Strategic Talent Management
Managing Human Capital in a Downturn
by Taleo Research
When times are difficult, the CEO of any company looks at expenses. You sit down with your CFO and see that over 65 percent of your spending is on salaries, so you cut salaries by a huge layoff. Recently we have seen many companies announcing important people reductions, from 15,000 at Deutsche Bank to 30,000 at Boeing.
But most of the time CEOs are in situations where they have to reduce staff, but don’t really know who to cut and why, and how it will change the future of the enterprise.
This article uncovers how the new economy and technology have created new principles of Human Capital, and why any organization has to understand and internalize them in order to be a leader either in a downturn or in a growing economy.
This article is intended for executive management as well as leaders of HR departments for large corporations in order for them to understand what can be achieved today.
Here we will review the five new principles of Human Capital Management and explain them in detail. They are:
- A skilled workforce is a cash multiplier
- The ubiquity of skills demand
- The automated matching of supply and demand
- The recruiting supply chain
- Human Capital Management as a systematic process
For each, we identify the consequences for large corporations and provide some actionable recommendations in order for your enterprise to become Human Capital Centric.
The new economy is often called the knowledge economy. Emerging from an industrial age, this new economy distinguishes itself by having a large amount of the value of the company residing in the head of the employee instead of in the tangible assets of the company.
This realization was made very clear by a 1999 Business Week article showing that the valuation of Microsoft was superior to GM + Ford + Boeing + Lockheed-Martin + Deere + Caterpillar + USX + Weyerhauser + Union Pacific + Kodak + Sears + Marriott + Safeway + Kellogg. Yet, the only value at Microsoft resides in the heads of its employees!
Another way to show the intrinsic value of intangible and human capital is to look at the historical evolution of the ratio of the S&P 500 between the market value and the book value. The ratio of book value to market value was approximately 1 in the early 1980s. In 2000 it had risen to about 6. Among those companies, current employees are now perceived as a key element, along with the ability to attract and retain talent. Faced with this issue, many academics started to review and suggest some new models to give a better account of a corporation’s worth.
Fortune magazine’s “Best Company To Work For” is also a sign of the times showing more emphasis on human capital importance. But more than a tool to attract twice as many applications and make the front page, it has also been shown that those corporations exhibit better financial performance than other companies1.
The challenge to any corporation for the recruitment and retention of outstanding talent has never been more profound. High performing employees are the key for corporate success. At the individual level, a study from McKinsey & Company showed how high performers generate more results than average performers; corporate officers they surveyed believe the difference in impact for sales positions is as high as 67 percent2.
As mentioned on a corporate level, studies from Hewitt, and Watson Wyatt have shown that recruiting excellence brings positive financial results. The Human Capital Index Survey demonstrated that organizations with excellence practices in recruiting have been linked to a greater than 10 percent return in shareholder value. Human capital management strategies make a clear impact on the corporate bottom line.
On a more anecdotal basis, examples such as 3M creating the Post-it® success story out of a failed project to invent a super glue, show that human creativity and fine awareness of business needs can create miracles.
In light of those facts we can see why most financial reports start with something like “Our employees are our greatest assets, and they are the key driver of our future success.” It is also the reason why we see a skilled workforce as a cash multiplier. Most venture capital companies have understood this and repeatedly state “we prefer a B idea with an A team, to an A idea with a B team!”
Unfortunately, by mass layoffs large corporations forget this basic principle and cut A teams on projects that are not yet profitable and often waste the potential to re-deploy the A team on what they determine as their A project! This is the paradox of executive management today and understanding the next principle can help to address this contradiction.
The key consequence of a true understanding of this principle is an emphasis on a quality workforce. The definition of quality is the ability for an individual to increase the corporate value. Although the discussion of the legitimacy of this definition is beyond the scope of this paper, the strategies to achieve better quality can be understood and applied.
Ubiquity of Skills Demand
The second principle of Human Capital is “the Ubiquity of Skills Demand.” The best way to understand this principle and its implications is to describe the dynamic between supply and demand in the workforce arena. If we look at the demand side, we see organizations in demand of skills or talents to perform the tasks to deliver value to the marketplace.
The economic theory of supply and demand in economics has been widely publicized. It can be summarized as: in any market there is equilibrium between demand and supply that will set a specific price point.
However, every economist knows the limitation of this theory. For instance, if I am a corporation looking for a specific skill to perform a task, I demand it using traditional recruiting methods such as advertising and a referral system. The limited reach of the demand broadcast creates its own limitation: i.e. limited supply. The reason for limited access to supply is called friction, or a lack of perfect communication between the suppliers and the buyers, in this case between the employers and the jobseekers.
Digital communication has been a great tool to reduce friction and enable better equilibrium. Today’s online marketing techniques enable jobseekers and corporations to bridge the gap between supply and demand, and reduce friction.
Let’s consider some data and online tactics. As of Q2 2001, jobseekers could access job opportunities of 88 percent of Global 500 companies online at any time from anywhere. This increased from 29 percent in 1998. This contrasts well with the traditional unique source of employment opportunities available quasi-exclusively through newspapers as it was only a few years ago. This first shift in availability or ubiquity of data is called by Taleo ubiquity of demand, i.e. every job opportunity is available any where at any time.
Other techniques are available for corporations to timely market their opportunities to candidates. One is “job agents” and is an extension of the permission marketing concept. The candidate can leave a personal email address to receive automated notification of future matching positions. Job Agents build ongoing relationships with jobseekers, stretch marketing budgets further and require no resource allotment from recruiting staff. In 2000, only six percent of Fortune500 companies benefitted from this powerful functionality3, perhaps because their hiring management systems did not provide the necessary profiling and automation.
