Human Capital: The Other Capital in Impact Investing

1400 929 Paul Breloff

Why Human Capital May Matter More than Money, and What Investors Can Do About It

human capital

Impact investing, in the words of Mugatu, is “so hot right now.” More than $15 billion a year is flowing into impact investment, fueled by a growing appreciation for the ways business and market-based mechanisms can drive positive change in the world. This is great news! I’ve been working in the social enterprise world for more than a decade, from my early days as a wannabe begging for an unpaid internship in India, through stints at a fast-growing microfinance institution and a seed impact fund, and now co-founder of a social enterprise of my own. But money is not enough for impact businesses to succeed; they desperately need an answer to their human capital challenges to unlock their world-changing potential.

As an investor, I saw firsthand how deeply companies struggle to recruit and retain the best talent, cultivate senior leaders and define the right culture and values. This cross-cutting challenge is not confined to one sector, and deserves much broader attention and action, in a similar way that multiple sectors unified and rallied around impact investing over a decade ago.

There is definitely some great work underway in worlds beyond impact investment, with myriad funders, nonprofits and even companies dedicated to human capital issues around the world. Firms specialize in delivering leadership training, running fellowship programs as social enterprise on-ramps, providing all varieties of up-skilling to in-market talent, and promoting talent management best practices. But while impact investors have at times mobilized around cross-cutting ecosystem factors like capital markets, regulatory frameworks and distribution infrastructure (which is great!), most relegate talent topics to side conversations and suppose portfolio companies will figure it out on their own.

I hope impact investors can start to understand the many ways that human capital issues are worthy of more attention, lest all this money flowing into the space will not be leveraged to its fullest potential.

Why does human capital matter?

How do we dimension this human capital problem, and why should the impact investing world care?

Bottleneck to growth and impact

Entrepreneurs and managers consistently cite variations on “not finding the right people” as one of the biggest challenges and constraints to scale, ranked on par with or sometimes even higher than funding. One study recently found that once they’ve raised capital, 75 percent of early-stage entrepreneurs believe that the inability to attract and retain talent is a critical impediment to scaling. McKinsey has found that over half of companies the world over cannot find qualified candidates for entry-level roles. During my time at Accion Venture Lab, we surveyed 35 financial inclusion CEOs around the world and found that talent was the top issue facing their organizations and the single most important issue to them personally (above funding).

For companies, vacant positions stall growth and cause quarterly targets to slip. Making the wrong hire can be even more costly than none at all, given the amount of time and money invested in new employees. A recent global study found that 69 percent of employers reported that a bad hiring decision put a strain on their company, and other data reveals that up to 50 percent of hiring decisions were considered a mistake. Even further, if a company can’t effectively develop its team, the failure of employees to realize their potential directly impedes the company’s growth and impact potential.

Fixing a rigged opportunity marketplace

Beyond measures of enterprise-level underperformance, impact investors should care about fostering more fair and transparent job marketplaces as ends in themselves. More than just income, work for most people shapes identity, self-worth and personal fulfillment.

Unfortunately, today’s labor marketplace is rigged. Job opportunities are determined far more often by factors like pedigree, connections and bias than genuine ability and merit. Researchers from the University of Chicago and MIT have found that white-sounding names had a 50 percent better chance of being called for an interview than African-American sounding names, and similar biases exist globally around race, gender, religion and more. Further, in emerging markets, where access to opportunity is more often determined by “birth lottery” (the initial conditions into which someone is born) than ability, mindset and hard work, impact businesses need a better way to identify competencies and match talent to opportunity. We need to shift the recruiting paradigm from pedigree to potential.

This isn’t charity, it’s just about leveling the playing field and giving talented people the chance to be considered for life-changing opportunities on the basis of what matters, rather than what doesn’t.

Why is human capital being under-supported by impact investors?

If focusing on talent is such a big opportunity, why wouldn’t impact investors be all over this? How can we account for this apparent “impact market failure”? Without belaboring the point, there are a few issues that might explain the minimal attention:

· No owner: Most funders are issue- or sector-specific, and because human capital doesn’t “belong” to a single sector, it often slips through the cracks.

