| ||||
Andrea Schulman of HBS Working Knowledge recently met with the study's authors to discuss their research.
Schulman:Should firms, especially investment firms, worry about losing analysts who leave to start their own companies?
Nanda: There has not been much attention paid to losing people to entrepreneurship because the numbers are small, but the impact on the organization may be huge. You lose not the non-stars, nor the new stars, but the super-stars. You are losing not just the monetary returns, but what they contribute to the culture and the environment. These are probably the creative people, the people who bring in new ideas, who stir things up. And the organization risks losing all of that when they lose these people. Firms should focus their retention policies more than they do on the threat of losing people to entrepreneurship. It's relatively easy to do this. You get people in the center of the organization. Make them feel a greater ownership of what they are doing. Encourage people to have new ideas.
A mixture of autonomy and a sense of working together in a team are extremely powerful in fostering entrepreneurial activity and keeping people glued to the firm. Small teams that are given license to do interesting work can be effective.
We found in a case study that Lehman Brothers Equity Research Department was able to raise its ranking from number sixteen to number one in three years without significant monetary investment. It was just a way of making people feel that they had freedom and autonomy to do what they wanted and yet, were part of a team. That is the combination that is needed.
Groysberg: In that particular case people referred a lot to an emotional bond among co-workers. I want to add that the ability to develop new skills is very important. An environment in which you have autonomy and you have opportunities to acquire new skills will help a firm retain its talent.
Prats: I have been studying e-consulting firms. A lot of [people] come to these companies from big consulting firms. They left because they didn't have the autonomy or the freedom to build what they were thinking was the future. Sometimes they left with a team, four or five people from the same place, to start something that they thought was going to be key to the future.
I also think that knowing that you are working with the best keeps you where you are.
What do top equity analysts have in common with entrepreneurs?
Nanda: Both have very strong points of will. The star equity analysts will be those that take a stance that goes against the grain. The same is true of entrepreneurs. They have a worldview and they believe that it is the right worldview.
That much they have in common. We should also look at the differences. Many star analysts find that they're not successful as entrepreneurs. Entrepreneurship requires not only a strong point of view, but also the ability to follow it through by passionately implementing one's ideas and thoughts. Analysts are really good at looking at a situation, critiquing it, and suggesting what should be done. Good entrepreneurs have an additional element: the passion and the capacity to implement.
Groysberg: It is relatively easy for star analysts to create firms because they have an established record of performance that makes it easy to acquire resources to start a new venture. They bring relationships, clients, and money with them. I think that's a trait of professionals and knowledge workers.
Prats: Yes, they have social capital. Now we are trying to determine if this first endowment really matters. Does it lead to success? It may not have a long-lasting effect.
Groysberg: I think we see something that's like the Michael Jordan phenomenon. The best and the brightest in the field are the ones who try to set up something on their own. It's interesting that when those at the top of their profession leave, they do it for an entrepreneurial opportunity versus going to a competitor.
Are there differences between star performers who move to another firm and those who start their own firm?
Nanda: Boris and I have been looking at analysts who have moved to another firm. We find ... newly anointed stars tend to move between firms.
It's a function of two things. First, established stars might stay because their firm has created an alignment that has allowed them to become stars. Moving to another environment may not be as good. Secondly, management is more likely to match an offer for a well-established star than for someone who has only recently received recognition.
One of the easiest ways to lose stars both to competitors and to entrepreneurship is by under-performing the rest of the industry. Under-performing the industry has a huge negative effect in how you compensate people and in the work environment.
Groysberg: I find that stars do not do well when they change firms. It kind of suggests that the firm itself is important for knowledge workers' performance. This is often de-emphasized, interestingly, by professionals and knowledge workers. They do not feel that the firm has a lot to bring to the table.
Did you find any difference between new stars and established stars in starting new companies?
Groysberg: Almost all of the entrepreneurs have been established stars.
