How Companies Can Tap Into Talent Clusters

CURT NICKISCH: Welcome to the HBR IdeaCast from Harvard Business Review. I’m Curt Nickisch.

In 1974, General Electric left New York City. It was part of a wave of big U.S. companies moving to the suburbs, with their office parks and country clubs. But today, that trend is reversing. In 2016, GE moved its headquarters from Fairfield, Connecticut to the Boston waterfront. The company said it wanted access to the “technologically-fluent workforce” – magic words for Boston’s mayor Marty Walsh.

BOSTON MAYOR MARTY WALSH: GE recognizes the innovation in our city, the educational institutions in our city, the diversity of our city, the people in our city. We’re excited about this.

CURT NICKISCH: GE is one of many companies moving recently to tech centers like Silicon Valley, London, and Shanghai. They want to be right next to startup incubators, research universities, and co-working spaces. Brent Grinna, the CEO of a Boston startup, says that’s where the talent is today.

BRENT GRINNA: People want to do the same thing, we want to work near where we live. Where we live is different and where we work is catching up.

CURT NICKISCH: This trend poses big strategic questions for companies. Moving your headquarters is really expensive. But there are other ways to access these talent clusters. And here to sort through the options facing senior leaders is Bill Kerr.

He’s a professor at Harvard Business School, and the author of the HBR article “Navigating Talent Hotspots.” Bill, thanks for coming on the show.

BILL KERR: It’s a pleasure to be here.

CURT NICKISCH: Clusters aren’t new – or cluster research, even. Right, your colleague, Michael Porter is known for this. You know, there have been places around the world many times over in the last centuries, right, where you’ve had industries in one place and so they’re understood, but you’re writing specifically about technology clusters, innovation clusters. And why are they different now and why is it such a hot topic now?

BILL KERR: Yeah, I’ll expand it a little bit broader and I often use the phrase ‘talent clusters,’ and some of this has been around for centuries. You can think of fashion in Milan or academia clusters that could be in Cambridge, UK or Cambridge, Massachusetts; Hollywood; Wall Street. Then you get sort of the increase in the technologies zones, the technology clusters, the Silicon Valleys of the world or Bostons or increasingly Shanghai and similar.

What separates these places from economic clusters is a very important set of ingredients that they need to bring into this. In order for density to ever exist, in order for it to make sense for all the production to come into one place of a particular good, we have to have the property that that good is sold to people outside of the local area.

So let’s take Detroit as an easy example: Detroit was probably America’s preeminent 20th century cluster.

CURT NICKISCH: Motor City.

BILL KERR: Motor City. Exactly. It became synonymous with that production. But it was different in the form that the talented people that were being sort of put into the development of the car industry were one of a set of essential ingredients that included things like very large factories and masses of moderately skilled, semi-skilled workers that we’re going to man the factories, huge amounts of raw material input. And at some sort of demention in these clusters are going to get big, but it’s not that we’re going to think of them as being a talent cluster that continually sort of grows and grows and grows.

It can become big. You know, Motor City was was big, but when you can switch over to a situation like a Silicon Valley and the entrepreneurship, high-tech place there, if mainly what we need to have in the room are talented people and we’re going to sell to a global market, that gives it sort of much more explosive power to take off.

CURT NICKISCH: I don’t totally understand that, still, because I would just imagine that in Detroit you must have had high specialization to and you must have had machinists and design experts and all that kind of stuff as well, which had to have been a pretty specialized talent cluster to some extent as well?

BILL KERR: It’s not to say that Detroit did not have specialized people. It certainly did, but when you’re asking what is the thing that has created this sort of extra draw or attention to places today, it’s the fact that we’ve gone from that specialized design, the specialized mechanics and so forth, going from being just a part of the overall picture to, in a situation where we’re trying to create artificial intelligence, it’s now the whole picture.

And that just allows the clusters themselves to become ever larger, to feed upon themselves ever more and to make it that other people going to those places don’t diminish the prospects of the people that are already there, and don’t diminish the prospects of future people that want to, that want to migrate and join the cluster.

CURT NICKISCH: Essentially you’re saying technology too is a – it’s just a bigger disruption in how business is being done and if it affects so much more than, than sort of the combustible engine.

BILL KERR: Sure it has and it is something that influences organizations all around the world, as you’re highlighting. This goes into both the pervasiveness in which technology now influences our lives. You can think – you might be an industrial equipment manufacturer, you’re thinking a lot about technology. You’re a bank. A bank is essentially in many cases, moving ones and zeros around over places.

