Creative Class

Google has developed a nifty new algorithm to identify employees who are most likely to leave the company. Discoblog explains:

Performance reviews, pay raises, promotion histories, and other data on its 20,000 employees were crunched into yet another mathematical formula, which reportedly spat out the names of who was most likely to quit.

No surprise, Google insiders are keeping quiet about the details of the algorithm, though they will say that it has already “identified employees who felt underused,” a key precursor to telling your boss to shove it. Meanwhile Laszlo Bock, the company’s head of HR, told the Wall Street Journal that the algorithm helps the company “get inside people’s heads even before they know they might leave.”

Perhaps it’s fashionable to bash uber-successful companies. I visited Google twice for book talks  – once at their Silicon Valley headquarters, and also at their NYC office. I’ve been to a lot of high-tech companies, leading-edge manufacturing plants, and the trendiest of creative enclaves, but Google still blew me away. The digs were great, and employees (at least the ones I met) appeared smart, challenged by their work, and genuinely engaged in what they were doing. Not to mention, the algorithm seems pretty useful and reasonable to me.

But the enormity of the creative destruction sweeping the industry goes far beyond the iPod killing off the CD. The Gang of Four’s Dave Allen argues that we are seeing the “end of the album” – a construct initially created by the limitation of vinyl technology in 1930 – as the organizing principle of musical production. He sees this as potentially liberating for musicians – or those musicians that can adapt. Industry veteran Bob Lefsetz predicts a return to the pre-LP era, when artists constantly pumped out singles and toured. He even draws a comparison to the way that Toyota has succeeded by building a reputation for reliability gradually through word of mouth.

Technology is also changing the way we experience music. Strange as it may seem to vinyl purists out there, many of the net generation increasingly prefer the “sizzle” of compressed MP3s to the sound of higher-quality files. Some musicians now check their final mixdowns on cell phones.

But not all the results are positive. Mark Fisher counters that the ubiquity of digital recording is again changing the way we experience music. As more and more people produce their own music, and with more music to consume online and elsewhere, we have less time to actually experience music. We now take our music in small bits, seldom listen to anything “whole,” and have precious little time left over for live events. Like a digital-age Walter Benjamin, Fisher argues that such instantaneous exposure deprives cultures of the time and space they need to germinate and grow.

Technology and music have long interacted as economist Peter Tschmuck has shown. On the one hand, new technologies like the long play (LP) record, the synthesizer, and now the iPod have changed the music industry and led to the rise of whole new music genres. But, on the other hand, music has also powerfully affected the rise and dissemination of new technology. Without music and some ingenious entrepreneurs in the music industry, the phonograph would still be used as Edison intended: to dictate letters and store phone calls. Radio was seen as a “wireless telegraph” until one of Thomas Edison’s researchers broadcast himself playing O Holy Night on the violin on Christmas Eve 1906. And we’re all familiar with the way the MP3 popularized peer-to-peer file-sharing and broadband internet connections. But, It’s about more than just technology, actually.

The way I see it, that music is a “fruit-fly industry” – one that can tell us a lot about the nature of technology, new business models, and the economy in general. Music is a highly competitive business – a hyper-competitive market in miniature, where competition for sonic, technological, and talent advantage spurs rapid evolution and change. New recording and network technology means that barriers to entry are lower than ever. Music is often the first sector to experience the full force of disruptive technology. It was the first industry to face the file-sharing crisis, and other industries like film and publishing are now learning from its experience. Musicians are quintessential examples of free-agent workers, mixing income and seeking out affordable, creative places to do their work. And the concentration of musical talent and firms into clusters and scenes – in an industry which requires little in the way of capital infrastructure and fixed costs – can help us better understand geographic clustering across a wide variety of fields.

We all know the power of an Apple or a Google to create new business models and generate massive new wealth. But, long ago, the great economist Joseph Schumpeter argued that the formation of new entrepreneurs lies behind the great “gales of creative destruction” which set in place new firms and industries and revolutionize old ones.

