The War for Talent (Excerpt 6)

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One reason why the hyperallocation of talent to certain industries, regions, and firms goes ignored is that it combines narratives no one wants to talk about. Our economy has progressed from making things to supplying financial services. It’s not the first time an economy has made this transition. Both the Netherlands and Great Britain were global manufacturing powers in their day. The British supplanted the Dutch in the early 1800s. We supplanted the British in the early 1900s. The Dutch and British then turned to financial services and insurance as the drivers of their economies. Unfortunately, it’s hard for an economy to rely solely on financial services, and both countries receded from the world stage.*

We no longer manufacture devices, we manufacture analyses. Investment banks, private equity firms, corporate law firms, and management consultancies are all vitally important to today’s US economy. They serve crucial roles in helping companies raise capital, get acquired, document complex transactions, and integrate new technologies, among plenty of other necessary tasks.

These types of professional service firms operate in incredibly competitive contexts. Their sustained success hinges on the type of people they have working for them. Everything is honed to a razor’s edge. They thus focus assiduously on getting the very smartest people that they can inside their walls. They invest millions in this process and offer prestige, high-starting salaries, training, expense accounts, and the promise of community and open doors.

As one of the cofounders of a major management consulting explained it to me,

“We loved to recruit at the top schools because we knew there’d be good hires on campus. It was just a matter of putting resources to work, improving our funnel and tweaking variables until we found them. We would figure out which classes were indicative of intellectual ability and which were just padding, what leadership positions were significant, what majors tended to do well. . . . The more years we spent on campus the better we would get at it. We wanted to get a certain number of recruits from each of our top campuses each year so there would be a constant stream of personal referrals and connections. If we didn’t get someone for a few years it was a lot tougher to restart at that school.”

It’s very admirable and well executed—exactly what you would hope the consulting firm would do if you were a shareholder. But this firm is jockeying for position with dozens of other firms that implement the same sort of process. And before long you have a sort of tragedy of the commons, where the firms are all grazing on the same field to depletion.

To give a sense of the resources being dedicated to this effort, Teach for America’s recruitment and selection budget alone in 2011 was $37.6 million. A friend who works in financial services recruiting estimated that her firm spends $50,000 per recruit. If you project the analogous expenditures from every major bank and consulting firm to develop talent pipelines, you have tens if not hundreds of millions being spent each year at campuses across the country. One hedge fund spends so much on recruitment that it offered to pay Dartmouth students a hundred dollars each to tell the company why they chose not to participate in its recruitment process. In 2012, of the four Dartmouth valedictorians, two went to Goldman Sachs, one to Morgan Stanley, and one to McKinsey

There’s an arms race for the best talent at dozens of universities each year. To be clear, no one’s at fault. Private firms ought to be doing their utmost to maximize their own well-being. In this case, that means getting on campus, spending time and money, and fighting it out for the top educational prospects in the country.

The recruitment culture gives rise to a general pursuit of pathways of prestige as undergrads see those around them heading down well-defined tracks and look to do the same. Most banks and consulting firms make offers between August and December of a student’s senior year; imagine being a competitive and slightly insecure senior watching this process unfold around you.

What is the result of this war for talent? Statistics are measured and reported differently, but here’s the general picture for top university grads, measured over the last several years of available data.

Postgraduate Pursuits of National University Graduates

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Take a minute to survey these numbers. While there’s some variation (i.e., more Yale grads go to law school, more people from Johns Hopkins go to med school, and so on), you get a sense that they’re all pretty similar in terms of breakdown.

As you can see, a literal majority of national university graduates will pursue one of these six paths after graduation, none of which leads directly to new business formation or growth. What begins as a universe of options quickly shrinks to just a few.

I’ve spoken to hundreds of college seniors who are in this predicament on the front lines. Some examples of the things I heard:

• “If I go to career services, they’ll tell me straight out that they only have finance and consulting jobs for me to look at. That or Teach for America.”

• “It seems like everywhere you look people are in suits scurrying to another banking interview. It has an effect on you after a while.”

• “My friend tried to look for a job at a startup, but it was really difficult. Eventually he gave up and joined a consulting firm.”

Some observers mistakenly believe that the recent downturn in financial services and the existence of the movie The Social Network mean that the world has changed. But the reality on the ground is determined by which organizations have the resources, brand equity, know-how, time horizon, and consistent and predictable need for new recruits to go on campus and roll out the welcome wagon. These factors have remained more or less constant even after the financial crisis.

Let’s say that you’re a small growth company that wants to hire a few top prospects to help fuel your growth. It’s not going to be easy. First, you’d have to start trying to hire months in advance, even though your needs may change by the time the hire shows up. You’d have to dedicate scarce staff time and resources to sign up for career fairs, post job descriptions, and show up on campuses that might be several states away. You’d have to compete side by side against name-brand companies with giant displays and well-dressed alumni. You’d have to make a competitive offer against firms that are offering outsize wages and likely recruiting multiple people at once. You’d struggle to get the attention of career services officers because you’re probably only looking to hire one or two college seniors. You’d have to evaluate candidates for fit. And after all that, there’s little guarantee that you’d actually get your man or woman.

It’s a daunting landscape that doesn’t serve the little firm very well, so most don’t bother trying to go down this road. Yet it’s these small firms that will potentially expand, innovate, and hire more and more people if they mature to a certain stage of development.

*For an in-depth discussion of this progression, see Samuel P. Huntington’s The Clash of Civilizations and the Remaking of World Order (New York: Touchstone, 1996).

From SMART PEOPLE SHOULD BUILD THINGS by Andrew Yang© 2014 Andrew Yang. Reprinted courtesy of Harper Business, an imprint of HarperCollins Publishers.