· No comfort zone: When all you have is a hammer, everything looks like a nail — and at present, most impact investors come from financial backgrounds and are more comfortable talking money than people.

· No easy answers: Human capital is a many-headed beast, implicating structural issues like local education systems and globalization; individual differences in personality, circumstances and abilities; firm-level differences in organizational context and culture; and so on. It touches everything and resists easy fixes.

· No success stories: Most sectors become “a sector” when a successful new model shows potential. Microfinance’s rise gave birth to “financial inclusion” and solar pioneers gave birth to “access to energy” as fields with dedicated funding pools, in-depth research and dedicated convenings. There haven’t been human capital posterchildren yet, but I’m hoping the rise of impact-oriented talent players like RippleWorks, Omidyar Network’s human capital team, African Leadership Network, Spire, African Management Initiative, and my company Shortlist can start to change that.

· No convening body: Financial inclusion has CGAP (and others), solar lighting has GOGLA, cookstoves has the Global Alliance for Clean Cookstoves — and, of course, impact investing has the Global Impact Investing Network (GIIN). Unfortunately, the GIIN of human capital just hasn’t been created yet.

What can we do about it?

I hope more funders start to recognize the critical importance of human capital as the foundation for the success of the impact enterprises and initiatives we’re all supporting. A number of groups have started doing research and a small but growing body of literature is emerging on talent and human capital. But we need more to further diagnose the problem, understand the ecosystem, contextualize issues and ideas to local markets, and make recommendations for action (at both an ecosystem and firm level).

We also need more pioneering investors to see this as an area of great opportunity. Omidyar Network has been a leader here, setting up an in-house “human capital” team to help their investees attract, develop and retain top talent — but I’m not aware of other impact investors who have shown such commitment. Organizations like Argidius Foundation, Blue Haven Initiative and AHL Venture Partners (all funders of ours) have made human capital a focus area, but they are the exceptions (unless the broad bucket of “education” or “edtech” counts). At Shortlist, we just went through a fundraising process and heard a similar refrain from many impact investors: “Human capital is not within scope or is not a mandate fit,” or “human capital only counts as ‘impact’ if focused on people making less than $2 a day.” I’m hoping more investors and funders start to see this as an important issue with the promise of system-level impact, up and down the salary scale.

Even for investors who don’t start investing in human capital companies, I hope they can focus more actively on human capital issues within portfolio companies. When making an investment, go deeper than assessing the co-founder biographies: Spend time understanding the organizational structure, staffing plans, recruitment strategies, training programs and the company’s values. I’ve seen impact investors spend weeks digging through financial models, formation documents and board minutes, but not ask a single question about the culture and sub-C-suite team. If investors cared more about people, so would entrepreneurs — you can help entrepreneurs prioritize people just by asking about them.

We also have an opportunity to learn from mainstream global trends around the future of work and the evolving higher education landscape. It’s a heady time with many calling for the unbundling and disruption of higher education, the digitization of economic opportunity, and new tools to help companies find, recruit, manage and train talent. Let’s learn from the best and bring these new practices and technologies into our markets and investments.

Finally, let’s turn this into a sector, shall we? I, for one, would love to see a dedicated resource center focused on “talent for impact” that could bring together the best research, resources, brains and energy around the world to help impact investors and social enterprises alike. That’s a conference I’d show up for, and bring my friends.

This article originally ran on NextBillion.

Related: To Be or Not To Be (a Social Enterprise)

Hiring in Kenya

Hiring in Kenya: Three takeaways from our new report

1080 788 Simon Desjardins
“How much time are growing companies spending on hiring?”

“What is most challenging and time-consuming about the hiring process?”

“Can we quantify the benefits of making a great hire?”

