In this (long) article, I want to talk about a new concept called Talent density. And as I pondered the concept I think it represents one of the more important topics in management. So I hope you find it as interesting as I do.
First of all, the concept of talent density, pioneered by Netflix by the way, is simple.
Talent Density is the quality and density of skills, capabilities and performance you have in your company.
So, if you have a company that is 100% high performers, you’re very dense. If you have a company that’s 20% high performers, you’re not very dense. It’s easy to understand, but hard to implement, because it gets to the point of how we define performance, how we select people to hire, how we decide who’s going to get promoted, how we decide who’s going to work on what project and how we’re going to distribute pay.
So before I explain talent density, let’s talk about the basic beliefs most companies have. Most organizations believe that they’re operating with a normal distribution or bell curve of performance. I don’t know why that statistical model has been applied to organizations, but it has become almost a standard policy. (Academics have proven it false, as I explain below.)
Using the bell curve, we identify the “mean” or average performance, and then categorize performance into five levels. Number ones are two standard deviations to the right and number fives are two standard deviations to the left.
The people operating at level one get a big raise, the people operating at level two get medium raise, the people operating at level three get an average raise, the people operating at level four get a below average raise and the people operating at level five probably need to leave. Lots of politics in the process, but that’s typically how it works.
As I describe in The Myth of The Bell Curve, these performance and pay strategies have been used for decades. And at scale they create a mediocrity-centered organization, because the statistics limit the quantity and value of 1’s. If you’re operating at 1 level and you get a 2, you’ll quit. If you’re operating at 3 level, you’re probably going to coast. You get my drift. And since the bulk of the company is rated 2 or 3, most of the managers are in the middle.
As the saying goes, A managers hire A people, B managers hire C people. So over time, if not constantly tuned, we end up with an organization that is almost destined to be medium in performance.
Now I’m not saying every company goes through this process, but if you look at the productivity per employee in large organizations it’s almost always below that of smaller organizations. Why? Because as organizations grow, the talent density declines. (Netflix, as an example, example, generates almost $3M of revenue per employee, twice that of Google and 10X that of Disney. And they are the only profitable streaming company, with fewer than 20,000 employees and a $240 billion market cap.)
The traditional model was fine in the industrial age when we had a surplus of talent, jobs were clearly defined, and most employees were measure by the “number of widgets they produced.” In those days we could swap out a “low performer” for a “high performer” because there were lots of people in the job market.
We don’t live in that world anymore. The world we now live in has sub 4% unemployment, a constant shortage of key skills, and a growing shortage of labor. And thanks to automation and AI, the revenue or value per person has skyrocketed, almost an order of magnitude higher than it was 30 years ago.
So we need a better way to think about performance in a world where companies with fewer people can outperform those who get too big. Look at how Salesforce, Google, Apple, who are essentially creative companies, have slowed their ability to innovate as they get bigger. Look at how OpenAI, who is a tiny company, is outperforming Google and Microsoft.
Today most businesses outperform through innovation, time to market, customer intimacy, or IP – not through scale or “harder work.”
How do we maintain a high level of talent density when we’re growing the company and hiring lots of people? Netflix wrote the book on this, so let me give you the story.
First, the hiring process should focus on talent density, not butts in seats. Rather than hire someone to “fill a role” we look for someone who is additive or multiplicative to the entire team. Hire someone that challenges the status quo and brings new ideas, skills, and ideas beyond the “job” as defined. Netflix values courage, innovation, selflessness, inclusion, and teamwork, for example. These are not statements about “doing your job as defined.”
Netflix’s idea is that each incremental hire should make everybody else in the company and everybody else in the team produce at a higher level. Now this is a threatening thing for an insecure manager because most managers don’t want to hire somebody that could take their job away. But that’s why we have this problem.
Second, we need to manage or create some type of performance management process that is built around the Pareto distribution (also called the Power Law) and not the normal distribution. In the Pareto distribution or the power law, we have a small number of people who generate an outsized level of performance, you can call it the 80/20 rule or the 90/10 rule. (20% of the people do 80% of the work)
Studies have shown that companies and many populations work this way, and it makes sense. Think about athletes, where a small number of super athletes are 2-3 better than their peers. The same thing is true in music, science, and entertainment. It’s also true in sales and many business disciplines.
