Book Excerpt: Management By Baseball

The following is an excerpt from Management by Baseball: The Official Rules for Winning Management in Any Field by Jeff Angus. For more information on the book, which was released this week by Harper Collins, click here.

Shelving Wood, Pumping Hart—Stealing 2nd Against the Cult of “At Will” Employment

Once in a while, there’s a lesson in baseball that just turns everything you think you know on its head and makes you wonder why you never noticed reality before. As we slip into The Incongruous Zone, we won’t use Rod Serling as our guide, but call upon former Cleveland Indians general manager John Hart to point out how much smarter baseball is than business at managing talent.

Take how we hire talent in the late 20th- and early 21st centuries. Mainstream U.S. economic wisdom holds that we’re exporting unskilled jobs to lower-pay labor markets and that’s great because we’re growing skilled jobs here. Those skilled folks will benefit additionally because lower-pay labor will produce goods for Americans at lower cost, so we’ll be earning the same and paying less.

Skilled people, by definition, know how to do something valuable. But universally, organizations strive for “at will” employment, where the employer may discharge the employee at any time without cause, without notice, and generally without a golden (or even tin) parachute. In exchange, the employee may resign at any time without notice. “At will” is a rational hiring model for low-value-added commodity businesses with a dynamic labor pool, like seasonal farm work.

Farmers need pickers, but only for a short period, and the skill differences among workers have a small effect on product quality or quantity. In a fair market, pickers and growers will adjust prices to find efficient pay for work. The at-will ability of the picker to pack up her machete in the middle of the day and move to a better-paying spot, or for the grower to give the ax to lower-performing workers if good weather stretches the time for harvest, lubricates the efficiency of a fair market.

With skilled jobs, though, why would we hire people at will, a strategy clearly meant for fungible jobs? Baseball doesn’t, even though, synchronistically, “at-will” was invented by Horace Wood, a creative legal scholar, a year after the founding of the National League in 1876. Baseball signs its talent to contracts with specific duration. Like reliable Java programmers, competent project managers, creative accounting whizzes, smooth salesfolk, or the members of ZZ Top, major leaguers are skilled employees. They are, in management’s opinion, the best 1,200 people in the world at what they do.

When an organization spends $35,000 looking for, finding, interviewing, selecting, and making an offer to a person they hope will be one of the best 1,200 Java programmers or one of the best critical care nurses, or one of the best long-haul truck drivers, why does it strive to work out an at will set-up with her? Look at it rationally. You hire someone with special talents. In exchange for the potential benefit of laying her off in a downturn or when stock analysts need to be fed a bit of ledger de main, you surrender control over her efforts.

The cost of her leaving is not just in recruitment, but in her knowledge walking out the door. That organization can count on training and acclimatizing her replacement, meaning lower initial productivity and schedule slippages. Even the creative accounting geniuses at the U.S. Department of Labor can’t tell how much this costs and perhaps this is why the dysfunctional habit persists.

Baseball knows, though. In 1876, baseball was reeling from five years of labor chaos. Skilled players moved from team to team in response to offers of better pay, or the chance to play alongside better teammates, or in front of more fans. I n 1994, American employers were reeling from the effects of skilled employees changing organizations at the drop of a cap to garner better compensation, more interesting work, or better chances to build skills. In both eras, executives were ballistic about skilled labor instability.

In baseball, the solution was enforceable contracts. Sign the talent to a relationship of fixed, known length. This solution worked for the owners for almost 100 years. In business, the “solution” was…at-will employment? At-will, invented in the 1870s, minimizes loyalty while lubricating the ability of skilled labor to move on—that is, it was a total failure for employers because even when the shop doesn’t intend to chuck the talent overboard, the threat is implicit every day of the relationship.

The more skilled and employable the talent, the more likely they’d jump ship, leaving a higher concentration of roster plaque and passive people. At-will made worsened employment instability until Alan Greenspan bailed out the skilled-sector economy with his second recession in 2001, crashing it.

Great managers take advantage of others’ counterproductive compulsions. Ex-Cleveland general manager John Hart’s front office team recognized one and revolutionized baseball personnel patterns based on an idea floated by now-Colorado Rockies G.M. Dan O’Dowd. Before Hart, Free-Agency Era teams pretty much acted uniformly based on this treadmill.

– Bring up a prospect.

– Keep his salary as low as possible for three years until he’s eligible for salary arbitration. In arbitration, his pay goes way up.

– At six years he becomes a free agent. His pay goes way, way up.

– Let him go. Sign another free agent or go back to start of this cycle.

Now, you’ve lost half the player’s highest-skill years to another team, plus you need to pay for another guy, someone you don’t know as well and have to invest some resources to learn about.

The Indians’ front-office, however, invested in a smokin’ farm system, generating a lot of fine young players. Then they short-circuited the cycle, signing players to longer-term contracts before arbitration, essentially capturing talented players’ best years. Hart eventually moved on to the Texas Rangers, and his front office cohort Mark Shapiro inherited the general manager job. While a few other franchises have tried to copy the model, Shapiro and the Indians still are the masters of it. Shapiro initiated another round of short-circuiting in 2004 – 2005, and the team just got really competitive in the latter season, finishing 93-69, and presaging an interesting run.

RULE 5.03 Follow your Hart, scrap your Wood. Organizations that have employees that represent hard-to-replace (or expensive-to-replace) value should sign the talent to enforceable contracts of fixed duration and dump the dysfunctional “at will” delusion.

Think about it. How much does turnover cost you in resources you can measure? How much in lost time, knowledge, and lower productivity? How many quarters of comparative advantage will you gain over competitors by recapturing that waste and pouring it into productivity? What prevents you starting a Hart pilot right away, and what will you do about it?

References & Resources
Copyright 2006 Jeff Angus. All rights reserved. No part of this may be used or reproduced without written permission of the author. Management by Baseball: The Official Rules for Winning Management in Any Field is available online or from bookstores in the U.S. & Canada.