Rethinking the ‘War for Talent’

Despite the earnest efforts of many executives to win the so-called war for talent, employee mobility remains a fact of life. According to a recent survey, from the beginning of 2005 to the end of 2006, companies lost nearly 30% of their human capital.1 What are managers to do? The traditional solution has been to focus on strengthening employee-retention programs in order to curb worker turnover. But although such efforts might produce limited gains, they do not address the broader issues driving employee mobility. Instead, a more innovative approach is needed. Our research suggests that companies might benefit from developing new strategies that, instead of focusing on suppressing employee mobility, actively seek to exploit the potential opportunities it creates.2 (For an overview of our research, see “About the Research“) For such approaches to succeed, however, managers must rethink some of their basic assumptions about the “war for talent.”

About the Research »

In the past, employee mobility was framed as a win-or-lose scenario: A company wins if it keeps its employees and loses if they leave. Turnover hurts businesses because of the increased administrative expenses associated with recruiting, hiring and training replacements. These costs have been estimated to be 100% to 150% of the salary of a high-performing employee with unique skills. Companies also lose from worker turnover because employees are repositories of human capital — an organization’s knowledge, skill and knowhow. When a talented employee quits to take another job, she takes with her generic as well as company-specific knowledge (for example, trade secrets), thus increasing the human capital of her new employer while decreasing the human capital of her former company.

Consider the recent case of a semiconductor manufacturer that lost both the project lead and chief architect who had been working on a new product. From a human-capital perspective, these two employees were perhaps the two most important assets of the fledging business. They knew more about the new product than anyone else and had significant proprietary knowledge about the chip market and technologies. The natural reaction for the company would be to bemoan the departures as a huge loss, particularly as it scrambled to replace the two individuals. But dwelling on the loss would only prevent company executives from seeing the potential opportunities created by the social capital embedded in their relationships with the departing employees.

Social capital is defined as the sum of the actual and potential resources embedded within, available through and derived from relationships.3 When employees move between companies they often maintain contact with former colleagues. Because of the trust and comfort embedded in these ties, employee mobility can create a conduit for information, allowing knowledge to flow between organizations. These relationships can also serve as the basis for future business dealings between companies. In addition, because mobile individuals possess knowledge about the capabilities, work practices and processes of their former employers, they can make interorganizational endeavors more efficient. Thus, the social capital created by the movement of employees across companies can be a key source of competitive advantage.

An implicit assumption of the “war for talent” perspective is that departing workers are lost to competitors. Yet employees also leave to join existing and potential “cooperators,” such as customer companies, suppliers and partners, and such movement can facilitate the creation and strengthening of business relationships with those organizations. In 2004, for example, several high-performing traders left Goldman Sachs & Co., the investment banking firm, to start multibillion-dollar hedge funds. Goldman Sachs executives might have been worried that the exodus of talent would harm company performance, but the exact opposite occurred as these hedge funds became important new clients.4 Similarly, in 1998, Michael Jacobson, then a securities lawyer with Cooley Godward LLP, announced his resignation to become general counsel for eBay Inc., which at the time was a little-known online auction site. Because Jacobson had more than 12 years of experience in Cooley Godward’s securities division, the managing partners believed his loss would severely damage the practice. A few months later, however, Cooley Godward was retained as lead counsel for eBay’s initial public offering — which set a record at $1.3 billion — due in part to the firm’s ties with Jacobson.5

Now consider again the example of the semiconductor manufacturer. As it turns out, the two departing employees left to start their own business, which develops systems built around chips like the one being designed by their former employer. As such, by virtue of their shared social capital, the start-up is an excellent prospective customer and potential alliance partner for the semiconductor manufacturer.

The lesson is clear: Employee mobility isn’t a simple win-or-lose scenario. Although a company might lose the human capital of former employees, it can retain access to the social capital it shares with them. Depending on the types of organizations former employees join, this social capital can have substantial value, significantly increasing a company’s performance. Consequently, executives need to differentiate between situations where employees quit to join competitors versus those where they leave to work for cooperators.