Research conducted in 2011 and 2012 by Ernest O’Boyle Jr. and Herman Aguinis (633,263 researchers, entertainers, politicians, and athletes in a total of 198 samples). found that performance in 94 percent of these groups did not follow a normal distribution. Rather these groups fall into what is called a “Power Law” distribution.
In every population of human beings there are a few people who just have God-given gifts to outperform in the job, and they just naturally seem to be far better than everyone else.
Bill Gates once told the company that there were of the three engineers that he felt made the company of Microsoft. And I’ve heard this in many other companies, where one software engineer and the right role can do the work of 10 other people.
Now, this is not to say that everybody will fall into one level of the Pareto distribution. At a given point in time in your career, you may be in the 80% and over time, as you learn and grow and find the things that you’re naturally good at, you’ll end up in the 20%. But in a given company this is a dynamic that’s constantly taking place. And that’s what Netflix is doing – constantly working on talent density.
What does this mean for performance management? It means that in order to care for a population like this, we have to hire differently, avoid the bell curve, and pay high performers well. Not just a little more than everybody else, a lot more. And that’s what happens in sports and entertainment, so why not in business.
If you look at companies like Google, Microsoft, and others, there are individuals in those companies that make two to three times more than their peers. And as long as these decisions are made based on performance, people are fine with it.
What obviously does not work is when person making all the money is the person who’s the best politician, best looking, or most popular.
And that leads me to item three: In the Netflix culture there’s a massive amount of empowerment, 360 feedback, candor and honesty. You’ve probably read the Netflix culture manifesto: it’s all about the need for people to be honest, to speak truth, to give each other feedback, and to focus on judgement, courage, and accountability. Netflix only recently added job levels: they didn’t have job levels for many years.
Giving people feedback is a challenge because it’s uncomfortable. So this has to to start at the top and it has to be done in a developmental, honest way. This does not mean people should threaten or disparage each other, but we all need to know that at the end of a project or the end of the meeting it’s okay for somebody to tell us “here’s what was great about that and here’s what wasn’t great about it.”
One of the most important institutions in the world, the US military lives, eats and dies by this process. If you’re in the military and you mess something up, you can guarantee that somebody’s going to tell you about it, and you’re going to get some help making sure you don’t do it again. We don’t have life or death situations in companies, but we can certainly use this kind of discipline.
The fourth thing that matters in talent density is leadership and goal setting. One of the things that really gets in the way of a high performing company is too many individual goals, too many siloed projects and responsibilities and people not seeing the big picture.
If your goal setting and performance management process is 100% based on individual performance you are sub-optimizing your company. Not only does this work against teamwork, but there really isn’t a single thing in a company that anybody can do alone. So our performance management research continuously shows that people should be rewarded for both their achievements as well as that of the team. (Here’s the research to explain.)
Why is talent density important right now? Let me mention a few reasons.
First, we’re entering a period of low unemployment so every hire is going to be challenging. And thanks to AI, companies are going to be able to operate with smaller teams. What better time to think about how to “trim down” your company so it’s performing at its best?
Second, the transformations from AI are going to require a lot of flexibility and learning agility in your company. You want a highly focused, well aligned team to help make that happen. And while AI will help every company improve, your ability to leverage AI quickly will turn into a competitive advantage (think back about how web and digital and e-commerce did the same).
(I firmly believe the companies with the most ingenious applications of AI will disrupt their competitors. I’m still amazed at Whole Food’s hand recognition checkout process: I can see self-service coffee, groceries, and other retail and hospitality coming.)
Third, the post-industrial business world is going to start to devalue huge, lumbering organizations. Many big companies just need a lot of people, but as Southwest Airlines taught us long ago, it’s the small team that performs well. So if you can’t break your company into small high-performing teams, your talent density will suffer.
When the book is written on Apple’s $10 Billion car, I bet one problem was the size and scale of the team. We’ll see soon enough. By the way, I still recommend everyone read “The Mythical Man-Month,” which to me is the bible of organizing around small teams.
