Losing employees to a rival company can have an upside
While losing a valuable employee to competition shouldn't be celebrated, it does provide an opportunity for innovation and collaboration
Typically, it is in a company’s best interests to hold onto their employees. They have invested time and money into hiring and training them to be a part of the company and don’t want to lose them.
In fact, they usually go to great lengths to keep employees from leaving to go to work for rival companies, relying on employee benefits, trade secret protection, non-compete clauses, and other legal means to avoid company knowledge getting into the hands of competitors.
However, a study I conducted together with Martin Goossen, assistant professor at the department of management of Old Dominion University in Norfolk, Virginia, highlights that losing key employees to a competitor isn’t all bad, and can actually lead to successful collaboration opportunities.
Our research focused on R&D collaborations between major pharmaceutical companies. These alliances are common as they help to reduce the financial burden of costly drug development, especially when it comes to big innovation projects.
Data was collected on strategic alliances formed among the 55 largest pharmaceutical firms from 1990 to 2005, identifying all patenting scientists that moved between these firms. Results showed it is relatively common for scientists to move between competing pharmaceutical companies; of the 130,00 scientists monitored, more than 8,200 moved from one firm to another. In-depth interviews were also conducted with 15 high-ranking pharmaceutical executives responsible for R&D and business development based in the US, the UK, Germany, and France.
On average, the likelihood of forming an R&D alliance increased by 33% when a scientist had moved between two firms within the last five years. Also, employees moving from one company to another not only led to more frequent alliances, but also more successful ones. The number of patents filed within three years was almost twice as high as those from alliances not involving scientists that had worked for both companies. Furthermore, these companies were more likely to collaborate again in the next three years.
Finding a suitable partner for collaboration is a difficult and time-consuming process as companies must be constantly aware of emerging trends in technology and must identify partners with skills that match their needs. Even then, discussions between potential collaborators often break down, leading to a loss of resources and opportunities.
Involving employees familiar with both companies in the decision-making can help streamline this alliance-formation process. By acting as ‘bridges’, hires from rivals can facilitate the forming of highly successful R&D alliances between the old and new employer, and the benefits of the alliance can often outweigh the cost of losing an innovative employee.
From the interviews we conducted, it was suggested that mobile employees can act as bridges in at least two ways.
First, forming strategic partnerships can be difficult as both sides have different technological capabilities, goals, and expectations. However, employees who have moved between companies speed up the discussion of collaboration as they know the skills and needs of their former and current employers and can identify opportunities for collaboration.
Second, and more importantly, mobile employees can explain to their new employer the capabilities of their old employer. This is often what companies fear – rivals appropriating knowledge from their old employees – but it can be beneficial for competitors to know the capabilities of other companies so they can take advantage of opportunities to collaborate.
The mobile employee’s background was also an important factor in the success of the collaboration. Scientists who had collaborated with more colleagues at their previous company were more effective in building bridges between their new and former employer, as they had a deeper understanding of their old firm.
Losing highly-skilled employees is certainly not something that should be celebrated, but our research findings do demonstrate that there is a silver lining. Our interviews showed that executives do value mobile employees for how they improve the speed and stability of forming alliances with competitor firms.
Managers of the hiring firms can take advantage of mobile employees by actively involving them in strategic decisions that would benefit from their unique experience and information on competitors. For example, some firms connect employees hired from a potential partner with the team responsible for carrying out due diligence prior to forming an alliance.
These findings not only apply to the formation of R&D alliances but to many inter-organisational collaborations as well, including negotiations around outsourcing contracts, formal joint ventures, and merger and acquisition decision-making. The results from our study show that, although it is far from ideal to lose an innovative employee to a rival company, there may at least be an upside.
Stefan Wagner is an associate professor of strategy at ESMT Berlin