The last couple of days, we’ve looked at how class effects economic growth and innovation. We now look at the relationship between class and entrepreneurship. In the graphs below, Charlotta Mellander compares countries’ performance on the Global Entrepreneurship Index developed by economist Zoltan Acs to shares of the creative class and working class.

Again, the results speak for themselves. Entrepreneurial countries are creative class countries. Those with high percentages of the creative class have higher scores on the Global Entrepreneurship Index.

The opposite is true of countries with a large share of the working class. Their scores on the Global Entrepreneurship Index are considerably lower.

Source of all graphics: Martin Prosperity Institute

There is more data than ever available for human resource specialists, including:

• The unemployment rates in specific occupations, in specific cities.
• Employee turnover rates in particular industries, and places.
• The relationship between particular workplace styles and productivity.
• Graduation rates in certain fields (and thus the supply of new accountants, lawyers, engineers).

And, within certain large employers such as the big accounting firms, retail chains, or large information technology companies such as Google or Microsoft, further internal data can be scrutinized.

Jason Warner, the VP of HR at Google (and formerly Starbucks), recently pondered the role of enhanced information on the human resources field:

I’m not a statistician, but for large sample sizes at large companies, there is a LOT of information that is just waiting to be discovered by progressive HR organizations who can pull the data and turn it into meaningful information. We had talked about doing this at Starbucks right before I left; running multivariate regression analysis against the thousands of store level staff to better predict attrition and the demographic trends that play out when you have large sample sizes of people.

But HR is rarely predictive. It tends to be more like ‘old medicine’, identifying what is wrong and then prescribing a fix. “You see, your attrition spiked so now we need to recruit more…..” Exit interviews. Employee relations. Compensation reviews. Most all of it analyzes post data.

It is admittedly difficult to be predictive, but it is also because we don’t ask enough smart questions. We ought to be significantly better as an HR function at predicting things. Because predictive HR is a lot more helpful that diagnostic HR.

For example, we can reasonably predict what range the US unemployment level is likely to be in the next 2 years, by comparing the delta in unemployment from the top of the boom in 1999/2000 to the peak in unemployment in 2003 (50 basis points, or 2% points overall) and fudge a little for the gravity of the economic issues that we face. It’s probably going to jump to about 8% (we can now wait and see if I’m right). And from that, HR should be able to extrapolate candidate flow and inform a recruiting strategy and resourcing plan. But the vast majority of groups won’t ever do this.

I expect in the next decade (provided I make it that far), that we’ll see much more predictive HR at the best companies.

I think Warner is right.  Workplaces will start to be shaped by this knowledge.

A firm that has below-average employee retention rates might change up the workplace, offering employees something different.

Maybe we’ll soon know much more about how turnover really affects productivity, for example. The conventional wisdom is the cost to recruit, hire, and train a replacement is very high in terms of dollars and lost productivity. But maybe, based on our discussion here last week, it may be that some turnover is desirable and actually raises productivity through the introduction of new ideas – even best practices – from new employees coming from competitive and complementary firms.

The H-1B’s spousal complement, the dreaded H-4 or “dependent” visa, means if he wants to stay and work in America, his brilliant, cheerful and pregnant wife Samvita Padukone, 27, would be chained at home by work restrictions. “The H-4 is out,” he says, sitting next to Padukone in their Toronto home. “Because there’s no way that I would be comfortable – I mean, I don’t have the right, to tell my wife `You have to sit at home and be barefoot and pregnant.’ No one has the right to tell anyone that, let alone someone who studied in Singapore on scholarship.” …

The couple’s situation isn’t unique. Mavinkurve, who works on digital mapping and was recently promoted to head a team at Google’s California headquarters, says he is one of several Google employees stationed in Canada because of American visa restrictions. Noting that Alberta has targeted H-1B holders, he says “Canada is already showing signs of capitalizing on America’s misguided `walls.’” …