What if you’re a healthcare provider, retailer, manufacturer, hospitality company? Does talent density apply to you? Absolutely! Go into a Costco and see how happy and engaged the employees are. Then go into a poorly run retailer and you’ll feel the difference.
In my book Irresistible I give examples of companies who embrace what I call “the unquenchable power of the human spirit.” Nobody wants to feel like they’re underperforming. With the right focus on accountability and growth we can help everyone out-perform their expectations.
Now is a time rethink how our organizations work. Not only should we promote and reward the hyper-performers, the Pareto rule and Talent Density thinking encourage us to help mid-level performers learn, grow, and transform themselves into superstars.
Let’s throw away the old ideas of bell curve, forced distribution, and simplistic performance management. Companies that push for everlasting high performance are energizing places to work, they deliver outstanding products and services, and they’re great investments for stakeholders.
Additional Information
Welcome To The Post-Industrial Age (research)
We Wasted Ten Years Talking About Performance Ratings. The Seven Things We’ve Learned.
The Changing Face Of Total Rewards (Certificate Course)
I’ve written about the Immersive Learning market often, each time pointing out the astounding learning power within these platforms. Now that we have consumer VR headsets like the Meta Quest and Apple Vision-Pro, this market is ready to explode.
Today, Cornerstone, the $1 Billion+ leader in corporate learning platforms, is announcing the acquisition of Talespin, one of the leaders in tools and content for immersive learning.
What Is Immersive Learning?
Teachers and instructors know that the only way we truly learn is “learning by doing.” And this understanding has led to the development of simulations, role-plays, war games, and hundreds of other interactive learning experiences. In fact every “major learning” experience I’ve had in my life started with some memorable (or frightening) experience that taught me to “never let this happen again.”
In corporate training this is difficult. Companies like Shell and AT&T spend tens of millions of dollars on simulators, games, and interactive experiences to teach people things like oil drilling practices, telephone system repair, and even things like how to safely enter a manhole without falling or damaging equipment. Even companies like Starbucks, Disney, and Walmart need these solutions: nobody can really learn how to deal with an angry customer, a rush of traffic, or a lost child at the theme park without some experience.
The problem, of course, is that building these experiences is difficult. Immersive Learning, pioneered by companies like Talespin and STRIVR, have built tools and platforms to make this easy. So organizations like Walmart, Bank of America, Verizon, Sony, Accenture, MGM Resorts, and even Sprouts Stores use these platforms. The value is high: a PwC study found that employees who learn through VR are almost 300% more confident about their skills than those who learn in other ways.
These top vendors, Talespin and STRIVR, are different. STRIVR focuses on realistic 3D using glasses, similar to the experience in Meta Quest or Apple Vision Pro. Talespin is a software company, offering a wide range of tools and content to help companies build immersive experiences for many applications.
Talespin in particular offers the following features and tools:
- Emotionally engaging, voice-driven learning experiences: Users can engage in lessons and scenarios that are designed to be emotionally engaging, with voice-driven interactions
- Intuitive UX/UI for creating story-based learning narratives: The platform provides an intuitive interface for creating and refining story-based learning narratives with advanced logic
- No animation or coding experience required: Users can create complex conversational simulations without the need for animation or coding skills
- Extensive library of virtual characters, voices, gestures, and environments: Creators have access to a wide range of virtual elements to enhance the immersive learning content they develop
- Content deployable via the Talespin App: Users can access all available immersive learning content through the Talespin App on various devices, including VR headsets like Oculus Quest, Vision Pro, and HTC Vive, as well as desktop application
- CoPilot Designer: This no-code authoring tool allows authors to create dynamic conversational learning experiences where users can practice role play. It offers simplicity in customizing virtual poses, gestures, emotional nuances, and assembling complex narratives with ease.
While Talespin has been a smaller player, their impact on the market could now be huge. With Talespin you can use GenAI to build character-based content in minutes to hours, instead of days to weeks. Over time the Generative tools are getting better, enabling companies to build lifelike character-based learning at scale. (Other vendors in this space include Immerse, Osso VR, MAI, Warp Studio, and others.)
