Transform HR in your organisation by meeting the leadership challenge of understanding the business and the people you lead, explains Christian Hasenoehrl.
No business sector has journeyed like HR to find it’s place and path. No other department has undergone such radical transformation, has questioned itself more deeply or has doubted itself more strongly. Rather than dwelling on why this may be it is time to look forward and grasp the strategic leadership opportunity now available. In order to be a great modern HR practitioner and a successful leader of your people, it is essential to understand the business, how it acts and why it behaves as it does. Much of this understanding can come from understanding your people, realising how they are motivated and why they make the decisions they do.
The leaders who will best function in this new world will be the ones who best understand the state of mind of their constituencies. State of mind is everything that matters to leadership: talent, innovation, entrepreneurship, creativity, optimism, determination, plus all the other things that create economic growth. This next generation of business, civic, political and religious leaders, as well as social entrepreneurs, will understand their constituents’ state of mind and the capacity to quantify it better than their predecessors did. These leaders will be uniquely poised to create real economic growth.
Businesses have maximised most conceivable benefits from process improvements such as Six Sigma, re-engineering, and total quality management. The competitive advantages from these practices have hit a point of diminishing returns. Yet, vast new business frontiers are left unexplored. Behavioural economists are discovering that human decision making is more emotional than rational. This turns on its head a core assumption of neoclassical economic theory: that consumers can be counted on to always make rational decisions about the products and services they buy. It also opens up a vast new area for businesses to exploit and companies need to explore the fast-developing leadership science within behavioural economics.
There hasn’t been a big idea for leadership in 25 years, nothing that pushes the big advancements like Six Sigma and TQM. Now we need the next generation of leadership, because quality and price don’t differentiate as much anymore. With globalisation, almost everything can be made just as well or more cheaply somewhere else. We may feel sorry for the widget manufacturers whose jobs are being outsourced. But the other side of globalisation is that heart surgery costs a fraction as much — and is just as good — in Mumbai as in big western cities. Excellent quality has become the point of entry in most markets and someone can usually deliver at the same or better price point and level of excellence.
The next evolution of leadership will be leading with an in-depth understanding of behavioural economics. Nobel Prize-winning psychologist Daniel Kahneman and Richard Thaler, Angus Deaton, et al have made great advances in the study of behavioural economics that relate how human beings make decisions and how that affects their behaviour. Innovation, talent and entrepreneurship are what should matter most to leaders now. These are the areas new leadership must master, because they are the areas that will drive growth in the new economy.
But you can’t apply behavioural economics until you can go beyond anecdotally describing human behaviour to mathematically describing it. Problems like education, security, job creation and wellbeing can be solved, but leaders are using the wrong tools to solve them. Mostly, they’re just throwing money at them. Leaders can double productivity if they spend enough on it, but it’s not sustainable. Eventually, they run out of things to spend money on — or money to spend — and improvement stops, then starts trending down. That’s where the new leadership breakthroughs will be. Leaders who can quantify behavioural economics and make decisions about their constituencies based on that information are the ones who will successfully address the critical issues facing us. If you’re making decisions without understanding what your constituency is thinking, you’re going to make bad decisions.
Companies can no longer easily buy customer constituencies with a £100 million ad campaign. That’s a lot harder to do now because of the constant information overload. Now you have hundreds of cable channels and the Internet, YouTube, etc. — and your ad campaign gets buried by all the other stuff out there. All that makes innovation more important and talent is key to innovation.
Remember, in the global marketplace, you can get anything from anywhere at the price you want — or close to it this negates competition based on price or quality. Leaders must make decisions based on their workers’ and customers’ states of mind. Now leaders need to calibrate their strategies not just against the old neoclassical economic data but also against a new institution of behavioural economic data that quantifies the role of emotional decision making and human nature in their constituencies. This requires a whole new way to lead.
Christian Hasenoehrl is a Partner at the Gallup Organisation