As we help growing companies built high performing teams, these are a few of the questions that we keep being asked. Despite how basic these questions may seem, there’s actually very little reliable data out there to answer them, at least in an emerging market context. To begin to change that, we partnered with FSD Kenya and Open Capital Advisors to learn more about how small and medium-size enterprises (SMEs) in Kenya are hiring. We’re excited to release the report and share its findings with you. In case you don’t have time to read it in full, here are three takeaways:

1. Hiring is extremely time-consuming

During the decade we spent — before and after we created Shortlist — helping SMEs source and screen talent, we have become acutely aware that hiring is massively time consuming. From figuring out what to put in a job description, to sourcing candidates through multiple channels, to sifting through hundreds of applications, to organising and managing interviews, to all the follow-up needed to negotiate a final offer — the hours add up. But most companies that we’ve observed, including the ones we interviewed for this research, aren’t actually recording or analysing the time it takes them to hire, and consequently don’t know what it’s really costing them.

We found that for a single mid-level hire, companies are spending around 18 hours screening CVs, and then 19 additional hours interviewing candidates. Unfortunately, many hiring managers report feeling that much of the time spent before the interview stage is being wasted.

How can organisations screen and interview candidates more efficiently and effectively? A few solutions:

  • Rather than filtering candidates based on CV data, implement a competency-based screening approach to objectively filter out candidates who don’t possess the core requirements needed perform on the job. Much of this process can now be done online.
  • Generate discipline around what you will screen before an interview and how you’ll spend valuable interview time. Many assessments are more effectively administered remotely and scored by machine, equipping hiring managers to interview candidates who have already been pre-vetted in ways that can be tough to do in an interview setting. Cognitive ability, for example, is highly correlated to job performance across job categories, but is often harder than we might imagine to assess quickly in a short face-to-face setting.
  • Use a structured interview method to significantly increase the chances that your interview will actually predict on-the-job performance.

2. Too many high-level staff and non-HR employees are involved in hiring

When companies consider their hiring costs, they often only consider direct expenses, such as job board posting fees. In fact, we found that the key cost driver is time, and 85 percent of hiring time is spent by non-HR staff.

In practice, this means that non-HR staff are involved with screening CVs, because functional knowledge is needed for identifying the right skill sets and experience, though CV screening can be a futile task. Business managers often lead the interview process as well, and up to 3 interviews are often conducted.

We’re sometimes asked how business managers can spend less time on the hiring process, and we often provide the following guidance:

  • Define the “must have” requirements that will drive high performance (and by “must have”, we mean a maximum of 3 requirements, not 20).
  • Collaborate on designing an assessment that mimics a key task that a candidate would need to excel at if you hired them (not a theoretical exercise).
  • Agree in advance what will constitute a “good answer” to your interview questions, such that business managers don’t need to be present in each interview round.

3. A high-performing hire is exponentially more valuable than a low performer.

We all know what it feels like when we make an amazing new addition to our team. As soon as they join, we’re often instinctively aware they will have a net positive impact on the company. We wanted to back up that instinct by quantifying the difference high-performing employees make. We found that top-performing employees have a an exponential — not linear — effect on their organisation’s bottom-line, especially in sales or credit roles:

  • A high-performing sales agent can generate around two and a half times the margin of a low performer in the same organisation.
  • For one of the companies consulted, the difference between a high and low performer amounted to a difference of approximately US $30,000 in revenue per agent per year (in a business with sub-$1,000 transaction sizes).
  • High-performing loan officers can generate up to seven times the annual margin of low performers.

These figures show that for growing SMEs, hiring high-performers should be prioritised with great urgency. If this sounds obvious, you may be surprised to know that the vast majority of HR departments are measured based on cost-per-hire or speed-per-hire rather than quality-per-hire.

We recognise that this research isn’t exhaustive, but we hope it will at least begin to point to ways that you can help your organisation hire more effectively, and we would welcome your questions and input.

Download the full report here — Hiring in Kenya: Current Methods, Hidden Costs and the Value of Top Performers — and check out our Business Daily op-ed on the research findings. Want to spread the word? Share your favourite fact from the report on Twitter using #HiringinKenya, and tag us @Shortlisthires!