Automated Matching of Supply and Demand
The consequences of this new principle of ubiquity of skills demand are multiple. The first one is to give the jobseeker the ability to shop more for opportunity and be more in a decision maker role: “I know what is available out there and what I am worth.” Today many salary surveys are available online and give the jobseeker control over his or her own career.
The second consequence of this principle is an increased flow of supply for the corporation. This simply translates to an increased volume of applications and the issue of quality. To address this fully it is important to understand the third principle of Human capital management.
The ubiquity of skills demand is a great step forward; nevertheless it is also a limitation and often creates a fair amount of unqualified supply. If the network that created the Internet is the base of the second principle, the computers that are linked by this network are the enablers of this third principle.
In order to explain the Automated Matching of Supply and Demand principle we have to dissect the content of the communication delivered in this transaction. For years, the content holder for such transactions has been the resume. The resume has been the best tool to summarize the competencies and skills a candidate can bring to a new position through highlighting abilities, certification and experience by describing past positions, past diplomas and employers. The resume has been the best tool at the time to try to make a match between a task and an individual.
The process of finding the best individual to fulfill a given task has been highly manual and paper intensive, with very little automation, because a fit for a position is not reducible to a computer algorithm. However, although the final fit of the position with the individual cannot be based on a computer-made decision, the first set of selections based on minimum criteria can be. A final decision should and will always be based on individuals working together and having to meet and to know each other.
Let’s review and understand what is done when a department of a large company needs additional resources. They fill a request form that is called a requisition, go through the approval process, and create a job description. The job description is what will be used to match the candidates with the tasks to achieve. In fact it is the job description that will be matched to the resumes of the candidates.
This matching of two unstructured documents is done by individuals who most of the time apply highly unsystematic and subjective criteria to make the first selection, called prescreening. This activity not only has been highly inefficient, very time consuming, but also very ineffective. The criteria used to select candidates do not insure systematic results.
Recruiting Supply Chain
Human Capital Management as a Systematic Process
Yet, as explained earlier, it was the best of the worst systems and was better than saying you should hire this candidate because he is some one’s brother-in-law.
Today, the combination that the Internet represents — meaning the connectivity of the phone and the processing power of the computer — enables new treatment for this step. A common platform for the job description and the resume is created enabling instant connectivity and refined processing of information. This platform includes corporate-wide standard skills that can now be systematically ranked according to new standards. This new possibility has been created only by the widespread acceptance of the computer as a new communication device for job applications externally and as a portal for redeployment internally.
The ubiquity of skills demand and the matching of supply with demand have an important impact at the macro economic level. It is believed that it will reduce the base level of unemployment called friction unemployment. Friction unemployment is the residual level caused by the inefficiency of the communication between corporation and individual. Moreover, real time access to a pool of candidates not only impacts the economy globally. It also creates a positive productivity boost in corporations that can identify needs, translate them into a common language and fill those in a timely and quality fashion as well as to help re-deploy resources in a downturn.
Recruiting can be seen as a succession of steps in a process with several providers. Traditionally, hiring managers, recruiters, candidates as well as the processes of background checking, EEO data gathering and reporting, job board posting etc., for the most part, operated independently. Today, they can be brought together. The Internet has allowed recruiting to function at a much higher level.
The recruiting flow can now be seen as a supply chain and thought of in terms of inventory. The importance of the supply chain principle applied to recruitment is the JIT or just in time philosophy. When we start to see the individuals performing the tasks as inventory, and we see the opportunity cost of undone tasks, we recognize the importance of a readily available workforce or redeployment efficiencies.
The opportunity cost is typically computed by dividing the revenue by the number of employees, which gives revenue generated by year by employee. We then divide this number by the number of working days to calculate the opportunity cost per day. So every day saved by providing an on-time inventory does have a financial impact.
The importance of thinking in terms of inventory and supply chain enables two other consequences. The first one is to push human resources to think more in financial terms and the complete business impact on corporations. This shift has already transpired in the language used to describe the practice itself: Human Resources is often described today as Human Capital! The second consequence is to be able to upgrade from a tracking system to a workflow. This distinction is more than just a semantic one; it is the difference between a simple date stamp system and a push process that drives next steps in order to speed up the final result.
Today, Human Capital Management is regarded as a true business differentiator for any successful business. The principles detailed above mean that corporations can now begin to think about human resources as a true process, not as something that is hard to grasp and is mostly an art. If all business is a combination of science and art, human capital has been the area in which the proportion of art has been way above the other discipline. New technology can help to give more balance and at the same time more efficiency.
The birth of an infosphere called the Internet has allowed the second principle, the ubiquity of demand, to become reality. Technology such as Taleo’s hiring management solution enables the third and fourth principle, the automated matching of supply and demand and the recruiting supply chain. However it is only the leaders of organizations that will make Human Capital Management become a systematic process. It is the increasing amount of evidence of the first principle – a skilled workforce is a cash multiplier – that is pushing them to act now!
[1] Are the 100 Best Better? An empirical Investigation of the relationship between being a best employer and firm performance. Hewitt Associates LLC, March 2000.
[2] The war for Talent, Mc Kinsey and Company, September 2001.
[3] Best Practices for Fortune 500 Career Web Site Recruiting. Taleo Research, 2000.