discouraged by their treatment, and the re-tention of C players.

To say that you need to disproportionately invest inyour A positions and players doesn't mean that you ig-nore the rest of your workforce. B positions are importanteither as support for A positions (as IBM's feeder posi-tions are) or because of any potentially large downsideimplications of their roles {as with the airline pilots). Putanother way, although you aren't likely to win with yourB positions, you can certainly lose with them.

As for those nonstrategic C positions, you may conci udeafter careful analysis that, just as you need to weed out Cplayers over time, you may need to weed out your C posi-tions, by outsourcing or even eliminating the work.

Roche is one firm that is placing more emphasis on thestrategic value of positions themselves. Over the past fewyears, the pharmaceutical company has been looking atdifferent positions to determine which are necessary for

Making Tough ChoicesDespite the obvious importance of developing high-performing employees and supporting the jobs that con-tribute most to company success, firms that routinelymake difficult decisions about R&D, advertising, andmanufacturing strategies rarely show the same disciplinewhen it comes to their most valuable asset: the workforce.In fact, in our long experience, we've found that firmswith the most highly differentiated R&D, product, andmarketing strategies often have the most generic or undif-ferentiated workforce strategies. When a manager at oneof these companies does make a tough choice in this area,the decision often relates to the costs rather than thevalue of the workforce. (The exhibit "Are We Differentiat-ing Enough?" can help you determine whether you aremaking the distinctions likely to create workforce value.)

It would be nice to live in a world where we didn't haveto make hard decisions about the workforce, but we don't.Strategy is about making choices, and correctly assess-ing employees and roles are two of the most important.

IMany managers will mistakenly equate ^vorkforcescarcity with workforce value, but A positions aren'tdefined by how hard they are to fill.

maintaining competitive advantage. Regardless of howwell a person performs in a role, if that position is nolonger of strategic value, the job is eliminated. For exam-ple, Roche looked at tbe strategic value provided by dataservices in a recent project and as a result decided whichpositions need to be added, which needed to change (orbe moved)-and which, sucb as data center services (DCS)engineer, needed to be eliminated. In a similar manner,another pharmaceutical firm, Wyeth Consumer Health-care, following a strategic decision to focus on large cus-tomers,e]iminated what had been a strategic position forthe company-middle-market account manager-as well asstaff that supported the people in this position.

The ultimate aim is to manage your portfolio of posi-tions so that the right people are in the right jobs, payingparticular attention to your A positions. First, using per-formance criteria developed for determining wbo your A,B, and C players are, calculate the percentage of each cur-rently in A positions. Then act quickly to get C players outof A positions, replace them with A players, and work tohelp B players in A positions become A players. Glaxo-SmithKIine currently is engaged in an initiative to pushboth line managers and HR staff to ensure that only top-tier employees (as determined by tbeir performance eval-uations) are in the company's identified key positions.

For us, the essence of the issue is the distinction betweenequality and equity. Over the years, HR practices baveevolved in a way that increasingly favors equal treat-ment of most employees within a given job. But today'scompetitive environment requires a shift from treatingeveryone the same to treating everyone according to hisor her contribution.

We understand that this approach may not be foreveryone, that increasing distinctions between employeesand among jobs runs counter to some companies' cul-tures. There is, however, a psychological as well as a stra-tegic benefit to an approach that initially focuses on Apositions: Managers who are uncomfortable with theharsh AandCp/aytfrdistinction-especially those in HR,many of whom got into the business because they careabout people-may find the idea of first differentiatingbetween A and C positions more palatable. But shyingaway from making the more personal distinctions is alsounwise. We all know that effective business strategy re-quires differentiating a firm's products and services inways that create value for customers. Accomplishing thisrequires a differentiated workforce strategy, as well. ^

Reprint RO512G; HBR OnPoint 2424To order, see page 155.

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