And the scale goes far beyond having a nice character and presence to interact with. Talespin’s latest development tools let you create characters that have almost unlimited scenarios for response, creating an environment that feels like a real person. This not only lets companies build content faster, it lets Talespin address more complex use cases: sales training, management training, negotiation, ethical situations, and more.
What Does This Mean For Cornerstone?
The big question is this: in the new rush toward what I call “Autonomous Learning Platforms,” does this bring Cornerstone into a leading position?
Well remember this: today Cornerstone is a private-equity owned company primarily operating as a profit engine. The company has acquired most of the legacy LMS vendors (SumTotal, Saba, EdCast) TM vendors (Halogen, Lumesse) and content provider Grovo. And along the way these companies each acquired other companies, so there are more than 20+ platforms operating within the Cornerstone business.
Since Cornerstone went private in 2021 the company has continued to grow its revenue (over $1 billion) and is probably one of the more profitable companies in HR Tech. So this is a large company with a massive sales, marketing, and engineering team (7,000 customers, more than 140 million end-users). So as a market maker, Cornerstone has relationships with most large companies around the world.
However as AI and VR has matured, the market has become competitive. Fast-growing vendors like Docebo, Sana Labs, 360 Learning, SAP Litmos, Adobe, Learnupon, Fuse Universal, Uplimit, and many others are winning business. These newer vendors may not have the industry depth of Cornerstone, but their systems are modern, easy to use, and often AI-enabled. So Cornerstone, as a growth-oriented business, wants to stay ahead.
They’ve done this in three big ways: first by building a skills system (they call it their Skills Fabric) that lets companies create a skills taxonomy, assess skills, and use skills-based tools for learning recommendations, performance and talent management, and career management. This is a very crowded market but for Cornerstone clients these tools add a lot of value.
Second, Cornerstone has built out a significant content business. The Grovo acquisition brought a content development team along with development tools, courses and customers, and this team has merged to create Cornerstone content unit. The group has become a reseller of corporate content and is probably generating more than $100M of top line business. That makes Cornerstone one of the top 10 content companies in the market.
Third, Cornerstone is now focusing on VR and AI. As I discussed in my podcast with Joel Hellermark from Sana, AI is going to flip L&D on its head. For the first time in 20+ years we now have corporate learning platforms that can ingest content, generate instructional programs, and personalize experiences for every employee in the company. While Cornerstone has not introduced anything as comprehensive as Sana, Uplimit, Docebo, Arist and the others, the Talespin acquisition gets us close.
And there’s more. Analysts (not me) estimate the VR market at $4 Billion, expected to grow at 31% CAGR over the next five years (including hardware). This is a big opportunity. With Talespin integrated into Cornerstone’s platform the company can become a leading end-to-end provider in this space.
I talked with a few clients about this and the opportunity is real. Accenture, for example, uses Talespin for its foundational management coaching program because it delivers real-world experiences to young leaders. And the characters and personalities of the agents can be customized and tuned for different audiences. As the designers of the offering told me, Talespin lets learning professionals use Dall-E or Midjourney to build characters and then use the Talespin’s development suite to build complex simulations and conversations for softskills training.
And there’s much more to come. Platforms like Talespin (and the others I mention above) can personalize the experience to each employee, dynamically create assessments based on your activity, and can provide almost infinite branching as you converse with a virtual character. Given the rapid evolution of AI, this is going to get better in short time.
Bottom Line: Huge Potential Growth
While VR training has been around for a while, most companies don’t know much about it. With Cornerstone’s sales muscle and all the new buzz about Apple and Meta’s headsets, this growth curve will accelerate. And the applications for this are everywhere: from operational training to leadership scenarios to safety and even first-person shooter safety. There’s nothing like a real-world scenario to teach you something you don’t really understand.
Can Cornerstone get focused and rapidly grow this market? That would be my only question: the company has a lot going on so let’s hope Talespin stays in tact and we see some amazing solutions to come. AI and VR is clearly the future of corporate learning.
Additional Information
Autonomous Corporate Learning Platforms: Arriving Now, Powered by AI
Interview With Joel Hellermark, CEO of Sana – AI-Powered Learning Arrives
Virtual Reality Has Now Gone Mainstream For Corporate Training
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