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The Unbearable Cost of the Wrong Hire

Leonel van Aldere de Mendonça

 

It is no revelation that the cost of the wrong hire by far outweighs the cost of a proper executive search process. But the cost of the wrong hire becomes even higher when this happens in Emerging Markets where business is more relationship based and less transactional and where senior management talent is scarce and difficult to attract. Put this into a highly value added professional services or financial services context, and the cost is literally unbearable. These unbearable costs include among others:

  • Loss of income
  • Decline in brand equity value
  • Departure of talent to competitors
  • Damage of the talent and leadership development program
  • Loss of productivity and motivation
  • Reduced access to business opportunities
  • Dented relationships with local governmental institutions and other relevant stakeholders
  • Loss of time and money invested in the wrong hire

During the last 15 years, we have seen the same talent management issues move across various emerging markets, alongside with the capital flows of hedge funds, asset managers and private equity funds. First in Russia and the Middle East from 2002 until 2008, followed by Indonesia, then Brazil until 2012 and more recently in Africa as western investors are looking for higher returns in markets that after the global downturn are no longer seen as excessively risky. 

They all have in common that as capital inflows increase dramatically, local markets boom, talent becomes very quickly scarce and the pressure to hire the rarely available local talent with western education and top business school education becomes enormous.  The best senior executives are snapped-up and locked-in with non-compete clauses and long-term incentives aimed at creating unassailable exit barriers. This results invariably in a hyper inflation of salaries, cut-throat competition for the best candidates, and quite often, the wrong hires. 

Wrong hires come in many shapes and forms, but the most common are the following:

  • Lack of cultural fit with the employer
  • Lack of adaptability to the local business culture
  • Lack of appropriate skills

The great majority of wrong hires for high value added services in emerging markets are related with culture as described in the first two points: lack of cultural fit with the employer or with the local business environment.  The third point that may seem the most common is actually the least relevant as senior executives are hired based on their track-record and hence it is quite straightforward to do a due diligence based on performance in previous roles and proper reference checking.

Lack of cultural fit with the employer

The lack of cultural fit with the employer is extremely common when hiring in very tight market conditions in emerging markets. As the pressure to hire increases in an often little known market, employers tend to look for recognizable brands that will decrease their emotional perception of risk. These can be top business schools like Harvard, Stanford, Wharton, Insead, etc. or reputable western companies that are familiar to the employer. This is a natural and justifiable logic, but the problems arise when employers confuse these “trusted brands” with cultural fit of the senior executive. Top business schools do indeed for the most part produce top-notch executives, and companies like Goldman Sachs, McKinsey and The Carlyle Group have very structured and renowned development programs, but this is by no means a guarantee for cultural fit. Best case scenario these “trusted brands” can reduce the risk around appropriate skills, but cultural fit is about how the individual fits with the employer.  This is about intrinsic motivation and mind-set and finding the right fit is not linear, nor a scientific process that can be assessed with case study interviews or multiple choice psychometric tests. 

 

 Like most important things in live, this is more about art than science and nothing beats an open hearted conversation in an informal and relaxed setting. Making the right hire is like courting and finding the right life partner, but with a severe time constraint. Hence it is important to go right to the point and the key questions should be of existential nature in order to understand the underlying motivations that will drive every single future business decision. If there is alignment on that level, the probabilities of a positive outcome will increase dramatically.

It must be said, that in the same way as marriages evolve and change over time, so does the fit between executives and employers. Companies are living and evolving entities that are continuously adapting to their environment in order to survive. People are equally always growing and changing, so contrary to what in general is expected for a marriage, the relationship between an employer and an executive is finite and should only last for as long as both can profit from it. Notwithstanding, in order for both parties to extract substantial value of such a relationship, this should last at least between five and ten years. And making the right hire will generate windfalls for years to come.

Lack of understanding or adaptability to the local business culture

The misfit with the local business culture comes mostly in two shapes:  when hiring an executive with origins in the country of destination or when hiring an expatriate.

When the employer hires executives with origins in the country or region of destination, in some cases, when returning home, the executives are faced with the fact that they no longer fit with the local context and they feel detached from the business culture of their country of origin. In some cases it is not the executive, but the spouse or children that cannot adapt. This will surely lead to problems on the home front that will eventually affect the performance of the executive. It is paramount to detect potential problems with the lack of adaptation of the family early in the interview process.  A working spouse with a career, teenage children and different nationalities or cultural heritage of the spouses are all early warning  signals that need to be explored. They are not necessarily deal breakers, but cannot be ignored.

The more obvious misfit with local business culture comes from hiring expatriates who might have a perfect fit with the employer in the headquarters, but are completely unable to adapt and function in the market where they are sent out to. It is per definition a better option to hire someone with cultural affinity with the local market, but in some cases it is either necessary or even convenient to hire an expatriate, and in those cases it is absolutely paramount to assess the capability to adapt and to deal with unknown situations and context. It is also preferable to hire someone who has already lived and worked successfully in another emerging market, although experience teaches that intrinsic flexibility and adaptability are more important.       

Lack of appropriate skills

The lack of appropriate skills is rarely the true reason for a wrong hire and hence of little interest. A responsible employer should ask their Executive Search partner to conduct a proper due diligence and reference checking. This should suffice as a tool to avoid a wrong hire due to lack of skills.

Hiring the right senior executives is always challenging and even the best CEO´s recognize that from every five hires, one is excellent, three are average and one is a wrong hire. The cost of these wrong hires is very high, even more so in emerging markets within a high value added services context. In order to minimize the risk of making the wrong hire, senior management should, in addition to the regular interview process, invest time to meet informally with finalist candidates and discuss existential matters that are not related to business, but that are fundamental drivers of the decision making process of the senior executives. Like in a relationship it is more about finding the “right long term partner” and less about finding the “best possible candidate”.