Goldman Sachs now calls itself a technology company. So you go across all these places and the technology has become more central to the operations that they are conducting and that’s required them to pay ever  more attention to these talent clusters and the particular application of technology clusters that have had a deeper kind of influence into today than they have in times past.

CURT NICKISCH:  That means that the gravity of these clusters is that much stronger, right? Because you can also be an agriculture business and you still feel like you need to be there.

BILL KERR:  Let me give an example of that gravity or some way we’ve tried to measure that gravity. If you went back to 1995, America’s largest companies – call it the Fortune 50, but it can go to the Fortune 100 and similar – were underrepresented in the leading cities in the United States for patenting, so roughly at that point, about half of all patents were being conducted in 10 cities, but only about 42 percent of this activity by the largest of the Fortune 50 companies was being conducted in those places.

Look ahead two decades to 2017 and invention overall has become more concentrated in those places. So we’ve moved from about 50 percent up to say 58 percent. If you look at the largest companies, that number is now 68 percent. And some of that is is simply that we’ve had more tech firms enter the top 50, but it’s a more pervasive thing that even when you look at the people that had been a part of that same cohort all the way through, they’re increasingly doing their innovation in certain top cities rather than in remote corporate labs. We used to have a, you know, whether was Rochester, New York or some other location that was known as the company town. We used to have large companies doing a lot of their work outside of those places and increasingly that shifted in.

CURT NICKISCH: Yeah, which is dramatically affected those towns for one, but it’s also dramatically affecting the cities to which these companies are moving.

BILL KERR: Exactly. And it creates a dynamic where it may be even more imperative for someone else to also go to one of those locations if they’re trying to gain that, you know, certain edge or lever by being closer to the technologies or by having their labs more integrated with MIT or with CalTech or with other places. That becomes also a – something that others are going to have to respond to.

CURT NICKISCH: This is a basic question, but we should probably answer it now. Why do you have to be there?

BILL KERR: Yeah, it’s a great question.

CURT NICKISCH: Because Rochester’s a nice city.

BILL KERR: Yeah. Now everything is online and all that kind of stuff, like what needs to be there?

CURT NICKISCH: Yeah. There’s some irony too, that you know, this is happening at a time when the ability to work remotely and collaborate you know…

BILL KERR: I often have have thought of that question as: if you’re going to be in Starbucks, can’t that Starbucks just be anywhere in the world? You know, like, what makes it so important to be here? And let me first give some evidence just concretely that it is that important. The best evidence I think comes actually from real estate prices. And the differential for the premium spaces in places like either Wall Street or Market Street in San Francisco or Sand Hill Road or somewhere. Those premiums relative to other places are at all-time highs.

Likewise the wage differentials you see. So clearly, somebody is willing to pay and pay dearly in order to be in those environments.

CURT NICKISCH: Flight to quality?

BILL KERR: You come back and you say, but what about email or what about like the fact that we can do all this stuff at a distance? And my kind of next reflection on email – and this would be true for phone calls – is that if I thought of what’s the number one destination of emails from Harvard Business School? It’s Harvard Business School.

So just because things can, you know, engage at a distance doesn’t mean that we all suddenly become untethered to place. Broadly speaking, at this point, technology has done as much to enforce the value of place as to make the world weightless and distance-less and to not have that kind of internal connection.

If I was a company in 1980, I might’ve been able to wrestle my R&D stock and the things that I had learned in my labs over the previous 25 years and think, “I’m in a pretty good position here.” If I’m today, and I’m trying to compete against people that are bringing software and, similar type of applications into domains that have never existed before, then that requires me to be closer to that rate of change, that rate of information flow.

CURT NICKISCH: Yeah. So you need to be there?

BILL KERR: You need to be there. But that doesn’t mean we’re all gonna move to Silicon Valley or we’re all gonna move to London. People are going to have to identify for their companies: What’s the right approach? How important is it for us to be there? And then to what degree do we need to emphasize or prioritize that feature?

CURT NICKISCH: Yeah.

BILL KERR: One of my colleagues has joked that, you know, the leading indicator for where startup companies want to go next is any asset-heavy industry. And you could go through and ask about the hotel industry or the taxi cab industry or – that thought itself immune. You know,  we have the hotels, we’ve got the brands, there’s no way this crazy Silicon Valley kind of stuff is going to influence us.