“It’s hard for me to know what `from’ means. I was born in Bombay and I have a lot of family there. But I grew up in Saudi Arabia, because that’s where my dad was working for a long time. And then at the age of 14 I went to America,” he says. “The baby will just, kind of, be born whenever, wherever we are.” Living here and working for a company in California presents its own, uniquely modern challenges” …

This past Saturday we went to a party in Miami hosted by a young gay couple who are planning on having a family – one’s a Canadian with long experience in financing sustainable investments in emerging economies, the other an American with strong ties to Miami. They’re looking at houses in Toronto – because it’s a great place to raise a family and because of the economic crisis.

Crises are times when the relative positions of nations and cities can, and frequently do, change quickly. The closing of European economies during the late 20s and 30s causes a massive movement of top scientific, entrepreneurial, and creative talent to the United States. I’m not saying anything like that will happen to the U.S. But when it comes to top talent, the margin can really matter. If talented people or their spouses face obstacles to working and living in the U.S., they will go elsewhere: some will return home, some may go to Canada.  Enterprising companies will open up facilities where needed to attract this talent. Over time, these sorts of places can develop a self-reinforcing cycle of growth, developing greater abilities to attract talent.

The Authors@Google program welcomed Richard Florida in March 2008 at their Google New York City office where he discussed the methodology behind, and evolution of, his latest book Who’s Your City?: How the Creative Economy is Making Where to Live the Most Important Decision of Your Life.

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Google CEO Eric Schmidt counters the notion of the long tail (via Whimsley):

although the tail is very interesting and we enable it, the vast majority of the revenue remains in the head. And this a lesson that businesses have to learn. While you can have a long tail strategy, you better have a head, because that’s where all the revenue is. a very short Head of Long Tail aggregators: Amazon, iTunes, Google and their kin dominate their markets to a blockbuster-like degree.

Chris Anderson, author of The Long Tail, responds noting the “irony” that:

a very short Head of Long Tail aggregators: Amazon, iTunes, Google and their kin dominate their markets to a blockbuster-like degree.  … [N]ew research from McKinsey suggests that this sort of radical inequality is increasingly the norm as markets get more networked. ”Powerlaws do imply wildly unequal distributions of money, power, celebrity and everything else.” So much for “democratization.” And it’s not just companies. The Long Tail – the powerlaw created by network effects – may be creating super-celebrity,

Whimsley concludes: “There’s more, and he holds on to some of his assertions, but basically, it’s all over for the long tail.”

We have been looking closely at the geography of creative industries and occupations. You get exactly this pattern of a big fat huge head (that is extreme geographic concentration in two super-celebrity markets – New York and L.A.), a dramatic fall-off after that, the emergence of one or two specialized nodes (Nashville in music, D.C. in media, Las Vegas in dancers, and so on) and then some gentle dispersion among much smaller centers in the tail. We see this pattern of a biruficated, barbell-like spatial structure popping up in the geography of these and other creative industries and occupations. More to come…

Generational and gender shifts are contributing to a different workforce and workplace.

Who is working, the ways they are working, and what kind of work they are doing has changed. How people live their lives outside of work is also different, along with their attitudes toward their careers.

Accounting firm Deloitte & Touche has done their own research to better understand who the new generations of workers are and what they will need from their employer. Here are five facts and analysis taken from Volume 2 of their studies.

Then: Only 37% of married women worked outside the home in 1967.
Now: 61% of married women worked outside the home in 2000.
Implication: Deloitte notes that with a gainfully employed partner, many employees have the flexibility to quit or change jobs whenever they want. Retention is therefore a greater challenge today.

Then: Workers typically had a partner at home who looked after household and personal matters.
Now: Between working married women and working single parents, few employees have a “homemaker” at home.
Implication: Employees need flexibility to handle personal matters and blend their energy between personal and professional.

Then: Men earned the majority of university degrees.
Now: Women earn 55% of all accounting degrees (and 55% of bachelor’s and master’s degrees as of 1998 according to Knoll).
Implications: Attracting and retaining women will be essential for firms like Deloitte (as well as many knowledge economy companies).

