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Play Ball: Baseball Strategies that Empower Executives to Win the Human Resources Game By Alan D. Leib The biggest challenge for the general manager of any Major League baseball team is to figure out which players to acquire, given payroll constraints imposed by management (except maybe for the Yankees), to give the team the best chance to win. For years, team management has used statistical data (i.e. “metrics”) as a vital tool for use in making multi-million dollar personnel decisions. Baseball team managers and player agents commonly use statistics to compare and benchmark players as part of determining market value. Unquestionably, the inflated egos of many baseball owners continue to drive players’ salaries to astronomical levels. However, in recent years several teams such as the Oakland Athletics, Anaheim Angels and Florida Marlins have been able to achieve extraordinary success on the field with very limited payrolls. As chronicled in Michael Lewis’ best selling book “Moneyball,” a new breed of computer savvy Major League Baseball general mangers have developed methodologies to find the “hidden gems”—those sometimes obscure players that actually contribute to achieving the most wins. Analysis models have been developed which crunch statistical information and enable management to target players that have the skills that impact wins. A player may hit for a good batting average, but does he perform well in “clutch” situations or is he a liability in the outfield? Clearly, a pitcher has a disproportionately dramatic impact on the number of wins or losses than other positions. The powerful impact of these decision models has dramatically increased the power and influence of executives who understand how to use those tools _________________________________________________ Alan D. Leib is a member of the Chicago law firm of Horwood Marcus & Berk Chartered where he represents closely held businesses. Mr. Leib is also a Certified Public Accountant. and gotten them to the table in making vitally important personnel decisions. As outlined below, key concepts used by cuttingedge baseball franchises for making enlightened player personnel decisions provide useful guidance to corporation’s in developing a decision framework to maximize human resources investments. Define your “Win.” At first blush, the success equation in sports appears to be pretty simple—win enough games to make the playoffs and win enough playoff games to win the championship. However, the Holy Grail for a sports franchise is not merely to win a championship, but to create a dynasty. The saga of the Chicago Bulls is a telling example. With Michael Jordan on the team, the Bulls won six championships in eight years. However, after he and some other key players left the team several years ago, the Bulls have been not come close to achieving a consistent level of success. In order for a business to “win”, business managers must not only meet short-term financial goals, but are charged with building long term shareholder value. A long-term strategic plan outlines the steps required to attain meaningful and sustainable growth, profitability and competitive advantage—attaining these strategic objectives is the business “win.” Executives must first and foremost understand what constitutes a “win” in order to provide management with suitable metrics to guide resource allocation decision-making. Allocating Responsibility for Wins In baseball, the metric for determining wins is obvious--scoring more runs then the opponent. Responsibility for a team’s wins is divided equally between offense which is responsible for scoring runs (batting and base running) and defense which is responsible for preventing the other team from scoring runs (pitching and fielding). Within the defense, statistics show that pitching is generally allocated with 60% to 75% of the defensive responsibility for wins. Thus, the impact each group has on achieving a win has been quantified. Allocating responsibility for business wins, although much more difficult, follows the same general process. Each separate strategic objective must be analyzed in order to determine which group or groups of talent has the greatest impact in reaching the objective. For example, strategic objectives may apply to specific business processes, business disciplines, etc. After looking at each individual objective, business managers can use statistical weighting techniques to quantify the impact that each identified talent pool has on achieving an overall corporate “win.” Using HR Metrics to Field your Team Like sports statistics, there has been a tremendous proliferation of HR data and metrics available to business managers. Unfortunately, like the old school baseball executives, HR executives and business managers’ use of these metrics has generally been limited to benchmarking employee salary and benefit costs against industry norms. However, such basic benchmarking is just the starting point for using metrics. Metrics can be used to identify crucial skill sets, measure performance and motivate talent to perform at high levels to achieve corporate strategic objectives. Corporate executives are now in a position to “play ball” by taking a leadership role in maximizing their company’s talent investment. Example Let’s apply these concepts to a hypothetical company, XYZ Co., a closely held manufacturer of specialized components. XYZ Co. has $20 million in revenues, profits of $2 million and 400 non-union employees (30 managerial) all at one location. XYZ Co. has a reputation for good quality, innovation, on time delivery and customer service and has a substantial share of the domestic market for its goods. XYZ Co.’s strategic plan reveals that the two main drivers for future growth are (i) penetrating foreign markets and (ii) continued development of unique engineering designs for its products. Historically, XYZ Co. has paid its employees at or above market based in industry survey data. XYZ Co. has a discretionary cash bonus plan for management with distributions based upon company and individual performance. The following is a very rudimentary example of the application of the above- described methodology in connection with XYZ Co.’s budgeting process: 1. Assign Positions. Assign each position (existing and budgeted) to a “Functional Talent Group.” Functional Talent Groups are determined based upon the nature of the key skills required to successfully perform the function. Functional Talent Groups typically will cut across multiple business units. XYZ Co. has established the following nine Functional Talent Groups: Executive Officers, Management, International, Sales, Customer Service, Technical, R&D, Administration and Manufacturing. 2. Identify Starting Pitchers and Make Your Lineup. Assign each Functional Talent Group a weighting factor (“Impact Factor”) on a scale of 1(low) to 5 (high) based upon the assessment of the degree of impact such group is projected to have on achieving key strategic objectives. 3. Set Beginning of Season Payroll. Consistent with budgetary constraints, allocate base salary/wages and employee benefit costs to individual positions (existing and budgeted) within the Functional Talent Groups based upon a combination of factors including existing salary/wage levels, comparable market data and performance review metrics. Above-market base salary/wages and benefits may be needed to attract/retain certain individuals with high Impact Factors. 4. Establish Programs to Motivate Your Team to Win. The amount determined in #3 is subtracted from the projected total amount available for compensation and benefits (assuming XYZ Co. achieves its targeted profit and cash flow for the year) to arrive at the “Value Pool” amount. The Value Pool represents the total value of incentive compensation available for distribution if the company attains its targeted operating profit and cash flow. The Value Pool is scaled up or down (or eliminated) based upon XYZ Co.’s actual operating results for the year. XYZ Co. then allocates the Value Pool among each Functional Talent Group based upon two weighting factors: seniority (XYZ Co. will use base salary to approximate seniority) and Impact Factor. The aggregate base salaries/wages for each Functional Talent Group is multiplied by the Impact Factor for each Functional Talent Group. The Value Pool is allocated to each Functional Talent Group based upon that group’s proportion of the total weighted salary/wage dollars. 5. Identify and Reward MVP’s. XYZ Co.’s HR then works with management to craft vehicles for distributing the Value Pool among the individuals in each Functional Talent Group. Each such program incorporates metrics that capture the success of the Functional Talent Group in attaining such group’s benchmarks and the success of each individual in attaining individual benchmarks. Such benchmarks map with the company’s longer-term strategic objectives. For example, a meaningful portion of XYZ Co.’s Executive Functional Talent Group program incorporates metrics tied to success in establishing a top notch international team and the success of product innovation investments. The Sales group’s program incorporates metrics that place a premium on establishing new customer relationships. The R&D group’s program incorporates metrics capturing new product innovation benchmarks. Conclusion In summary, corporate executives, like the new breed of savvy baseball executives, can use sophisticated tools and metrics to maximize their company’s return on its talent investment. Strategic thinking and decision frameworks will enable executives to help their companies level the playing field and lead their team to victory for years to come.