Now they wake up, they say, “Wow, that did have a big impact.” And there’s a lot of smart people that are working in these places. They’re going to try to figure out how to enter your space. So you need to have insight into what’s going on, what they’re thinking.

CURT NICKISCH: Not everybody can move to San Francisco or to Boston. Like you said, there isn’t enough room.

BILL KERR: Not everybody wants to.

CURT NICKISCH: And not everybody wants to, yeah, right. Because of those real estate prices, they’re getting more and more expensive, so for some companies just to move and do that, it would completely upend their cost structure. And they may not even be able to afford that.

BILL KERR: And they may not be appropriate for it. That’s actually a subtle point. If you’re a chemical manufacturer, you would be insane to pay the real estate prices on Wall Street. In fact, for anyone outside of financial services, it’s fairly insane for you to pay the real estate prices on Wall Street. So what do you do with the rents that are so high, and how do you think through that process?

One is that most of the times when a company relocates a headquarters or does something significant with the – where the CEO sits or where some of the top decision makers and innovators sit, it’s a relatively small and light operation. When General Electric was making this process to come to Boston, it was about 800 people out of a company that had more than 300,000. So it’s not that we’re moving an enormous number of people into these locations. We’re prioritizing who should be in that environment. When we’ve seen companies move headquarters, they’ve typically not moved all the staff that would have existed in what was a suburban office park headquarters.

It’s often a smaller set that’s focused on key people that are wanting to be close to the information to make their decisions and then often part of kind of the innovative group that wants to tap into sort of young digital talent or some particular technological spillovers that are coming from a university that’s in the downtown. It’s very well thought through who is going to go there and often times are  even thought of as being a virtual headquarters. So it’s anticipated that there will be hot desking or other types of drop in for a little bit and be a part of the headquarters. But we’re not going to build three enormous towers right in the middle of downtown because as you’ve highlighted, it’s so expensive.

CURT NICKISCH: Yeah. It’s interesting because even with GE, some of the executives didn’t even move to Boston, right?

BILL KERR: Yes.

CURT NICKISCH: And you often wondered what, 800 people out of 300,000 globally – is that even enough?

BILL KERR: Yeah, it’s an important question. Especially in the case of a company that’s as large as General Electric, they’re going to have multiple billion dollar businesses that are going to be elsewhere in the world

CURT NICKISCH: And have their own clusters to some extent.

BILL KERR: Exactly. And I think one of the important challenges you face with thinking through the headquarters location choice is that – let me set up to sort of extreme examples. Extreme example number one is I put, you know the boss, I put the production person, I put the innovator and I put the customer sales rep all into the same room.

We’re not going to have as much internal communication challenges in that setting, but we’ll all be at a distance from the people that we’re going to be interacting with. You can go to another extreme of saying I want to park each of those individuals onsite with the customer, with the lowest cost production site, with, you know, the best R&D center or our cluster in my space, and so forth.

And then you’ve created a challenge of I now can communicate easily with the external party, but I’ve created very large internal kind of gaps in some of the information flow. So companies have to be able to balance those things.

CURT NICKISCH: Okay. So moving headquarters in a limited way is one strategy, who do you think this applies to most?

BILL KERR: I think it applies most to companies where technology is going to be the central thing that shapes their company’s future. If you are a senior leader and at some point senior leaders have to sort of make their belief about what the future is and act upon it. That’s what these things require. And it’s not that excellent customer service is not going to be important, and low-cost production and all those operational efficiencies. But in terms of at the margin, where am I going to be most effective in helping my company make the big choices that it needs to make? The people  that are going to end up making this headquarters transfer will be those that say: “That’s the thing that I need.”

CURT NICKISCH: Even that’s expensive, right? So how can you do this on this a little bit more on the cheap?

BILL KERR: Well, I wouldn’t call it on the cheap. But why this is important – when you think about headquarters moves are expensive because you’re going to put a lot into that. You’re also going to put a lot of people, even if it’s, you know, only that 800 that we described, you’re going to put a lot of people into it.

CURT NICKISCH: And you’re going to move expensive people and all that stuff?

BILL KERR: And it’s going to be permanent in a way that perhaps you later come to regret. One one might remember that circa even 1980-ish one could have thought of Detroit, as, you know, again, America’s a powerful engine there. And you would not be going down well in the annals of history if you had relocated your headquarters right there saying that was going to create, you know, our base for the future.

