Monday, August 11, 2003


Once in a while, there’s a business lesson in baseball that just turns everything one thinks one knows on its head and makes an observer wonder why they never noticed practical reality before. We'll call upon former Cleveland Indians’ General Manager John Hart to point out how much smarter baseball is about managing talent than American business is.

Take how we hire talent in the late 20th- and early 21st centuries. What’s the environment? Mainstream U.S. economic wisdom holds that we’re exporting unskilled jobs to lower-pay labor markets and that’s allegedly great because we’re growing skilled jobs here. Those skilled folks will benefit additionally because lower-pay labor will produce goods for Americans at lower cost, so we’ll be earning more and paying less.

Skilled people, by definition, know how to do something valuable. But universally, organizations strive for "at will" employment, where the employer may discharge the employee at any time without cause, without notice, and generally without a golden (or even tin) parachute. In exchange, the employee may resign at any time without notice. “At will” is a rational hiring model for low-value-added, commodity business with a dynamic labor pool, like seasonal farm work. They need pickers, but only for a short period, and the skill differences among workers have little effect on product quality or quantity. In a fair market, pickers and growers will adjust prices to find efficient pay for work. The at-will ability of the picker to pack up her machete in the middle of the day and move to a better-paying spot, or for the grower to give the ax to lower-performing workers if good weather stretches the time for harvest, lubricates the efficiency of a fair market.

With skilled jobs, though, why would we hire people at will, a strategy clearly meant for fungible jobs? Baseball doesn't.

Synchronistically, “at-will” was invented by Horace C. Wood, a creative legal scholar, within a year after the founding of the National League in 1876. Baseball, cleverly using a system that's 180 degrees from "at-will", signs the talent to contracts with specific duration, because, like reliable Java programmers, competent project managers, creative accounting whizzes, smooth salesfolk, or the members of ZZ Top, major leaguers are skilled employees. They are, in baseball management’s opinion, the best 1,200 people in the world at what they do.

When an organization spends $35,000 looking for, finding, interviewing, selecting, and making an offer to a person they hope will be one of the best 1,200 Java programmers, why does it strive to work out an at will set-up with her? Look at it rationally. You hire someone with special talents. In exchange for the potential benefit of laying them off in a downturn or when stock analysts need to be fed a bit of ledger de main, one surrenders control over their efforts. The cost of leaving is not just in recruitment, but in knowledge walking out the door. The company can count on training the replacement, leading to lower initial productivity and schedule slippages. Even the creative accounting geniuses at Arthur Andersen can’t tell how much this costs.

Baseball knows, though. In 1876, baseball was reeling from five years of labor chaos. Skilled players moved from team to team in response to offers of better pay, or the chance to play alongside better teammates, or in front of more fans. In 1994, American employers were reeling from the effects of skilled employees changing organizations at the drop of a bat to garner better compensation, more interesting work, or better chances to build skills. In both eras, executives were ballistic about skilled labor instability.

In baseball, the solution was enforceable contracts. This solution worked for the owners for almost 100 years. In business, the “solution” was… at-will employment? This solution failed completely for employers. It made the situation worse until the skilled-sector economy crashed in 2001.

Great managers take advantage of others’ counterproductive compulsions. Ex-Cleveland G.M. John Hart recognized one of these compulsions and revolutionized baseball personnel patterns, advancing even beyond the enforceable contract model. Before Hart, teams acted uniformly. Bring up a prospect. Keep his salary as low as possible for three years until he’s eligible for salary arbitration. Pay goes way up. At six years he becomes a free agent. Pay goes way, way up. Let him go. Now, you’ve lost half the player’s highest-skill years to another team, and you need to find and pay for another guy.

The Indians’ front-office, however, invested in a smokin’ farm system, generating a lot of fine young players. Then they short-circuited the cycle, signing players to longer-term contracts before arbitration, essentially capturing talented players’ best years.

Baseball teaches us to sign talent to contracts of fixed duration and dump the dysfunctional “at will” delusion.
Follow your Hart, scrap your Wood. Organizations that have employees that represent hard-to-replace (or expensive-to-replace) value should sign the talent to enforceable contracts. There' are side-benefits to this approach, too, but you've already guessed what they are.

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