The cost of not staffing properly has never been greater, and there is a post up on Forbes by Steve Denning today that exemplifies that fact quite well.

Dell failed not because it based decisions on expected rate of return but because it didn't factor staffing - recruitment, retention, learning, training - into that rate

Denning debunks a theory belonging to innovation-meister Clayton Christiansen regarding Dell's catastrophic downfall.

The bottom line, per Denning, is that Dell fell, not because it made decisions based on expected return (IRR) as Christiansen posited, but because it measured IRR wrong.

It failed to factor in human capital.  It failed to factor in the value of its staff - recruitment, retention, learning, training etc.

Here's the background on the Dell case from Denning's post:

In big corporations, the use of the the internal return (IRR) has led to market-creating investments suffering in comparison with cost-saving investments. But why? Is it the tools or the mindsets of the people using the tools?  Thus let’s take the example that Christensen frequently uses to demonstrate disruption—the case of Dell. Some years ago, Dell began outsourcing manufacturing to a Taiwanese electronics manufacturer, ASUSTek. The outsourcing started with simple circuit boards, then the motherboard, then the assembly of the computer, then the management of the supply chain and finally the design of the entire computer. Using IRR and ROA analyses, this sequence supposedly “made sense” because Dell’s revenues were unaffected and its profits improved significantly. The end result? ASUSTeK became Dell’s formidable competitor, while Dell itself, apart from its brand, was hardly more than a shell, without any real expertise to run or grow its business.  “Bingo. One company gone, another has taken its place.” The implication is that the IRR and ROA “made Dell do it.” It made “perfect sense” for Dell, on the basis of those ratios, to outsource until it suddenly found had no expertise left.

But Denning finds the fallacy.

“There’s no stupidity in the story,” wrote Christensen. But is that really true?  So far as we know, the decision-making at Dell didn’t include:

  • The cost of the knowledge that was being lost, possibly forever.
  • The cost of being unable to innovate in future, because critical knowledge has been lost.
  • The consequent catastrophic cost of its current business being destroyed by creating a competitor—ASUStek— who could make make a better product at lower cost.
  • The missed opportunity of profits that could be made from innovations based on that knowledge that is being lost.

Yes, there's a reason the staffing industry is booming around the world today.  It's because in a hyper-competitive global economy, we're all being forced to figure out very quickly what works and what doesn't.

What doesn't work is traditional financial performance measurements.  What does work is factoring human capital - knowledge, the knowledge of your staff - as a key component of performance.

By the way, don't let this critique of Christiansen keep you from reading him.  He's a super funny, smart guy, and I'm a big fan of his and like to apply his thoughts to the staffing industry.

Tags: Business