The Full Stack Business Model for Talent?

600 617 Paul Breloff

I am very excited about the current popularity of the term “full stack,” the zeitgeist of which was captured by John Herrman’s recent New York Times’s article on “the stack” as the flavor-of-the-moment tech metaphor for understanding everything. The author noted that the term refers to a set of software that works together to accomplish something, but has expanded to comfortably roll off the tongues of a diverse range of non-techies in such contexts as diet (a “supplement stack”), leadership (a “talent stack”), and public policy (the “India stack” — though I suppose that’s still kind of techie). I will admit, I’m a gleeful offender, though I mostly still use the term in boring, as-intended phrases like “full stack engineer” and in sentences like, “Gosh, we’re having a hard time finding awesome full stack engineers, do you know any in Hyderabad?” (Seriously; do you know any?)

All this full stack talk has made me think about the full stack business model— distinct from a full stack tech solution or full stack platform— which happens to be what we’re building at Shortlist. In this context, full stack connotes something akin to “vertically integrated,” owning the full (in this case) recruiting value chain from job description to source to shortlist. But it also means that we act as a company’s outsourced full tech stack, bringing the “best of” a robust talent tech stack to companies so that they don’t have to go figure it all out on their own.

How does this concept play out at Shortlist?

We work with companies to deeply understand the role (and which competencies will drive success), build a candidate pool through a diverse range of channels, and most importantly, narrow down large candidate pools from many to few using a mix of sophisticated software and thoughtful human touch.

This is a bit unusual for a tech company, and earns us the occasional accusation of being a “service company,” an insult in VC/tech parlance on par with egg-throwing in a French election (Marine Le Pen, you deserved it!). It’s true that most companies in the talent tech world are obsessed with being a purely tech solution that picks one thing (video interviews, gamified assessments, social media search) and slots neatly into a company’s HR tech stack, playing nicely with the jumble of HRIS, CRM, ATS, social search, and other stuff revving the engine of sophisticated Fortune 500 HR teams around the world. If you’re a startup selling to a big company with a sophisticated talent value chain, there’s a darn good case to be made to specialize and focus, optimize the heck out of your corner of heaven, integrate promiscuously, and wait for someone to buy you.

Unfortunately, I think this is a challenging strategy for a company building a tech solution for talent issues in emerging markets, because it’s not what the market wants or is ready for.

Across industries, I’ve seen many companies fail trying to tackle just one part of a value chain, and I’ve seen how the success stories realized they needed to figure out the entire thing to succeed. We saw this in microfinance, as the success stories in India of the early/mid 2000s grew by owning the entire product and distribution value chain for financial services. We saw this in household solar products, as the success stories in East Africa of the late 2000s/early 2010s grew by owning the complete manufacturing to packaging to sales/distribution value chain, many times extending into after-sales service as well. And we’re seeing it even today as e-commerce businesses figure out new ways of solving last mile delivery and payments in order to grow their businesses.

We think it’s a similar case when it comes to talent and recruiting, albeit with less distribution and more of a tech dimension. SMEs with 1,000 or fewer employees will rarely have “talent tech stacks,” and frankly will rarely have any HR-focused software capable of integrating with cutting edge tech tools.

And when it comes time for SMEs to hire and grow, they don’t want to go out hunting for software, doing demos, comparing features and prices, negotiating contracts, waiting out tech integrations, training employees on how to use it, weathering complaints about how “the old way was better,” and praying the new tech actually works and generates ROI to write home about. No way!

When SMEs need to hire and grow, they want people, not software: they want to talk to people who understand their needs and they want to be given candidates who are great, ready to be interviewed, and ready to get to work. It’s not that these companies are opposed to software and tech — not at all! — they’d just rather someone else figure that out, so they can get back to their core business.

At Shortlist, we figure that out. We build technology that makes the human touch more efficient and effective, while not expecting it to replace humans altogether (yet). And we build for the full value chain, knowing most SMEs in particular want partners to solve their whole problem, not just part of it.