What we see a lot of companies doing – and it’s not mutually exclusive – what we see a lot of companies doing is creating a series of innovation outposts or labs that are in places around the world that they need to keep in touch with. Why I say it’s not exclusive: you could take Microsoft. Microsoft’s headquarters are of course in Washington, but they have a series of seven or eight innovation labs that are – one’s in Cambridge, Massachusetts, one’s in Cambridge, UK.

They’re going to have one in Bangalore. They’re going to have one in Silicon Valley. They’re going to be places where they have developed these centers in order to be a part of that cluster. One of the things you can risk doing in that situation is being penny wise and pound foolish, in that you’re only talking about a small number of people and you should put those small number of people where the insights are going to be the best and not worry as much about that per real estate price.

Whereas if you go back to headquarters move, if you have a thousand people coming, you may create a center of gravity and say it’s better for us to be two or three miles away and then get that set up.

CURT NICKISCH: Somebody at one of these companies in Europe or wherever, where they’re thinking about this, somebody’s going to say, “Oh, if we send our best people over there or send the people who need to be there, they’re going to end up working at Apple anyway someday. If you’re in Rochester or someplace, you don’t have to – you don’t have the same competition that you do to keep your talent than you do in those places.

BILL KERR: So the leaky bucket problem is a very serious one. This goes to a funny thing that people tend to forget.

They say, I want to be in Silicon Valley, or I want to be in this place because I’ll absorb all this wonderful knowledge and I’ll get all these wonderful people. And then you’re sort of like, “Well, where’s that knowledge and people coming from?” Well there’s a lot of idea flow and a lot of people flow that happens across these companies. And if you are coming into that environment, you might actually have a few of your ideas also flow out to other people. That’s part of that environment. You also have a few of your people flew out to the other people.

CURT NICKISCH: Yeah.

BILL KERR: And there can be for a company at a choice that says we don’t want to send this type of information or we don’t want to put that into those spaces. At some level you are competing against some of the major employers – tech employers – and you have to be able to compete in that space.

GE had a whole series of ads that they published to try to kind of attract people into the organization from others and companies are going to always be able to – are always going to need to think of how am I approaching that recruitment process?

CURT NICKISCH: It was a brilliant ad campaign and the fact that they could use that just for advertising jobs, I mean it was amazing. Who do you think is a good candidate for that strategy of doing an outpost, but keeping your headquarters and company kind of where they are?

BILL KERR: I think it’s a very broad-based strategy. Gor any company of a certain size, they’re going to want to keep touch with multiple places,  in part because lightning strikes at different times in different places. People are working on competing ideas. You never know what your company needs to be a part of and you’re in a war for talent. So having, you know, having several places to connect into workers can be a good thing.

For a smaller company – and let’s call it a, you know, a $1,000,000,000 sales company – I think you should think strategically about what is the place that I would most want to have insight into and be a part of. And that’s probably a place that if you don’t already have a presence there, run an experiment. Think about how to, how to get a team there, see what you can learn and develop it.

CURT NICKISCH: And the advantages is you can extract, right? You can end it?

BILL KERR: Yeah, unfortunately, that can become too much of an advantage.

CURT NICKISCH: People do it too soon.

BILL KERR:  People do it too soon. They forget how long it takes to develop the insights. It’s complex and what the great thing about – for many companies is that the great thing about innovation today is that it often involves re-combining things together, existing building blocks that we’ve seen in novel ways that we haven’t done before.

So the great thing is that if I can find that spark, often I have at other parts of the company, the other pieces that need to be put into place. The downside or the challenge is that it’s not obvious what that spark is. And it’s not obvious that it would even be something you would label as being from your industry or from your technology zone the first time you see it. And so that exploration process requires the capability to do it.

CURT NICKISCH: So you need to commit to this to some extent. And then you also need to make sure that people want to be there, that they still feel connected to the home company right? And that the communication lines are good and they’re not being neglected and you know, that that’s not a death for their career to move out there. All that kind of stuff?

BILL KERR: Those are all very important management pieces. The management of these outposts should not be underemphasized. Just because it’s a small number of people doesn’t mean you should not think about how to build them into global teams, how to transfer talent around them, how to make sure that the knowledge doesn’t get observed and just stay there. Because that’s not any better than having never been observed at all.

CURT NICKISCH: So that’s a strategy for kind of being able to put your feet there, but also, you know, pick up and go if you need to or not get stuck there. In your article, you suggest like a third way for companies to be exposed to these talent clusters without actually having a presence there. Who does that apply to and hat is that exactly?

