Seeing your star employees being poached by a rival always seems a bit of a bummer. And rightly so. We know from research, on industries as varied as semi-conductors and mutual funds, that they often take valuable knowledge with them and therefore enhance the performance of your rivals. And indeed, research on Silicon Valley law firms as well as on Dutch accounting firms*, shows that moving employees do not only enhance the survival chances of the poaching firms but also decrease the survival probability of the firms from which they were poached. This was especially true if the employees moved in groups and if it concerned geographically proximate rivals, because they are the ones you are especially in competition with.
So far the bad news. But can there be any upside to your employees being recruited? Well, yes, actually there is definitely a potential upside to that as well – especially if your employees are being hired by your customers, as professors Deepak Somaya, Ian Williamson and Natalia Lorinkova discovered. They examined the movement of patent attorneys between 123 US law firms and 109 Fortune 500 companies from a variety of industries. And they found strong evidence that if a client company recruited a patent attorney from a law firm, subsequently that law firm would start to get significantly more business from that company.
Hence, your employees leaving for your clients can be a good thing; they bring you valuable business. McKinsey – always ranked as one of the most admired professional services firms in the field – understands and manages this process particularly well; once you have been employed by McKinsey you automatically become “an alumnus of The Firm” (rather than a deserter). The firm carefully nourishes its relationship with its “alumni”, because they subsequently bring a large chunk of their business through the door.
Recently, professors Rafael Corredoira from the University of Maryland and Lori Rosenkopf from the Wharton School even found a beneficial effect of your employees being poached by rival firms. Using patent analysis studying US semi-conductor firms, they examined the transfer of knowledge between pairs of firms: the firm from which the employee was poached and the poacher. Not surprisingly, there is quite a bit of evidence that when this happens, knowledge transfers to the poacher; it comes in the form of the brains of the newly arrived recruit. However, Rafael and Lori also discovered that, as a result of employees moving to another firm, the old employer also experienced knowledge inflow from the recruiting firm!
Now, how is that possible? Someone moves out and, as a consequence, you gain knowledge from the place they went to?! Well, that’s because in real life we often socialize with our colleagues. When they start to work for a different firm, this does not mean that we stop talking to them. And what do they talk about? Well, work… While having a drink or two, former colleagues exchange information about how things work at their new place, how they solved a particular problem over there, what technology they use, and how they have got their processes organized. And you benefit from that.
Perhaps slightly surprisingly, Rafael and Lori’s findings showed that this exchange of knowledge was especially pertinent if it concerned a geographically distant firm. They conjectured that that is because there are other means in which you can get knowledge from rival firms that are nearby; perhaps then it is likely that you already have friends there, go to the same local conferences anyway, or that your kids go to the same school. Whatever the reason, it seems evident that if your employees are at risk of being poached by a rival firm, make sure it is done by one far away: you don’t suffer the adverse consequences of a strengthened competitor as much, but you do get the knowledge inflow upside.
Hence, scrap the non-compete agreements and gardening leaves, but only on the condition that they are moving far away, and promise them a sumptuous dinner and lavish drinking budget if they come back to visit their old friends at the firm.