Strategic Responses to Employee Mobility

Traditionally, companies have adopted two types of strategic responses to employee turnover: defensive and retaliatory.6 In the first approach, managers take steps to reduce the motivation of current employees to leave. Examples include changes to internal human resources practices, such as increasing salaries and benefits, improving internal communications, developing succession plans and offering employees training. The underlying logic is that if the work environment is made as appealing as possible, employees will be less inclined to pursue or accept outside job offers.

In a retaliatory approach, companies take actions to threaten or harm departing employees or the organizations that hire them. For example, managers may aggressively enforce employee non-compete clauses, file lawsuits against any business that poaches their workers or participate in retaliatory poaching against such firms. The objective is to make it more costly to poach the company’s employees and restrict the ability of former employees to use their valuable knowledge and relationships, thus reducing the incentive for other firms to hire them. In 2005, for example, Microsoft Corp. filed a lawsuit to restrict a former vice president from working on specific projects at Google Inc. that overlapped with his previous work at Microsoft.7 The litigation was widely seen as an attempt by Microsoft to discourage Google from hiring other Microsoft employees in the future.

The aim of both defensive and retaliatory responses is to reduce employee turnover, the former by enhancing the benefits that employees gain by staying (namely, a better working environment) and the latter by increasing the costs associated with leaving (specifically, the threat of litigation). As such, these actions are concerned primarily with managing the administrative and human-capital costs associated with employee mobility. But neither approach formally addresses the role of social capital. We contend that firms can benefit from adopting a third type of strategic response — a relational approach. This strategy differs from traditional defensive or retaliatory actions in that, as opposed to trying to stop employee turnover, it focuses on leveraging the potential social capital the turnover creates.

In a relational approach, companies take active steps to maintain positive relationships with former employees. One example is the use of formal alumni programs, which have been adopted by a number of multinational organizations across a wide range of industries, including Procter & Gamble, Capital One, Microsoft, KPMG, BearingPoint, Accenture, McKinsey & Company, Children’s Healthcare and Shell. Through such programs, the companies sponsor forums (conferences, social gatherings and online communities, for example) that encourage former workers to interact with each other as well as with current employees. Many firms that have alumni programs actively market the service to former employees and might, in some cases, even offer incentives (for example, product discounts) for joining. When implemented effectively, relational approaches can provide benefits in at least three areas: (1) enhancing access to potential clients, (2) increasing the pool of human capital and (3) generating organizational good will.

As illustrated by the Cooley Godward LLP example discussed earlier, when former employees accept prominent decision-making roles in their new organizations, they can become excellent points of contact for client development. That kind of social capital can be particularly helpful for businesses trying to break into new markets. A technology consulting firm based in Germany, for example, wanted to expand internationally and was able to obtain references for work in Indonesia, Egypt and Brazil from just one former employee. The CEO of the firm was quick to acknowledge that the company might never have had access to these projects had it not been for that individual.8

Relational approaches can also increase access to alternative sources of human capital and reduce the administrative costs associated with hiring. People often quit their jobs to pursue career opportunities that are unavailable at their current companies, or they might leave for non-work reasons (for example, the relocation of a spouse, the raising of children or the care of an elderly parent). But over time those issues may become irrelevant, or new opportunities might appear in an organization that would be appealing to a former employee. Maintaining a relationship with former workers enables a company to communicate new opportunities at the organization, making it easier to recruit back those individuals. Deloitte & Touche, the accounting giant, has estimated that the hiring of former employees helped save $3.8 million in search-firm fees in just one year.9 Such “boomerang hires” also have the benefit of being less of a turnover risk the second time around. (Just as the company will have a better idea of what a boomerang hire can provide, former employees will have a clearer understanding of what working for the organization is truly like.)