At least that’s what we always wished existed as we’ve built companies as founders, managers and investors in India and Kenya over the years.

So here’s to the full stack business model! (And here’s to full stack engineers, too, who should come talk to us if they’re in Hyderabad and ready to build something awesome.)


Can we shift the recruiting paradigm from pedigree to potential?

1200 900 Paul Breloff
All around the world, companies big and small are facing a similar problem: Hiring is so much harder than it should be.

While India adds a million people to its job market every month and Africa is set to add more people to its workforce by 2020 than the rest of the world combined, over half of emerging market companies still can’t fill the roles they have open. Startups consistently rank talent acquisition as a top barrier to growth. What gives?

I saw this dilemma firsthand while investing in financial technology startups around the world for the last five years, as the founder of seed venture fund Accion Venture Lab. Once an investment was closed and cash was in the bank, the company’s problem shifted from not having financial capital to not having the human capital they needed to be successful.

The picture is even bleaker on the jobseeker’s side. Even skilled professionals often can’t get hired because they didn’t go to the “right” school, didn’t work at the “right” company, don’t know the “right” people, or fall victim to unfair biases during the application process. They are left lobbing their CV into job board black holes, never able to show potential employers what they can do.

This needs to change. We believe that talent is equally distributed, but opportunity is not. What often appears to be a lack of talent supply in markets is more often a failure of not knowing where to look or what to look for. At Shortlist, we want to level the job search playing field, shifting the recruiting paradigm from one based on pedigree and prejudice to a new version grounded in competency and potential.

How are we doing it?

1. Bringing intelligence to technology

Technology has burst on the scene to flatten access to job opportunities and broaden candidate pools (thank you LinkedIn and Monster). But without intelligent intermediation, more tech creates more noise, more decision fatigue, more work, and more despair for companies and jobseekers — not better outcomes. Just ask any of our employers who have received 2,000+ applications to a single job posting.

We combine a chatbot questionnaire with online assessments and phone screens to help us decide who is most likely to be great in a job. This filtering layer combines technology, data, and a human touch to ensure that talented candidates don’t slip through the cracks, particularly those who risk being overlooked based on CV alone.

2. Creating signals beyond the CV

Most companies have been hiring the same way for centuries (seriously): source and skim a lot of CVs, speak with some of the candidates, then make a decision — and regret those decisions more often than they would like. Not only is it hard to discern genuine ability and fit through a CV and unstructured interview alone, but this mode of decision-making is also often riddled with bias and prejudice.

Companies often do this not because they think it’s best, but because, frankly, there’s nothing else to go on. It’s like the joke about the economist looking for his keys under a streetlamp, not because that’s where he lost his keys, but because that’s where the light is better. At Shortlist, we engage candidates digitally to user-generate more accurate signals. We screen not only for basic experience fit but layer on additional data points for cognitive ability, competencies, and motivation. To be Shortlisted for a job, it’s more important to show us what you can do, not just tell us what you’ve done.

3. Refocusing on what matters

Let’s be clear: many people who went to great schools and worked at impressive companies are great and impressive. But for the vast majority of job-seekers, particularly in emerging markets like India and Kenya (where we work), prior experience paints an incomplete and often misleading picture of a candidate’s capabilities.

Schooling and subsequent corporate experience is — in all countries — more often determined by “birth lottery” than by merit. And we all hold biases, positive or negative, about certain schools or corporate brands. Looking past pedigree and refocusing on potential is the first step towards a world where everyone gets a shot at fulfilling professional experiences. Further, reconceiving the nature and focus of talent screening matters not only for hiring fairness, but also for hiring effectiveness. Building a team based on merit and performance instead of connections and pedigree is not only the right thing to do — it’s good for the bottom line.

The Shortlist mission

At Shortlist, we are on a mission to unlock professional potential and help great companies succeed in building great teams. We’re starting with a new way to match talent with opportunity, but we’re just getting started.

