How Good Are Your People? Comparatively?

The theory of comparative advantage

In 1817 the economist David Ricardo developed the theory of comparative advantage.  It explains why nations trade.

He gave this example to explain it:

Scenario 1.

Imagine the economy consists of two countries that produce both cloth and wine; Portugal and England. Though their output is of equal quality, Portugal is the more productive country.  In Portugal it only takes 90 working hours to produce cloth and 80 to make wine.  In England it takes 220 working hours to make a unit of both.

Portugal’s economy has the competitive advantage.  It makes wine and cloth faster.

Scenario 2

Now imagine that instead of competing the two economies start to collaborate and trade.  Portugal focuses all its attention on producing wine and England makes cloth.  The two countries then swap a unit of wine for a unit of cloth.  Even though Portugal has the competitive advantage it is in their interest to trade. Both countries get more for less.  The global economy becomes more productive.  England exploits its comparative advantage in producing cloth.

Now everybody can knock of early on Friday afternoon.

An astute observation, but what has it got to do with running an organisation?

Image you run a firm of management consultants

You hired two graduate trainees  Alice and Freddie.  They have been with you for a year.  It is time for their first annual performance review.

You benchmark how well each graduate has performed on similar tasks.  After much conversation it becomes clear that Alice is the better hire.  It only takes her 1 day to work out some analysis and 2 days to pull together a coherent presentation for a client.

Freddie is a no-hoper.  It takes him 4 days to do similar analysis and 3 days to pull together a presentation.

What should you do?

Management wisdom

The answer is obvious.  Award Alice an A in her performance appraisal, give her a fat pay rise and her first proper management job.  Freddie should get an F and his P45.

That is the way we manage H.R.

The theory of comparative advantage provides another way to look at the problem

Utilise Alice and Freddie’s comparative strengths.  Learn from David Ricardo.  Ask Alice to focus on the analysis and Freddie to focus on preparing the presentations.

Now instead of it taking 10 days to satisfy two clients it only takes 8 and you can set about finding another one to bill.

We talk a lot about competitive advantage

Hiring the best people and “performance managing” the worst is a common approach.  But there are some downsides.

• It leaves you short-staffed.
• You spend time trying to hire replacements.
• You waste a huge amount of training and development effort.
• Performance is rarely clear-cut.  David Beckham wouldn’t last long on our management development programme…

All that glisters…

Hiring the best people is an obvious strategy.  Great if you are a world class organisation, but, let’s be honest, you probably aren’t.  The best people don’t want to come and work for you. Your chances of recruiting two Alices are vanishingly small.

Seductive though it may be; “hiring the best people” is lazy thinking.

Is there a better strategy?

I am not suggesting you should keep all your wasters.  If somebody is taking the Mick get rid of them.  Just don’t relentlessly search to find the bottom 10%.  You’d be better off if you:

• Get your staff to play their strengths.
• Ensure they cooperate with each other.

Don’t play the best people, play your people best.

Perhaps, some day the guys in HR will learn all about David Ricardo

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Image by dgarkauskas