Through contract work arrangements, former employees can also provide a flexible resource for satisfying short-term labor demands. Given their previous tenures at a company, former employees often can come up to speed more quickly on projects and they can work in a more collaborative manner with current employees than can other contractors who lack experience with the organization. One corporation that has successfully deployed former employees in this manner is Shell Oil Company, which launched a Web site called AlliancexShell to support corporate business development and recruitment and to provide alumni with an online networking platform.10 The site allows ex-employees living around the world to post their resumes, detailing their Shell and other work experience; the company can then search the database to find alumni candidates with the relevant skills for various projects.

Finally, relational approaches can be effective in generating organizational good will. When a company maintains good relationships with its former employees, those individuals can be excellent references for new talent and can even assist with recruitment efforts. When interviewing people for a job, for example, one law firm provides candidates with access to its alumni directory and encourages them to contact former employees to learn more about the organization.

Toward a Portfolio Approach

Although relational practices can provide several benefits, companies need to tailor their strategic approaches to individual situations. Executives should develop a portfolio of strategies, including defensive, retaliatory and relational actions. In selecting which types of responses to deploy, managers need to weigh the turnover’s administrative and human-capital costs against the potential social-capital benefits. Two factors will influence the decision.

First, managers should consider the knowledge that departing employees will take with them. In some cases, that knowledge is generic — while valuable to the company, it is of low strategic importance and can be replaced by new hires or the training of current employees. For example, the generic programming skills possessed by a talented software engineer might be valuable to the IT consultancy that employs him, but if he left he could conceivably be replaced by someone with a similar base of knowledge. The same might not be true, however, for an engineer who possesses intimate, unique and critical knowledge about company-specific technologies. To the extent that such knowledge was developed through a combination of project experience, coworker interactions and innate abilities, it can be very difficult and costly, if not impossible, to replace that individual.

Second, managers should consider the destination of departing employees, specifically whether they are leaving to join a cooperator or competitor. Losing employees to cooperator companies can result in opportunities to generate new social capital with potential clients, suppliers or strategic partners. When an individual leaves to join a competitor, however, the impact is often detrimental, as rivals are likely to use the knowledge of a company’s former employees in an adversarial manner.

These two factors — the knowledge and destination of departing employees — can be plotted as different dimensions to construct a two-by-two matrix. (See “A Portfolio Approach to Employee Turnover.”) The matrix defines four distinct scenarios, each calling for a different type of strategic response.

In the first scenario, employees with knowledge that is generic or of low strategic importance leave to join competitors. This type of turnover can hamper the productive capacity of an organization while increasing that of its competitors. Although the departing employees can be replaced, the recruiting and training expenses could be substantial, especially in a tight labor market. Furthermore, an ex-employee working for a competitor will not likely generate much social-capital benefit for her former company because of the adversarial relationship between the two organizations. Thus, in this scenario, a top priority for businesses is to reduce the administrative costs associated with replacing employees. Consequently, we recommend the use of defensive maneuvers, which are designed to retain existing workers.

In the second scenario, employees possessing knowledge that has low strategic importance depart to join cooperators. This type of turnover also results in administrative and human-capital costs, but here those costs must be weighed against the possible social-capital benefits — the new business opportunities that can be generated by ex-employees in their new jobs at potential clients, partners and other cooperator organizations. Thus, in this scenario, we recommend using relational actions in which a company supports an individual’s decision to join a cooperator and maintains a positive relationship with him. To increase the odds of realizing the potential social-capital benefits, managers might even consider actively helping those who wish to leave find new positions at cooperator companies. Partners in consulting and law firms, for example, will sometimes assist junior employees — those who, for whatever reason, will not become partners — find new jobs with current or potential clients.

