I finally got around to watching Moneyball, the movie adaption of Michael Lewis’s 2003 book of the same name starring Brad Pitt. Back in the Wombat days, the book was ‘required reading’, along with a number of other leading quant books in the genre; Liar’s Poker, Bringing Down the House, When Genius Failed, etc. I’ve read a few others recently that fit a similar profile, including The Quants but haven’t been able to keep across it as much as I would like.
For those of us with a quant bent, Moneyball is an all-time classic. The movie was a great spin on the story. I loved it.
The Moneyball approach, which really amounts to applying empirical filtering and relative value to a population subset, is at the core of a bunch of interesting stuff we’ve been working on for managing growth-equity portfolios. More interestingly though the Moneyball approach was at the core of the team building strategy we employed in Wombat.
Seen in a historical context, the idea of differentiation and portfolio management for team building is hardly unique to baseball and underpins the approach used by many firms. It was the cornerstone of the legendary Goldman Sachs management model. It was used in GE, as outlined by Jack Welch in Winning. The approach even goes as far back as John D. Rockefeller, who first referenced it over a hundred years ago.
(On a side note, I always loved Rockefeller’s view of management: “Good management consists in showing average people how to do the work of superior people”. I’ve used that quote more times than I can remember and I’ve found it to be the ultimate put down for managers who constantly complain about the quality of their team members.)
In Wombat we worked off a spread sheet* with a very simple system using a relative value ranking derived from a scoring system. The key factor here is that the output takes the emotion out of a host of HR decisions; be it allocating bonuses, promotios, pay rises, exits, who to let go and when to counter-offer. It was used when we had ten people in Wombat and was still effective years later when restructuring NYSE Technologies with 1,500 people globally.
The Wombat philosophy was based on the concept of “Talent Arbitrage”. In laypersons terms, it is better to hire a graduate on £20,000 with smarts, the right attitude and a willingness to learn, than pay £50,000 for someone with five years’ experience. Our focus was on building a team of very talented young people, and in particular people who would have been among the top 20% in other companies (as in 20% of the team that do 80% of work!). That is not to say we didn’t make some exceptional senior hires from time to time, but the average age in the company was 26 ½ years on exit and the median was even lower. The average total compensation actually fell over time as the base got bigger.
The evaluation and ranking methodology was a cornerstone of this system as it provided a systematic way to rank the team in percentiles. Basically each manager ranked their team members between 1 & 10 on each of the categories giving a team ranking. These were then merged (and normalised) to given an overall order. As can be seen from the sheet, there was a really heavy focus on teamwork, getting things done, going the extra mile, willingness to travel, customer focus etc. It examined all the key portfolio characteristics we thought essential to succeed in the front office technology sector. All of this is quite a break from the normal approach to reviews, which more often than not, boils down to whether a manager likes or dislikes the individual in question.
Bonuses, pay rises, promotions, etc. were concentrated at the top of the ranking. Barring one exceptional young chap who landed a £95,000 offer from a London Bank (he’d started in Belfast on £20,000 a year earlier), we always made counteroffers when someone in the top 20% of the rankings came to us with a job offer. Conversely we were happy to see folks in the bottom 50% move on to a more suitable role with another firm.
Looking back, we adopted many of the same principles as Moneyball, and at times on a slightly larger scale. There’s no doubt it’s an approach that works. Billy Beane (Brad PItt) and the Oakland Athletics enjoyed their 20-0 win streak and we had our successes too.
– Danny
* A copy of the spreadsheet can be provided upon request.
Further Reading:
Moneyball: The Art of Winning the Unfair Game by Michael Lewis
Bringing Down the House by Ben Mezrich