Then: Older baby boomer fathers spent an average of 2.2 hours per day with their children.
Now: Generation X fathers spend and average of 3.4 hours per day with their children and 90% say they have either a primary or equal focus on the family compared to work.
Implication: A generation gap at Deloitte who notes that “although many of the leaders in our organization have a stay-at-home partner and a single-minded focus on work, only a small proportion of today’s younger workforce places a primary focus on work.”

Then: Most baby boomers wanted to climb the corporate ladder. In 1992, 66% of college-educated men and 50% of college educated women wanted to move into jobs with more responsibility.
Now: In 2002, only 50% of college educated men and 35% of college-educated women wanted more responsibility. In an independent (non-Deloitte) study, 80% of prime candidates for promotion wanted to work fewer hours.
Implication: Today’s employees will work hard, but will typically not work longer hours and will frequently not trade promotion for their personal time.

I would argue that because of corporate inertia (sticking with “the way things have always been done”) the workplace does not fully reflect these new realities. There is a tension between the previous approach to life that centered on work, and a more current one in which work is blended into the rest of a person’s everyday life.

But changes are happening. When the big four accounting firms are making dramatic changes to work philosophies (and not just Google), it provides strong evidence that mobile and flexible workplaces are not a fad.

An article in the latest New Yorker talks about the effect the big investment banks going public has had on the Wall Street collapse. By putting themselves at the mercy of the stock market, they surrendered a lot of freedom and autonomy. They were pushed to keep leveraging their bets by shareholder demand for profits. And when the profits fell, so did the companies. Gone are the days when JP Morgan could assemble a few bankers and save the economy. Aside from the irony of the titans of Wall Street not understanding the market, what does this say about modern capitalism?

In a related vein, I heard an interesting interview recently about the rash of IPO’s in the dot-com heyday. The speaker said that the old purpose of going public was to raise capital for expansion, but the new purpose became for founders to cash out. As a result, capital formation didn’t go into new production but private fortunes. The result didn’t add value to the economy.

Google, perhaps the most successful company of the new millennium, held off on going public during the dot-com years and instead depended on private investors. As a result, the owners were able to plow profits back into growth and keep the company’s income and assets out of the public eye. By the time Google did go public it was much bigger than anyone thought – too big for Yahoo to catch up, too big for Microsoft to squash.

So, I’ll throw this out to the economists among us. Has the way the stock market handles new offerings outlived its purpose? Are companies going public too soon, or perhaps totally unnecessarily? Are there problems that are deeper than simple regulation can solve? And what would a better model look like?

Writing in the Wall Street Journal, Michael Malone argues that we are rapidly becoming one:

The most compelling statistic of all? Half of all new
college graduates now believe that self-employment is more secure than
a full-time job. Today, 80% of the colleges and universities in the
U.S. now offer courses on entrepreneurship; 60% of Gen Y business
owners consider themselves to be serial entrepreneurs, according to
Inc. magazine. Tellingly, 18 to 24-year-olds are starting companies at
a faster rate than 35 to 44-year-olds. And 70% of today’s high
schoolers intend to start their own companies, according to a Gallup
poll.

An upcoming wave of new workers in our society will
never work for an established company if they can help it. To them,
having a traditional job is one of the biggest career failures they can
imagine.

Hmmmm… to a certain extent or for a certain segment of society.  However, Google, Microsoft, Starbucks, Toyota, Wal-mart, the health sector, the defense-industrial complex, the public school system and the government still really do exist. In fact, education and health are the largest single employers in many large cities.  Honestly, while people change jobs frequently, I wonder to what degree the profile of the entrepreneurial and self-employed has changed over the past 2 or 3 decades. There are many people who prefer the security of a “job” to the risk of an entrepreneurial venture.  Our own personality studies, as well as those of others, substantiate that.  I could go on, but what do you think?