The third scenario — employees with strategically important, company-specific knowledge resign to take jobs with competitors — is potentially the most damaging form of turnover. Because of the unique and critical expertise possessed by these individuals, an organization will likely incur very high administrative and human-capital costs from their departure. And if the ex-employees share their knowledge with competitors, the resulting damage could impair the competitive position of their former organization. Furthermore, as opposed to generating social capital, this type of turnover can deplete it, because departing individuals take with them key social ties to clients and suppliers that might then be used by their new employers. Thus, in this scenario, companies might best be served by emphasizing retaliatory actions. As with Microsoft, a company can seek to sue poaching organizations as well as the departing employees themselves to restrict their use of proprietary knowledge or their ability to contact certain clients. Businesses might also consider combining retaliatory actions with defensive maneuvers targeted toward the retention of specific employees who are crucial contributors. A company could, for example, match or exceed a job offer that a key employee has received to prevent her from joining a close competitor.

In the fourth and final scenario, employees with strategically important, company-specific knowledge leave to work for cooperators. This type of turnover might not be as potentially damaging as the previous scenario, but it nonetheless produces interesting challenges. Because the loss of key employees incurs high administrative and human-capital costs, companies have a strong incentive to adopt defensive strategies to reduce such turnover. But the movement of key employees to cooperators can also lead to substantial opportunities for businesses to expand their social capital with important clients and suppliers. Because these individuals possess intimate knowledge of their former company, they might be well-suited to convey information about its operations, products and services. Furthermore, ex-employees with highly specialized and valued skills might be more likely to assume high-level positions in their new jobs. Thus, they could have more decision-making authority regarding the choice of external partners, potentially increasing the likelihood of business exchanges between their current and former employers. Therefore, even when defensive maneuvers fail, a company still has a strong incentive to adopt a relational approach, maintaining positive relationships with departing key employees as they make the transition into their new jobs at cooperators. Indeed, defensive and relational approaches can be strong complements to each other: Defensive actions geared toward improving the job satisfaction of employees can generate good will that will help facilitate the formation of positive relationships should those individuals ultimately decide to leave.

Managers should use the four turnover categories merely as a guide. In practice, the distinction between knowledge with high versus low strategic importance will vary across situations, which managers need to judge carefully. Depending on the industry, companies might also find it difficult to distinguish between competitors and cooperators. In many markets, competition and cooperation often proceed along parallel tracks, and today’s rival could become tomorrow’s alliance partner. Furthermore, during the entire course of their careers, former employees may go on to join both competitors and cooperators. Thus, although employee mobility might not initially generate valuable social capital, adopting a relational strategy could yield benefits further down the road. Take, for example, the case of an IT consulting firm that lost a highly skilled programmer to a competitor. The firm tried to restrict her from using her knowledge by suing her, alleging trade secrecy misappropriation. Before the litigation could be settled, however, the ex-employee had left the competitor to work for a very large company that was a potential client of the IT firm. Unfortunately, the bitter experience of the litigation made it impossible for the firm to approach its former employee for potential business opportunities.

As the example of the IT firm illustrates, managers might do well to consider adopting a long-term view when balancing their concerns about social capital, administrative issues and human capital. The IT firm adopted the traditional win-or-lose approach, which looks at employee turnover only through the lens of administrative and human-capital costs. Accordingly, management used retaliatory tactics as a means to fight the employee and the poaching competitor. That approach, however, ultimately resulted in the firm’s loss of a potentially valuable source of social capital — connections to a prospective client.

IN SPITE OF CONCERTED EFFORTS by companies to fight the “war for talent,” employee mobility continues to increase. That trend is likely to become even more pronounced in the future because of increased globalization, demographic shifts, changing career norms and the ongoing transition to a knowledge-based economy. Accordingly, managers should adopt a new mindset toward employee mobility. Instead of the old “war” mentality, which frames turnover as a win-or-lose scenario, companies should adopt a more holistic perspective and consider the administrative, human-capital and social-capital implications of worker mobility. A balanced consideration of these factors will help managers adopt strategies that not only minimize the damage caused by employee turnover but also take advantage of situations in which the loss of employees might lead to economically beneficial business relationships.