BILL KERR: Well, a third and growing way that companies attempt to pull insights from places or inspiration from places or at least kind of prod the executives to see further out as to how their industry may unfold is through what are called often immersions, where you bring an executive team over to a talent cluster. They spend five days meeting with faculty members, looking at startup companies, interacting with some of the leading tech companies that are in the area. Really trying to kind of inspire the group as to what is the possibilities that can exist in this place?

Now, at one level you run a risk that it could just become tourism, some form of glorified tourism.

CURT NICKISCH: Right, a nice company trip.

BILL KERR: A nice company trip. Or the other risk is you spend all your time doing your job by email and you never actually engage. Those are both risks. But done well, a company outlines for itself – we need to explore these four or five things. Let me give an example. I worked with one consumer packaging manufacturer that was in Europe. They said, “When we look to the future, sustainability is a very important thing. We think is going to shape how our customers like Starbucks and Mcdonald’s and so forth order their products from us. So let us start that exploration process by getting our team there. Understanding how the technology around the packaging goods, how that’s evolving. Hear from some of the leading customers, what they are anticipating to demand of a company like us into the future.”

And that got very much built into the way the company was setting up itself, and an ongoing internal dialog it was having. When you can accomplish something like that, you can deliver a lot with a relatively short amount of time in the location that you’re doing. And then you may want to come back or you may want to visit one cluster and then the next year or 18 months later go visit another one. But what you’re trying to do is in a systematic way think through what are some of the things that we need to learn about and then can we create for ourselves an opportunity to explore that in a very intensive way for four or five days?

It’s not golfing and you can’t be emailing back home all the time, but get us the insights that we need to take that next step for us.

CURT NICKISCH: And who would be involved in that, typically?

BILL KERR: Well, I suppose you could separate it into two groups. I think the most important group – and the ones that we’ve typically worked with, the ones you hear about most in these types of programs – it’s the top leadership team, and even potentially the board of directors that are coming with them. But it’s getting everyone into the same room, exploring the same topics together and then taking that and saying, “Okay ladies and gentlemen, what do we need to do in order to be ready for this future? How do we need to, to act?”

CURT NICKISCH: Yeah. I want to ask maybe a counterintuitive question, which is one way you succeed in business is by not doing what everybody else is doing and finding a way to do it differently. And if this gravity is pulling everybody in and you’re just trying to play that race, have you seen companies or do you think it’s a viable strategy for some companies to stay where they’re at or find a different way to, you know, access these technologies, be innovative and do it in a way that doesn’t mean they’re running the same race as everybody else? Or is that just folly?

BILL KERR: I don’t think it’s folly, It’s been classically pointed out that Microsoft was set up at a distance from where the core of the software industry was at that time.

CURT NICKISCH: There’s a very little known story that Bill Gates flew out to Boston to make an offer to buy a technology company here, because he thought that Washington wasn’t going to be a place – the Seattle area wasn’t going to be a place – where he could grow Microsoft and that he needed to be based in Boston.

BILL KERR: Yeah. And Warren Buffet has always been, you know, in Omaha. What I want to highlight is that it is not that this is an absolutely sufficient and necessary condition for success. You can move to a talent cluster or invest deeply in it and if you don’t have the right way of harnessing the insights in a way that helps your company excel, at the end, your company’s going to fail.

Likewise, I don’t think that it must be necessary, but that said, we commented earlier about how Microsoft has centers all around the world. They’ve developed Washington into a premier area in and of itself.

CURT NICKISCH: Right, and Amazon’s there now.

BILL KERR: Exactly. And it’s become one of the most prominent places in the country for this type of work. You have to just understand the route that you’re on and make sure that you, I guess to use term – the things you don’t know. Make sure that you understand and you have at least something, whether it’s the immersions or other strategies, ways of being a part of the cluster. If you’re going to say, I want to be at a distance from it.

CURT NICKISCH: Bill, this has been great. Super interesting.

BILL KERR: Thank you. I appreciate being here.

CURT NICKISCH: That’s Bill Kerr, a professor at Harvard Business School. He wrote the new book “The Gift of Global Talent.” And he also wrote the article “Navigating Talent Hotspots.” It’s in the September-October 2018 issue of Harvard Business Review.

This episode was produced by Mary Dooe. We get technical help from Rob Eckhardt. Adam Buchholz is our audio product manager. Thanks for listening to the HBR IdeaCast. I’m Curt Nickisch.