In the last module, I talked a lot about the partnership approach to human capital management. And particularly this idea that in order to be successful organizations want to be effective at making sure their workforce has high ability, motivation, and opportunities. Particularly when it comes to the ability piece kind of the fundamental piece of first place to start is staffing, right? Making sure that you're hiring the right people putting the right people in the right jobs. It's so important, I want to spend this entire module talking about it. Specifically, I want to talk about three things. First of all, just broadly what it means to hire effectively. What are our metrics for doing this right, and why is it so important? The meat of the module is really how we should do this. So I'm going to spend a bunch of time talking about best practices in selecting our employees. And then finally towards the end, I want to talk a little bit about the talent pipeline. And particularly offer some thoughts on internal promotion and using that to staff jobs alongside external hiring. So what does it mean to hire effectively? A lot of it as I'll talk about is making sure we hire the right people. But before we talk about that, I wanted to talk a little bit about a second topic, which is making sure we hired the right number of people. How many people should we hire? If you think about, say, staffing a store, how many people would you want to have in that store? How many do we need? So if you remember your college economics, we hire people until the marginal cost of employing them equals the marginal revenue. If we hire people where the marginal revenue is below the marginal cost of the extra money that they bring in is less than what it costs to hire them, then we're going to lose money. We don't want to have that many people. But if the next person we hired, we're bringing greater marginal revenue than the cost the increase in sales to be greater than we have to pay them. Then it would make sense to hire them, hiring them would be net positive for profits overall. So that's what we want to do symbols, right? So it's actually one of my first experiences with this was working as a consultant. So like before becoming an academic, I spent two years as a management consultant, probably not massively effectively. Actually, one of the projects I worked on was about hiring salespeople, how many should we hire? Done this in economics. It's easy, marginal cost equals marginal revenue. That's when I realized we didn't actually know what the numbers for these were and it'll be very hard to work them out. Not 100 accurate, marginal cost, marginal cost we know, right? We know the cost of hiring additional person is basically how much we're going to pay them and any benefits that we pay them. Perhaps some overhead, if they're in an office, we might want to think about office space and those sorts of things. But basically marginal cost is paying benefits, that we can do. The tricky one is marginal revenue. So we already have a store with a bunch of people in it. We add another person. How much more money are we going to make? Because they're there, well, yeah, there are various sources so they can serve customers better. So we can imagine we might make more money because while all of the other sales people are busy working with customers, maybe there's some other customers who aren't being served, they eventually get bored and leave, right? If we had that extra person there, then they'll be able to serve those customers, persuade them to buy lots of lovely things and our revenue will go up. And so being able to serve more customers, that would help maybe also because people are really happy that they got served more rapidly, they will do better. So, for example, have more people on the check out, okay? My lines go down, people are more likely to come back, right? And so that's another way in which having that person improves my ability to make money because with better customer service people keep coming back to my store. So that's the way in which money may go up when I hire the additional person. Another advantage of having that additional person is my logistical processes, right? One of the things I've got to do is I've got to take all of the stock, get it off the trucks, get into the store, get it into the right place. When stuff gets bought, I need to replenish my shelves, I need to know where everything goes and so on. As long as I have enough people in the store that gets done when I don't have enough people shortcuts start being made, stuff piles up in various places that shouldn't pile up. I can no longer find my goods and they're not getting to the shelves, things aren't on the shelves, people won't buy them, okay? And so if I don't have enough people, I can't really maintain those logistical processes. My store looks tidier and cleaner because I have people there to do all of that stuff for me. That's better if I have more people, ultimately, hopefully that attracts more people into the store, I get more sales. And if people aren't completely rushed off their feet all the time, then maybe all those innovations, those suggestions I talked about last time now, how do we do things better? People actually have time to sit back, make those suggestions reflect and all those sorts of things. And so we can imagine adding an extra person has the ability to increase my revenue through all of those different routes. Now there's a slight asymmetry here, which is, it is really easy to quantify how much that additional worker costs me. But it is very, very hard to know exactly how many additional sales I'm getting out of that extra worker. One risk I think this creates is that we often end up under-staffing stores because we know exactly what it's costing us. And we may underestimate how much that additional person actually makes us in terms of additional revenues. There's a very nice evidence on this. So Zeynep Ton who I think I've mentioned before, Professor of MIT has a wonderful study where she looked at this in a bookstore. And she basically found that those bookstores that had more people working there ended up being more profitable even though they had to pay more for pay and benefits, they more than made that up with extra sales. One thing that she pointed out was a big part of this was actually just having the right stock on the shelves. People come into those bookstores, they want to be able to find the books that they want. If you have enough people there to keep the book stocked, that's more likely to happen. It's not just her research that finds us. There's another nice paper by I think it's Marshall Fisher, a giant christian in and so again a Texan from water. They looked at profits in various different stores. And again in a store chain they found that those stores which had higher payrolls, they were spending more on people. Actually more than made up for that higher payroll in terms of being able to make higher sales. Again, it suggests that those stores in the chain that were driving down payroll ended up hurting themselves. Because the cost that they incurred in terms of not being able to increase sales, in terms of not being able to get the goods to people in the ways that people wanted those costs were actually greater than what they were saving on payroll. Okay all these studies, academics, pointy headed blah blah blah. How about a really concrete example? Think about Walmart. Again, we talked about Walmart, a huge retailer in the US known for low prices. So in effort to drive prices even lower or maybe just drive margins up, in the years about 2008 to 2013, they looked to get even leaner. So one of the ways they did this was they tried to cut back on staffing, have fewer and fewer people in the stores. Again, costs go down when I do that. What they ended up finding was that even the costs went down, they didn't end up making more money. They had too few people in order to be able to actually maintain them logistical processes, right? So they don't have enough people in the stores, they can't keep the shelves stacked. Without being able to keep things on shelves they can't actually sell it, customer satisfaction tax. So at the end of this experience, they reversed course and they actually started to look at increasing the number of employees in the stores as well as the way they rewarded them. It's really an important lesson to them in terms of yes people are cost driver, but also they are a key source of organizational capacity. And so a tricky calculation that you really want to think about as you think about hiring is just how many people you want to have. And it seems like you want to be where falling into a trap a lot of organizations do, which is you're able to estimate the pay and benefits. But when you can't estimate the marginal revenue, you may end up with too few people to actually carry out the core services that you need in order to sell things. Obviously this doesn't mean that what you want to do is just flood the store with people to make sure that all of these things get done. Being efficient is important, having high productivity is important. But those stores that tend to be very productive, they do it less by driving their staffing down and more by figuring out how those staff can do things efficiently and make sure that all of the work gets done. So these questions about how many staff you have turn out to be a surprisingly important profit driver alongside who you hire. Nonetheless, what I really want to focus on in most this module is the second question. How do we make sure that the people who we do hire are the right people?