Nanda: It's the Michael Jordans who become entrepreneurs, not last year's new all-star. With turnover to competitors: established stars less, new stars more. Entrepreneurship: established stars more, new stars less.
· · · ·
Why Superstars Skedaddle
| ||||
An excerpt from the working paper, "Entrepreneurship Among Knowledge Workers: Evidence from Equity Analyst Markets."
We find that drivers at several levels influence knowledge workers' entrepreneurial decisions. Star knowledge workers have a higher probability than non-stars of becoming entrepreneurs. There are three possible explanations. First, stars can set up their own firms more easily than their non-star counterparts because they can leverage their industry relationships and reputation to attract professionals, clients, and capital to their new ventures. Second, stars may have greater risk-taking ability because of being wealthier than non-stars. Third, stars may not stand to lose as much as non-stars in taking the entrepreneurial route because their reputations make re-entry into the industry within a few years of exit an option. For example, Edward Greenberg, who left telecommunications coverage at Morgan Stanley to start his own consulting firm in 1991, returned to Morgan Stanley a few years later as an investment banker.
Our findings confirm the importance of some contextual variables and disconfirm the importance of other contextual variables in knowledge workers' decisions to quit and start firms. Better research departments tend to lose fewer of their analysts to entrepreneurial turnover. Analysts in firms that are underperforming compared to the industry average leave to set up their own ventures more readily than analysts in firms that are performing on a par with or superior to the industry average. Contrary to some industry insiders' belief that "hot" sectors are especially vulnerable to entrepreneurial turnover, sector performance does not correlate significantly with entrepreneurial activity. Analysts' entrepreneurial activity is pro-cyclical. Perhaps, as business conditions improve, analysts' entrepreneurial opportunity sets expand as well leading them to set up their own firms more actively.
Analysis of entrepreneurial activity across the twenty-four firms using firm dummies (regressions are not reported) suggests significant inter-firm differences. Analysts from UBS, Montgomery, and Kidder Peabody become entrepreneurs more frequently than do those from DLJ, Lehman Brothers, Merrill Lynch, and Salomon Brothers. Analysts' entrepreneurial activity might depend on the firm's structure and the relationship between the firm and its employees. For example, at DU the analysts are treated as entrepreneurs running their own franchises.
We conducted additional regressions to test for the impact on probability of turnover of a number of interaction variables, notably between individuals' performance (star vs. non-star) and departmental, firm, sector and economy variables (regressions are not reported). The only interaction variable with a significant coefficient was Analyst star * Firm performance. Its positive significant coefficient, in addition to positive significant coefficient for Analyst star and positive but non-significant coefficient for Firm performance, suggests that firms underperforming their industry counterparts are particularly vulnerable to losing their stars. This finding is in consonance with existing research that, if firm compensation is not competitive with that of other firms in the industry, the best and brightest will depart (Holbeche, 1998). During difficult times, such as downsizing, it is the talented employees who anticipate layoffs and are the first to flee (Hamel and Prahalad, 1994). Cost of moving is low for star knowledge workers because often they, not their employers, own their clients (Woodruffe, 1999; Johnson, 2000; Tulgan, 2001).
Besides its contribution to research, this paper has normative implications for the managers of knowledge-intensive firms seeking to retain their star employees. It suggests that managers should take care to make their star employees feel that they are running entrepreneurial operations to not lose them to the "entrepreneurial bug." Further, managers should be particularly careful about losing their employees to entrepreneurial projects when the firm is underperforming the industry and when the economy is expanding.
Future research can examine whether entrepreneurs who were stars are more successful than entrepreneurs who were non-stars. We are contemplating small-sample case studies and empirical data analysis to address this question. The results of our current study are based on findings in one industry, investment banking. Comparing the entrepreneurial activity of star analysts with entrepreneurial activities of star programmers, management consultants, lawyers, accountants, money managers, and other professionals could help test for generalizeability of our conclusions to knowledge workers across industries.