We want to level the talent playing field, but we can’t do it alone! We want to learn from each of you about what you think works to find and understand great talent, and what makes a great team. Visit our website, email us, or tweet at us — we’d love to talk with you about how we can help you hire. We’ll be using this blog as one of the ways we share the ideas behind what we do and how we do it, so stay tuned…

Structured interviews

Everyone should be using structured interviews — here’s why

1080 565 Simon Desjardins

Interviews are often less predictive of on-the-job performance than we imagine, a problem we wrote about here. Despite their ubiquity, unstructured interviews — where we ask candidates different questions in different sequences that may or may not be tied to job requirements — have been debunked as an effective predictive technique.  The interview process is vital to the hiring process and using structured interviews may be a better approach.

Structured interview 101

Decades of research tells us that using a “structured interview” is more than twice as effective than its unstructured counterpart in predicting on-the-job performance, and even more so when combined with competency-based assessments. The evidence is clear, and yet it’s extremely rare to see structured interviews employed in practice.

The idea behind a structured interview is underpinned by the objective of keeping the interviewer focused on questions that can predict performance and reducing the variance of scoring that exists when different interviewers prioritise different attributes in a candidate. They are best suited to interviews for junior and mid-level roles involving multiple interviewers.

Anatomy of a structured interview

  • Candidates are asked the same questions, in the same order, by every interviewer.
  • Questions are explicitly linked to key competencies required to do the job.
  • A standard rating scale is used by interviewers to grade candidate answers.
  • Interviewers agree in advance what they are looking for in a good answer.

When used correctly, the structured interview reduces the risk of bias affecting the interview outcome, increases consistency in ranking candidates, and minimises the interview time.

The key to using this concept effectively is crafting predictive questions and understanding that you’ll only have time to ask a few. Forcing ourselves to prioritise which two or three competencies actually drive 80 percent of the performance in a given role is a good place to start.

Reducing the time we spend on the interview process

We often hear hesitancy to adopt structured interviews because they can be perceived to take more time. “We have to hire 50 people this month. We don’t have time to implement a new structure,” is a common justification. Some may be surprised to learn that adopting a structured interview process actually reduces average interviewing time, particularly when more than one interviewer is involved. This is achieved both by reducing the pre-interview preparation period (because the questions are already prepared and optimized for an efficient interview) and by reducing the time to make a final hiring decision (because interviewers are clear about what they’re looking for).

Pathway to building a predictive question bank

Ultimately, building discipline around data collection throughout the interview process will help move beyond improving just our “hire rate” to something far more valuable: improving the rate at which high performers are selected. Hasty bullets written in our notebooks from 6 months ago are all but impossible to link to the ultimate performance of a candidate down the line (“What did we ask her again?”). If we have consistent interview data — meaning which questions were asked and what the responses were — we can baseline those questions with their teams to identify which interview questions and corresponding answers are most predictive of identifying high performers. We’ll also be able to pinpoint which questions are ultimately uncorrelated and can be dropped in the future.

Why are structured interviews so rarely used?

The ultimate benefits of a structured interview process can take months to materialise. Responsibilities are spread across multiple people on the team. Half a year may have passed by the time the candidate has been onboarded and we’ve had a chance to evaluate performance. The original interview seems like a distant memory at this point. Taking a decision to adopt a structured interview process will probably require a push from senior management along with commitment to enforce the practice.

We often have a related challenge of convincing hiring manager colleagues to change their interviewing practices, particularly when our colleagues don’t necessarily perceive interviewing to be a process in need of fixing in the first place.

At Shortlist, we have worked with clients ranging from start-ups to large multinationals. We also design competency-based assessments to further enhance screening outcomes before a candidate even reaches the interview stage.

Not all organisations will transition off of the unstructured interview as a screening tool, but the evidence to do so is clear. It’s time to implement a better way to interview.

About Shortlist Insights

Shortlist Insights helps companies build capacity to improve how they recruit and manage talent. We combine best practices from industry experts, research, and our experience to deliver practical and tested solutions and thought leadership. Ultimately, we help our clients build a competitive people advantage.

Related: Unstructured Interviews: Less Predictive Than We Think